Advanced Financial Management

(MBA 532)

Master of Business Administration[MBA]

HARMONY GRAND COLLEGE

Instructor : Zelalem B. (Assi. Professor)

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 Advanced Financial Management
(MBA 532)

Chapter 1
AN OVERVIEW OF FINANCIAL
MANAGEMENT

Master of Business Administration[MBA]

HARMONY GRAND COLLEGE
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 What is financial management?
 Financial management is an integrated decision-
making process concerned with acquiring, financing,
and managing assets to accomplish some overall goal
within a business entity.
 Financial management (business finance) is concerned
with managing corporation’s money.
For example, a company must decide:
– Where to invest its money.
– Whether or not to replace its old assets.
– When to issue new stocks and bonds.

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 The Field of Finance

 The field of finance is closely related to

economics and accounting, and financial
managers need to understand the
relationship between these fields.
 Economics provides a structure for decision
making in such areas as
– risk analysis, pricing theory through supply
and demand relationships,
– comparative return analysis, and many other

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 The Field of Finance
 A financial manager must understand the
– institutional structure of Federal Reserve system,
– the commercial Banking system, and
– the interrelationships between the various sectors
of the economy.
 Accounting provides financial data through
– income statements,
– balance sheets and
– statements of cash flows.
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 The Economic Environment
 The financial manager considers economic variables,
such as
– gross domestic product,
– industrial production,
– disposable income,
– unemployment,
– inflation, interest rates, taxes (to name a few)
must fit into the financial manager’s decision
models and be applied correctly.

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 EVOLUTION OF THE FIELD OF
FINANCE

• 1920’s: Raising capital.

• 1930’s: Capital preservation, bankruptcy and
reorganization.
• 1950’s: shift to analytical decision-making,
capital budgeting.
• Markowitz, and Sharpe(risk-return & portfolio
management), Merton Miller(capital structure
theory), Modigliani, Scholes Agency Theory.

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 The Goals of Financial
Management
 A Valuation Approach-profit is important, the key is how to use
it in setting the goal of the company.
 Maximizing Shareholder Wealth: Primary goal is to maximize
the long-term wealth of the company’s shareholders (owners) by
increasing the market value (price) of their shares.
 May conflict with
– social / ethical goals (for example, pollution control)
– interests of management (for example, short-term
compensation). Management can encourage an increase in share
price by earning an attractive return at an acceptable level of risk.

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 Figure 1-1 Functions of the Financial Manager

FM supervise important functions –

-Monitoring cash flow
-Determining profitability

-Managing expenses
-Producing accurate financial information
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 Functions of Financial Management
Functions involve:
– allocate funds to current and fixed assets
– obtain the best mix of financing alternatives
– develop an appropriate dividend policy.
– infrequent use of the capital markets to acquire new funds.
– The daily activities of FM include credit management, inventory
control, & the receipt& disbursement of funds.
– Less routine the sale of stocks and bonds and the establishment of
capital budgeting and dividend plans.

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 Activities of Financial Management
• Activities include:
– Working Capital Management
• short-term (S/T) financial decisions (<1 year)
• ex., managing cash and other current assets
– Capital Budgeting
• long-term (L/T) financial decisions (>1 year)
• ex., purchasing a new machine in the future
– Financing decisions
• how to raise money
• loans? leases? shares? bonds?
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 Forms of Organization

Sole Proprietorship
– single owner with unlimited liability.
– limited access to capital
Partnership
– 2 or more owners (partners)
– greater access to capital
Corporation
– smallest in actual number but largest in total sales
revenue and profits
– owned by the shareholders
– large corporation can raise money by selling more shares
or bonds
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 What is financial Market?

 Financial market is the market were

financial asset is exchanged (i.e. traded). or
 Financial market is the place where
financial assets are bought and sold.
 Financial markets are the arenas through
which funds flow.

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 Classification of financial Markets

 Financial Markets can be classified into

– Money vs. capital Markets(Based on maturity of claim)
– Debt vs. Equity markets(Based on nature of claim)
– Primary vs. secondary markets( Based on seasonality of claim)

– Cash or spot vs. derivatives market( based on delivery)

– Auction vs. over-the-counter vs.

intermediated market(based on organization structure)

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 Classification of financial Markets

 Money markets: short term securities are

bought and sold(Maturity </= 1 year);
 capital markets: long-term debt and equity
securities were bought and sold(Maturity >1 year).
 Primary markets: new securities are sold for the
first time.
 secondary markets: the existing securities sold
for the second time or third or fourth times and
etc.
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 Classification of financial Markets
 Debt market – long-term debt instruments
sold(e.g., Bond markets).
 Equity markets – the market for equities (e.g.,
common stocks and preferred stocks).
 Cash or spot- market for immediate delivery.
 Derivatives market- market for future delivery.
 Auction markets-outcry auction(e.g., NYSE).
 Over-the-counter – Automated(e.g., Nasdaq).

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 Financial Markets
 Financial markets determine value and
allocate capital to the most productive use on
a risk-return basis.
• characteristics of Financial Markets
– reliance on debt
– volatile interest rates
– corporate restructuring
– internationalization

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 Financial Instruments

 They are also called financial securities or

financial assets.(money or capital instruments).
 Debt instruments:
– Example: Treasury Bills, Certificate of Deposit,
Commercial Paper, Bankers Acceptance, Repos,
Fed Funds, Bank loans, Government bonds,
Corporate bonds, Municipal bonds, Foreign bond,
 Equity instruments:
– Example: Preferred Stocks and Common Stocks.
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 A Risk-Return Tradeoff

↑ Profitability → ↑ Risk

↓ Profitability → ↓ Risk

ex., investing in stocks vs. savings accounts

• Stocks may be more profitable but are riskier
• Savings accounts are less profitable and less
risky (or safer)

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 End of the chapter

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