Marketing

An overview of finance

FMTCh1.ppt

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Appreciate the objectives of companies. Understand the role of the financial manager. Distinguish between the different forms of business organisations. Understand the concept of shareholder value. Understand why an expansion plan will need finance

Financial Management – An Irish Text © Text and illustrations Thomas Powere, Paul O’Meara & Stephen Walsh 2001

What is finance?

• Finance is about managing money. • Assessing the firm’s long-term investment projects. • the most fundamental principle in finance – net present value (NPV). • This will involve an assessment of the future timing and risk of future cash flow generated by these investments. • Where this cash will come from - the capital structure decision. • Managing the day-to-day working capital.

• Overriding consideration - maximising owners wealth.

Financial Management – An Irish Text © Text and illustrations Thomas Powere, Paul O’Meara & Stephen Walsh 2001

Maximising shareholder value

• Shareholders will want managers to manage the company in such a way that will maximise shareholders wealth. • The wealth of shareholders is the number of shares they hold multiplied by the market price of the share, plus dividends • Share prices impact everyone due to the proliferation of pension funds, life insurance companies & unit-funds. • Pension fund and mutual fund managers are seeking out companies that are adopting shareholder value added financial systems.

Financial Management – An Irish Text © Text and illustrations Thomas Powere, Paul O’Meara & Stephen Walsh 2001

What maximises share price?

• The value of a share depends on the ability of a company to generate cash flows both now and in the future. • Shareholder value is maximised by generating cash flow and not necessarily maximising profits. • The ‘timing’ of cash flows , and the cost of capital (e.g. Interest or Ke) is also important in enhancing shareholder value as they impact the NPV...