FIN B280 Unit 1 Scope And Concepts Note

FIN B280 Introduction to Financial Management

│Unit 1│
Scope and Concepts
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FIN B280 Introduction to Financial Management

Unit Overview
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Financial Objective of a Firm

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Agency Problem

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Time Value of Money

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Making interest rates comparable

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Effect of taxes on financial decision making

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FIN B280 Introduction to Financial Management

Financial Objective of a Firm

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FIN B280 Introduction to Financial Management

Financial Objective of a Firm
Financial Management covers three areas of decisions:
1. evaluating a firm’s investments in capital assets
2. evaluating alternative financing methods
3. managing the flow of financial resources for adequately maintaining the firm’s liquidity position and supporting its business operations

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FIN B280 Introduction to Financial Management

Agency Problem
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Separation of: ownership – shareholders [ Principal ] control – management [ Agent ]
 managers do not necessarily act in the best interests of the shareholders
 Agency Problem / Principal – Agent Problem
 Agency Cost

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FIN B280 Introduction to Financial Management

Agency Problem
Agency Cost (1)
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loss in shareholders’ wealth caused by suboptimal decisions made by agents who give priority to their own interests
Example:
managers may prefer equity over debt financing in raising capital as inclusion of the explicit interest cost has the effect of lowering the firm’s net profit, which will cause negative implication for awarding their performance bonuses in consequence

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FIN B280 Introduction to Financial Management

Agency Problem
Agency Cost (2)
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financial resources used to monitor managers and to assure that they act in the best interest of the shareholders Example: use of