Financial Management For Decision Makers

Second Canadian Edition

SECOND CANADIAN EDITION

PETER ATRILL PAUL HURLEY

FINANCIAL MANAGEMENT
FOR DECISION MAKERS

Chapter 1 - 1 © 2012 Pearson Canada Inc.

 Chapter 1
Introduction to Financial Management
LEARNING OUTCOMES

1 Discuss the role of the finance function within a

business.
2 Identify and discuss possible objectives for a business.
3 Explain why the wealth maximization objective is
considered to be the primary objective of a business.
4 Explain the agency problem faced by owners of a
business and discuss how this problem may be either
prevented or minimized.
Chapter 1 - 2 © 2012 Pearson Canada Inc.
 The Role of the Finance Function

• Strategic Management
• Operations Management
• Risk Management

Chapter 1 - 3 © 2012 Pearson Canada Inc.

 Key Tasks Undertaken by Finance
Function

• Financial Planning
• Investment Project Appraisal
• Capital Market Operations
• Financial Control

Chapter 1 - 4 © 2012 Pearson Canada Inc.

 The Objectives of a Business

Shareholder Wealth Maximization

Shareholders provide funds to a business
•expect maximum increase in wealth
•for the level of risk that must be faced.
•Wealth refers to the market value of shares.
•Market value of the shares reflect the future returns
•Long term…not short term. NB
Chapter 1 - 5 © 2012 Pearson Canada Inc.
 Profit Maximization

Various measures of profit can be maximized:

■ Operating profit (that is, earnings before

interest and taxation)
■ Earnings before tax
■ Net income
■ Net income available to common shareholders
■ Net income per common share—also called
earnings
Chapter 1 - 6 © 2012 per share
Pearson Canada Inc. (EPS)
 What stakeholder groups may have a
financial interest in a business?
The following groups may be seen as being stakeholders:
■ Shareholders
■ Employees
■ Bondholders
■ Bankers
■ Managers
■ Suppliers
■ Customers
■ The community
Note: This is not an exhaustive list. You may have thought of other examples
Chapter 1 - 7 © 2012 Pearson Canada Inc.
 Mission Statements

• A business will often express its ultimate

purpose in the form of a mission statement

• Mission statements are usually concise and try

to convey the essence of the business

• Often include a commitment to maximize

shareholder wealth
Chapter 1 - 8 © 2012 Pearson Canada Inc.
 Ethics and Finance

Businesses often proclaim their commitment to

high standards of ethics and social responsibility
in their dealings and develop appropriate
policies to guide managers and employees in
carrying out their work
• Code of Conduct
• Bill 198 (Canada)
• Sarbanes-Oxley Act (US)

Chapter 1 - 9 © 2012 Pearson Canada Inc.

 Corporate Governance

• The ways in which companies are directed and

controlled
• Risk of Agency problems: conflict can occur
between the interests of shareholders and the
interests of senior managers

NB
Chapter 1 - 10 © 2012 Pearson Canada Inc.
 Executive Team/Shareholders’ Interests

Two types of actions are employed in practice:

1. The shareholders may insist on closely
monitoring the actions of the managers.
2. The shareholders may introduce incentive plans
for executives that link their compensation to
the share performance of the business.
Example: Share options

Chapter 1 - 11 © 2012 Pearson Canada Inc.

 Corporate Governance and Economic
Performance
• A lack of concern for shareholders can
have a profound effect on the
performance of the economy.

Chapter 1 - 12 © 2012 Pearson Canada Inc.

Corporate Governance and Economic
Performance
• Three Guiding Principles to monitor and
control behaviour of directors include:
1. Disclosure
2. Accountability
3. Fairness

Chapter 1 - 13 © 2012 Pearson Canada Inc.