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AE108 FinMan C1 Introduction

This document provides an overview of key topics in financial management including definitions, the roles of financial managers, the goal of the firm and finance, the financial environment, and axioms of financial management. It defines financial management as the efficient planning and controlling of financial resources to maximize profitability and ensure achievement of organizational goals. The financial manager's roles may include cash management, credit analysis, financial analysis, capital expenditures, and project finance. The goal of the firm and finance is maximizing shareholder wealth over the long-term. The financial environment includes financial institutions, securities, and markets such as money markets, capital markets, bond markets, and stock markets.

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63 views27 pages

AE108 FinMan C1 Introduction

This document provides an overview of key topics in financial management including definitions, the roles of financial managers, the goal of the firm and finance, the financial environment, and axioms of financial management. It defines financial management as the efficient planning and controlling of financial resources to maximize profitability and ensure achievement of organizational goals. The financial manager's roles may include cash management, credit analysis, financial analysis, capital expenditures, and project finance. The goal of the firm and finance is maximizing shareholder wealth over the long-term. The financial environment includes financial institutions, securities, and markets such as money markets, capital markets, bond markets, and stock markets.

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UNIT 1: INTRODUCTION

TO FINANCIAL
MANAGEMENT
AE108: Financial Management
TOPIC OVERVIEW

• Financial Management and the Financial Manager


• The Managerial Finance Function and Goal of the
Firm
• Financial Environment
• Axioms of Financial Management
FINANCIAL MANAGEMENT

• Definitions:
• The efficient and effective planning and controlling of financial
resources so as to maximize profitability ensuring of
achievement of organization goals
• The process of putting the available funds to the best advantage
from the long-term point of view of business objectives.
FINANCIAL MANAGEMENT

• Other terms:
• Managerial Finance
• Corporate Finance
• Implies focus on the Corporate form of business
THE BUSINESS ORGANIZATION

Shareholders
Elects among themselves

The
Corporation Board of Directors
Appoints
(may or may not be
shareholders, usually not)
Top Management
FINANCIAL MANAGER

• Possible Roles
Position Description
Cash manager Maintains and controls the firm’s daily cash balances. Frequently manages the
firm’s cash collection and disbursement activities and short-term investments and
coordinates short-term borrowing and banking relationships.
Credit Administers the firm’s credit policy by evaluating credit applications, extending
analyst/manager credit, and monitoring and collecting accounts receivable.
Financial analyst Prepares the firm’s financial plans and budgets. Other duties include financial
forecasting, performing financial comparisons, and working closely with
accounting.
FINANCIAL MANAGER

• Possible Roles
Position Description
Capital Evaluates and recommends proposed long-term investments. May be involved in
expenditures the financial aspects of implementing approved investments.
manager
Project finance Arranges financing for approved long-term investments. Coordinates consultants,
manager in- vestment bankers, and legal counsel.
Pension fund Oversees or manages the assets and liabilities of the employees’ pension fund
manager
Foreign exchange Manages specific foreign operations and the firm’s exposure to fluctuations in
manager exchange rates.
GOAL OF THE FIRM AND FINANCE

• Maximization of Profit (short-term/ traditional)


• Maximization of Shareholder’s Wealth (long-term/
contemporary)
• Includes increasing profit, extending the life of the
business, and decreasing risk
FINANCIAL ENVIRONMENT
• Components
• Financial Institutions
• Financial Securities
• Financial Markets
FINANCIAL ENVIRONMENT
• Components
• Financial Institutions
• An intermediary that channels the savings of individuals, businesses, and
governments into loans or investments
• Commercial banks, investment banks/underwriters, cooperatives,
• Financial Securities
• Financial Markets
FINANCIAL ENVIRONMENT
• Components
• Financial Institutions
• Financial Securities
• Negotiable financial instruments
• Assets or packages of capital that can be traded.
• In the form of cash, a contractual right to deliver or receive cash or another type of
financial instrument, or evidence of one’s ownership in some entity.
• Bonds (Negotiable promissory notes), Shares and Stocks, Foreign Currency
• Financial Markets
FINANCIAL ENVIRONMENT
• Components Money markets vs
• Financial Institutions Capital Markets
• Financial Securities
Primary vs Secondary/Tertiary
• Financial Markets
markets
• place in which suppliers of funds
and demanders of funds can transact
business directly Spot vs Futures

Organized vs Centralized
FINANCIAL ENVIRONMENT
FINANCIAL ENVIRONMENT
• Other terms of note: Private Placement vs Public Offering
• Private Placement
• the sale of a new security directly to an investor or group of investors.
• Public Offering
• the sale of either bonds or stocks to the general public.
• Initial Public Offering (IPO) of stocks
• First issuance by a corporation of its shares to the public
• Indicator of a corporation being “publicly listed”
FINANCIAL ENVIRONMENT
• Examples:
• Commercial Banks – Over-the-counter market for currency, mutual funds and
loans
• Investment Banks – stock and bonds market, primary market, centralized market

• Philippine Dealing System Holdings Corp. - Bonds Market – Centralized market


– Capital Market – secondary market
• Philippine Stock Exchange - Stock Market – Centralized market – capital market
– secondary market
BOND MARKET IN THE PHILIPPINES: PHILIPPINE
DEALING SYSTEM HOLDINGS CORP.
BOND MARKET IN THE PHILIPPINES: PHILIPPINE
DEALING SYSTEM HOLDINGS CORP.
STOCK MARKET IN THE PHILIPPINES: PHILIPPINE
STOCK EXCHANGE
STOCK MARKET IN THE PHILIPPINES: PHILIPPINE
STOCK EXCHANGE
STOCK MARKET IN THE PHILIPPINES: PHILIPPINE
STOCK EXCHANGE
STOCK MARKET IN THE PHILIPPINES: PHILIPPINE
STOCK EXCHANGE
AXIOMS OF MANAGERIAL FINANCIAL
MANAGEMENT
1. The Risk-Return Trade-off
• We won’t take on additional risk unless we expect tp be
compensated with an additional return
2. The Time Value of Money
• A dollar received today is worth more than a dollar received in
the future.
AXIOMS OF MANAGERIAL FINANCIAL
MANAGEMENT
3. Cash Flows is King
• This states that Cash flows and not profits is king in
terms of financial management
4. Incremental Cash Flows
• Only the cash flows that changes are the ones that count
AXIOMS OF MANAGERIAL FINANCIAL
MANAGEMENT
5. The Curse of Competitive Markets
• Why it’s hard to find exceptionally profitable projects
6. Efficient Capital Markets
• The markets are quick and the prices are right
AXIOMS OF MANAGERIAL FINANCIAL
MANAGEMENT
7. The Agency Problem
• Managers will not work for the owners unless it is in their best
interests
8. Taxes Bias Business Decisions
• In evaluating projects, income taxes ply a significant role in the
decision-making
AXIOMS OF MANAGERIAL FINANCIAL
MANAGEMENT
9. All Risks are Not Equal
• Some risks can be diversified away and some cannot
10 Ethical Behavior is Doing the Right Thing
• Ethical dilemmas are everywhere in finance
UNIT 1: INTRODUCTION
TO FINANCIAL
MANAGEMENT
AE108: Financial Management

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