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SOME PRELIMINARIES
When, Where, Who?
FUNDAMENTALS OF FINANCIAL MANAGEMENT My preferred way of communication
How to get your materials for the lecture?
Blackboard
Financial Management
Email
Checking attendance?
Food/drink during lecture time?
My grading policies?
PHAN NGC ANH, MBA Class environment: learning attitude?
Spring 2017
Being absent from quizzes?
1 2
Tutorials
CONTACT COURSE ASSESSMENT
PHAN NGOC ANH, MBA.
Email: pnanh@hcmiu.edu.vn Elements Weight
2 in-class tests 10%
Consultation hours: Tuesday and Thursday mornings
Room: A1.305 Group project assignment 20%
Financial Management
Financial Management
Mid-term exam 30%
Final Exam 40%
TOTAL 100%
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RESOURCES COURSE CONTENT
Topic 1 : Introduction to Finance: Overview of Corporate Financing
Textbook:
Decisions; Capital Markets and Financial Instruments
Brealey, R.A., Myers, S.C. and Marcus, A.J., Fundamentals of
Corporate Finance, 7th ed, McGraw Hill 2013
Topic 2: Calculate financial ratios and conduct companys basic
Note: the course will cover Chapters 1 13
financial analysis;
Brigham, E.F. & Ehrhardt M.C. (2008). Financial Management: Theory
Topic 3: Discounted Cash Flow and Present Value Concept
Financial Management
and Practice, 12th ed, Thompson South-Western.
Financial Management
Note: the course will cover Chapters 3-4
Topic 4: Debt vs. Equity Financing Valuing Bonds and Stocks
Websites:
http://www.mhhe.com/business/finance/corpfinonline/. Choose
Topic 5: Investment Evaluation : Capital Budgeting Decisions
Finance Tutor Series.
Yahoo Finance at www.finance.yahoo.com
Topic 6 : Risk and Return: Introduction to Portfolio Theory
CNN at www.money.cnn.com
Wall Street Journal at www.wsj.com
Topic 7 : Long-term Financial Decisions: Capital Structure and Cost
The economist at www.economist.com
5 6 of Capital
LECTURE OBJECTIVES
Understand the BIG PICTURE of corporate finance, the
INTRODUCTION TO CORPORATE FINANCE differences between accounting and financial view of the firm
Discuss the basic types of financial management decisions
and the role of the financial manager.
Financial Management
Financial Management
Know the financial implications of the three forms of
business organisation.
Explain the goal of financial management and why it is
superior to other possible goals.
Explain the agency problem, and how it can be controlled
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and reduced.
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THE TRADITIONAL ACCOUNTING BALANCE SHEET FINANCIAL MANAGEMENT DECISIONS
Investment
decision
Which
Assets Liabilities & Equity assets/projects to
invest in?
Current assets Current liabilities
Three main
Fixed assets - tangible Long-term liabilities decisions a
Working capital firm deals
decision with: Financing
How to manage the decision
Fixed assets - Intangible Equity receipt and
disbursement of Where and how
current assets and to raise the
current liabilities? money?
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FINANCIAL MANAGEMENT DECISIONS FINANCIAL MANAGEMENT DECISIONS
The investment decision The financing (capital structure) decision
Assets Liabilities & Equity Assets Liabilities & Equity
Current assets Current liabilities Current assets Current liabilities
What long- Long-term Liabilities How can the Long-term Liabilities
term firm raise
investment Fixed assets money for
Fixed assets
should the the required
firm engage Equity investment? Equity
in?
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FINANCIAL MANAGEMENT DECISIONS
CHECK YOUR UNDERSTANDING !
The working capital decision
Which of the following are financing decisions?
Assets Liabilities & Equity
A/ Intel decides to spend $1 billion to develop a new
Current liabilities microprocessor.
Current assets Working
capital B/ Volkswagen borrows 350 million euros (350 million) from
Deutsche Bank.
Long-term Liabilities
How to manage C/ BP constructs a pipeline to bring natural gas onshore from a
the receipt and
production platform in the Gulf of Mexico.
Fixed assets disbursement of
current assets D/ Budweiser spends 200 million to launch a new brand of
and current Equity
beer in European markets.
liabilities ?
13 14 E/ Pfizer issues new shares to buy a small biotech company.
CHECK YOUR UNDERSTANDING ! FORMS OF BUSINESS ORGANIZATION
Organiza Who owns Legal Are owners Limitation Access to
-tional Form the Liability and biz on Life of Capital
A. Intel decides to spend $1 billion to develop a new business ? taxed Entity
microprocessor. separately
?
Proprietor Proprietor/ Unlimited No Limited Limited
B. Volkswagen borrows 350 million euros (350 million) -ship Manager Individual
from Deutsche Bank. Income Tax
Financial Management Partnership Partners Limited & No Limited Limited
C. BP constructs a pipeline to bring natural gas onshore from Unlimited Individual
a production platform in the Gulf of Mexico. Income Tax
D. Budweiser spends 200 million to launch a new brand of Corporation Share- Limited Yes Unlimited Moderate
holders, Corporate
beer in European markets. ownership Income Tax
can be & Individual
E. Pfizer issues new shares to buy a small biotech transferred Tax
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company.
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FINANCIAL MANAGEMENT : THE BIG PICTURE
FM tries to How do we manage
Which the receipt and
What long- identify FM
mixture disbursement of
term investment decides
opportunities
of Debt short-term assets ?
investment how and
that are worth and
where to
should we more to the Equity
raise the
Inventory
Accounts Receivables
THE GOAL OF FINANCIAL MANAGEMENT
make ? firm than they should we
money Accounts Payables
cost to acquire make ?
....
Financial Management
The investment The financing decision The working capital
decision Find the right kind of decision
Invest in assets that debt for your firm and Ensure that firm has
earn a return greater the right mix of debt and sufficient resources to
than they cost to equity to fund your continue operations and
acquire operations avoid costly interruptions
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POSSIBLE GOALS OF FINANCIAL MANAGEMENT POSSIBLE GOALS OF FINANCIAL MANAGEMENT
Maximize earnings Maximize earnings
Maximize sales or market share
Case: Vedan Vietnam
cut costs by dumping
wastes in Thi Vai river!
Financial Management
Financial Management Price increased
Gain market share
Set low price
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POSSIBLE GOALS OF FINANCIAL MANAGEMENT POSSIBLE GOALS OF FINANCIAL MANAGEMENT
Maximize earnings
FINANCIAL MANAGEMENT
Maximize sales or market share
Survive PROFITABILITY CONTROLLING RISK
Financial Management
Financial Management
Avoid financial distress and bankruptcy Maximize earnings
Maximize sales Avoid financial distress
Maximize market share Avoid bankruptcy
Minimize costs ...
... .... ...
.... ...
...
....
...
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POSSIBLE GOALS OF FINANCIAL MANAGEMENT THE GOAL OF FINANCIAL MANAGEMENT
THE CLASSICAL VIEWPOINT
Maximize earnings Van Horne: "In this book, we assume that the objective of the rm is to
maximize its value to its stockholder.
Maximize sales or market share
Brealey & Myers: There is a natural financial objective on which almost
Survive all shareholders can agree: maximize the current market value of
shareholders investment in the firm...A smart and effective financial
Financial Management
Financial Management
Avoid financial distress and bankruptcy manager makes decisions that increase the current value of the
companys shares and the wealth of its stockholders.
Ross, Westerfield, & Jordan : The goal of financial management is to
... maximize the current value per share of the existing stock.
... Brigham and Gapenski: Throughout this book we operate on the
assumption that the management's primary goal is stockholder wealth
...Maximize shareholders wealth maximization which translates into maximizing the price of the common
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stock.
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THE GOAL OF FINANCIAL MANAGEMENT
THE CLASSICAL VIEWPOINT
WHY STOCK PRICE IS CONSIDERED A
MEASURE OF THE MARKET ESTIMATE OF
EQUITY VALUE ?
Financial Management
Financial Management
Maximize the Maximize the
Maximize stock
wealth of value per share
prices ???
stockholders of stock Easily observable
Constantly updated
If investors are rational (are they?), stock price reflects the
Primary goal is to wisdom of decisions, short term and long term, instantaneously.
maximize the
stocks true or
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AGENCY PROBLEM THE FIRM AND THE FINANCIAL MARKETS
Agency relationship : The relationship between the Firm Firm issues securities (A) Financial
principal and agent
Firm invests markets
Agency problem: The conflict of interest between the in assets
Retained
principal and agent (B) cash flows (F)
Agency costs: The direct and indirect costs arising from Short-term debt
Current
this conflict of interest
Financial Management
Financial Management assets Cash flow
from firm (C)
Dividends and
debt payments (E)
Long-term debt
Equity shares
There could be an agency problem between managers and Fixed assets
Taxes (D)
shareholders !
Do managers ususally act in
the interests of shareholders ?!
Government
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PRIMARY vs. SECONDARY MARKETS MONEY vs. CAPITAL MARKETS
Primary market: primary issues of securities are sold, allows
governements, banks, corporations to raise money by directly Money market: where short-term assets (maturity of less
selling financial instruments (securities) to the public. than one year) are traded.
Secondary market : where securities are bought and sold Certificates of deposits (CDs)
after the original sale. Securities can be exchange traded or Commercial papers (CPs)
over-the-counter (OTC) traded. Treasury bills
Financial Management
Financial Management
Stocks and
FIRM Bonds INVESTORS Capital market : where long-term assets (maturity of more
Money
than one year) are traded.
Stocks
Corporate bond
Government bond
Primary Market Secondary Market
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ORGANIZED EXCHANGE vs. OTC TUTORIALS
Organized exchange: Most of stocks, bonds, and derivatives
are traded
has trading floor: traders execute transactions in the
secondary market for their clients
E.g. NYSE
Financial Management
OTC: Stocks not listed on the organized exchanges are
traded on the over-the-counter (OTC) market
No trading floor : buy/sell orders are completed via NOT YET !!!
telecommunications network
E.g. NASDAQ
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