Course Introduction

An Overview of Financial Management

A simplified lecture by Prof. Ken Yumang

References: n  Fundamentals of Financial Management, Brigham and Houston n  Financial Management: Principles and Application, Titman, Keown, and Martin

Outline How should we make decisions? I. Decision-making Framework

What is it about? II. Financial Management

Vis ion Why do weed need to study finance? III. Reasons for Studying Finance

What do they mean? IV. Financial Terminologies

What are the four basic financial principles? V. Basic Principles

The Framework on How to Arrive at a Decision

Logical Conclusion

Decision

Logical Analysis

Conceptual Frameworks

Concepts (Theories, Scientific

Laws, Principles or Faith)

What is Finance? n  Finance is the study of how people and

businesses evaluate investments and raise capital to fund them. (Titman, Keown, and Martin)

n  Finance can be defined as the science of money management. (Wikipedia)

n  Financial Management means the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization.

Reasons for Studying Finance

n Knowledge of financial tools is critical to making good decisions in both professional world and personal lives.

n Finance is an integral part of corporate world

n Many personal decisions require financial knowledge (for example: buying a house, planning for retirement, leasing a car)

Financial Markets

•  Money Market (short-term financial market) •  Capital Market (long-term financial market)

Goal of Financial Management

The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price.

The Basic Financial Management Principles

Borrow for as short-term as

possible!

Avoid borrowing as much as

possible!

Borrow at the lowest interest

rate as possible!

A peso today, all things being the same, is worth more than a peso tomorrow. Therefore, it is important to compute the value of money from different time periods.

Principle 1: Money has time value.

Although invest ing in higher risk investments do not always result in higher realized rate of return, generally, higher risk are expected to generate higher return.

Principle 2: There is a risk-return tradeoff.

The Basic Financial Management Principles

The net present value of cash flow to the company is the difference between the cash flows the it would produce with the potential new investment, and the cash flows it would sacrifice for that investment.

Principle 3: Cash Flows are source of value.

The Basic Financial Management Principles

Investors respond to new information by buying or selling their investments. The speed with which they act and the way that prices respond to the information determine the efficiency of the market.

Principle 4: Market prices reflect information.

The Basic Financial Management Principles

END