MARKETS AND FINANCE MANAGEMENT-

TCHE422

Nguyen Thu Hang

nguyenthuhang.cs2@ftu.edu.vn

1
 Outline
• Chapter 1: Introduction to Financial
Management
• Chapter 2: Financial Statement Analysis
• Chapter 3: Time value of Money
• Chapter 4: Interest rates and Bond valuation
• Chapter 5: Stock Valuation
• Chapter 6: Capital Budgeting

2
 Assessment
• Performance +warming-up activities: 10%
• Mid-term test (60 mins-MCQ and essay
questions): 30%
• Final exam (60 mins-MCQ and essay
questions): 60%

3
 Course materials
1. Ross, Westerfiled & Jordan, Corporate
Finance
2. Berk DeMarzo, Corporate Finance
3. CFA Program Curriculum, Level II, Volume 3,
Corporate Finance
4. CFA Program Curriculum, Level I, Volume 3,
Financial Reporting Analysis

4
 CHAPTER 1
INTRODUCTION TO FINANCIAL
MANAGEMENT
( 6 hours)

5
 Learning Objectives
• Four major types of firms (main advantages and
disadvantages).
• Financial decisions in corporations.
• Goal of Corporate Finance Decisions/ Goal of
CEO
• Agency problem
• Solutions to the agency problem

6
 Four types of firms
 A business is an organization involved in the trade
of goods, services, or both to consumers, for profit
or not-for profit.
Types of Business Ownership
 (Sole) Proprietorships.
 Partnerships.
 Limited Liability Companies
 Corporations

7
 (Sole) Proprietorship
• Is a business owned and run by one person
• Sole proprietorships are very small with few, if any,
employees.
• Although they do not account for much sales revenue in
the economy, they are the most common type of firm in
the world.
• Straightforward to set up.
• The firm can have only one owner.
• The owner has unlimited personal liability of any firm’s
debts.
• The life of a sole proprietorship is limited to the life of the
owner  It is difficult to transfer ownership of a sole
proprietorship. 8
 Partnership
• A partnership is identical to a sole proprietorship
except it has more than one owner.
• All partners are liable for the firm’s debt.
• The partnership ends on the death or withdrawal
of any single partner, although partners can avoid
liquidation if the partnership agreement provides
for alternatives such as a buyout of a deceased or
withdrawn partners.
• A limited partnership is a partnership with two
kinds of owners, general partners and limited
partners.
9
 Limited Liability Companies (LLC)
• A limited liability company (LLC) is a limited
partnership without a general partner.
• All the owners have limited liability, but unlike
limited partners, they can also run the
business.

10
 Corporations
• The distinguishing feature of a corporation is
that it is a legally defined, artificial being (a
judicial person or legal entity), separate from its
owners  it is solely responsible for its own
obligations.
• The owners of a corporation are not liable for
any obligations the corporation enters into.
• The corporation is not liable for any personal
obligations of its owners.
• A corporation has many of the legal powers that
people have. 11
 Ownership of a corporation
• No limit on the number of owners a
corporation can have.
• The entire ownership stake of a corporation is
divided into shares known as stock. The
collection of all the outstanding shares of a
corporation is known as the equity of the
corporation.
• Shareholders, or stockholders or equity holders
are entitled to dividend payments.

12
Four types of firms

(Re: CFAI 2013, Volume 2,

SS. 4)
13
 Types of U.S. Firms

Ref: Berg, Ch 1
14
 Four types of U.S. firms

(Re: U.S. Bureau of Census, 2012 Statistical Abstract) 15

 Four types of firms

(Re: General Statistics Office) 16

• What is corporate finance?

17
 Financial system
The Financial System
Public Finance

Financial
Market
Financial
Institutions

Corporate Finance Personal Finance

18
 Financial system (cont.)
Public Finance
 Government operations to implement policy.
 Efficient resources allocation, income distribution and
economic stabilization.
Business Finance (Corporate Finance)
 Business operations to maximize owner’s wealth.
 Investing and financing decisions.
Personal Finance
 Individual or family activities.
 Maximize utilities.
19
 What is corporate finance?
 Corporate Finance is the study of financial decisions in
corporations.
Types of Decisions in a Corporation
 Investment decisions.
 Financing decisions.
Which type of decisions comes first?

20
21
 Ownership versus Control
of Corporations

• Corporate Management Team

– In a corporation, ownership and direct control are
typically separate.
– Board of Directors
• Elected by shareholders
• Have ultimate decision-making authority
– Chief Executive Officer (CEO)
• Board typically delegates day-to-day decision making
to CEO.

22
Figure 1.2 Organizational Chart of a Typical
Corporation

23
 Financial Manager

Ref: Mayers, Principles of Corporate Finance, Ch1

24
 Financial Manager
• Within the corporation, financial managers are
responsible for three main tasks:
- Making investment decisions
- Making financing decisions
- Managing the firm’s cash flows.

25
 Investment decisions
• Weigh the costs and benefits of all
investments and projects  Decide which of
them qualify as good uses of the money
stockholders have invested in the firm.
• Shape what the firm does and whether it will
add value for its owners.

26
 Financing decisions
• Decide how to pay for the investments.
• Decide whether to raise more money from
new and existing owners by selling more
shares of stock (equity) or to borrow the
money (debt).

27
 Cash Management
• Ensure that the firm has enough cash on hand
to meet its day-to-day obligations.
• Commonly known as managing working
capital.
• In a young or growing company, it can mean
the difference between success and failure.

28
 Goal of Corporate Finance Decisions
Goal of CEO:
 Maximize shareholders (long-term) value.
 How?

29
 Reading 1
 CFA Corporate Finance, Level II, Reading 26
• Stakeholders and corporate performance
• Profitability, profit growth, and Stakeholder
claim

30
 How to maximize shareholders’ wealth?

• The best way for managers to generate the

funds for future dividend payments and to
keep the stock price appreciating is to pursue
strategies that maximize the company’s long-
run profitability and grow the profits of the
company over time.

31
 Agency cost and information asymmetry

Principal-Agent Problem
 Separation between ownership and control.
 Managers act for their own self-interest, which may
substantially differs from the interest of the
shareholders.
 Manager- Shareholder conflicts, director-
Shareholder conflicts
 That imposes a cost to shareholders to monitor
managers (agency cost).

32
 Reading 2
 CFA Corporate Finance, Level II, Reading 27
• Manager- Shareholder conflicts
• Director-Shareholder conflicts

33
 Methods to Mitigate Principal-Agent Problem
 Ownership.
 Jensen and Meckling (1976): positive relationship between management
ownership and performance.
 Himmelberg, C. P., R. G. Hubbard, D. Palia (1999), Understanding the determinants
of managerial ownership and the link between ownership and performance,
Journal of Financial Economics 53: No significant relationship!
 Incentive pay. (salary and bonus base on the
performance)
 Long-term contract.
 Corporate Governance
(Refer: CFAI 2013, Volume 2, SS4)

34
 Corporate Governance
 Is the system of principles, policies, procedures, and
clearly defined responsibilities and accountabilities
used by stakeholders to:
o Eliminate or reduce conflicts of interest.
o Use the company's assets in a manner consistent with
the best interests of stakeholders.

35
 Corporate Governance
Effective Corporate Governance System
 Define the rights of shareholders and other important
stakeholders.
 Define and communicate to stakeholders the
responsibilities of managers and directors.
 Provide for fair and equitable treatment in all dealings
between managers, directors, and shareholders.
 Have complete transparency and accuracy in
disclosures regarding operations, performance, risk,
and financial position.
36
 Corporate Governance
Effective Board of Directors
 Composition of the board, election and independence
of board members.
 Qualifications of the directors.
 Frequency of meetings.
 Responsiveness to shareholder proxy votes.
 …

37
 The agency problem

Why does it arise?

• Divergence of ownership and control
• Managers’ goals differ from shareholders’
• Asymmetry of information.
What are the consequences?
• Shareholder wealth is no longer maximised.

38
 Reading 3
CFA Corporate Finance, Level II, Reading 27
• Corporate governance: objectives and guiding
principles
• Corporate governance evaluation (board of
directors)
 Internal regulations on corporate governance
of VNM

39
 Case 1: Divergence VS Concentration of Ownership

 Phương Xuân wants to expand her chain of fashion

shop. She may borrow or sell 30% of her equity in the
chain to raise fund.
 If Phương Xuân borrows fund (or sells equity ), $1
incremental income (or expense) from the shops will
increase Phương Xuân’s income by how much?
 Predict Phương Xuân’s behavior in each case.

40
 Case 2: Management Entrenchment
Phương Xuân Corp. (100% equity) has $100 mil cash.
Corporate tax rate 25%, personal tax rate 15%. Bank-
deposit interest rate 5%. No investment opportunity is
viable.
 Should Tuấn Bách, CEO of Phương Xuân Corp. keep this
amount of cash to deposit it on a bank account or
should he pay out the money to shareholders (by
dividend)?

41
 Case 2: Management Entrenchment
Phương Xuân Corp. (100% equity) has $100 mil cash.
Corporate tax rate 25%, personal tax rate 15%. Bank-
deposit interest rate 5%. There is an investment
opportunity.
 Before-tax cost of debt 8%, cost of equity 15%. Should
Tuấn Bách consider the use of debt?

42
 Case 3: Shareholders VS Debtholders
 Phương Xuân Limited Liability Company has a
debt of 100 bil. on the balance sheet payable in
one year. Value of all asset is now 80 bil.
 There is one investment opportunity available:
Initial investment 50 bil. In one year there is a
probability of 30% that the return is 100 bil (win).
and 70% that the return is 0 (fail).
 Phương Xuân is the only owner and manager of
the company. Phương Xuân owns a house
whose value is 10 bil.. She also has a 10 bil
bank deposit.
43
 Case 3: Shareholders VS Debtholders
1. If Phuong Xuan decides not to invest. In one year, the
value to Phuong Xuan and debtholders will be:
a/ 80 bil and 20 bil b/ 100 bil and 0 bil
c/ Other
2. If Phuong Xuan decides to invest and fail, in one year
the value to Phuong Xuan and debtholders will be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 50 bil and 0 bil d/ Other

44
 Case 3: Shareholders VS Debtholders
3. If Phuong Xuan decides to invest and win. In one year,
the value to Phuong Xuan and debtholders will be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 100 bil and 50 bil d/ Other
4. If you were Phuong Xuan, what would you do?
a/ Invest b/ Do not invest
c/ Go America d/ Other

45
 Case 4: Share Issues in Financial Distress
 Phương Xuân Limited Liability Company has a
debt of 100 bil. on the balance sheet payable in
one year. Value of all asset is now 40 bil.
 There is one investment opportunity available:
Initial investment 50 bil. In one year there is a
probability of 70% that the return is 100 bil (win).
and 30% that the return is 0 (fail).
 Lenders refuse to lend. Phuong Xuan can only
raise capital through equity issue.

46
 Corporate governance and performance
• Duality
• Independence of board
• Board size
• Managerial ownership
• Institutional ownership
• State ownership
• Foreign Ownership
• Ownership concentration
• Block Shareholder
• …..
47
• End of Chapter 1

48