1-Introduction to Financial Management 2
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Transcript of 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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Legal Forms of Business
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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Legal Forms of Business
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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Legal Forms of Business
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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The Managerial Finance Function
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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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 theadded benefits exceed the addedcosts.
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The Managerial Finance Function
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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The Managerial Finance Function
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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