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ACC08/FMS01
LECTURES
Financial Management Part 1
Gems
ACC08/FMS01
That is what
LECTURES learning is. You
suddenly
Financial Management Part 1 understand
something
Overview of Financial Management you've
understood all
Topical Objectives
your life, but in
At the end of this section, you are expected to :
1. Recall the characteristics of the different types of business
organizations; a new way .
2. Identify financial objective(s) of organizations; -Doris Lessing
3. Identify the various decision areas of organization
management that requires finance knowledge;
4. Gain familiarity to the functions of the finance department and
the Chief Financial Officer in an organization; and FINANCIAL
5. Review the fundamental concepts of finance. MANAGEMENT
1
www.suncorpfilings.com/documents/EntityComparison chart.pdf
The first objective is identified to result to two types of the agency problem3. The third one focuses on
the increase in the market price of the shares owned by its owners and it has been favored because of
its impartiality and inkling to serve social responsibility. The fourth is similar to the second, however
does not focus on stock price alone.
2Aswath Damodaran cited in his lectures of the Classic Viewpoint: Van Horne: "In this book, we assume that the objective of the firm is
tomaximize its value to its stockholders" Brealey & Myers: "Success is usually judged by value: Shareholders aremade better off by any
decision which increases the value of their stake in thefirm... The secret of success in financial management is to increase value."
Copeland & Weston: The most important theme is that the objective of thefirm is to maximize the wealth of its stockholders." Brigham
and Gapenski: Throughout this book we operate on the assumptionthat the management's primary goal is stockholder wealth
maximizationwhich translates into maximizing the price of the common stock.
3Sen Jaya indicates the following as possible ways to reduce type 1 agency problem:1) Tie management compensation to stock price
performance2) The threat of firing through the board of directors3) Hostile takeovers by other firms motivate managers to prevent share
prices from falling4) Shareholders sponsoring resolutions at the annual shareholders meeting
Into
The following chart shows a sample of the functions found under the Finance Division
4
Money, Banking and Financial Markets. Cecchetti 2e
5
Moyer, 2010
Firm Value
6
Affected by amount, timing, and uncertainty of cash flows
7
Agency costs include: Corporate governance ; Management compensation; Threat of takeover; Annual audit by accounting
firm