INTRODUCTION TO FINANCIAL WHY STUDY FINANCE

MANAGEMENT AND FINANCIAL MARKETS Marketing and Finance - Financial

management allows marketing and publicity
FINANCIAL MANAGEMENT- strategic to stay on track, to manage business
planning, organizing, directing, and controlling of financial aspects accurately and to prevent
financial undertakings in an organization or an financial mistakes that may cost the company.
institute. Accounting and Finance - For accountants to
understand the implications of different financial
BASIC AREAS contracts, and its impact on financial statements.
1. Corporate Finance - area of finance that Management and Finance - Financial matters
deals with sources of funding, the capital of a company are important in making a
structure of corporations. business plan. Financial strategy must always
2. Investments - allocation of money, and be considered in coming up with a business
other financial assets (stocks and bonds) with strategy.
the expectation of a positive benefit/return in the Day-to-day life and Finance - a guide in
future. making financial decisions in a personal manner.
Stockbroker - has the authority to buy and Following up our spending patterns and
sell stocks for other investors. expenditures allows us to increase our own cash
Portfolio manager - manage money for flow.
investors. Also invest and manage money for FINANCIAL MANAGEMENT DECISION
different types of institutions. 1. Capital Budgeting - the process of
Security Analysis - researches individual planning and managing a firm's long-term
investment; stock in a company, and if the price investments.
is reasonable. 2. Capital Structure - the mixture of debt
3. Financial Institution - deals with and equity maintained by a firm.
financial matters. (Insurance companies, lending 3. Working Capital - A firm’s short-term
companies, banks, etc.) assets and liabilities.
4. International Finance - International
aspects of corporate finance, investments, and
financial institutions.
 FORMS OF BUSINESS ORGANIZATION
Sole Proprietorship
⮚ Simplest type of business - owned by one
person
⮚ Owner keeps all the profit
⮚ Unlimited liability - creditors can look to the
owner’s personal assets for payment
⮚ Business income is taxed as personal
income
⮚ Limited life span of the business
⮚ Limited equity
⮚ Ownership is difficult to transfer

SIMPLIFIED ORGANIZATIONAL CHART

Partnership FINANCIAL MANAGEMENT’S GOAL
⮚ Easy and inexpensive to form In general: Profit Maximization
⮚ General partners have unlimited liability In corporation:
⮚ All income are taxed as personal income to - To maximize the current value per share
the partners of the existing stock (more precise)
⮚ Limited equity - To maximize the market value of the
⮚ Limited life of the business existing owner’s equity (more general)
⮚ Ownership is difficult to transfer
⮚ General partnership AGENCY RELATIONSHIP, PROBLEMS AND
- all partners share in gains and losses, CONTROLS
and all have unlimited liability Agency Relationship - the relationship between
⮚ Limited partnership stockholders and management.
- one or more general partners will run the Agency Problem - conflict of interest between
business and have unlimited liability but there the stockholders (principal) and the
will be more one or more limited partners who do management (agent).
not actively participate in the business. Agency Cost - a type of internal company
expense, which comes from the actions of an
Corporation agent acting on behalf of a principal. It usually
⮚ Separate legal entity owned by one or more comes as a result of core inefficiencies,
individuals or entities. dissatisfaction and disturbances, such as
⮚ Articles of Incorporation and by-laws are interest conflicts between shareholders and
important in forming a corporation. management.
⮚ Ownership can be easily transferred Management Compensation - economic
⮚ Life of the business is not limited incentive to increase share value, improve the
⮚ Borrows money on its own name efficiency and effectiveness of the management,
⮚ Limited liability and to improve performance.
Control of the firm
Unsatisfied stockholders can replace
existing management by:
1. Proxy fight - refers to a situation in which ⮚ Auction Market - It has a physical
a group of shareholders in a company joins location. It serves as a middle man
forces in an attempt to oppose and vote out the between the sellers and the buyers.
current management or board of directors. 3.Money Markets - Markets that trade
2. Takeover debt securities or instruments with maturities
STAKEHOLDERS - is a party other than a of less than one year.
stockholder or creditor that has an interest in a Money Market Instruments
company and can either affect or be affected by 1.Treasury Bills - short term obligations
the business (employees, customers, suppliers, issued by the U.S. government
government). 2.Federal funds - short term funds
transferred between financial institutions usually
FINANCIAL MARKETS are the arenas and for no more than one day.
structures through which funds flow. 3.Repurchase agreements - agreements
1.Primary Markets - Markets in which involving the sale of securities by one party to
corporations raise funds through new issues of another with a promise by the seller to
securities. It has two types: repurchase the same securities from the buyer
⮚ Public offerings - involves selling securities at a specified date and price.
to the general public. 4.Commercial paper - short term unsecured
⮚ Private Placements - negotiated sale promissory notes issued by a company to raise
involving a specific buyer. short-term cash.
⮚ Most primary market transactions are 5.Negotiable certificate of deposit -
arranged through financial institutions called bank-issued time deposit that specifies an
investment banks. interest rate and maturity date and is negotiable
2.Secondary Markets - Markets that trade 6.Banker’s acceptance - time draft payable to
financial instruments once they are issued. a seller of goods, with payment guaranteed by a
Involves one owner or creditor selling to another. bank.
It has two types: 4.Capital Markets - Markets that trade debt
⮚ Dealer Market - dealers buy and sell for equity instruments with maturities of more than
themselves. Over-the-counter (OTC) is the one year.
dealer market in stocks and long-term debt. Capital market instruments
1.Corporate Stock - the fundamental
ownership claim in a public corporation
 2.Mortgages - loans to individuals or
businesses to purchase a home, land, or other
real property.
3.Corporate bonds - long term bonds issued LET’S PRACTICE!!
by corporations. 1. What is the main financial goal of
4.Treasury Bonds - long term bonds issued the firm?
by the government a. To build a long-lasting relationship with its
5.Bank and consumer loans - loans to stakeholders
commercial banks and individuals b. To maximize shareholder wealth
6.State and local government bonds - long c. To reduce cost of its production
term bonds issued by state and local d. To maximize its annual sale
governments.
5.Foreign Exchange markets - markets in 2. The following are the disadvantages of
which cash flows from the sale of products or a Sole Proprietorship business, except
assets denominated in a foreign currency are a. Difficult to raise capital
transacted. b. Unlimited liability
6.Derivative markets - Markets in which c. Ownership is not easily transferred
derivative securities trade. d. Life of the business is not limited

3. Statement I: Financial management

provides the skills needed for managers to
be able to evaluate and identify corporate
strategies that add value to the firm.
Statement II: A financial analyst is in charge
of monitoring and maintaining the daily cash
balance of a company.
a. Only statement 1 is incorrect
b. Only statement 2 is correct
c. Both statements are correct
d. Only statement 1 is correct
e. None of the statements are correct
f. Only statement 2 is correct
 7. It is defined as a firm's short-term
4. Statement I: Typically, a controller assets and its short-term liabilities
handles accounts, for example tax a. working capital
management, data processing, financial b. Debt
accounts and cost accounting. c. investment capital
Statement II: In evaluating and d. net capital
recommending proposed asset investments,
a capital expenditures analyst/manager is 8. This is defined as a conflict of interest
responsible. between the corporate shareholders and the
a. Only statement 1 is incorrect corporate managers?
b. Only statement 2 is correct a. agency relationship
c. Both statements are correct b. corporate breakdown
d. Only statement 1 is correct c. agency problem
e. None of the statements are correct d. by laws
f. Only statement 2 is correct
9. A stakeholder is can be defined as:
5. A particular form of partnership that a. Any person who has voting rights based
restricts liability for some partners on stock ownership of a corporation.
a. General partnership b. The founder of the company
b. Special partnership c. creditor to whom a firm currently owes
c. Disclosed partnership money.
d. Limited partnership d. any person or entity other than a
stockholder or creditor who potentially has a
6. Which one of the following terms is claim on the cash flows of a firm.
defined as the management of a firm's
long-term investments? 10. Which of the following questions are
a. working capital management commonly addressed by financial
b. financial allocation managers?
c. agency cost analysis I. How should a product be marketed, and
d. capital budgeting advertised to the public?
II. Should customers be given 15 or 60 days to b. funds flow from the buyer of the
pay for their credit purchases? asset to the seller.
III. Should the firm borrow more money to c. the issuer of the asset receives funds
finance its other projects? from the buyer.
IV. Should the firm acquire new equipment for its d. the existing issue changes hands in
operations? the primary market.
a. II, III, & IV
b. I, II, III, IV 14. Statement I: Secondary markets
c. I & IV facilitate the issuance of new securities.
d. II & III Statement II: Primary markets facilitate the
trading of existing securities, which allows
11. The conflict between owners, for a change in the ownership of the
employees, suppliers, and customers of a securities
company is known as ___. a. Only statement 1 is incorrect
a. regulatory risk b. Only statement 2 is correct
b. problem of agency c. Both statements are correct
c. conflict of multiple environments d. Only statement 1 is correct
d. conflict of interests e. None of the statements are correct
12. company offer its securities directly to f. Only statement 2 is correct
banks, financial institutions, and wealthy
investors 15. The use of income today in a way that
a. Auction market allows for a future benefit
b. Dealer market a. Debts
c. Repurchase agreement b. Savings
d. primary market private placement c. Investments
d. Money Market
13. The key distinction between a primary
market and a secondary market is that, in the
secondary market, ________.
a. funds flow from the seller of the asset to
the buyer.
ANSWERS:
1. B
2. D
3. D
4. C
5. D
6. D
7. A
8. C
9. D
10. A
11. D
12. D
13. B
14. E
15. C