1-introduction to financial management 2

7/31/2019 1-Introduction to Financial Management 2

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INTRODUCTION TO

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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?

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Legal Forms of Business

1. Sole Proprietorship

2. Partnership

3. Corporation4. Cooperative

5. Other legal forms:

a. Joint venture

b. Joint stock

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1. Sole Proprietorship - A business

owned by single person, assumes all

the risk derives all profits. Theentrepreneur makes the financial

decision.

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2. Partnership - A contract between two

or more persons binding themselves to

contribute money, property orindustry to a common fund with the

intentions of dividing the profits and

losses among themselves.

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3. Cooperative A voluntary

organization composed of small

producers and consumers jointogether to form business enterprise.

4. Other legal forms:

a. Joint ventureb. Joint stock

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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.

2. 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 ofearnings to the stockholders of a firm.


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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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HOMEWORK

sheet, c.w., handwritten

What are the career opportunities in

Managerial Finance. Enumerate the

positions and the corresponding job

description for each position.

Look for the answer in the book Principles of

Managerial Finance by Gitman, 12th ed. Table 1.3

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Areas of Specialization in Finance

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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Areas of Employment in Finance

Financial Analyst

Capital budgeting analyst/manager

Project finance manager

Cash manager

Credit analyst/manager Pension fund manager

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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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Role in the Organization

a) Treasurer: Financial planning, fund

raising, capital expenditure

decisions, cash and creditmanagement.

b) Controller: Corporate accounting,

cost accounting, and taxmanagement.

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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 theadded benefits exceed the addedcosts.

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Relationship to accounting

a) Emphasis on Cash flows:

Accrual Basisrecognizes sales revenue

and expenses incurred to make sale attime of sale.

Cash Basis: recognizes sales revenue

and expenses only with respect o

actual inflows and outflows of cash.

b) Decision Making*

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Accounting vs. Financial Views

Accounting View

(Accrual Basis)

Income Statement

XYZ Co.For year ended 12/31

Financial View

(Cash Basis)

Cash Flow Statement

XYZ Co.For year ended 12/31

Sales revenue P100,000

Less: Costs 80,000

Net Profit P 20,000

Cash inflow P 0

Less: Cash outflow 80,000Net cash flow (P80,000)


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Primary activities of the financial manager Technically, financial managers make

recommendations with regard to

decisions that are ultimately made by

the CEO and/or corporate board ofdirectors.

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The Primary activities of the financial

manager

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Balance Sheet

Current

Assets

_______________

Fixed

Assets

Current

Liabilities

_______________

Long-Term Funds

(Debt & Equity)

Financial Analysis & Planning

Making

Investment

Decisions

Making

Financing

Decisions


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The Goal of the Firm:

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Should Firms Maximize Profit or

Should Firms Maximize ShareholdersWealth?


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Should Firms Maximize Profit?

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Corporations commonly define profit asEarnings per Share (EPS).

The amount earned during the period on behalf ofeach outstanding share of common stock, calculatedby diving the periods total earnings available forcommon stockholders by the number shares ofcommon stock outstanding.

EPS ignores critical factors of

the timing of the returns.

cash flows available to common shareholders.

risk factors facing the firm.


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Timing of the returns

The receipt of funds sooner rather than later ispreferred.

Profit maximization fails to account for differences inthe level of cash flows (as opposed to profits), thetiming of these cash flows, and the risk of thesecash flows.

Which Investment is Preferred?

Earnings Per Share (EPS)

Investment Year 1 Year 2 Year 3 Total for Years 1, 2 and 3

Rotor PHP 1.40 PHP 1.00 PHP 0.40 PHP 2.80

Valve 0.60 1.00 1.40 3.00


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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

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.


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The Goal of the Firm:

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Should Firms Maximize ShareholdersWealth?

Evaluating Shareholder Wealth addresses

factors of timing, cash flows and riskignored by the EPS.

Therefore, Maximizing Shareholder Wealthis a more comprehensive goal for the

firm, its managers and employees. This can be explored through economic

valued added and a focus onstakeholders.


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1-introduction to financial management 2

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