Igor Exam 1

Financial Management

Strategic planning and organizing of financial undertakings in an organization

Why FM is important

• Ensures efficiency

• Helps achieve business objectives

• Facilitates decision making

• Enhances profitability and sustainability

2 Main Goals of FM

• Profit Maximization

• Value Maximization

Risk-return Trade-off

As risk goes up so should returns (you should get compensated more for bearing more risk)

Capital Structure

Mix of debt and equity to finance a firm

How the 3 Statements Tie Together

Net Income from IS flows into Retained Earnings on the Balance Sheet. Final Cash line on the CFS is the Cash line on the BS

Phases of Financial Cycle

Expansion, Peak, Contraction, Recovery

Risk

Probability actual outcomes will deviate from expected outcomes

Two Main Risk Components

• Probability

• Impact

Risk Exposure

Probability x Impact

Value at Risk

Statistic that quantifies the extent of financial losses over a time frame

DSCR

NOI/Annual Debt Service

Interest Coverage Ratio

EBIT/Interest Expense

Current Ratio

Current Assets/Current Liabilities

Sensitivity Analysis

how changes in rates could effect different outcomes

Forex Risk

how changes in interest rates can affect business profitability

Transaction Exposure

Risk that currency fluctuations will alter contractural payments between transaction and settlement dates

Translation Exposure

Risk that financial statements will decrease in value when translated to home currency

Operating Exposure

Measures change in PV of a firm resulting from change in change in future operating cash flow

Foreign Direct Investment (FDI)

One entity acquires a lasting, controlling investment in another economy (requires active management)

FDI Risks

Culture, Adminsitrative, Geographic, Economic

Soft Commodities

natural products that are grown or cultivated

• Ex: Sugar, coffee, wheat

Hard Commodities

metals and energy components

• Oil, gold, silver

Commodity Risk

risk that a businesses financial performance will be affected by fluctuations in commodity price

Commodity Risk & FX Risk

Most commodities trade in USD, so organizations that are exposed to commodity risk may also carry FX risk

Credit Risk

Risk that borrower may default

Expected Loss Formula (EL)

EL = PD * EAD * LGD

• PD: probability of default

• EAD: exposure at default

• LGD: loss-given default

Financial Analysis Objectives

• present a company’s financial situation at a specific point in time (BS)

• inform about a company’s economic operations over time (IS, CFS)

2 Key Factors in Business Survival

• Profitability

• Solvency

2 Types of Trend Analysis

• Horizontal

• Vertical