FINANCIAL MANAGEMENT EUT
ADAM SMITH (1776)
“Invisible hand”
-Profit Maximization is the right goal for a
business and free enterprise system is best for
society
ADAM SMITH’S THEORY (modified version)
 Firm’s principal goal should be to maximize
the wealth of stockholders = maximize the
value of stocks
 Free Enterprise = best economic system
- companies develop products and services
that people want and benefit society
 Firms should NOT be allowed to pollute air
and water, engage in unfair employment or
create monopolies that exploit customers
FINANCE
- study of how money is managed and the actual
process of acquiring needed funds
- encompasses the oversight, creation and
study of money, banking, credit, investments,
assets and liabilities that make up financial
systems
(Investopedia)
ORGANIZATIONAL CHART
A. Shareholders
-pinakamataas daw na ranking sabi ni sir
B. Board of Directors
-in charge of governance
-chairperson of the board = highest-ranking
individual
C. Chief Executive Officer
-chairperson of the board
-oversees operation of business
D. 1. Chief Operating Officer (COO)
 Marketing
 Production
 Human Resources
 Other Operating Departments
2. Chief Financial Officer (CFO)
 Accounting – controllership function
 Treasury – custody of funds
 Credit
 Legal
 Capital Budgeting
 Investor Relations
SARBANES-OXLEY ACT
- CEO and CFO must certify that their firm’s
financial statements are accurate to SEC
CORPORATE SCANDALS:
1. Enron Scandal
- hiding the financial losses of the trading business
and other operations of the company
- misleading accounting practices that led to
overstated profits
2. WorldCom
- borrowed from Bank of America to cover margin
calls using WorldCom shares as collateral
-made their expenses go to their assets
3. Madoff
- owner of investment securities or banking
- Ponzi Scheme / Salami Fraud
- promising high rates of return with little
risk to investors
3 AREAS OF FINANCE
CORPORATE FINANCE / FINANCIAL MANAGEMENT
- focuses on decisions relating to:
 how much and what types of assets to
acquire
 how to raise the capital needed to
purchase assets
 how to run the firm to maximize its value
CAPITAL MARKETS
- relate to the markets where interest rates, along
with stock and bond prices are determined
- study financial institutions that supply capital to
businesses
 Federal Reserve System
- regulates banks and controls the supply of
money
 Securities and Exchange Commission
- regulates the trading of stocks and bonds
in public markets
INVESTMENTS
- relate to decisions concerning stocks and bonds
and include activities:
a. Security Analysis
- finding proper values of individual
securities (stocks and bonds)
b. Portfolio Theory
- to structure portfolios, or baskets, of
stocks and bonds
c. Market Analysis
- whether stock and bond markets are “too
high”, “too low”, or “about right”
Behavioral Finance
- investor psychology is examined in an
effort to determine if stock prices have
been bid up to unreasonable heights or
lows or just right
FINANCIAL MANAGEMENT EUT

FORMS OF BUSINESS ORGANIZATION Limited Partners

1. Sole Proprietorship
- owned by 1 individual
ADVANTAGES:
1) Easily and inexpensively formed
2) Subject to few government regulations
3) Subject to lower income taxes
DISADVANTAGES:
1) Unlimited liability
2) Life of business = life of owner
3) Difficulty obtaining capital
- cannot participate in the general management
and daily operations of the partnership business
without being considered general partners in the
eyes of the law
General Partners
- either an individual or a corporation
SHAREHOLDER WEALTH MAXIMIZATION
- management’s primary goal to maximize the
long-run value of firm’s common stock

2. Partnership INTRINSIC VALUE

- owned by 2 or more persons
ADVANTAGES:
1) Easily and inexpensively formed
2) More funds
3) Infusion of more knowledge
- estimate of stock’s true value
- can be estimated but not measured precisely
- long-run concept

DISADVANTAGES: MARKET PRICE

1) Liable for actions of partner - perceived value
2) Unlimited liability - low economy = low market price
3) Dissolution of partnership
MARGINAL INVESTOR
3. Corporation - determines the actual stock price
- legal entity created by a state, separate and
distinct from its owners and managers EQUILIBRIUM
- managed by elected board of directors - actual market price = intrinsic value
ADVANTAGES: - investors are indifferent between buying or
1) Limited liability (stockholders) selling stock
2) Continuous existence
3) Shares of stocks can be easily transferred Management’s goal:
DISADVANTAGES: - Maximize firm’s intrinsic value, NOT
1) Many requirements and more costly current market price
2) Strict control of government
3) Distribution of net income
IMPORTANT BUSINESS TRENDS
S Corporations 1. Globalization
- 100 shareholders or fewer the benefit of - countries are open of doing business
incorporation while being taxed as a partnership - emergence of multinational companies
2. Information Technology
C Corporations - spurs globalization as it changes the financial
- owners, or shareholders, are taxed separately management of businesses
from the entity 3. Corporate Governance
- the way top managers operate and interface with
4. Limited Liability Company stockholders
- a corporate structure whereby the members of
the company are not personally liable for the BUSINESS ETHICS
company's debts or liabilities - study of proper business policies and practices
- hybrid entities that combine the characteristics of
corporation and partnership or sole proprietorship ETHICS
- standards of conduct or moral behavior
Limited Liability Partnerships
- allows limited partners to enjoy limited personal MANAGERS
liability while general partners have unlimited - more interested in maximizing their wealth than
personal liability stockholder’s wealth

*Example: It involves a silent partner, where one or STOCKHOLDER

more limited partners provide financing for the - owner of one or more shares of a
venture and the general partners run the business corporation's capital stock
FINANCIAL MANAGEMENT EUT
C. TREND ANALYIS
BONDHOLDERS - analyzes only two years in comparison but covers
- receive fixed payments 3, 4, or 5 years financial statements
- bonds have consistent interest payments and the
return of principal at maturity
% change = current
Factors that affect Managerial Behaviors: X 100
base
1. Managerial Compensation Packages
2. Direct intervention with stockholders
3. Threat of firing
4. Threat of takeover

CORPORATE RAIDER
- targets a corporation for takeover because it is
undervalued

HOSTILE TAKEOVER
- acquisition of a company over the opposition of
its management

10 Axioms of Financial Management

1) The Risk-Return Trade-off

2) The Time Value of Money
3) Cash is King
4) Incremental Cash Flows
5) Curse of Competitive Markets
6) Efficient Capital Markets
7) The Agency Problem
8) Taxes Bias Business Decisions
9) All Risk is Not Equal
10) Ethical Behavior Means Doing the Right
Thing

FINANCIAL STATEMENT ANALYSIS

A. HORIZONTAL ANALYSIS
- compares the same account in the FS of two
periods determining the amount of changes and
computing % change

Peso change = current- base (amount)

% change = current-base
X 100
base

B. VERTICAL ANALYSIS
- shows the relationship of each part to the whole
in a single financial statement

% change = account title

X 100
total