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INTRODUCTION TO
FINANCIAL MANAGEMENT
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What is Finance?
Finance can be defined as the art and science of managing money. What does the Bible say about money?
owned by single person, assumes all the risk derives all profits. The entrepreneur makes the financial decision.
or more persons binding themselves to contribute money, property or industry to a common fund with the intentions of dividing the profits and losses among themselves.
created by operations of law having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
b. Joint stock
Key Terms:
1. Unlimited liability The condition of a sole proprietorship (or a general partnership) allowing the owners total wealth to be taken to satisfy creditors. Articles of Partnership The written contract used to formally establish a business partnership.
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Key Terms:
3. Stockholders The owners of a corporation, whose ownership, or equity, is evidenced by either common stock or preferred stock. 4. Common Stock The purest and most basic form of corporate ownership. 5. Dividends Periodic distribution of earnings to the stockholders of a firm.
Key Terms:
6. Board of Directors Group elected by the firms stockholders and typically responsible for developing strategic goals and plans, setting general policy, guiding corporate affairs, approving major expenditures, and hiring/firing, compensating, and monitoring key officers and executives.
Key Terms:
7. President or Chief Executive Officer (CEO) Corporate official responsible for managing the firms day-to-day operations and carrying out the policies established by the board of directors.
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Look for the answer in the book Principles of Managerial Finance by Gitman, 12th ed. Table 1.3
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Financial Markets
Markets of users and savers of funds.
Financial Services
Design and delivery of financial advice and products to individuals, businesses, government.
Managerial Finance
Financial management of business firms.
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The Managerial Finance Function Role in the Organization Relationship to economics Relationship to accounting Primary activities of the financial manager
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The Managerial Finance Function Role in the Organization a) Treasurer: Financial planning, fund raising, capital expenditure decisions, cash and credit management. b) Controller: Corporate accounting, cost accounting, and tax management.
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The Managerial Finance Function Relationship to economics a) Foreign exchange manager: Monitoring and managing the firms exposure to loss form currency fluctuations. b) Marginal cost-benefit analysis: Financial decisions should be made and actions taken only when the added benefits exceed the added costs.
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Cash inflow P 0 Less: Cash outflow 80,000 Net cash flow (P80,000)
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The Goal of the Firm: Should Firms Maximize Profit or Should Firms Maximize Shareholders Wealth?
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The amount earned during the period on behalf of each outstanding share of common stock, calculated by diving the periods total earnings available for common stockholders by the number shares of common stock outstanding.
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Timing of the returns The receipt of funds sooner rather than later is preferred.
Which Investment is Preferred? Earnings Per Share (EPS)
Investment Year 1
PHP 1.40 0.60
Year 2
PHP 1.00 1.00
Year 3
PHP 0.40 1.40
Rotor Valve
Profit maximization fails to account for differences in the level of cash flows (as opposed to profits), the timing of these cash flows, and the risk of these cash flows.
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Cash flows available to stockholders Profit do not necessarily result in cash flows available to stockholders. High EPS do not necessarily translate into a higher stock price.
Risk factors facing the firm Profit maximization also disregard risk. Risk and return are the key determinants of share price, which represents the wealth of the owners in the firm. Cash flow and risk affect share price differently: Cash flow, tends to generate share price Risk, tends to result in share price
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