CHAPTER 1: Introduction to Financial Management

The Role of Financial Management

- plays a dynamic role in a modern company’s development
- 1900’s financial managers primarily raised funds and managed
Financial Manager their firm’s cash position
- 1950’s the increasing acceptance of present value they are
encouraged to expand their responsibilities and to become
concerned with the selection of capital investment projects
- team player in the overall effort of a company to create value
 Heightened corporate competition
 Technological change
External Factors that have an  Volatility in inflation and interest rate
impact on Financial Manager  Worldwide economic uncertainty
 Fluctuating exchange rates
 Tax law changes
 Environmental issues
 Ethical concerns
- concerns with acquisition, financing, and management of assets
Financial Management with some overall goal in mind
- it has 3 decision function namely investment decision, financing
decision, and asset management decision
- most important among the three major decisions when it comes to
value creation
- it is concerned with the left-side of the balance sheet (assets)
- it begins with the determination of the total amount of assets
Investment Decision needed to be held by the firm (investment)
- composition of asset must still be decided (e.g., how much total
asset must be devoted to cash or to inventory)
- also, the flip side of investment – disinvestment – must not be
ignored. Assets that can no longer be economically justified may
need to be reduced, eliminated, or replaced
- here, the financial manager is concerned with the right-hand side
of balance sheet (liabilities + owner’s equity)
- dividend-payout ratio determines the amount of earning that can
Financing Decision be retained in the firm
- dividend-payout ratio annual cash dividends divided by annual
earnings; or, alternatively, dividends per share divided by earnings
per share. The ratio indicates the percentage of a company’s
earnings that is paid out to shareholders in cash
- third important decision
- once asset has been acquired and appropriate financing is
Asset Management Decision provided, these assets must still manage efficiently
- concerned more with management of current assets (financial
manager) than with that of fixed assets (operating manager)
The Goal of The Firm
- under this goal a manager could continue to show profit increases
by merely issuing stock and using the proceeds to invest in treasury
 Value Creation bills (stock or bonds issued by the government)
- this requires management to judge alternative investment,
financing, and asset management strategies in terms of their effect
on shareholder value (share price)
(TERMS UNDER VALUE CREATION) - is offered as the proper objective of the firm
Profit Maximization - maximizing firm’s earnings after taxes (EAT)

Earnings per share - earnings after taxes (EAT) divided by the number of common
shares outstanding

Market Price - serves as the barometer for business performance, it indicates how
well management is doing on behalf of its shareholders