FINANCIAL

MANAGEMENT
Week 1/ Session 2
Introduction to Managerial Finance and Financial Statement
 Acknowledgement
These slides have been adapted from:
Chad J. Zutter., Scott B. Smart (2022). Principles of Managerial Finance,
Global Edition, 16th Edition. Pearson Education. England. ISBN: 978-1-
292-40064-8

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 Financial Institutions
Financial institution : An intermediary that channels the savings of
individuals, businesses, and governments into loans or investments

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 COMMERCIAL BANKS, INVESTMENT BANKS,
AND THE SHADOW BANKING SYSTEM

• Commercial banks : Institutions that provide savers with a secure

place to invest their funds and that offer loans to individual and
business borrowers.
• Investment banks : Institutions that assist companies in raising capital,
advise firms on major transactions such as mergers or financial
restructurings, and engage in trading and market-making activities.
• Shadow banking system : A group of institutions that engage in
lending activities, much like traditional banks, but that do not accept
deposits and therefore are not subject to the same regulations as
traditional banks.
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 Financial Markets

Financial markets
• Forums in which suppliers of funds and demanders
of funds can transact business directly.

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 Financial Markets

To raise money, firms can use private placements or public offerings:

• Private placement : The sale of a new security directly to an investor or group of

investors.
• Public offering : The sale of either bonds or stocks to the general public

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 Financial Markets

• Primary market : Financial market in which

securities are initially sold by the issuing
When a
company or entity.
government
entity sells • Secondary market : Financial market in which
stocks or bonds
to investors investors trade securities with each other
and receives
cash in return,
it issues
securities in :

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Flow of Funds

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THE MONEY MARKET
Money market : A market where investors trade highly liquid securities with
maturities of one year or less.

In the money market, buyers and sellers trade marketable securities, which are
short-term debt instruments such as U.S. Treasury bills, commercial paper, and
negotiable certificates of deposit issued by governments, businesses, and financial
institutions, respectively

The international equivalent of the domestic money market is the Eurocurrency

market. This market for short-term bank deposits is denominated in U.S. dollars or
other major currencies. Eurocurrency deposits arise when a corporation or individual
makes a bank deposit in a currency other than the local currency of the country
where the bank is located.

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 The Capital Market
The capital market enables suppliers and demanders of long-term
funds to make transactions.

Key Securities Traded: Bonds and Stocks

• Bonds are long-term debt instruments used by business and government to raise large
sums of money, generally from a diverse group of lenders.
• Shares of common stock are units of ownership, or equity, in a corporation. Common
stockholders earn a return by receiving dividends—periodic distributions of cash—or by
realizing increases in share price.
• Preferred stock is a hybrid security that has features of both debt and equity.
• Firms promise to pay preferred stockholders a fixed dividend, much like the fixed
• interest payments that bonds offer

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 Broker Markets and Dealer Markets

A desirable feature of secondary The typical secondary market

markets for traders is liquidity,
which refers to the ability to
quickly buy or sell a security
without having an impact on the
security’s price.
trade requires an investor to
submit an order to a brokerage
service, for which the brokerage
charges the investor a fee called a
commission.

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 Type of trade in Secondary Market
• Market order, which is an order to either sell or buy a
security at the prevailing bid or ask price,
respectively.
• bid price is the highest price a buyer in the market is
willing to pay for a security,
• ask price is the lowest price a seller in the market is willing
to accept for a security
• The difference between the bid and ask prices is the
bid/ask spread:

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 Bid/Ask Price
The bid/ask spread is a kind of trading cost that investors may pay when they trade through
a market maker. A market maker is a securities dealer who makes a market in one or more
securities by offering to buy or sell them at stated bid/ask prices.
A broker market, the market maker brings the buyer’s order and the seller’s order together
to execute the trade at the midpoint of the bid/ask spread.

A dealer market the buyer’s and the seller’s orders are not brought directly together.
Instead, market makers execute the buy/sell market orders they receive using their own
inventory of securities
The essential difference between broker and dealer markets is a technical point that deals
with the way trades are executed.

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 International Capital Markets

The foreign bond market is an international

Eurobond market, corporations and
governments typically issue bonds
denominated in dollars and sell them to
investors located outside the United States.
market for long-term debt securities. A foreign
bond is a bond issued by a foreign corporation
or government that is denominated in the
investor’s home currency and sold in the
investor’s home market.

The international equity market allows

corporations to sell blocks of shares to
investors in a number of different countries
simultaneously.

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 THE EFFICIENT MARKETS
HYPOTHESIS
An efficient market establishes prices for securities by rapidly incorporating all available
information.

In an efficient market, a security’s price is an unbiased estimate of its true or intrinsic value.

• In an efficient market, prices respond to new information, and by definition, new information
is unpredictable.
• random walk hypothesis, which says that predicting stock price movements is very difficult if
not impossible. It’s counterintuitive that stock price movements should be somewhat random.
• behavioral finance, an emerging field that blends ideas from finance and psychology, argue
that stock prices and prices of other securities can deviate from their true values for extended
periods and that these deviations may lead to predictable patterns in stock prices

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 Regulation of Financial Markets and
Institutions
The Glass-Steagall Act created the FDIC and imposed a separation between commercial and
investment banks. The act was designed to limit the risks that banks could take and to protect
depositors.

More recently, the Gramm-Leach-Bliley Act essentially repealed the elements of Glass Steagall
pertaining to the separation of commercial and investment banks.

After the recent financial crisis, much debate has occurred regarding the proper regulation of large
financial institutions. The Dodd-Frank Act was passed in 2010 and contained a host of new
regulatory requirements, the effects of which are yet to be determined.

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 Regulation of Financial Markets and
Institutions
The Securities Act of 1933 and the Securities Exchange Act of 1934
are the major pieces of legislation shaping the regulation of
financial markets.

The 1933 act focuses on regulating

The 1934 act also created the
the sale of securities in the primary
Securities and Exchange Commission,
market, whereas the 1934 act deals
the primary body responsible for
with regulations governing
enforcing federal securities laws.
transactions in the secondary market.

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 The Securities Issuing Process

Issuing common stock

• The initial rounds of external financing for business

startups come from private investors via a private
equity placement. Then, as the firm establishes the
market potential of its product or service and begins to
generate revenues, cash flow, and profits, it will often
“go public” by issuing shares of common stock to a
much broader group of investors.
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 Issuing Common Stock

Private equity is equity financing that is raised via a private placement, typically by early-stage
firms with attractive growth prospects.

Angel financing : Private equity financing provided to a young firm by a wealthy individual
investing his or her own money.

Venture capital : Equity financing provided by a firm that specializes in financing young, rapidly
growing firms. Venture capital firms raise pools of money from outside investors, which they then
use to purchase equity stakes in small private companies.

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Organization of Venture
Capital Investors

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The Selling Process for a
Large Security Issue

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 Process of issuing common stock, including venture
capital, going public, and the role of the investment bank

The initial external financing for business startups with attractive growth
prospects typically comes in the form of private equity raised via a private
equity placement. These investors can be either angel investors or venture
capitalists (VCs). VCs usually invest in both early-stage and later-stage
companies that they hope to take public to cash out their investments.

The first public issue of a firm’s stock is called an initial public offering
(IPO). The company selects an investment bank to advise it and to sell the
securities. The lead investment bank may form a selling syndicate with
other investment banks. The IPO process includes getting SEC approval,
promoting the offering to investors, and pricing the issue.

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 Financial Markets in Crisis

When home prices

Financial fell and mortgage
Securitization : The institutions lowered delinquencies rose,
That, in turn,
process of pooling Mortgage-backed The financial crisis their standards for the value of the
contributed to a
mortgages or other securities Securities was caused by lending to mortgage-backed
severe recession in
types of loans and that represent several factors prospective securities held by
the United States
then selling claims claims on the cash related to homeowners, and banks plummeted,
that became known
or securities against flows generated by investments in real institutions also causing some banks
as the Great
that pool in the a pool of mortgages estate. invested heavily in to fail and many
Recession
secondary market. mortgage-backed others to restrict
securities. the flow of credit to
business.

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FINANCIAL REPORT AND RATIO

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Financial Statement – Income
Statement
The income statement summarizes the firm’s operating
results.

Public companies file quarterly and annual income

statements with the SEC.

These statements are based on the firm’s fiscal year,

which may or may not align with a calendar year.
Financial
Statement
– Income
Statement

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Financial Report – Balance Sheet

Balance Sheet : presents a

summary statement of the firm’s
financial position at a given time.

The statement balances the

firm’s assets (what it owns)
against its financing, which can
be either debt (what it owes) or
equity (what owners provided).
Financial
Report –
Balance
Sheet

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Financial Report - Statement of
Retained Earnings

The statement of retained earnings is an

abbreviated form of the statement of
stockholders’ equity.

Unlike the statement of stockholders’ equity,

which shows all equity account transactions
that occurred during a given year, the
statement of retained earnings reconciles the
net income earned during a given year, and
any cash dividends paid, with the change in
retained earnings between the start and the
end of that year

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Financial Report - Statement of
Retained Earnings

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Financial Report - Statement of
Cash Flows

The statement of cash

flows is a summary of the
cash flows over the period.

The statement categorizes • An operating cash flow is one that results from the
fundamental business of the company such as
cash flows as operating selling goods and paying wages.
• An investment cash flow refers to cash spent on
cash flow, investment cash fixed assets (or cash received from selling them).
flow, or financing cash • A financing cash flow means money received from
issuing stock or borrowing, or money spent paying
flow. dividends, buying back stock, or repaying debt.

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 NOTES TO THE FINANCIAL
STATEMENTS
Notes to the financial statements, which provide
detailed information on the accounting policies,
procedures, calculations, and transactions
underlying entries in the financial statements

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FINANCIAL RATIO

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FINANCIAL RATIO

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Thank You
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