Financial Management

Fin105 JTA-A 1st Semester, SY 2011-2012

Aldo Tong

Course Syllabus
atong@ateneo.edu Consultation hours: by appointment

Reminders
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NICKNAME FIN105 (Sec.)

Full Name ID Number Course Birthday Cellphone Number, Landline Number Email address High School
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What grade do you plan to get for this course What are you willing to do to get this grade. What is investment?

Forms of Business Organization

1.

Sole Proprietorship
o an unincorporated business owned by

one individual
2.

Partnership
o an unincorporated business owned by

two or more persons

3.

Corporation
o a legal entity created by a state,

separate and distinct from its owners and managers

Forms of Business Organization

Sole Proprietorship Partnership Corporation
Setting up and accomplishing all requirements can become complex and timeconsuming Corporate earnings are subject to double taxation

Easy and inexpensive to form

Few government operations

NO corporate income tax

Forms of Business Organization

Sole Proprietorship Partnership Corporation
Easy to obtain additional capital Limited liability and unlimited life Easy transferability of ownership

Difficult to obtain large sums of capital Unlimited liability and limited life Difficult to transfer ownership

An Overview of Financial Management

1. Money and Capital markets

2. Investments
3. Financial Management
Decision making
How to raise capital What to spend on

An Overview of Financial Management Trends Affecting Finance BUSINESS ETHICS GLOBALIZATION INFORMATION TECHNOLOGY

Social Responsibility
Business should be actively concerned with the welfare of society but this will entail cost and might be disadvantageous

Business Ethics
A companys attitude and conduct toward its employees, customers, community and stockholders

Tasks of Financial Staff

Forecasting and planning Major investment and financing decisions 3. Coordination and control 4. Dealing with the financial markets 5. Risk management
1. 2.

THE MAIN TASK IS TO MAXIMIZE THE VALUE OF THE FIRM!

Goal of the Corporation

Stockholder Wealth Maximization

Primary goal for management decisions Considers the risk and timing associated with expected earnings per share in order to maximize the price of the firms common stock

The Agency Problem

A potential conflict of interests between the agent (manager) and (1) the outside stockholders or (2) the creditors (debtholders) This problem can be remedied by motivating the managers to act in the best interests of the stockholders.

Shareholders versus Managers

Managers are naturally inclined to act in

their own best interests. But the following factors affect managerial behavior: Managerial compensation plans Direct intervention by shareholders The threat of firing The threat of takeover

Shareholders versus Creditors

Shareholders (through managers) could

take actions to maximize stock price that are detrimental to creditors.

In the long run, such actions will raise

the cost of debt and ultimately lower stock price.

Financial Management
The intrinsic price of a firms stock depends on the cash flows paid to shareholders, the timing of the cash flows, and their riskiness. The level and riskiness of cash flows are affected by the financial environment as well as by investment, financing, and dividend policy decisions made by financial managers.

Basic Valuation Model

CF CF CF 1 2 n Value (1 k)1 (1 k)2 (1 k)n n CFt . t t 1 (1 k)

To estimate an assets value, one

estimates the cash flow for each period t (CFt), the life of the asset (n), and the appropriate discount rate (k) Throughout the course, we discuss how to estimate the inputs and how financial management is used to improve them