Financial_Management_Theory_and_Practice (21)

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1.1 The basic EOQ formula
Key term
The economic order quantity (EOQ) is the optimal ordering quantity for an item of inventory which will minimize costs (order set-up + holding costs). Let D = usage in unit for one period (the demand)
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1 Managing inventory
Fast forward
An economic order quantity can be calculated as a guide to minimizing costs in managing inventory level. Bulks discounts can however mean that a different order quantity minimizing inventory costs.
I * Q* U 2
2Co D U CH
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1.3 Uncertainties in demand and lead times: a re-order level system
Fast forward
Uncertainties in demand and lead times taken to fulfill orders mean that inventory will be ordered once it reaches a re-order level Re-order level = maximum usage × maximum lead time

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Conflicts Between Managers and Stockholders

Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). But the following factors affect managerial behavior:


Well-functioning markets promote economic growth. Economies with well-developed markets perform better than economies with poorlyfunctioning markets.
Value of any asset is present value of cash flow
stream to owners.
Most significant decisions are evaluated in terms
of their financial consequences.
more persons
Corporation
An incorporated business owned by many
shareholders
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Proprietorships and Partnerships

Advantages
Ease of formation Subject to few regulations No corporate income taxes

1.3 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE
Some concepts of financial economics:
Arbitrage Market efficiency Capital Asset Pricing Risk classification
The U.S.–Canada trade agreement; the North American Free Trade Agreement (NAFTA),
1.3 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE
The main objective of multinational financial management is to maximize shareholder wealth as measured by share price. Shareholders are the legal owners of the firm and management has a fiduciary obligation to act in their best interests. Financial management is traditionally separated into two basic functions: the acquisition of funds (financing decision) and the investment of those funds (investment decision). The risks of multinational management include exchange and inflation risks; international differences in tax rates; multiple money markets, often with limited access; currency controls; and political risks, such as sudden or creeping expropriation. The most advantage of MNC is the international diversification of markets and production sites.

Subsequent issues of debt and equity
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Agency Problems and Corporate Governance



Agency problem: managers may act in their own interests and not on behalf of owners (stockholders) Corporate governance is the set of rules that control a company’s behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community. Corporate governance can help control agency problems.
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© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.