Course Introduction

An Overview of Financial Management

A simplified lecture by Prof. Ken Yumang


References:
! Fundamentals of Financial Management, Brigham and Houston
! Financial Management: Principles and Application, Titman, Keown, and Martin



Outline
How should we make decisions?
I. Decision-making Framework
What is it about?
II. Financial Management
Vis ion Why do weed need to study finance?
III. Reasons for Studying Finance
What do they mean?
IV. Financial Terminologies
What are the four basic financial principles?
V. Basic Principles
The Framework on
How to Arrive at a Decision
Logical
Conclusion

Decision
Logical
Analysis
Conceptual
Frameworks
Concepts
(Theories, Scientific
Laws, Principles or Faith)
What is Finance?
! Finance is the study of how people and
businesses evaluate investments and raise capital
to fund them. (Titman, Keown, and Martin)
! Finance can be defined as the science of money
management. (Wikipedia)
! Financial Management means the efficient and
effective management of money (funds) in such a
manner as to accomplish the objectives of the
organization.
Reasons for Studying Finance
! Knowledge of financial tools is critical to
making good decisions in both professional
world and personal lives.
! Finance is an integral part of corporate
world
! Many personal decisions require financial
knowledge (for example: buying a house,
planning for retirement, leasing a car)
Financial Markets
Money Market (short-term financial market)
Capital Market (long-term financial market)
Goal of Financial Management
The primary financial goal is shareholder wealth
maximization, which translates to maximizing stock
price.
The Basic Financial Management Principles
Borrow for as
short-term as
possible!
Avoid borrowing
as much as
possible!
Borrow at the
lowest interest
rate as
possible!
A peso today, all things being
the same, is worth more than a
peso tomorrow. Therefore, it is
important to compute the value
of money from different time
periods.
Principle 1: Money has time value.
Al t hough i nvest i ng i n
higher risk investments do
not always result in higher
realized rate of return,
generally, higher risk are
expect ed t o generat e
higher return.
Principle 2: There is a risk-return tradeoff.
The Basic Financial Management Principles
The net present value of cash flow to the company is the
difference between the cash flows the it would produce
with the potential new investment, and the cash flows it
would sacrifice for that investment.
Principle 3: Cash Flows are source of value.
The Basic Financial Management Principles
Investors respond to new information by buying or selling
their investments. The speed with which they act and the
way that prices respond to the information determine the
efficiency of the market.
Principle 4: Market prices reflect information.
The Basic Financial Management Principles
END