FINANCIAL MANAGEMENT

WEEK 1 LECTURE NOTES

AY 2020-2021

I. INTRODUCTION TO FINANCIAL MANAGEMENT

Profit maximization versus Stockholders’ Wealth Maximization

Goal Objective Advantages Disadvantages

Profit maximization Obtain large amount 1.Calculating profits is 1.The short term is
of profits easy. more emphasized.

2.Determining the link 2.Risk or uncertainty is

between financial ignored.
decisions and profits is
simple
3.The timing of
returns does not
matter.
4.Immediate
resources are
necessary.
Stockholders’ wealth Achieve highest 1.The long term is 1. There is no clear
maximization market value of emphasized. relationship between
common stock financial decisions and
stock price
2. Risk or uncertainty 2.Management
is recognized anxiety and
frustration may be
experienced.
3.The timing of
returns is taken into
account.
4. Stockholders’
return is considered

Role of Financial Managers

 1. Investment decision: This entails an outflow of resources with the expectations of a benefit in
the form of cash inflow in the near future. Investments have to be evaluated in terms of their
expected returns and corresponding risks that could affect the firm’s valuation in the market.
In accepting or rejecting an investment proposal, a firm may use capital budgeting technique
that considers the time value of money(e.g. discounted payback period, internal rate of return,
net present value, and profitability index) or one that does not (e.g., payback period and
accounting rate of return).
2. Financing decision: The financial manager finds ways to provide money for the activities of the
firm. The main idea in financing decision is to look for resources that will give the company the
lowest weighted average cost of capital.
3. Dividend policy decision: Firms with a good history of dividend payment have better potential in
luring investors. Dividend declaration reflects a profitable status of the company. On the other
hand, companies with earnings retention have more funds for investment; hence, it indicates
the growth potential of the company.

Types of Business Organizations:

Sole proprietorship: A sole proprietorship is a business owned by a single person. It is the simplest form
of a legal organization. The two principal disadvantages of sole proprietorship are limited life and the
unlimited liability of the owner. Another disadvantage of a sole proprietorship is that it depends solely
on its own operations and the financial capabilities of its owner. It becomes difficult to raise large
amounts of capital.

Advantages of the Sole Proprietorship

1. Ease of formation.
2. Control over operations
3. No sharing of profits
4. Simplicity
5. No taxation. The business itself is not subject to tax. However, the income or loss generated
from the business shall be included and shall be a part of th income generated by the owner
which is subject to tax. The tax is graduated based on the total income of the taxpayer.

Disadvantages of the Sole Proprietorship

1. Limited life
2. Unlimited liability
3. Difficulty in raising capital
4. Limitation of skills.

Partnership: is composed of two or more persons who agree to contribute money, property, or services
for the purpose of dividing the profits between or among themselves. The basic requirement for the
registration of a partnership with the Securities and Exchange Commission (SEC) us the filing of the
Articles of Co-partnership. The following information is contained in the articles of partnership.

1. Name of the partnership

 2. Principal place of business
3. Date of effectivity and life of th partnership
4. Purpose of the partnership
5. Names, addresses, and contributions of the partners
6. Agreement as to the manner of management of the partnership
7. Manner of dividing the profits between or among the partners
8. Manner of liquidating the partnership with the rights and duties of the partners.
9. Arbitration of disputes

Advantages of the partnership:

1. A partnership is relatively easy to organize, being subject to few government regulations.

2. It is easy to handle since it is group of people that share expertise in running the business.
3. The combine capital resources of the partners offer better capitalization as compared with those
of a sole proprietorship.

Disadvantages of the Partnership:

1. Limited life
2. Unlimited liability
3. Mutual agency
4. Difficulty in raising capital

Corporation: is an artificial being created by the operation of law having the right of succession and the
powers, attributes, and properties expressly authorized by law or incident to its existence (Corporation
Code of the Philippines, Section 1).

Advantages of the Corporation

1. Limited liability
2. Indefinite life
3. No mutual agency
4. Ease of obtaining additional capital
5. Ease of transfer of ownership interest
6. Separate legal entity

Disadvantages of the Corporation

1. Double taxation
2. More government control
3. More costly to organize
4. More involved decision-making process
5. Dilution of earnings and control.