FINANCIAL MANAGEMENT

Variables Affecting System Behavior

SYSTEM

Sources
Leadership
 BUSINESS UNIT

Business unit is a sociotechnical

system that processes the production
factors into economical goods and
services for profit.

Business units have vital

importance in pushing the
living standarts of the public.
 Organizing A Business

Sole Proprietorships

Partnerships

Corporations
 Characteristics of Business
Organizations
Characteristics Sole Partner. Corp.
Prop.

Ownership Manager Partners Shareholders

Manager-Owner Same Same Usually

Seperation Seperated

Owner’s Liability Unlimited Unlimited Limited

Taxing Personal Personal Personal

Income Income Income
&Corporate
Tax
 Assets
Real Assets:Used to produce goods & services
Tangible: Machinery, factory, offices
Intangible:Trade mark,patents,technical expertise

Financial Assets: Claims to the income generated by real

assets. Also called securities.
 Basic Problems
Capital Budgeting Decision
What real should the Firm acquire?

Financing Decision
How should cash be raised to finance real investments?
 The Role of Financial Manager

Firm’s
Operations
Financial Investors
Real Assets
Manager

Money Flows
 The Role of Financial Markets

Financial Markets
Stock Markets
Bond Markets
Firm’s Foreign Exchange etc.
Operations
Financial Investors
Manager
Real Assets Financial Intermediaries
Mutual Funds
Pension Funds
Financial Institutions
Banks
Insurance Companies

Money Flows
 Goals of The Financial Management
 Shareholders desire
wealth maximization!
 Do managers maximize
shareholder wealth?

Max VALUE = f ( I, F )

Max VALUE = f ( I, F, D )
Productivity Profitability

Economy
of
Scale
 Productivity & Profitability & Economic of Scale

Unit Rate of Gross Rate of Com. Rate of

Units Price TOTAL Productivity Total Commission Paid Net Total Profitability

10 10 100 10% 110 0,200% 0,22 109,78 9,78%

100 10 1.000 10% 1.100 0,100% 1,10 1.098,90 9,89%

1000 10 10.000 10% 11.000 0,050% 5,50 10.994,50 9,95%

2500 10 25.000 10% 27.500 0,020% 5,50 27.494,50 9,98%

Rate of Profitability

10,00%
9,95%
9,90%
9,85%
9,80%
9,75%
1 2 3 4
 Financial Leverage
Rate of
Return

Cost of
Debt

Debt+ Profitability
Total Rate of Cost of Gross Net Total
Debt Equity Cost of of
Source Return Debt Income Income Income
debt Invesment

0 10000 10000 15% 0% 11500 0 1500 11500 15%

10000 10000 20000 15% 5% 23000 10500 2500 12500 25%

10000 10000 20000 15% 20% 23000 12000 1000 11000 10%

If the cost of debt < the rate of return; the profitability of investment increases
If the cost of debt > the rate of return; the profitability of investment decreases
 Financial Leverage
(Effects of Debt-Equity Ratio)

Amount of
Debt Amount of
Equity

Debt+ Profitability
Total Rate of Cost of Gross Net Total
Debt Equity Cost of of
Source Return Debt Income Income Income
debt Invesment

0 10000 10000 15% 0% 11500 0 1500 11500 15%

20000 10000 30000 15% 25% 34500 25000 -500 9500 -5%

10000 20000 30000 15% 25% 34500 12500 2000 12000 12%

If the amount of debt < the amount of equity; the profitability of investment decreases
If the amount of debt > the amount of equity; the profitability of investment increases