FINANCIAL MANAGEMENT

Session 1: Introduction

Instructor: Le Thi Bich Ngoc

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Finance

Financial Markets
Corporate &Institutions
Finance/FM Investment

Financial
assets
Firms Investors
Funds

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Finance

Investment: deal with Financial assets

What determine the price of Financial assets?
What are potential risks and rewards associated with
investing in financial assets?
What is the best mixture of different types of financial
assets to hold?
Financial Market & Financial Institutions
Places where financial assets are traded
Financial Management

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Financial Management
Financial management deals with how firms raise and use
funds to make short-term and long-term investments
Financial management functions:
Investment decision
What long- term investments should the firm engage in?
Financing decision
How can the firm raise the money for the required investments?
Working Capital decision
How the firm manage everyday financial activities (eg. Collecting from
customers and paying suppliers)?
An optimal combination of the three decisions will create
value!

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Goal of a Financial Management

• Is NOT
• to maximize sales
• to maximize market share
• to maximize profits
• PRIMARY GOAL should be to:
• Maximize the current value per share of existing stock (Shareholder
Wealth).

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 Financial decisions and Stock Price

Financial
Financial Increase
Decision Risk?
Manager Stock Accept
Alternative Return? Price?
Or Action

Reject
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The purpose of the course

“ The purpose of this course is to introduce the

fundamentals of Financial Management to the students,
with special emphasis on financial decisions within the
context of a business enterprise.”

Participants will learn finance concepts, and techniques,

which are applicable to business firms and other
organizations. Topic includes an overview of finance, time
value of money, cash flows, capital budgeting, Risk-Return,
and cost of capital
Schedule for the Course

Session Contents
1 Introduction to the course + Review of FS; Readings: chapter 1, 2,3

2 Time value of money; Readings: chapter 5,6

3 Bond Valuation; Readings: chapter 7, 8
4 Stock Valuation; Readings: chapter 7, 8
5 Net Present Value and other Investment Criteria; Readings: chapter 9

6 Review and Midterm

7 Making Capital Investment Decision; Readings: chapter 10
8 Risk and Return; Readings: chapter 12, 13
9 Risk and Return (con’t)
10 Cost of capital (chapter 14)
11 Review

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Assessment

ITEM Weight DATE DUE

______________________________________________________
Quiz 10%
Mid-term Exam 25% Session 6
Final Examination 50% Examination Week
Individual assignments 10%
Participation 5% Each week
_____________________________________________________

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Overview of Financial Statements
• The Balance Sheet
• The Income Statement
• Cash Flows

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 Balance Sheet

This lists the following at a specific point in time:

• Assets (resources)
• Liabilities (external claims on resources)
• Owner’s Equity (owners’ claims on resources)
This indicates the current position of an organization
This is reflected in the following equation:

Assets = Liabilities + Owner’s Equity

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 Balance sheet—Classification

• Current assets
• Will be converted to cash/consumed within 12 months
• Examples: cash, receivables, inventories
• Non-current assets
• Those which will last longer than 12 months
• Examples: plant, equipment, vehicles, land, buildings

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 Balance sheet—Classification

• Liabilities:
• Current liabilities
• Will be repaid within 12 months
• Examples: accounts payable, notes payable

• Non-current liabilities
• Those that will not be paid within 12 months
• Examples: long-term bank loans, bond

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 Balance sheet—Classification

• Owner’s equity
• The owner’s residual claim on assets
• Residual = after all liabilities have been paid
• Key components
1. Capital Contribution by owners
2. Retained Earnings

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US Corporation Balance Sheet

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 Income Statement

This lists the following over a set period of time:

• Income/Revenues
• Expenses
• Profit /net income
This indicates how well an entity has performed
over a period of time
This is reflected in the following equation:

Revenue – Expenses = Net Income

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Income Statement

• Generally Accepted Accounting Principles

• Recognition principle:
• Revenue should be recognized in the accounting period in which it is earned.
• Matching principle
• Expenses incurred by an organization must be charged to the income statement in the
accounting period in which the revenue, to which those expenses relate, is earned

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Revenue
 Revenue represents the cash received or amounts owing to a business as
a result of providing goods and services to customers.
 The business will either receive an immediate amount in cash, or an
equivalent amount in the form of accounts receivable.
 Revenue includes amounts received or owing from investments - interest
and dividends.
Expenses

 Expenses represent the costs incurred by a business in the process

of earning revenue.
• Cost of goods sold
• Depreciation expense
• Interest expense
• …..
US Corporation Income Statement

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Cash Flows

• Cash flows:
• Cash from assets
• Cash to creditors
• Cash to shareholders
• Cash Flow From Assets (CFFA) = Cash Flow to Creditors +
Cash Flow to Stockholders

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 Cash flow from Assets

• Cash Flow From Assets = Operating Cash Flow (OCF) –

Net Capital Spending (NCS)– Changes in Networking
Capital (NWC)
• OCF is the cash resulted from a firm’s normal business activities
(eg.buying and selling):
• OCF = Earnings before interest and tax + Depreciation - taxes
• Net Capital Spending (NCS) = Money spent on fixed assets – Money received from
selling fixed assets
• Ending net fixed assets – Beginning net fixed assets + Depreciation
• Changes in NWC = Ending NWC – Beginning NWC

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Cash Flow to Stockholders and Creditors

• Cash flow to Creditors:

• Interest paid – Net new borrowing
• Cash flow to Stockholders:
• Dividend paid – Net new Equity raised

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Example: US Corporation

• OCF (I/S) = EBIT + depreciation – taxes = $547

• NCS ( B/S and I/S) = ending net fixed assets – beginning
net fixed assets + depreciation = $130
• Changes in NWC (B/S) = ending NWC – beginning NWC
= $330
• CFFA = 547 – 130 – 330 = $87

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Example: US Corporation

• CF to Creditors (B/S and I/S) = interest paid –

net new borrowing = $24
• CF to Stockholders (B/S and I/S) = dividends
paid – net new equity raised = $63
• CFFA = 24 + 63 = $87

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