31-05-2012, 01:19 PM
FINANCIAL MANAGEMENT AND VALUE CREATION: AN OVERVIEW
FINANCIAL MANAGEMENT AND VALUE CREATION.ppt (Size: 1.04 MB / Downloads: 41)
Background
One of financial management’s most useful guiding principles
Managers should manage their firm’s resources with the objective of increasing the firm’s market value
Main objective of the course
To present and explain the methods and tools that help managers determine whether the firm’s current investments are creating value
If they are not then need to determine what remedial actions should be taken to improve operations
Book also shows how to determine whether a business proposal has the potential to raise the firm’s value and how it should be financed.
After reading this chapter, students should understand:
The meaning of managing a business for value creation
How to measure the value that may be created by a business proposal, such as an investment project, a change in the firm’s financial structure, a business acquisition, or the decision to invest in a foreign country
The significance of the firm’s cost of capital and how it is measured
The function of financial markets as a source of corporate funds and the role they play in the value-creation process
A firm’s business cycle and how it determines the firm’s capacity to grow
The basic structure and the logic behind a firm’s balance sheet, income statement and cash flow statement
Risk, how to measure it and how it affects the firm’s cost of capital
The terms “market value added” and “economic value added” and how they relate to the goal of managing for value creation.
The Importance Of Managing For Value Creation
The fundamental finance principle helps answer the Key Question
Paramount objective of management should be the creation of value for the firm’s owners
However, this does not mean the firm can neglect other stakeholders, such as employers customers or suppliers
Results of a survey show that the firms perceived to be highly valued with respect to management, employees and customers were value creators
While the lowest rated firms were value destroyers.
Only Cash Matters
The fundamental finance principle
Requires that the investment as well as its future benefits be measured in cash
Investors have invested cash in the firm and are only interested in cash returns
Net profit represents an accounting measure, not a cash one.
Discount Rates
To estimate the net present value of a proposal
Must first discount its future cash-flow stream and then deduct from that present value the initial cash outlay
A proposal’s appropriate discount rate is the cost of financing the proposal.
Applying The Fundamental Finance Principle
Textbook addresses the application of the fundamental finance principle for
Capital budgeting
Capital structure
Business acquisition
Foreign investment decisions