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Financial Management: Overview (Sources of FInance (Capital markets, Money…
Financial Management: Overview
Objective of F. Management
Maximise value of firm
Maximise Shareholder value
Maximising the company share price
Consider impact on other stakeholders
Supplier example
Why is profit max. not an obj.
Manipulation of acc. profits
Reducing advertising/research costs in short term = reduced value in the future
Timing
TVM - profits received sooner can be reinvested
Cash Flows
Acc. profits and cost of capital
Acc profits reflect actual costs & ignore opportunity costs
Risk
Ignores impact of risk on value
S/h want management to max value
Rolle of F. Manager
Pursue wealth-creating (operating & financial assets)investment opportunities
Source funds to finance investments
Sources of FInance
Capital markets
Money Markets
Creditors
Retained income
Portfolio Theory
Agency Problem
Conflicts of interests/objectives of owners & management
Solutions
Corporate governance
Share options to align objectives
S/h appoint board if directors who appoint management
Management put own interests first
Porter's Five Forces Models
Rivalry
Substitute products
New entrants
Bargaining power of customers/suppliers