THE GOAL OF FINANCIAL MANAGEMENT
For public companies:
maximize current share value of existing
stock
For companies that doesn’t have stocks
traded in the public market:
maximize shareholder/s (owner of the
company) wealth
-If a value of a company increases, its shares
are also worth more.
THE PROBLEM
-Profit is an accounting term and there are
various ways to manipulate it
-Manipulation can lead to boosting short-
term profit but will harm long-term growth
-No consensus on the appropriate time
horizon for profit maximization
-Besides shareholders, stakeholders also
include:
1. Employees 4. Suppliers
2. Customers 5. Society
3. Creditors
-Yoshimori (1995) surveyed more than 300
financial managers in different countries
and found:
 US and UK, shareholder interest =
priority
 Japan, Germany, and France =
stakeholder interest
CORPORATE GOVERNANCE
-Specifies the system of rules, practices, and
procedures by which corporations are
managed and controlled
-Good corporate governance helps the
company to achieve its goal
-Shareholders are owners of stock issued by
the company. They can be individuals or
institutions
-Majority shareholder = has more than 50%
of the stocks
SHAREHOLDER RIGHTS
-Right to vote on important corporate
issues
-Right to receive dividends
BOARD OF DIRECTORS
-Elected by shareholders to represent the
interests of shareholders and make sure
that the company management acts on
their behalf
THE AGENCY PROBLEM
-An agency relationship exists whenever a
principal hires an agent to represent his/her
interests
-Agency Problem: conflict of interest b/w
firm’s owners and managers
-Corporations suffer from this problem
AGENCY COSTS
-Agency costs = expenses incurred b the
agency problem
-Direct cost = Expenditures that benefit the
company’s management but cost the
shareholders
-Indirect cost = expenses incurred due to
the lost opportunities
AGENCY PROBLEM SOLUTIONS
1. Managerial Compensation
2. Replace management
/ Merger and acquisition – if the company’s
management is underperforming, the
company will become a target for other
companies
3 BASIC FINANCIAL STATEMENTS
1. The balance sheet
2. The income statement
3. The statement of cash flows
FINANCIALS
-Public traded companies must report their
financial reports to their shareholders and
the general public
-Financials are official documents that
summarize the financial performance of a
company
-Used by investors, creditors, researchers,
and anyone interested in the company
WHERE TO GET FINANCIAL INFO
1. PSE Electronic Disclosure Generation
Technology (EDGE)
2. Company website
Balance sheet – takes a snapshot of a firm’s
accounting value at a certain time
Income statement – shows company
revenues, expenses, and income over an
entire fiscal year
Statement of cash flows
-fills the gap b/w the balance sheet and
income statement by showing how much
cash is generated or spent, operating,
investing, and financing activities for a
specific period of time
FINANCIERS VS ACCOUNTANTS
-Financiers care more about the cash
inflows and outflows b/c they determine
the value of a business
-Accountants pay more attention to
accounting the income
-Difference: noncash items such as
depreciation and amortization
CASH FLOW ANALYSIS SOLVENCY/LEVERAGE RATIOS

-Depreciation has an impact on how much Solvency ratio =

taxes a company pays to the govt. and
affects the net income Total A / Total L

-Cash flow is a more accurate way to Debt ratio =

capture the company’s financial health b/c Total Debt / Total A
its numbers are hard to manipulate
Debt-to-equity ratio =
-Cash flows is composed of 3 categories:
operating, investment, and financing Total Debt/ Total Shareholder/s Equity
activities
Interes
FINANCIAL RATIOS
ANG UBAN RATIO SA PPT NALANG
-Short-term LIQUIDITY ratios = measure TANAWA KAY KAPOY NAKO
liquidity of a company

-Long-term SOLVENCY ratios = evaluate the

financial leverage of a company

-Asset TURNOVER ratios = tell us the

efficiency of asset management

-PROFITABILITY ratios

-MARKET VALUE ratios

LIQUIDITY RATIOS

-Ability of firm to pay SHORT-TERM

obligations

Current ratio =

Current assets / Current Liabilities

Quick ratio (Acid test ratio) =

Current A- Inventory-Prepayments/

Current L