Lesson 1

Introduction to Financial
Management

Lesson 1

Module: Financial Management

Key Concepts and Skills

Know the basic types of financial
management decisions and the role of the
Financial Manager
Know the financial implications of the
various forms of business organization
Know the goal of financial management
Understand the conflicts of interest that can
arise between owners and managers
Understand the various types of financial
markets
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Module: Financial Management

Career opportunities in
finance
Finance consists of three interrelated
areas:
Money and capital markets
Investments
Financial management (business
finance) actual management of the
firm.

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Module: Financial Management

The role of the Financial

Manager
raising cash in financial markets
(the financing decision);
investing cash (capital budgeting
decision);
generating cash from operation
allocating cash flows

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Module: Financial Management

Balance Sheet Model of the

Firm
Total Value of Assets: Total Firm Value to Investors:

Current Assets

Current
Liabilities
Long-Term
Debt

Fixed Assets
1 Tangible
2 Intangible
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Shareholder
s Equity
Module: Financial Management

The Role of The Financial

Manager
Capital Budgeting Decision
Decision to invest in tangible or intangible
assets.

also called the Investment Decision

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Module: Financial Management

The Capital Budgeting Decision

Current
Liabilities

Current Assets

Long-Term
Debt
Fixed Assets
1 Tangible
2 Intangible
Lesson 1

What long-term
investments
should the firm
choose?

Shareholder
s Equity

Module: Financial Management

The Role of The Financial

Manager
Financing Decision
Raising money that the firm needs for its
investments and operations.

Capital Structure
The mix of long term debt and equity
financing.

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Module: Financial Management

The Capital Structure

Decision
Current
Liabilities

Current
Assets

Fixed Assets
1 Tangible
2 Intangible
Lesson 1

How should the

firm raise funds
for the selected
investments?

Long-Term
Debt

Shareholders
Equity
Module: Financial Management

Short-Term Asset
Management
Current
Assets

Fixed Assets
1 Tangible
2 Intangible
Lesson 1

Current
Liabilities
Net
Working
Capital

How should
short-term assets
be managed and
financed?

Long-Term
Debt

Shareholders
Equity

Module: Financial Management

The Role of The Financial

Manager
(2)

Firm's
operations
Real assets

(1)

Financial
Manager

(4a)

Investors

(4b)

(3)
(1) Cash raised from investors
(2) Cash invested in firm

(3) Cash generated by operations

(4a) Cash reinvested
(4b) Cash returned to investors
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Module: Financial Management

The financial managers

responsibilities
Forecasting and planning
Major investment and financing
decisions
Coordination and control
Dealing with capital markets

Lesson 1

Module: Financial Management

What is corporation?
It is a separate legal entity owned by
shareholders;
It is a taxable entity;
It has perpetual life;
It is able to combine the capital of
many shareholders;
It has greater organizational and
legal costs;
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Module: Financial Management

What is a Corporation?
Types of Corporations
Public Companies
Private Corporations
Limited Liability Corporations (LLC)

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Module: Financial Management

Organizing a Business
Types of Business Organizations
Sole Proprietorships
Partnerships
Corporations
Limited Liability Partnerships

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Module: Financial Management

Organizing a Business

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Module: Financial Management

Corporate Structure
Sole Proprietorships

Unlimited Liability
Personal tax on profits

Partnerships

Limited Liability
Corporations

Corporate tax on profits +

Personal tax on dividends

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Module: Financial Management

The role of the financial

manager
which assets the firm should acquire
how those assets should be financed
how the firm should manage its existing
resources

Lesson 1

Module: Financial Management

Hypothetical Organization
Chart
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)
President and Chief
Operating Officer (COO)
Vice President and
Chief Financial Officer (CFO)

Treasurer

Cash Manager
Capital Expenditures

Lesson 1

Credit Manager
Financial Planning

Controller

Tax Manager

Cost Accounting

Financial Accounting

Data Processing

Module: Financial Management

Who is The Financial Manager?

Chief Financial Officer

Treasurer

Lesson 1

Controller

Module: Financial Management

Goals of The Corporation

Shareholders desire wealth
maximization
Do managers maximize
shareholder wealth?
Mangers have many
constituencies stakeholders
Agency Problems represent
the conflict of interest between
management and owners
Lesson 1

Module: Financial Management

Goals of The Corporation

Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Auditors

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Module: Financial Management

Financial Markets
Money

Primary

OTC

Markets

Markets
Secondary
Markets

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Module: Financial Management

Financial markets
Primary market the initial sale of
securities (also known as initial public
offering).
Subsequent sale of securities in
financial markets, between investors,
are in secondary market.

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Module: Financial Management

Financial Markets
Financing Decision
Source of Funds Capital
Capital Structure
Money Markets

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Module: Financial Management

Other financial markets

Debt securities (contractual obligations
to pay) are traded in the fixed-income
market or bond market
The market for long-term debt and
equity securities is called the capital
market.
The market for short-term, high quality,
liquid debt securities is money market.
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Module: Financial Management

Financial Markets

Issue Debt
Company

Lesson 1

Cash

Investors

Module: Financial Management

Financial Markets
Company
Banks
Insurance Cos.

Obligations

Funds

Intermediary

Brokerage Firms
Obligations

Funds

Depositors
Policyholders

Investor

Investors
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Module: Financial Management

Financial Markets
Company
Loan

Banks

$2.5 mil

Intermediary
Deposits

Depositors

Lesson 1

Cash

Investor

Module: Financial Management

Financial Markets
Company
Loan

Insurance
Company

$250 mil

Intermediary
Sell policies
Issue Stock

Policyholders

Lesson 1

Cash

Investor

Module: Financial Management

Lesson 1

Module: Financial Management