Second

year
Managerial Finance
(Chapter 1)

( FMI ) Dr.Romario
2024 01271535731
01149154059
 Second year [MANAGERIAL FINANCE (CHAPTER 1)]

Chapter One
Role & Environment of Managerial Finance

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 Second year [MANAGERIAL FINANCE (CHAPTER 1)]

The Goal of Firm

Lack of information on Profit maximization

The Inflation Risk and Time Value of money

1000 $ Now or 1000 $ after one Year

Money Have Value is Deal inversely With Time and Inflation
SO 1000 $ now is best than 1000 $ Tomorrow

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1 – Define finance Finance

The science and art of managing ( allocation ) [ money / funds /capital ] overtime
It is a science and art of dealing with managing of certain factor of production ( Capital )
Science : study relation between variables Can be taught
Art : Skills (cannot be taught )
- Scope of finance: Managing (planning ,organizing ,leading, monitoring and controlling )

- The core of finance is how individuals and business make choices between current
spending or receiving money now versus in future ‫كيف يتخذ األفراد والشركات اختيارات بين اإلنفاق‬
‫ الحالي أو تلقي األموال اآلن مقابل المستقبل‬.

Are Finance deal with corporations only ?

IT deal with individual level and business level regardless of size of business .
- Individual level : how individual manage its money
- Business level ( corporate finance ) 3 process
( Planning ,manage long term fund and manage working capital)

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The organizational level of the financial function

Depend only at the size of firm
In small firm : may be performed by owner or the accounting department
In a large firm : CFO (Chief Financial officer ) reported to CEO
CFO manage financial activities through two main officer :
1 – treasurer ‫ الخزانة‬: responsible for financial activates as cash management ,credit
management ,capital expenditure , raising fund and mange foreign currencies
2 – controller ‫ المراقب‬: responsible for accounting activates as taxes , financial statement

The difference between [ financial activities(management )/ and financial services ]

- Financial activities (management ) managerial Finance : manage capital and financial

decision
- Financial services ( consulting ) : provide business advices and financial products to
individual , business and government .

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RELATIONShIP TO ECONOMICS

-1-
4RELATIONShIP TO ECONOMICS
-The field of finance is closely related to economics.
-Financial managers must understand the economic framework
Examples include supply-and-demand analysis, profit-maximizing strategies, and price
theory.
-The primary economic principle used in managerial finance is marginal cost–benefit
analysis
marginal cost–benefit analysis :
Economic principle that states that financial decisions should be made and actions taken
only when the added benefits exceed the added costs.
Example :
Jamie Teng is a financial manager for Nord Department Stores, She is currently trying to decide
whether to replace one of the firm’s computer servers with a new, more sophisticated one that
would both speed processing and handle a larger volume of transactions. The new computer
would require a cash outlay of $8,000, and the old computer could be sold to net $2,000. The total
benefits from the new server (measured in today’s dollars) would be $10,000. The benefits
over a similar time period from the old computer (measured in today’s dollars)
would be $3,000. Applying marginal cost–benefit analysis, Jamie organizes
the data as follows:

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5-1 Relationship to Accounting

-The firm’s finance and accounting activities are closely related and generally Overlap
-In small firms, accountants often carry out the finance function
-in large firms, financial analysts often help compile ‫تجميع‬accounting information.
-however, two differences between finance and accounting
one is related to the emphasis‫ التركيز‬on cash flows, and the other is related to decision
making.
Accounting emphasis on (accrual basis.)
The financial manager emphasis on (cash basis)
accrual basis
In preparation of financial statements, recognizes revenue at the time of sales
recognizes expenses when they are incurred.
cash basis :
Recognizes revenues and expenses only with respect to actual inflows and outflows
of cash.

MCQ
[1] Managerial finance
A) Involves tasks such as budgeting, financial forecasting, cash management, and funds
procurement.
B) Involves the design and delivery of advice and financial products.
C) Recognizes funds on an accrual basis.
D) Devotes the majority of its attention to the collection and presentation of financial data.
[2] The responsibility for managing day-to-day operations and carrying out corporate policies
belongs to the .
A) Board of directors
B) Chief executive officer
C) Stockholders
D) Creditors

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[3] In a corporation, the members of the board of directors are elected by the
A) Chief executive officer.
B) Creditors.
C) Stockholders.
D) Employees.
[4] The treasurer is commonly responsible for
A) Taxes.
B) Data processing.
C) Making capital expenditures.
D) Cost accounting.
5- The controller is commonly responsible for
A) Managing cash.
B) Financial accounting.
C) Managing credit activities.
D) Financial planning.
[6] Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of
merchandise purchased during the year at a total cost of $7,000. Although the firm paid in
full for the merchandise during the year, it has yet to collect at year end from the customer.
The net profit and cash flow from this sale for the year are
A) $3,000 and $10,000, respectively.
B) $3,000 and -$7,000, respectively.
C) $7,000 and -$3,000, respectively.
D) $3,000 and $7,000, respectively.
[7] Included in the primary activities of the financial manager are
A) Financial analysis and planning.
B) Making investment decisions.
C) Making financing decisions.
D) Analyzing and planning cash flows.
E) all of the above.
[8] Among solutions to the agency problem in publicly-held corporations are all of the following
EXCEPT
A) Stock options.
B) Performance shares.
C) Cash bonuses tied to goal achievement.
D) Bonuses based on short-term results.

[9] Corporate ownerʹs receive realizable return through

A) Earnings per share and cash dividends.
B) Increase in share price and cash dividends.
C) Increase in share price and earnings per share.
D) Profit and earnings per share.

[10] The wealth of the owners of a corporation is represented by

A) Profits.
B) Earnings per share.
C) Share value.
D) Cash flow.

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[11] Wealth maximization as the goal of the firm implies enhancing the wealth of
A) The Board of Directors.
B) The firmʹs employees.
C) The federal government.
D) The firmʹs stockholders.
[12] The conflict between the goals of a firmʹs owners and the goals of its non- owner managers is
A) The agency problem.
B) Incompatibility.
C) Serious only when profits decline.
D) Of little importance in most large U.S. firms.
[13] Agency costs include all of the following EXCEPT
A) Management reports to stockholders.
B) Performance incentives paid to managers.
C) The cost of monitoring management behavior.
D) Purchasing insurance against management problems
[14] The agency problem may result from a managerʹs concerns about any of the following EXCEPT
A) Job security.
B) Personal wealth.
C) Corporate goals.
D) company-provided perquisites.
[15] Financial managers evaluating decision alternatives or potential actions must consider
A) Only risk.
B) Only return.
C) Both risk and return.
D) Risk, return, and the impact on share price.
[16] A financial manager must choose between three alternative investments. Each asset is expected
to provide earnings over a three-year period as described below. Based on the wealth
maximization goal, the financial manager would

[17]
A) Choose Asset 1.
B) Choose Asset 2.
C) Choose Asset 3.
D) Be indifferent between Asset 1 and Asset 2.
[18] The two key financial markets are
A) Primary market and secondary market.
B) Primary market and money market.
C) Money market and capital market.

10) ________ is concerned with design and delivery of advice and financial products to individuals, businesses,
and governments.
A) Managerial finance
B) Auditing services
C) Financial services

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D) Cost accounting
12) Finance is ________.
A) the system of verifying, analyzing, and recording business transactions
B) the science of the production, distribution, and consumption of goods and services
C) the art and science of managing money
D) the art of merchandising products and services
13) Which of the following is an area of career opportunities in financial services?
A) supply chain management
B) personal financial planning
C) auditing of financial statements
D) production planning
15) Which of the following is a duty of a financial manager in a business firm?
A) developing marketing plans
B) controlling the stock price
C) raising financial resources
D) auditing financial records
13) The primary goal of a financial manager is ________.
A) minimizing risk
B) maximizing profit
C) maximizing wealth
D) minimizing return
14) Corporate owners receive return ________.
A) by realizing gains through increases in share price and interest earnings
B) by realizing gains through increases in share price and cash dividends
C) through capital appreciation and retained earnings
D) through interest earnings and earnings per share
15) The wealth of the owners of a corporation is represented by ________.
A) profits
B) earnings per share
C) share value
D) cash flow
16) Wealth maximization as the goal of a firm implies enhancing the wealth of ________.
A) the auditors
B) the creditors
C) the federal reserve
D) the firm's stockholders
17) The amount earned during the accounting period on each outstanding share of common stock is called
________.
A) dividend per share
B) earnings per share
C) net profits after taxes
D) book value per share
18) Which of the following is the best measure of profit maximization goal?
A) retained earnings
B) risk of the investment
C) earnings per share
D) timing of the returns
20) Profit maximization as the goal of the firm is not ideal because ________.
A) profits are only accounting measures
B) cash flows are more representative of financial strength
C) profit maximization does not consider risk
D) profits today are less desirable than profits earned in future years

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