WARNING

This collection of slides provides an idea of the course

structure and key words.

It is NOT intended to substitute the readings required

by the instructor.

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 KET307
FINANCIAL MANAGEMENT
Nguyen Manh Hiep
2021

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 CHAPTER 1
INTRODUCTION
Nguyen Manh Hiep

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 In this chapter:
• CORPORATE FINANCE AND
I. FINANCIAL MANAGEMENT

• CORPORATE GOVERNANCE
II.

• FINANCIAL MARKETS AND THE

III. CORPORATION

• HOMEWORK
IV.
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 GUIDE TO KET307
▪ Go to the website. Download the reference guide,
the slides, and the supplementary materials. Read
and understand the readings.
▪ Ask questions in class or by email. Arrange
rendezvous with the instructor if needed.
▪ Mid-term 40%: daily oral tests, in-class
performance, mid-term paper test(s). Final-term
60%: paper test.
▪ Historical statistics: Grade A ~ 5%, B ~ 25%. C
~25%. D ~25%. F ~20%.
 COURSE CONTENT
As per the course’s syllabus.
 I. CORPORATE FINANCE?
▪ What is finance?
▪ What is a corporation?

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 I. CORPORATE FINANCE?
▪ The financial system
Public Finance

We focus on
Financial
Management in Financial
Corporations (one
major part of Markets
Business Finance) Financial
Institutions

Business Finance Personal Finance

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 I. CORPORATE FINANCE?
A business/A company/A firm is a group of natural or
legal persons working together towards specific goals.
Types of Business Ownership
▪ Proprietorship.
We focus on
▪ Partnership. Corporations

▪ Corporation.
❖ Are there other types of business organization?
❖ What is a co-operative?
❖ Can the owner of a sole proprietorship withdraw capital from the firm?
❖ Can the owners of a corporation withdraw capital from the firm? Is it a good
or a bad thing that they can/cannot withdraw their capital?
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I. CORPORATE FINANCE?

Source: CFAI 2013, Volume 2

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 I. CORPORATE FINANCE?
▪ Types of firms in the U.S.

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Source: www.irs.gov; Berk, DeMarzo Corporate Finance 4th edition.
 I. CORPORATE FINANCE?
▪ Organizational Chart of a Corporation

Berk, DeMarzo Corporate Finance 4th edition.

❖ Where are the shareholders in this chart?
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 I. CORPORATE FINANCE?
What Financial Officers do in a Corporation
▪ Investment decisions
▪ Financing decisions
▪ Operating decisions
❖ Which decision must be made first?

Example: What type of decision are these?

Tuan Bach Inc. buys from vendors on credit and
requires cash payment immediately when selling to
customers. Applies for a loan from a bank to build a
plant. Pays dividends. Pays taxes. 13
 I. CORPORATE FINANCE?
Example:
▪ Sacom Investment and Development Corporation
in 2011 buys VND31 billion worth of Quốc Cường
Gia Lai shares.
▪ Bibica Corporation from 2007 to 2010 reduces
debt-to-assets from 0.45 to 0.28.

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 I. CORPORATE FINANCE?
The goal of financial decisions?
Maximizing shareholders’ value
❖ Why? What about other stakeholders and the society? See more: Milton Friedman (1970): The
Social Responsibility of Business Is to Increase Its Profits.
❖ Do shareholders own the firm? Who decides where firm profit goes? Does the law require that the
firm must act to achieve this goal? See Điều 160 Luật Doanh nghiệp 2014.

What is shareholders’ value?

Stock price
❖ Jensen (2001), Value Maximization, Stakeholder Theory, and the Corporate Objective Function.
❖ Does everyone agree? See more: Shareholders VS Stakeholders, A New Idolatry (The Economist),
Unilever Warning on “Shareholder Value” (FT), Welch Condemns Share Price Focus (FT),
Shareholder value: Investors must learn to respect long-term thinking (FT), We must rethink the
purpose of the corporation (FT), Beyond the bottom line: should business put purpose before profit?
(FT), Shareholders are being dethroned as rulers of value (FT).
❖ Is the goal real and justified or flawed and unrealistic? See more: Lynn Stout (2012), The
Shareholder Value Myth, How Putting Shareholders First Harms Investors, Corporations, and the 15
Public, Berrett-Koehler Publishers.
 II. CORPORATE GOVERNANCE

Principal-Agent Problem
▪ Managers are agents of shareholders but act for
their own self-interest.
▪ That imposes a cost to shareholders (agency
cost).
❖ Are managers really agents of shareholders? Do they say they are? Do
they believe they are? Do they act as if they are?

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 II. CORPORATE GOVERNANCE

Means to Mitigate Principal-Agent Problem

▪ Ownership/Stock-based compensation.
▪ Incentive pay.
▪ Long-term contract.
▪ Good corporate governance practice: a system of
principles, policies, procedures and clearly
defined responsibilities and accountabilities that
helps to reduce the conflicts of interest.
❖ What empirical studies say about their effectiveness?

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 II. CORPORATE GOVERNANCE
Example: Which of the following is often regarded as a
sign of ineffective corporate governance system?
▪ There is clear and measurable accountability for
managers and directors in assuming their
responsibilities. (EX: directors of X corp must not be
CEO of the corp of their CEO) (e)
▪ Three-quarters of board members are independent. (e)
▪ CEO also serves as chairman of the board of directors.
(ineffective)
▪ Disclosure regarding operations and financial position
are made with complete transparency and accuracy.(e)
▪ Internal audit committee consists only of independent
 II. CORPORATE GOVERNANCE
Example: Which of the following is least likely an approach the
shareholders use to manage the principal-agent problem?
▪ Participate in general meetings to discuss and vote on major
corporate issues and transactions. (no)
▪ Elect and delegate a board of directors with oversight of the
company. (no)
▪ Choose a prestigious independent auditor to audit the company’s
annual financial records. (no)
▪ Regularly read and evaluate the company’s financial and non-
financial information. (no)
▪ Build remuneration policies that align the interests of managers
and directors with those of shareholders. (no)
▪ Vote for corporate social responsibility policies and practices that
promote labor welfare, environmental protection, and social good.
 II. CORPORATE GOVERNANCE
Divergence VS Concentration of Ownership
▪ Mai Linh wants to expand her chain of fashion
shop. She may borrow or sell 30% of her equity in
the chain to raise fund.
▪ If Mai Linh borrows fund (or sells equity ), $1
incremental income (or expense) from the shops
will increase Mai Linh’s income by how much?
▪ Predict Mai Linh’s behavior in each case.
❖ See more: Berle and Means (1932)
 II. CORPORATE GOVERNANCE
Management Entrenchment
Tuan Bach Corp. (100% equity) has 100 cash.
Corporate tax rate 25%, personal tax rate 15%.
Bank-deposit interest rate 5%. No investment
opportunity is viable.
▪ Should Tuấn Bách, CEO of Tuan Bach Corp, keep
this amount of cash to deposit it on a bank
account or should he pay out the money to
shareholders (by devidend)?
 II. CORPORATE GOVERNANCE
The Value of a Corrupt Manager
▪ Tuan Bach is a corrupt CEO. He doesn’t abide to
principles. He often finds ways to circumvent
rules and regulations to achieve his goals, for
example, by bribery, power abuse, bullying,
unethical competition, insider trading etc.
▪ Can Tuan Bach be good for a firm in any
circumstance? Corrupt environment, xã hội rối
loạn blabla
 II. CORPORATE GOVERNANCE
Short-term and long-term shareholders
▪ Tuan Bach, CEO, is considering a long-term
investment which requires a large capex,
generates no revenue in the first two years and
generates large revenue after the second year.
▪ Phuong Xuan is a master student who will need
to sell her shares next year to pay her tuition fee.
(Short-term)
▪ Dieu Le is an office employer who has a stable
job and want to keep her shares until retirement.
▪ In the annual meeting, Tuan Bach asks the
 II. CORPORATE GOVERNANCE
Majority and minority shareholders
▪ Tuan Bach owns 51% of shares in the company.
▪ Mai Linh owns 29% and Mai Anh owns 20%.
▪ Tuan Bach also owns NQ Inc, which is on the
brink of bankruptcy and priced at VND100/share.
▪ In the general meeting, Tuan Bach proposes an
M&A plan to buy NQ at VND10000/share.
▪ Predict if the M&A plan will be passed at the
shareholders meeting.
 II. CORPORATE GOVERNANCE
Socially (ir)responsible shareholders
▪ In the annual meeting, Mai Linh, CEO of Papery
Corp. proposes investing in a new technology of
waste production which would cost the company
a lot of money but will improve the company’s
CSR profile.
▪ Mai Linh also proposes that the company sells its
stake in Marlbara Smoking Inc even though the
investment generates very high dividend because
she thinks that investing in cigarette is not socially
responsible.
 II. CORPORATE GOVERNANCE

Example: Which of the following cases most likely represent the conflicts
of interest between the shareholders and the managers/directors?
▪ In order to finance growth, managers and directors decide to increase
borrowings to a level that would significantly increase default risk. (bad
for creditors – chủ nợ, đầu tư nguy hiểm khiến chủ nợ nguy cơ khó thu
hồi not shareholders)
▪ Managers and directors decide to abandon product safety features to
reduce costs. (firm and customers, not shareholder and manager)
▪ A controlling shareholder who owns a 51% stake in the company
demand the managers and directors to buy inventory from his spouse’s
company at above market price. (between shareholders)
▪ Managers and directors do not invest in high-risk projects even if they
have positive NPV because they want to protect their employment
status. (yes)
▪ Managers and directors decide to use accounting practices that reduce
 II. CORPORATE GOVERNANCE
Example X
▪ Tuan Bach Limited has a debt of 100 bil. on the
balance sheet payable in one year. Value of all
asset is now 80 bil.
▪ There is one investment opportunity available:
Initial investment 50 bil. In one year, there is a
probability of 30% that the return is 100 bil (win).
and 70% that the return is 0 (fail).
▪ Tuan Bach is the only owner and manager of the
company.
 II. CORPORATE GOVERNANCE
Example X (cont.)
1. If Tuan Bach decides not to invest. In one year,
the value to Nicolas and debtholder will be:
a/ 80 bil and 20 bil b/ 100 bil and 0 bil
c/ Other
2. If Tuan Bach decides to invest and fail, in one
year the value to Nicolas and debtholders will be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 50 bil and 0 bil d/ Other
 II. CORPORATE GOVERNANCE
Example X (cont.)
3. If Tuan Bach decides to invest and win. In one
year, the value to Tuan Bach and debtholders will
be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 100 bil and 50 bil d/ Other
4. If you were Tuan Bach, what would you do?
a/ Invest b/ Do not invest
c/ Go America to hide from lenders
 II. CORPORATE GOVERNANCE
Example Y
▪ Tuan Bach Limited has a debt of 100 bil. on the
balance sheet payable in one year. Value of all
asset is now 40 bil.
▪ There is one investment opportunity available:
Initial investment 50 bil. In one year, there is a
probability of 70% that the return is 100 bil (win).
and 30% that the return is 0 (fail).
▪ Lenders refuse to lend. Tuan Bach can only raise
capital through equity issue to himself, i.e.,
contributing more capital to the firm.
 II. CORPORATE GOVERNANCE
Example Y (cont.)
1. If Tuan Bach decides to invest and fail, in one
year the value to Tuan Bach shareholders and
debtholders will be:
a/ 0 bil and 0 bil b/ 0 bil and 40 bil
c/ 0 bil and 50 bil d/ Other
2. If Tuan Bach decides to invest and win. In one
year, the value to Tuan Bach shareholders and
debtholders will be:
a/ 50 bil and 100 bil b/ 70 bil and 0 bil
c/ 0 bil and 70 bil d/ Other
 II. CORPORATE GOVERNANCE
Example Y (cont.)
3. If you were Tuan Bach, what would you do?
a/ Contribute more capital to invest.
b/ Do not invest.
c/ Go America to hide from lenders.
d/ Other.
 III. FINANCIAL MARKETS
▪ Internal Finance: Reinvest the cash-flows
generated within the families, firms...
▪ Some households/firms/governments/sectors are
in budget deficit. Others have a budget surplus.
▪ External Finance: Ones with budget deficits seek
for outside sources of capital from those with
budget surpluses by the means of direct finance
and indirect finance.

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 III. FINANCIAL MARKETS

▪ Direct finance: borrowers issue securities to

borrow funds directly from the lenders.
▪ Indirect finance: financial intermediaries channel
funds from lenders to borrowers.
▪ Funds and financial assets are exchanged.
(Reference: Mishkin 9th, Chapter 2)

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 III. FINANCIAL MARKETS
Capital Movements in the Financial System

(Refer: Mishkin 9th Chapter 2)

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 III. FINANCIAL MARKETS

Internal versus External Funding

▪ More developed financial systems utilize more
external funds.
Example:
▪ In the U.S., external funds finance around 50% of
investments.
▪ In Vietnam, the number is somewhere less than
20%.

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 III. FINANCIAL MARKETS
Internal versus External Funding
▪ Large firms use more external funding.
Internal VS External (Vietnam)
Internal Funding External Funding

Large 73,7 26,3

Medium 79,3 20,7

Small 92,6 7,4

Average 82,3 17,7

(Source: WB)
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 III. FINANCIAL MARKETS
Sources of External Funds for Nonfinancial
Businesses (Refer: Mishkin 9th Chapter 7)

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 III. FINANCIAL MARKETS
Sources of External Funds (Vietnam) (Source: WB)

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 III. FINANCIAL MARKETS
Sources of External Funding
Vietnamese Firms’ External Funding for
Investment (%)
Bank Finance Equity Issue Other

Large 17,6 6,6 2,1

Medium 14,7 5,4 0,6

0,6
Small 6,5 0,3

Average 12,7 4,1 0,9 (Source: WB)

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 III. FINANCIAL MARKETS
Financial Assets
▪ Are vehicles for transferring funds.
▪ They are legal contracts which associate gains
and losses for the parties with the actual
occurrence of uncertain events.
(Reference: Mishkin 9th, Chapter 7)

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 III. FINANCIAL MARKETS
Laws and Regulations
▪ Important for the design, efficiency, stability and
innovation of the financial system. (Porta, Silanes,
Shleifer, Vishny 1998, Law and Finance, Journal of Political Economy)

▪ Religious law: Islamic law sets legal framework

for Islamic banking.
▪ Positive law: Common law (don’t protect people)
and Civil law (protect people who don’t have
enough knowledge). Ex: Force majure, hardship,
civil law quy định sẵn ko cần ghi trog hợp đồng,
common law phải ghi trog hợp đồng, nếu ko sẽ ko
đc quyền miễn trừ trog case đó)
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 III. FINANCIAL MARKETS
Financial markets are factor markets (capital).
Function
▪ Channel funds from saving to investment.
▪ Determine prices of financial instruments.
▪ Reduce information cost, search cost.
▪ Create liquidity.
▪ Government implements its economic policy.
(Refer: Mishkin 9th Chapter 2; Madura 9th Chapter 1)

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 III. FINANCIAL MARKETS
Financial Market Structure
▪ Monetary markets and Capital markets -> low
security
▪ Debt markets and Equity markets.
▪ Primary markets and Secondary markets.
▪ Exchanges and Over-the-counter markets.
(Refer: Mishkin 9th Chapter 2)

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 IV. HOMEWORK

1. Find out what happened at Coteccons

Construction Joint Stock Company (CTD). Do
you think the management of this company is
good or bad? Do you think the actions of
Kusto and Co. are reasonable?
2. Is crowdfunding direct or indirect finance,
equity or debt financing? What are the major
types of crowdfunding? What are the risks to
investors? Answer using Dunkley2016,
Powell2019, Johan2020, BelleFlamme2014.
END OF CHAPTER 1

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