Eugene F. Brigham & Joel F. Houston
Fundamentals of Financial
Management Concise 8E
2-1
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
INTRO
ORGANIZATION
CREATING VALUE
STK-MGR
CONFLICTS
STK-DBT
CONFLICTS
BAL INTERESTS
Chapter 1
An Overview of Financial
Management
Forms of Business Organization
Creating Value for Investors
Stockholder-Manager Conflicts
Stockholder-Debtholder Conflicts
Balancing Shareholder Interests and Society Interests
1-2
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
INTRO
ORGANIZATION
CREATING
…show more content…
All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
INTRO
ORGANIZATION
CREATING VALUE
STK-MGR
CONFLICTS
STK-DBT
CONFLICTS
BAL INTERESTS
Stock Prices and Intrinsic Value
•
In equilibrium, a stock’s price should equal its
“true” or intrinsic value.
•
•
Intrinsic value is a long-run concept.
•
Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.
To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.
1-7
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
INTRO
ORGANIZATION
CREATING VALUE
STK-MGR
CONFLICTS
STK-DBT
CONFLICTS
BAL INTERESTS
Determinants of Intrinsic Values and Stock Prices
Managerial Actions, the Economic Environment,
Taxes, and the Political Climate
“True” Investor
Cash Flows
“True” Risk
“Perceived” Investor
Cash Flows
Stock’s
Intrinsic Value
“Perceived”
Risk
Stock’s
Market Price
Market Equilibrium:
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
Kinicki, Angelo (2013). CGS_MBA_502. MBA502_0327_17032Attend Unit 2: Retrieved from https://www.betheluniversityonline.net/mba/default.aspx?SectionID=2315&tabid=156#2, slides 13-14. Retrieved on April 3,
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Corrections: The Fundamentals, by Burk Foster. Published by Prentice-Hall. Copyright © 2006 by Pearson Education,
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Every company, regardless the model of management followed, expects management to add value to the company. This is illustrated through financial statements. The 2013 financial statements for Google, Haier
Skills likes these are often not taught in a classroom, but have an impact on student’s education and can affect them later on in life.
Rappaport [1986] classified the above listed one time transactions as Phase I restructuring and those changes that bring continuous value improvement through day-to-day management of the business as Phase II restructuring. Rappaport [1986] argues that companies need to move from Phase I restructuring to Phase II because in Phase II, the shareholder value approach is employed not only when buying and selling a business or changing the company’s capital structure, but also in the planning and performance monitoring of all business strategies on an on-going basis. A successful implementation of Phase II restructuring not only ensures that management has met its responsibilities to develop corporate performance evaluation systems consistent with the parameters investors use to value the company, but also minimises the Phase I concern of managers that a hostile takeover is imminent. Copeland, Koller and Murrin [1990] also argue that managers should restructure companies to improve value, otherwise, external raiders will get an opportunity to take-over the company. Therefore, they claim that it is in the best interest of both managers and shareholders to keep the gap between potential and actual value as close as possible. Management can improve operations by increasing revenue or reducing cost, acquiring or disposing of assets and improving the financial structure of the company. Company executives often