Chapter 1-3

financial management

• also referred to as managerial finance, corporate finance, and business finance

• it is a decision making process

goal of financial management

• to make money and add value for the owners

• to maximize the current value per share of the existing stock

investment decisions

decision that determines how scarce or limited resources in terms of fund

financing decisions

decision that asserts the mix of debt and equity chosen to finance investments should maximize the value of the investments

dividend decisions

decision concerned with the determination of quantum profits 

accounting

• discharges the function of systemic recording of transactions relating to the firm’s activities

• looks backwards in decision making

finance

• uses accounting data for analysis review

• looks forward for decision making

macroeconomics

• economic decisions of individuals and firms

• small-scale

macroeconomics

• provides insight to the overall economic climate

• large-scale

strategic financial planning

• long-range

• focused on financial forecasting and policy formulation

strategic/business plan

reflects how a company plans to achieve its goals and objectives

short-term objectives

• maximization of ROI

• growth in earnings per share

• minimization of finance charges

long-term objectives

• growth in the market value of equity shares

• survival and growth of the firm

owner’s perspective

• primary goal

• maximize shareholder or owners wealth

stakeholder’s perspective

• secondary consideration

• emphasizes social responsibility over profitability

investing

• managing the firm’s assets

• decisions: Capital budgeting (project selection), determining current vs. fixed asset mix, and working capital levels (inventory, receivables).

financing

• obtaining and managing necessary funds

• decisions: Optimal capital structure (debt-equity mix), cost of raising funds, and issuance of financial instruments (shares, bonds).

operating

• Day-to-day management of short-term assets and liabilities.

• Issues: Setting levels of cash/inventory, credit policy (selling on credit), and source of short-term financing.

financial manager

• makes decision involving planning, acquiring, and utilizing funds which involve risk-return trade-off

corporate governance

process of monitoring managers and aligning their incentives

with shareholder goals.

monitors (inside)

board of directors,

monitor (outside)

Analysts, Investment Banks, Credit Agencies, and Government (SEC, BIR, BSP).

board of directors

appointed to represent shareholders’ interest

external auditors

they examine the firm’s accounting systems and comment on whether the FS are presented fairly

investment analysts

they keep tract of the firm’s performance, conduct their own evaluations of the company’s activities and report to the investment community

investment banks

they help firms access capital markets

credit analysis

examine a firm’s financial strength for its debt holders

government

they monitor the business activities through various government agencies

ethics

it is the primary importance in any practice of finance