1

The Goals and Activities

of Financial Management
Block, Hirt, and Danielsen
Foundations of Financial Management
18th edition

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 Learning Objectives
• List some of the concepts of the field of finance covers.
• Recognize that a firm can have many different forms of
organization.
• Describe how the relationship of risk to return is a central
focus of finance.
• Explain the primary goal of financial managers.
• Recall that financial managers attempt to achieve wealth
maximization through daily activities such as credit and
inventory management and through longer-term decisions
related to raising funds.
• Explain future and present value and how they relate to the
time value of money.

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 The Field of Finance

• Finance fits between economics and

accounting
• Economics provides picture of business
environment
• Consider consumers and producers
• Accounting provides financial data
• Income statements, balance sheets, cashflow
statements

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 The Field of Finance Continued

• Financial manager needs to know how to

understand and interpret financial statements
• Finance is closely tied to accounting
• CFO often in charge of financial planning,
accounting, and tax systems
• Finance is forward thinking vs accounting
which measures business activity results

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 Investments vs. Corporate Finance

• Investments
• Investors use investment principles to value stocks
and bonds of companies
• Investors choose which to purchase
• Portfolio includes securities by multiple companies
• Corporate finance
• Principles used to determine which assets the firm
should develop or buy

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 Investments vs. Corporate Finance
Concluded

• Financial management
• Term can be used interchangeable with corporate
finance
• Related to various investment topics
• Include how outside investors evaluate the
company

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 The Value of Studying Finance

• Career opportunities include

• Corporate financial officer, banker, stockbroker,
financial analysist, portfolio manager, investment
banker, financial consultant, & personal financial
planner.
• CEO reports directly to board of directors
• Marketing managers interested in return on
investment of marketing initiatives

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 Activities of Financial Management

• Financial managers perform numerous

activities
• Daily activities include monitor cash balances,
manage credit decisions, monitor inventory levels,
collect and distribute cash.
• Less routine activities include negotiations with
banks for loans, sale of stocks and bonds,
establishment of capital budgeting and dividend
plans

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 Figure 1-1 Functions of the
Financial Manager

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 Activities of Financial Management
Continued

• Risk-return trade-off determined to maximize

the market value
• Influences operational side (capital vs. labor or
Product A vs. Product B)
• Influences financial mix (stock vs. bonds vs.
retained earnings)

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 Corporate Governance
• Sarbanes-Oxley Act of 2002
• Response to scandals and audit failures
• Created legally binding standards for public companies
• Dodd-Frank Act
• Wall Street Reform and Consumer Protection Act of 2010
• First major financial regulatory change since great
Depression
• Goal to reduce systemic risks that undermine financial
system in U.S.

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 Corporate Governance Concluded
• Agency theory
• Examines relationship and potential conflict
between owners and managers of firm
• Management operates vs owners focused on
shareholders
• Institutional investors
• Have more to say about how publicly owned
companies are managed
• Able to vote large blocks of shares for election of
board of directors
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 Goals of Financial Management

• Primary goal—maximization of profit

• Drawbacks
• Change in profit may also represent change in risk
• Fails to consider timing of benefits
• Impossible task of accurately measuring key variable
“profit”
• Problems with inflation and international currency
transactions further complicate the issue

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 Maximizing Shareholder Wealth
• Shareholder wealth maximization is the broad
goal of the firm
• Achieved through high value for the firm
• Residual claim – value of their claims is not
fixed
• Financial manager cannot directly control
firm’s stock price
• Can act in consistent way with shareholder desires
• Long-term wealth is more important that daily
value
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 Management and Stockholder Wealth

• Only way to retain power in long run is by

becoming sensitive to shareholder concerns
• Management maintains long run perspective
• Board of Directors align management’s incentives
and those of shareholders
• Institutional investors often control enough shares
in large companies that they are able to influence
the board to unseat managers who are not
responsive to shareholders’ interests

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 Social Responsibility and Ethical Behavior

• Adopting policies that maximize values in

market
• Attract capital
• Provide employment
• Offer benefits to society
• Socially desirable action like pollution control,
equitable hiring practices, and fair pricing
standards may be inconsistent with achieving
maximum valuation in the market.

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 Social Responsibility and Ethical Behavior
Continued

• Insider trading
• Using information not available to public, making
undue profit from trading in company’s publicly
traded securities
• Unethical and illegal practice protected against by
Securities Exchange Commission (SEC)
• Has a negative impact on shareholder’s interest
• Ethical behavior creates invaluable reputation

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 Role of the Financial Markets

• Financial markets—meeting place for people,

corporations, and institutions
• Have either a need to lend, borrow, or invest
money
• Participants can be national, state, and local
governments
• Their markets are public financial markets
• Corporate participants raise funds in corporate
financial markets
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 Structure and Functions of the Financial
Markets

• Distinct parts of financial markets

• Domestic and international markets
• Corporate and government markets
• Money and capital markets

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 Structure and Functions of the Financial
Markets Continued
• Money markets
• Deal with short-term securities with life of one
year or less
• Securities include
• Commercial paper sold by corporations to finance daily
operations
• Certificates of deposit with maturities of less than one
year sold by banks

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 Structure and Functions of the Financial
Markets Concluded
• Capital markets
• Deal with securities that have life of more than
one year
• Long-term markets
• Defined as either 1 to 10 years (intermediate markets)
or greater than 10 years (long-term markets)
• Securities include
• Common stock
• Preferred stock
• Corporate and government bonds

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 Allocation of Capital

• Primary market
• When corporation uses financial markets to raise
new funds, sale of securities made through new
issue is called initial public offering (IPO)
• Secondary market
• Securities bought/sold amongst investors
• Prices of securities keep changing continually
• Financial managers given feedback about firms’
performance

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 Allocation of Capital
Continued

• Return maximization and risk minimization

• Investors can choose risk level that meets
objective, maximizes return for given risk level
• Companies rewarded with high-priced securities
can raise new funds in money and capital markets
at lower cost than competitors
• Firms pay penalty for failing to perform
competitively

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 Internationalization
of Financial Markets

• Allocation of capital and search for lower-cost

sources of financing in global market
• Impact of international affairs and technology
has resulted in need for managers to
understand
• International capital flows
• Computerized electronic funds transfer systems
• Foreign currency hedging strategies

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 END

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