PRAYER BEFORE STUDY

St. Thomas Aquinas

Lord, true source of light and

wisdom, give us
a keen sense of
understanding,
a retentive memory and a
capacity, to grasp thing
correctly.
Grant us the grace to be
accurate in our exposition
and the skill to express ourself
with thoroughness and clarity.

Be with us at the start of our

class, Guide our progress and
bring it to completion.
Grant this through Christ, our
Lord. Amen.
 INTRODUCTION TO
FINANCIAL
MANAGEMENT

Assoc. Prof. Imelda T Angeles, CPA, Phd

Course Facilitator
 1
1

Learning
Outcomes
LO.1 Explain what finance
entails and why everyone
should understand basic
financial concepts.

LO.2 Identify different forms of

business organization as
well as the advantages
and disadvantages of
each.
 1
2

Learning
Outcomes
LO.3 Identify major goal(s) that
firms pursue and what a
firm’s primary goal should be.

LO.4 Explain the role of ethics and

good governance in a
successful businesses.

LO.5 Describe how foreign firms

differ from U.S. firms and
identify factors that affect
financial decisions in
multinational firms.
Why Study
Finance?
a. Understand
personal finance
b. For business
decision purposes
c. To hone analytical
and problem-
solving abilities
d. Global perspective
e. Investment
opportunities
 Why is finance
important to
the following?

a. Owner of the
company
b. Manager/Treasurer of
the company
c. Investor
d. Creditor
e. Employee
f. You (student)
 LO.1 Explain what finance entails and why
everyone should understand basic financial concepts.

What is Financial Management?

a. Plan and control of the

company’s finances

b. Concerned with raising

financial resources

c. Effective utilization of
funds towards achieving
the firm’s goal

d. All of the above

 What is Financial Management?

a. Plan and control of the

company’s finances

b. Concerned with raising

financial resources

c. Effective utilization of
funds towards achieving
the firm’s goal

d. All of the above

 “Financial management is concerned with raising
financial resources and their effective utilization
towards achieving the organizational goals”. Dr. S. N.
Maheshwari
“Financial management is the process of putting the
available funds to the best advantage from the long-term
point of view of business objectives”.
Richard A. Brealey
18
 What is the basic function of
Financial Management?

a. To raise capital.

b. To use efficiently the

financial resources of the
company

c. To manage the
resources of the firm
towards achieving the goal
of the company.

d. All of the above

 What is the basic function of
Financial Management?

a. To raise capital.

b. To use efficiently the

financial resources of the
company

c. To manage the
resources of the firm
towards achieving the goal
of the company.

d. All of the above

Function of
Financial
Management

Financial
management
applies the
basic
principles of
General
Management.
Function of
Financial
Management

Financial
management
applies the
basic
principles of
General
Management.
 What is the goal of the company?

a. To maximize the value

of the firm.

b. To increase the
resources of the firm.
c. To expand the
distribution of the
product.

d. To raise more capital.

 What is the goal of the company?

a. To maximize the value

of the firm.

b. To increase the
resources of the firm.
c. To expand the
distribution of the
product.

d. To raise more capital.

Taking a commercial business as the most common
organizational structure, the key objectives of financial
management is to:
• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in
mind the risks that the business is taking, and the
resources invested
1. What are the ways by which the company should
Taking a commercial business as the most common organizational
structure, the key objectives in achieving the goal of the company
are:
manage the finances in• Create
order to create wealth?
wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks
that the business is taking, and the resources invested
 Taking a commercial business as the most common organizational
structure, the key objectives in achieving the goal of the company

2. What are the ways• Create

towealth
are:
raise capital?
for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks
that the business is taking, and the resources invested
 Taking a commercial business as the most common organizational
3. How can the management are: utilize funds to ensure the return
structure, the key objectives in achieving the goal of the company

on the investment of the owners?

• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks
that the business is taking, and the resources invested
 There are three key
elements to the
process of financial
management:

• Financial Planning
• Financial Control
• Are assets being used
efficiently?
• Are the businesses
assets secure?
• Do management act
in the best interest of
shareholders and in
accordance with
business rules?
• Financial Decision Making
3
0
Areas of Financial
Management • Financial
Markets and
Institutions
1 2
• Investments
• Financial
Services
• Managerial
Finance

3 4
31
Financial Markets and Institutions
Financial
Markets
35
Financial Service Providers
The major functions in the investments area are
(a) determining the values, risks, and returns associated with such
financial assets as stocks and bonds and
(b) determining the optimal mix of securities that should be held in
a portfolio of investments, such as a retirement fund.

INVESTMENT

37
Investments
 Managerial finance deals
with decisions that all firms
make concerning their cash
flows, including both inflows
and outflows.
o making decisions about
plant expansions to
choosing what types of
securities should be
issued to finance such
expansions.
o deciding the credit terms
under which customers
can buy,
o how much inventory the
firm should carry,
o how much cash to keep
on hand, whether to
acquire other firms
(merger analysis), and

Managerial Finance o how much of each year’s

earnings should be paid
out as dividends versus
how much should be
reinvested in the firm.
Self-check test 1:
Identify which area of finance are the following:

Financial
1. Buying shares of stocks. Markets

2. Personal Finance consultation. Financial

Services

3. Decision on additional acquisition of equipment.

Managerial
Finance

4. Creation of Portfolio. Investment

Managerial
5. Decision about dividend policy. Finance

6. Putting money in time deposits. Financial

Institution

7. Assessment of current market price. Investment

Financial
8. Consultation about business acquisitions and Services
merger.
 Relating Finance with Non-
Finance Areas
• Management - personnel decisions and
employee relations, strategic planning, and the
general operations of the firm.
• Marketing—the four Ps of marketing—product,
price, place, and promotion—determine the
success of products that are manufactured and
sold by companies.
• Accounting- financial managers rely heavily on
accounting information because making decisions
about the future requires information that
accountants provide about the past.
• Information systems—To make sound decisions,
financial managers rely on accurate information
that is available when needed.
• Economics- focuses on public policy, while the
focus of finance is more company- or industry- 41
specific.
 GROUP TASK

1. Think of one company from

different industry.
2. In the discussion forum,
answer the following:
a. How does the company
maximizes the management of
fund?
b. During this pandemic
crisis, what is the financial
decision that the company
made to overcome the
economic crisis?
 Comparing Finance with other areas

Applies tools to financial information Financial accounting involves

to generate new information recording and classifying financial
• Ratio analysis information.
• Breakeven analysis • Completion of accounting cycle
• Compilation of financial statements
PRAYER BEFORE STUDY
St. Thomas Aquinas

Lord, true source of light and

wisdom, give us
a keen sense of
understanding,
a retentive memory and a
capacity, to grasp thing
correctly.
Grant us the grace to be
accurate in our exposition
and the skill to express ourself
with thoroughness and clarity.

Be with us at the start of our

class, Guide our progress and
bring it to completion.
Grant this through Christ, our
Lord. Amen.
4
5

Primary Forms • Proprietorship

of Business • Partnership
Organization • Corporation
• One Person Corporation
Sole Proprietorship vs Partnership
Corporation vs Partnership
One Person
Corporation
OPC and Sole Proprietorship
 • Limited Liability Partnership
(LLP)- least one partner is
designated a general
partner and the others
are limited partners.
Hybrid • Limited Liability Company
Forms of (LLC)- it combines the features
of a corporation and a
Business •
partnership.
S Corporation—no more than
100 stockholders- its income is
taxed the same as income
earned by proprietorships and
partnerships; that is, income
passes through the company
to the owners so that it is
taxed only once.

50
HYBRID FORMS
OF BUSINESS
 • Primary goal:
stockholder
wealth
maximization,
which is the same
as maximizing the
stock price.
• Managerial
incentives
• Corporate Social
responsibility
• Environmental,
Goals of the Social, and
corporate
Corporation governance
52
Business Organized as a
Corporation: Value
Maximized

• Limited liability reduces

risk, which increases
market value
• Ease of raising capital
allows corporations to
take advantage of
growth opportunities
• Ownership can be easily
transferred (via stock
transactions), thus
investors are willing to
pay more for a
corporation

5
3
Value of the Firm

54
Factors Influenced by Managers that Affect Stock Price
• Projected cash flows
• Timing of cash flow streams
• Risk of projected cash flows (earnings)
• Use of debt (capital structure)
• Dividend policy 55
 56

CORPORATE
ORGANIZATIO
N STRUCTURE
 • An agency relationship exists whenever a
principal (an owner) hires an agent
(management) to act on his or her behalf.
Agency • An agency problem results when the agent
Relationships (management) makes decisions that are
not in the best interests of principals
(owners).

5
7
 Agency What are the possible
Relationships conflict between the
manager and the
stockholders/owners?
5
8
59
AGENCY PROBLEMS

60
 Resolving
Agency Conflict
• Managers are naturally inclined
to act in their own best
interests.
• Mechanisms to motivate
managers to act in
shareholder’s best interest
• Managerial compensation
(incentives)
• Shareholder intervention
• Threat of takeover

6
1
Scenario # 1

• ABC Ltd. sells gel toothpaste for $20. The

company’s stockholders raised the selling price of
the toothpaste from $20 to $22 to maximize their
wealth. This sudden unnecessary rise in the cost
of toothpaste disappointed the customers and
boycotted the product sold by the company. Few
customers who bought the product realized a fall
in the quality and were utterly disappointed.
• In 2001, energy giant Enron Scenario #2
filed for
bankruptcy. Accounting
reports had been fabricated
to make the company appear
to have more money than
what was actually earned.
In the four years leading up to
The company's executives Enron's bankruptcy filing,
used fraudulent accounting shareholders lost an estimated $74
methods to hide debt in billion in value.5 Enron became the
Enron's subsidiaries and largest U.S. bankruptcy at that time
overstate revenue. These with its $63 billion in assets.
falsifications allowed the Although Enron's management had
company’s stock price to the responsibility to care for the
increase during a time when shareholder’s best interests, the
executives were selling agency problem resulted in
portions of their stock management acting in their own
holdings. best interest.
 What is the
difference between
Business Ethics and
Governance?
Business
Ethics
• Dictionary: “A standard
of conduct and moral
behavior.”
• Business Ethics: A
company’s attitude and
conduct toward its
employees, customers,
community, and
stockholders (i.e., the
firm’s stakeholders).
• Business ethics refer to a
set of professional or
applied ethics that
review or study ethical
or moral principles and
ethical or moral
problems that appear in
any business
environment. 66
Corporate • The “set of rules’
that a firm follows
Governance when conducting
business
• As a result of the
Sarbanes-Oxley Act
of 2002, firms have
substantially
revised their
corporate
governance policies
• Good corporate
governance
generally generates
higher returns to
stockholders
 • Foreign firms have
higher
Forms of concentrations of
ownership—i.e.,
Business fewer owners—than
U.S. firms
in • Foreign firms have
Other much different
relationships with
Countries financial institutions
differs than do U.S.
firms.

68
 Multinationa
l
Corporations
• Five reasons firms
“go international”:
• To seek new
markets
• To seek raw
materials
• To seek new
technology
• To seek
production
efficiency
• To avoid political
and regulatory
hurdles
 Factors Distinguishing
Domestic Firms from
Multinational Firms

• Different currency
denominations
• Economic and legal
ramifications
• Language differences
• Cultural differences
• Roles of governments
• Political risk

70
 Ten principles that
form the foundations
of financial
management

© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website for classroom use.

71
 Principle 1 The Risk–
Return Trade-Off
—We Won’t Take
On Additional
Risk Unless We
Expect to Be
Compensated
with Additional
Return at some
point when we
have all saved
some money.
Ten principles that form the
foundations of financial
management
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website for classroom use.
72
Principle 2 The Time
Value of Money—A
Dollar Received
Today Is Worth More
Than a Dollar
Received in the
Future
Principle 3 Cash—Not the Profit—Is King
 Principle 4
Incremental
Cash Flows

—It’s Only What Changes That Counts In making business

decisions, we are concerned with the results of those decisions:
What happens if we say yes versus what happens if we say no?
Principle 5- The Curse of Competitive Markets.
 • The Markets Are
Quick and the
Prices Are Right
As we have said,
our goal as
financial
managers is the
maximization of
shareholder
wealth.
Principle 6 Efficient Capital Markets
—
 Principle 7 The Agency
Problem—Managers Won’t
Work for the Firm’s Owners
Unless It’s in Their Best
Interest
Principle 8 Taxes Bias Business Decisions
Principle 9 All Risk Is Not Equal—Some Risk Can Be Diversified Away
Principle 10 Ethical Behavior Means Doing the Right Thing, but Ethical Dilemmas
Are Everywhere
 Recall of the concluded discussion

Tell which principles the following statements are related to:

1. Given the current economic condition, I will not invest if I
do not get a return that will compensate the risk.
2. In assessing the financial statements of the company, the
report about the cash flow is more important to me.
3. There is an ongoing news about the failure of Mr. Dennis Uy
to pay his debt to BDO, I think I will withdraw my investment.
4. When I first started my business I enjoyed all the customers
in the community, now I need to close store because of the
many competitors.
5. I receive P1,000,000 as my inheritance and I want to put
them in stocks, bonds, and gold.
 Recall of the concluded discussion

Tell which principles the following statements are related to:

6. Mr. Cruz wants to buy an additional equipment, but the tax
is very high.
7. What do I need to do, if I pay taxes, I will exhaust all my
funds and may not continue the operation, but I need to pay
the tax.
8. The BOD of a Home Owners Association has requested the
freezing of the account and management is having difficulty
with the fundings.
9. I need to assess if receiving gift from my father will give me
a higher return if I invest it today or I will just let him do and
receive it after five years.
10. I need to decide whether to buy the property of lease it.