Introduction
Basics of Finance
 Finance: the management of large amounts of
money, especially by governments or large
companies
 Management:
o “a man with enough age to manage men”
o is the art of getting things done through and
with people in formally organized groups
o lifeblood is people
 Economics: the study of how individuals,
businesses, governments, and entire societies make
choices as they cope with scarcity and the
incentives that influence and reconcile these
choices; lifeblood is resources
 Financial Management: monitoring, controlling,
protecting, and reporting on a company’s financial
resources.
 Marketing: activities a company undertakes to
promote the buying or selling of a product or
service; lifeblood is sales
 Accounting: the process of recording financial
transactions pertaining to a business; lifeblood is
assets
 Taxation: the lifeblood of the government
Business Cycle
 Prosperity:
Prosperity
Recession
Recovery
Depression
o people have jobs, money, and are happy
o less or absolute 0% criminal rate
o prices of commodities are highest/at
peak/boom.
 Recession:
o people lost jobs
o increasing rate of criminality
o price of commodities starts to decrease
 Depression:
o companies are closed; they start to aim for a
breakeven, not a sale
o higher rate of criminality
o lowest price of commodities
 Recovery: everything starts to return to prosperity
Macroeconomics and Microeconomics
 Macroeconomics: involves producer, consumer,
government, and multinational corporations
o founded by John Maynard Kaynes: it means
changes focusing in economic output, inflation,
interest, and foreign exchange rates and the
balance of payments
 Microeconomics: involves producer and consumer
Elasticity of Demand
 Elasticity of Demand: measures how demand
responds to a change in price or income
o Elastic Demand: occurs when a product or
services demanded quantity changes by a
greater percentage than changes in price; its
demand changes more than its price changes
o Inelastic Demand: situation where the demand
for a good service or product remains relatively
unchanged when the price moves up or down
(Q 1−Q 2)
elasticity of demand=
(Q 1+Q2)
Inflation
 Inflation: the rate at which the values of a currency
is falling and, consequently, the general level at
prices for good and services are rising.
o Demand-Pull Inflation: there is an increase in
demand and the supply remains the same or
decreases
o Cost-Push Inflation: overall prices increase due
to increases in the cost of wages and raw
materials
o Built-In Inflation: occurs when workers demand
higher wages to keep up with rising living costs
and commodities
 The most commonly used inflation indexes are:
o Consumer Price Index (CPI): measures the
change in prices paid by consumers for goods
and services
o Wholesale Price Index (WPI): inflation indicator
that measures change in the overall price level
of goods before they are sold at retail
Import and Export
 Export: goods going out of the country
Accounts Debit Credit
Cash XX
Goods XX
 Import: goods coming in from other countries
Accounts Debit Credit
Goods XX
Cash XX
 If export is greater than import (positive), it o General Partner: has unlimited liability – can
indicates that the country has a trade surplus. manage/control the corporation
 If export is lesser than import (negative), the nation o Limited Partner: has limited liability – their
has a trade deficit. liability is only up to their contribution; has little
Gross Domestic Product and Gross National Product or no involvement in management
 Gross Domestic Product: total monetary or market  As to Contribution
value of all the finished goods and services o Capitalist Partner: contribute money or
produced within a country’s borders in a specific property or both money and property to the
time period (made in the nation) common fund; participates in company losses
 Gross National Product: the total value of all the o Industrial Partner: doesn’t participate in
goods and services produced by the residents and company losses and contributes only their
businesses of a country (made by a Filipino) industry or labor to the common fund
Determining Good and Bad Financial Statements o Capitalist-Industrial Partner: contributes money
Accounts 2019 2020 2021 2022 2023 or property and industry or both money,
Cash 1M 1.5M 2M 2.2M 2.5M property and industry to the common fund
A/R 60K 65K 70K 72K 75K  As to Participation
Inventories 50K 55K 60K 65K 66K o Managing Partner: manage actively the
 Question: Seeing the progress of the assets, is the business of affairs of the partnership
increase throughout the years good or bad? o Silent Partner: does not take active part in the
 Answer: The assets’ progress listed above may look business or affairs of the partnership though
good, but it’s actually bad. Here’s an analysis: they share in the profits or losses
o Cash: the cash excess should’ve been invested o Liquidating Partner: take charge of the winding
instead of letting it stay still in the accounts – up or liquidation of the partnership affairs after
“the worst thing you can do with money is save dissolution
it”  As to Third Person
o Accounts Receivable: the A/R remains o Secret Partner: whose connection with the
increasing can lead to possible loss of supposed partnership is not known to the public
payment o Dormant Partner: who do not take active part in
o Inventories: they are especially at risk when
the business and are not known to the public as
stored since most of them are perishables partners
Forms of Business Organizations o Ostensible Partner: takes active part and known
 Summary to the public as a partner in the partnership
Forms Ownership Management  In partnerships, there should always be at least one
Proprietorship Individual Individual general partner.
Partnership Partners General Partner
 Division of profits solely depends on:
Board of
Corporation Stockholders o Stipulation
Directors
o Contribution Capital (GR: Contribution Capital is
 Sole Proprietorship: being owned and managed by
basis for division unless there is an agreement)
one individual
 Partnership: when two or more persons bind Mutual Funds
 Definition: lets you pool your money with other
themselves to contribute money, property or
investors to “mutually” buy stocks, bonds, and other
industry to a common fund with the intention of
investments
dividing the profits among themselves
 Current Ratio: ability to settle liabilities through
 Corporation: an artificial being created by operation
assets
of law, having the right of succession, and the
o 2:1 – good: for every P1 liability, the company
powers, attributes, and properties expressly
authorized by law or incident to its existence has P2 to pay for it
o 1:1 – can be good, can be bad: for every P1
Types of Partnership
 As to Liability liability, the company has P1 to pay for it
 o .90:1 – bad: for every P1, the company lacks V. Alternative Courses of Actions (ACA)
P.10 to pay for it a. Advantages
Stocks and Bonds b. Disadvantages
 Stocks: VI. Recommendation (only 1 ACA)
o certificate of ownership VII. Environmental Analysis
o stockholder a. Internal Environment
o co-owner i. Strengths
 Bonds: ii. Weaknesses
o certificate of indebtedness b. External Environment
o bondholder i. Opportunities
o creditor ii. Threats
Kinds of Bonds VIII. Detailed Plans of Actions
 Par: price of bond remains the same as its value IX. Appendices
matures  Management: are responsible for many goals and
 Discount: price of bond decreases by a certain value proactively solves problems before they become
as its value matures crises
o critical trait of effective managers is the ability
 Premium: price of bond increases by a certain value
as its value matures to motivate teams to perform their best and
avoid the hazards of free riding and shirking of
Term of Investments
 Short-term: less than 365 days or within a year duties
o managers in a capitalist economy are
 Medium-term: a year to five years
motivated to monitor because they aim to
 Long-term: greater than five years
maximize returns to owners of the business
Chapter 1: Introduction and Goals of the Firm
 economic profits: difference between total
What is Managerial Economics?
 enables managers to select strategic direction, revenue and total economic cost (“normal”
allocate efficiently, and respond effectively to rate of return on capital contributions)
tactical issues The Role of Profits
 managerial economic decision making seeks to:  Risk-Bearing Theory of Profit: risk-bearing should
o identify the alternatives lead to higher profits
 Temporary Disequilibrium Theory of Profit: firms
o select the choice that accomplishes the
may earn a return above or below the long-run
objectives in the most efficient manner
normal return level
o taking into account the constraints
 Monopoly Theory of Profit: a firm that dominates
o and the likely actions and reactions of rival
the market can persistently earn above-normal
decision-makers
returns
The Decision-Making Model
 Innovation Theory of Profit: reward for successful
 Elements
innovations
1. establish the objectives
 Managerial Efficiency Theory of Profit: exceptional
2. identify the problem
managerial skills may lead to higher profits
3. examine potential solutions
Objective of the Firm
4. analyze the relative costs and benefits
 The Shareholder Wealth-Maximization Model:
5. analyze the best alternative
requires the public corporation to pursue a single
6. implement the decision
purpose to the exclusion of all others: increase the
 Case Study Analysis
wealth of shareholders by increasing the value of
I. Title
their shares, within the confines of the law
II. Time Context
o Shareholder Wealth: is measured by the market
III. Viewpoint
value of a firm’s common stock, which is equal
IV. Statement of the Problem
to the present value of all expected future cash
a. Symptom
b. Cause
 flows discounted at the required rate of return o Goals in the Public Sector and Not-for-Profit
plus real options Enterprises: profit maximization is not
π1 appropriate for NFP; public goods consumed are
V 0=
¿¿ consumed by more than one person at a time
∞
π1 with no extra cost
V 0= ∑ ❑
t =1
¿¿ o Not-for-Profit Objectives:
Separation of Ownership and Control: The Principal-  maximize quantity and equality of output
Agent Problem subject to breakeven budget constraint
 Divergent Objectives and Agency Conflict  maximize outcomes preferred by
o Growth makes owners (principals) delegate contributors
decision-making authority to professional  maximize longevity of contributors
managers (agents) o The Efficiency Objective in Not-for-Profit
o Agency Conflict: agents may seek acceptable Organizations
profit levels, pursuing their own interests  Cost-benefit analysis: resource-allocation
 Agency Problem model used to evaluate programs or
o Source of Problems: investments on the basis of the magnitude
 Inherent Unobservability of Managerial of discounted costs and benefits (does not
Effort incorporate subjective considerations or less
 Random Disturbances in Team Production quantifiable attributes)
o Separation of ownership and control permits  Goals due to spending constraint (caused
managers to pursue goals that are not always in by budget ceiling):
the long-term interest of shareholders  Maximize benefits for given costs
o In attempt to mitigate agency problems, firms  Maximize the costs while achieving a
incur agency costs: (bold – costs; norm – effect) fixed level of benefits
 grants of stock options or restricted stock  Maximize the net benefits (benefits –
from treasury stock so executive costs)
compensation aligns the incentives for
management with interests
 internal audits and accounting oversight
boards to monitor actions of management
 bonding expenditures and fraud liability to
protect shareholders
 complex internal processes to limit
discretion
Implications of Shareholder Wealth Maximization
 Caveats to Maximizing Shareholder Value
o Complete Markers: forward or future markets
and spot markets must be available for firm’s
inputs, outputs, and by-products to influence a
company’s cash flows
o No Asymmetric Information: this type of
information causes misunderstanding
o Known Recontracting Costs: managers must
forecast future recontracting costs for pivotal
inputs
o Residual Claimants: shareholders only have a
residual claim on net cash flows after all
expected contractual returns have been paid