2/7/2017

SOME PRELIMINARIES

When, Where, Who?

FUNDAMENTALS OF FINANCIAL MANAGEMENT My preferred way of communication

How to get your materials for the lecture?
Blackboard
Financial Management

Email
Checking attendance?
Food/drink during lecture time?
My grading policies?
PHAN NGC ANH, MBA Class environment: learning attitude?
Spring 2017
Being absent from quizzes?
1 2
Tutorials

CONTACT COURSE ASSESSMENT

PHAN NGOC ANH, MBA.

Email: pnanh@hcmiu.edu.vn Elements Weight
2 in-class tests 10%
Consultation hours: Tuesday and Thursday mornings
Room: A1.305 Group project assignment 20%
Financial Management

Financial Management
Mid-term exam 30%

Final Exam 40%

TOTAL 100%

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RESOURCES COURSE CONTENT

Topic 1 : Introduction to Finance: Overview of Corporate Financing

Textbook:
Decisions; Capital Markets and Financial Instruments
Brealey, R.A., Myers, S.C. and Marcus, A.J., Fundamentals of
Corporate Finance, 7th ed, McGraw Hill 2013
Topic 2: Calculate financial ratios and conduct companys basic
Note: the course will cover Chapters 1 13
financial analysis;
Brigham, E.F. & Ehrhardt M.C. (2008). Financial Management: Theory
Topic 3: Discounted Cash Flow and Present Value Concept

Financial Management
and Practice, 12th ed, Thompson South-Western.
Financial Management

Note: the course will cover Chapters 3-4

Topic 4: Debt vs. Equity Financing Valuing Bonds and Stocks
Websites:
http://www.mhhe.com/business/finance/corpfinonline/. Choose
Topic 5: Investment Evaluation : Capital Budgeting Decisions
Finance Tutor Series.
Yahoo Finance at www.finance.yahoo.com
Topic 6 : Risk and Return: Introduction to Portfolio Theory
CNN at www.money.cnn.com
Wall Street Journal at www.wsj.com
Topic 7 : Long-term Financial Decisions: Capital Structure and Cost
The economist at www.economist.com
5 6 of Capital

LECTURE OBJECTIVES

Understand the BIG PICTURE of corporate finance, the

INTRODUCTION TO CORPORATE FINANCE differences between accounting and financial view of the firm

Discuss the basic types of financial management decisions

and the role of the financial manager.
Financial Management

Financial Management
Know the financial implications of the three forms of
business organisation.

Explain the goal of financial management and why it is

superior to other possible goals.

Explain the agency problem, and how it can be controlled

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and reduced.
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THE TRADITIONAL ACCOUNTING BALANCE SHEET FINANCIAL MANAGEMENT DECISIONS

Investment
decision
Which
Assets Liabilities & Equity assets/projects to
invest in?

Current assets Current liabilities

Three main
Fixed assets - tangible Long-term liabilities decisions a
Working capital firm deals
decision with: Financing
How to manage the decision
Fixed assets - Intangible Equity receipt and
disbursement of Where and how
current assets and to raise the
current liabilities? money?
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FINANCIAL MANAGEMENT DECISIONS FINANCIAL MANAGEMENT DECISIONS

The investment decision The financing (capital structure) decision

Assets Liabilities & Equity Assets Liabilities & Equity

Current assets Current liabilities Current assets Current liabilities

What long- Long-term Liabilities How can the Long-term Liabilities

term firm raise
investment Fixed assets money for
Fixed assets
should the the required
firm engage Equity investment? Equity
in?

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FINANCIAL MANAGEMENT DECISIONS

CHECK YOUR UNDERSTANDING !
The working capital decision

Which of the following are financing decisions?

Assets Liabilities & Equity
A/ Intel decides to spend $1 billion to develop a new
Current liabilities microprocessor.
Current assets Working
capital B/ Volkswagen borrows 350 million euros (350 million) from
Deutsche Bank.
Long-term Liabilities
How to manage C/ BP constructs a pipeline to bring natural gas onshore from a
the receipt and
production platform in the Gulf of Mexico.
Fixed assets disbursement of
current assets D/ Budweiser spends 200 million to launch a new brand of
and current Equity
beer in European markets.
liabilities ?
13 14 E/ Pfizer issues new shares to buy a small biotech company.

CHECK YOUR UNDERSTANDING ! FORMS OF BUSINESS ORGANIZATION

Organiza Who owns Legal Are owners Limitation Access to

-tional Form the Liability and biz on Life of Capital
A. Intel decides to spend $1 billion to develop a new business ? taxed Entity
microprocessor. separately
?
Proprietor Proprietor/ Unlimited No Limited Limited
B. Volkswagen borrows 350 million euros (350 million) -ship Manager Individual
from Deutsche Bank. Income Tax
Financial Management Partnership Partners Limited & No Limited Limited
C. BP constructs a pipeline to bring natural gas onshore from Unlimited Individual
a production platform in the Gulf of Mexico. Income Tax

D. Budweiser spends 200 million to launch a new brand of Corporation Share- Limited Yes Unlimited Moderate
holders, Corporate
beer in European markets. ownership Income Tax
can be & Individual
E. Pfizer issues new shares to buy a small biotech transferred Tax
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company.

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FINANCIAL MANAGEMENT : THE BIG PICTURE

FM tries to How do we manage
Which the receipt and
What long- identify FM
mixture disbursement of
term investment decides
opportunities
of Debt short-term assets ?
investment how and
that are worth and
where to
should we more to the Equity
raise the
Inventory
Accounts Receivables
THE GOAL OF FINANCIAL MANAGEMENT
make ? firm than they should we
money Accounts Payables
cost to acquire make ?
....

Financial Management
The investment The financing decision The working capital
decision Find the right kind of decision
Invest in assets that debt for your firm and Ensure that firm has
earn a return greater the right mix of debt and sufficient resources to
than they cost to equity to fund your continue operations and
acquire operations avoid costly interruptions

17 Maximize the value of shareholders wealth 18

POSSIBLE GOALS OF FINANCIAL MANAGEMENT POSSIBLE GOALS OF FINANCIAL MANAGEMENT

Maximize earnings Maximize earnings

Maximize sales or market share

Case: Vedan Vietnam

cut costs by dumping
wastes in Thi Vai river!
Financial Management

Financial Management Price increased

Gain market share

Set low price

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POSSIBLE GOALS OF FINANCIAL MANAGEMENT POSSIBLE GOALS OF FINANCIAL MANAGEMENT

Maximize earnings
FINANCIAL MANAGEMENT
Maximize sales or market share

Survive PROFITABILITY CONTROLLING RISK

Financial Management
Financial Management

Avoid financial distress and bankruptcy Maximize earnings

Maximize sales Avoid financial distress
Maximize market share Avoid bankruptcy
Minimize costs ...
... .... ...
.... ...
...
....
...
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POSSIBLE GOALS OF FINANCIAL MANAGEMENT THE GOAL OF FINANCIAL MANAGEMENT

THE CLASSICAL VIEWPOINT

Maximize earnings Van Horne: "In this book, we assume that the objective of the rm is to
maximize its value to its stockholder.
Maximize sales or market share
Brealey & Myers: There is a natural financial objective on which almost
Survive all shareholders can agree: maximize the current market value of
shareholders investment in the firm...A smart and effective financial
Financial Management

Financial Management
Avoid financial distress and bankruptcy manager makes decisions that increase the current value of the
companys shares and the wealth of its stockholders.

Ross, Westerfield, & Jordan : The goal of financial management is to
... maximize the current value per share of the existing stock.

... Brigham and Gapenski: Throughout this book we operate on the

assumption that the management's primary goal is stockholder wealth
...Maximize shareholders wealth maximization which translates into maximizing the price of the common
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stock.
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THE GOAL OF FINANCIAL MANAGEMENT

THE CLASSICAL VIEWPOINT

WHY STOCK PRICE IS CONSIDERED A

MEASURE OF THE MARKET ESTIMATE OF
EQUITY VALUE ?
Financial Management

Financial Management
Maximize the Maximize the
Maximize stock
wealth of value per share
prices ???
stockholders of stock Easily observable

Constantly updated

If investors are rational (are they?), stock price reflects the

Primary goal is to wisdom of decisions, short term and long term, instantaneously.
maximize the
stocks true or
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AGENCY PROBLEM THE FIRM AND THE FINANCIAL MARKETS

Agency relationship : The relationship between the Firm Firm issues securities (A) Financial
principal and agent
Firm invests markets
Agency problem: The conflict of interest between the in assets
Retained
principal and agent (B) cash flows (F)
Agency costs: The direct and indirect costs arising from Short-term debt
Current
this conflict of interest
Financial Management

Financial Management assets Cash flow

from firm (C)
Dividends and
debt payments (E)
Long-term debt
Equity shares
There could be an agency problem between managers and Fixed assets

Taxes (D)
shareholders !

Do managers ususally act in

the interests of shareholders ?!
Government

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PRIMARY vs. SECONDARY MARKETS MONEY vs. CAPITAL MARKETS

Primary market: primary issues of securities are sold, allows

governements, banks, corporations to raise money by directly Money market: where short-term assets (maturity of less
selling financial instruments (securities) to the public. than one year) are traded.
Secondary market : where securities are bought and sold Certificates of deposits (CDs)
after the original sale. Securities can be exchange traded or Commercial papers (CPs)
over-the-counter (OTC) traded. Treasury bills
Financial Management

Financial Management
Stocks and
FIRM Bonds INVESTORS Capital market : where long-term assets (maturity of more
Money
than one year) are traded.
Stocks
Corporate bond
Government bond
Primary Market Secondary Market
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ORGANIZED EXCHANGE vs. OTC TUTORIALS

Organized exchange: Most of stocks, bonds, and derivatives

are traded
has trading floor: traders execute transactions in the
secondary market for their clients
E.g. NYSE
Financial Management

OTC: Stocks not listed on the organized exchanges are

traded on the over-the-counter (OTC) market
No trading floor : buy/sell orders are completed via NOT YET !!!
telecommunications network
E.g. NASDAQ

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