1.

The economic essence, tasks and objectives of financial management

Financial management can be defined as the management of the finances of an organization in
order to achieve the financial objectives of the organization.
Wealth maximization (shareholders’ value maximization) is also a main objective of financial
management. Wealth maximization means to earn maximum wealth for the shareholders. So,
the finance manager tries to give a maximum dividend to the shareholders. He also tries to
increase the market value of the shares. The market value of the shares is directly related to
the performance of the company. Better the performance, higher is the market value of shares
and vice-versa.
The financial manager will need to plan to ensure that enough funding is available at the right
time to meet the needs of the organization for short, medium and long-term capital.
(a) In the short term, funds may be needed to pay for purchases of inventory, or to smooth out
changes in receivables, payables and cash: the financial manager is here ensuring that working
capital requirements are met.
(b) In the medium or long term, the organization may have planned purchases of non-current
assets such as plant and equipment, for which the financial manager must ensure that funding
is available.
The financial manager may compare data on actual performance with forecast performance.
Forecast data will have been prepared in the light of past performance (historical data)
modified to reflect expected future changes. Future changes may include the effects of
economic development.
The financial manager makes decisions relating to investment, financing and dividends. The
management of risk must also be considered. Investments in assets must be financed
somehow. Financial management is also concerned with the management of short-term funds
and with how funds can be raised over the long term.

2. Basic concepts of financial management

In modern economic science the basic concepts of financial management are:
Cash flow, Agency relations, efficiency of markets, capital structure, time value of money,
dividend policy, risk and return and others.
- The concept of cash flows assumes that each company is a kind of resource, which
creates new money. Therefore, its value lies in how to increase the amount of money
compared to the amount that was previously invested in it.
- the Agency relationship gives answers to the questions related to the essence and
causes of the financial and economic problem that may arise between business
partners.
- time value of money comes from the need of understanding that our money at different
points in time have different value. And because investing in any project, you should
choose the most suitable moment, which will bring the most profit.
- the theory of risk and return is come from simple and well-known assertion that the
higher the risk, there is higher probability of getting a positive result from their use or
negative.
- Portfolio theory also has a very practical rationale: “you should never store all your eggs
in one basket”. To ensure warranty risk reduction should form the so-called portfolio
investment, in which funds are distributed in the form of various assets placed in various
investment processes.
- The concept of capital structure answers to the eternal question: “How to use the
money in the best way?”. The problem of attracting investments from reliable sources
and use them efficiently — main subject of study of this field of research management.
 - From the point of view of the practical relevance of the basic concepts of financial
management are considered as a theoretical basis for the formation, justification and
creation of effective models of business support, in this case – effective cash
management and their sources.
3. Financial aims and their interconnection with corporate strategy
Strategy may be defined as a course of action, including the specification of resources
required, to achieve a specific objective. Strategy can be short-term or long-term,
depending on the time horizon of the objective it is intended to achieve.
This definition also indicates that since strategy depends on objectives or targets, the
obvious starting point for a study of corporate strategy and financial strategy is the
identification and formulation of objectives.

Financial strategy can be defined as 'the identification of the possible strategies

capable of maximizing an organization's net present value, the allocation of scarce capital
resources among the competing opportunities and the implementation and monitoring of
the chosen strategy so as to achieve stated objectives'.

4. The concept of time value of money

The time value of money (TVM) is a basic financial concept that holds that money in the
present is worth more than the same sum of money to be received in the future. This is true
because money that you have right now can be invested and earn a return, thus creating a
larger amount of money in the future. (Also, with future money, there is the additional risk that
the money may never actually be received, for one reason or another.) The time value of
money is sometimes referred to as the net present value (NPV) of money.

The time value of money is an important concept not just for individuals, but also for making
business decisions. Companies consider the time value of money in making decisions about
investing in new product development, acquiring new business equipment or facilities, and
establishing credit terms for the sale of their products or services.
The formula:
FV = PV x [ 1 + (i / n) ] (n x t)

 FV = Future value of money

 PV = Present value of money
 i = interest rate
 n = number of compounding periods per year
 t = number of years

5. The concept of alternative return, its economic essence

The lure of alternative data sets is largely the potential for an information advantage over the
market with regard to investment decisions. True information advantage has occurred at
various times in the history of securities markets, and alternative data seem to be just its most
recent manifestation. Today’s fortunes may rest on the accessibility of vast volumes of data
coupled with advanced analytics that fuel the potential for information advantage, as opposed
to the winged messengers of yesteryear
A rate of return (RoR) is the net gain or loss on an investment over a specified time period,
expressed as a percentage of the investment’s initial cost. Gains on investments are defined
as income received plus any capital gains realized on the sale of the investment.
Rate of return=[ (Current value−Initial value)] / Initial value ×100
To measure efficiency of investment we should compare its rate of return with rates of return
of investment in some assets with the same level of risk.
6. The concept of cost of capital
Cost of capital is the required return necessary to make a capital budgeting project, such as
building a new factory, worthwhile. When analysts and investors discuss the cost of capital,
they typically mean the weighted average of a firm's cost of debt and cost of equity blended
together.
COMPONENTS OF COST OF CAPITAL
The cost of debt is the market interest rate that the firm has to pay on its borrowing. It will
depend upon three components:
(a) The general level of interest rates
(b) The default premium
(c) The firm's tax rate
The cost of equity is The return that equity-holders require on their investment in the firm.
Estimating cost of equity:
(a) The required rate of return given the risk (CAPM, Arbitrage)
(b) The Dividend yield and price appreciation
(c) The Returns approach
The weights attached to debt and equity have to be market value weights, not book
value weights.
WACC = ke (E/(D+E)) + kd (D/(D+E))
Aspects Of Wacc Calculation
WACC essence is estimating price of newly attracted funds
is a relatively stable indicator that shows the current structure of capital
There are two ways in determining the weights for estimation: market estimates of capital
structure and book values.
WACC accuracy depends on accuracy of estimation of components
All else being equal, lower WACC means increase in firm value

7. Informative basis of financial management

Financial statements are written records that convey the business activities and the financial
performance of a company. Financial statements include the balance sheet, income statement,
and cash flow statement. Financial statements are often audited by government agencies,
accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purpose.
The balance sheet is a snapshot of the firm. It is a convenient means of organizing and
summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference
between the two (the firm’s equity) at a given point in time.
Assets = Equity +Liabilities – this is known as the "accounting equation“.
The income statement measures performance over some period of time, usually a quarter or a
year. The income statement equation is:
Revenues - Expenses = Income
The statement of cash flows shall report cash flows during the period classified by operating,
investing and financing activities. Cash flows from operating activities are primarily derived
from the principal revenue-producing activities of the entity.
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

Cash flow from assets involves three components: operating cash flow, capital spending, and
change in net working capital.
Operating cash flow refers to the cash flow that results from the firm’s day-to-day activities of
producing and selling.
Expenses associated with the firm’s financing of its assets are not included because
they are not operating expenses.
8. Financial mechanism
A financial mechanism refers to the way in which a business, organization, or program
receives the funding necessary for it to remain operational. Private companies, for example,
typically receive such funding through a variety of means, including revenue generated from
the sale of services and products as well as from loans or the sale of stock. Other
organizations typically receive funding through various means, such as donations provided
by individuals and companies as well as fund-raising events. The financial mechanism for
government typically comes from taxes or other means of acquiring resources from the
populace, which is then used as funding for various agencies and programs.

There are many different contexts in which the term “financial mechanism” can be used,
though they all typically refer to the same basic concept. This is something of a catchall term
for the source of funding that an organization or business receives. By using this term, a
company can more easily establish practices and regulations for how funding is utilized on
an operational level, without having to refer to the process of receiving money at every
usage. The exact financial mechanism for an organization can be quite complex, and the use
of a simple term makes it easier to describe and consider overall.
Revenue is one of the most common forms of financial mechanism for a business. This is
typically generated through the sale of various products or services that the company
manufacturers or otherwise provides for customers. Large companies, especially
corporations, may use the creation and sale of stocks as a form of financial mechanism, to
allow for a greater influx of resources based on the perceived value of the company.
Businesses can also take out loans from banks and other institutions that ultimately have to
be paid back, but which provide that company with initial capital for development.
Organizations, such as charities and other non-profit groups, can use different mechanisms to
generate the resources necessary for ongoing operations. Donations from businesses and
private individuals are quite common. An additional financial mechanism can come in the
form of fund-raising through events and campaigns, and some groups may receive funding
from governmental bodies.
The government of a country often relies on the populace of that country as a financial
mechanism. Funds are typically raised through taxes levied upon the citizens of a country,
though loans from private organizations and other countries may also be necessary. These
resources are then used to fund individual agencies, departments, and programs within the
government, allowing the government itself to become a mechanism for those subsections.
9. The main financial ratios
A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing
one number by the other. There are several main groups of ratios that all business owners can
use in their business to gain a better insight about their business and take control of their
company’s success.
Profitability ratios provide information about management's performance in using the
resources of the small business. Many entrepreneurs decide to start their own businesses in
order to earn a better return on their money than would be available through a bank or other
low-risk investments. If profitability ratios demonstrate that this is not occurring—particularly
once a small business has moved beyond the start-up phase—then entrepreneurs for whom a
return on their money is the foremost concern may wish to sell the business and reinvest their
money elsewhere.
Liquidity ratios demonstrate a company's ability to pay its current obligations. In other words,
they relate to the availability of cash and other assets to cover accounts payable, short-term
debt, and other liabilities. All small businesses require a certain degree of liquidity in order to
pay their bills on time, though start-up and very young companies are often not very liquid. In
mature companies, low levels of liquidity can indicate poor management or a need for
additional capitalBut liquidity ratios can provide small business owners with useful limits to
help them regulate borrowing and spending.
Leverage ratios look at the extent to which a company has depended upon borrowing to
finance its operations. As a result, these ratios are reviewed closely by bankers and investors.
Most leverage ratios compare assets or net worth with liabilities. A high leverage ratio may
increase a company's exposure to risk and business downturns, but along with this higher risk
also comes the potential for higher returns.
By assessing a company's use of credit, inventory, and assets, efficiency ratios can help small
business owners and managers conduct business better. These ratios can show how quickly the
company is collecting money for its credit sales or how many times inventory turns over in a
given time period.
10. Profitability: the definition, main indicators and their interconnection. The DuPont
formula.

Show a company’s ability to generate profits from its operations.

Gross profit margin= gross margin/revenue(net sales) (how much gross margin a company
generates per 1$ of revenue) <1

Gross margin=revenue-cost of sales

Operating profit margin=operating income/revenue (shows how much of oper income a

company generates per 1$ of revenue)

Net profit margin=net income /revenue

ROA=net income/av.total assets

ROE=net income/av total equity( how much a company earns per 1$ of assets/equity)

ROA=income before tax/av total assets

ROE=income before tax/av total equity

DUPONT:

A DuPont analysis is used to evaluate the component parts of a company's return on equity
(ROE). This allows an investor to determine what financial activities are contributing the most
to the changes in ROE. An investor can use analysis like this to compare the operational
efficiency of two similar firms. Managers can use DuPont analysis to identify strengths or
weaknesses that should be addressed

ROE=net income/av total equity

ROE= net income/av equity*revenue/revenue*total assets/total assets

 11. Liquidity analysis: the definition, main indicators and their interconnection.

A company’s liquidity is its ability to meet its current obligations, it is a measure of its
financial health.

Working capital=cur assets-cur liabilities (the company’s ability to pay all of its short term
debts)

Cash ratio=(CCE+ST investments)/cur liabilities (the company’s ability to meet its current
liabilities with CCE and ST investments.)

Quick ratio= (CCE+ST investments+AR)/cur liabilities (the company’s ability to meet its
current liabilities with CC, ST investments and AR.)

Current ratio=cur assets/cur liabilies (the company’s ability to meet its current liabilities
with cur assets)

12. Types of cash flows.

By cash flow, we simply mean the difference between the number of dollars that
came in and the number that went out. For example, if you were the owner of a
business, you might be very interested in how much cash you actually took out of
your business in a given year.

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets involves three components: operating cash flow, capital
spending, and change in net working capital.
Operating cash flow refers to the cash flow that results from the firm’s day-to-day
activities of producing and selling.
Expenses associated with the firm’s financing of its assets are not included because
they are not operating expenses.
Capital spending refers to the net spending on fixed assets (purchases of fixed assets
less sales of fixed assets).
Finally, change in net working capital is measured as the net change in current
assets relative to current liabilities for the period being examined and represents the
amount spent on net working capital.

Cash flow to creditors is interest paid less net new borrowing; cash flow to
stockholders is dividends paid less net new equity raised.
13. Capital structure.
The capital structure is the particular combination of debt and equity used by a company
to finance its overall operations and growth. Debt comes in the form of bond issues or loans,
while equity may come in the form of common stock, preferred stock, or retained
earnings. Short-term debt such as working capital requirements is also considered to be part of
the capital structure.
Both debt and equity can be found on the balance sheet. Company assets, also listed on the
balance sheet, are purchased with this debt and equity. Capital structure can be a mixture of a
company's long-term debt, short-term debt, common stock, and preferred stock. A company's
proportion of short-term debt versus long-term debt is considered when analyzing its capital
structure.

When analysts refer to capital structure, they are most likely referring to a firm's debt-to-equity
(D/E) ratio, which provides insight into how risky a company's borrowing practices are. Usually,
a company that is heavily financed by debt has a more aggressive capital structure and
therefore poses greater risk to investors. This risk, however, may be the primary source of the
firm's growth.
Companies that use more debt than equity to finance their assets and fund operating activities
have a high leverage ratio and an aggressive capital structure. A company that pays for assets
with more equity than debt has a low leverage ratio and a conservative capital structure.
Analysts use the debt-to-equity (D/E) ratio to compare capital structure. It is calculated by
dividing total liabilities by total equity.

14. The risk caused by capital structure. The first concept of financial leverage. The
economic essence and methods of calculations.

Financial Leverage -- The use of fixed financing costs by the firm.

Financial leverage is acquired by choice.
Used as a means of increasing the return to common shareholders.
EBIT-EPS Break-Even Analysis – Analysis of the effect of financing alternatives on earnings per
share. The break-even point is the EBIT level where EPS is the same for two (or more)
alternatives.

Degree of Financial Leverage – The percentage change in a firm’s earnings per share (EPS)
resulting from a 1 percent change in operating profit.
15. The risk caused by capital structure. The second concept of financial leverage. The
economic essence and methods of calculations ((Lecture 9 “Operating and
financial leverage”)