Part 1

Getting
Started—
Principles of
Finance
Slide Contents

• Learning Objectives
• Introduction
1. Finance: An Overview
2. The Goal of the Financial Manager
3. The Five Basic Principles of Finance
• Key Terms

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Learning Objectives

1. Understand the importance of finance in your

personal and professional lives and identify the
three primary business decisions that financial
managers make.

2. Understand the role of the financial manager

within the firm and the goal for making financial
choices.

3. Explain the five principles of finance that form the

basis of financial management for both businesses
and individuals.
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 1.1 FINANCE:
AN OVERVIEW

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 WHAT IS FINANCE?

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What is Finance?

• Finance is the study of how people and

businesses evaluate investments and raise
capital to fund them.
• Finance is concerned with decisions about
money
To make sound financial decisions, remember:
o More value is preferred to less
o The sooner cash is received the more value it has
o Less risky assets are more valuable than risky
assets

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Sound Financial Management

• provide better products and customers at

lower price,
• pay higher salaries to employees
• provide greater returns to investors

Contributes to the well-being of both

individuals and general populations

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Four Major Areas of Finance

• Financial markets and institutions

• Investments
• Financial services
• Managerial finance

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Development of new product
C2 Ice Tea by URC
Prior to C2, there was no ready-to-
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does not taste good.

URC shook up the market as it

introduced C2 Cool & Clean - the first
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expanded its product portfolio by
offering juices, water, ready-to-drink
coffee, and ready-to-drink
chocolate..

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Copyright ©2014 Pearson Education, Inc. All rights reserved. 1-10
Why Study Finance:

1. Those interested in management will need to

study topics such as strategic planning,
personnel, organizational behavior, and human
relations, all of which involve spending money
today in the hope of generating more money
in the future
2. a key component of finance is the
management and interpretation of
information. Career in management
information systems or accounting, finance
managers are likely to be your most important
clients.

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Why Study Finance:

3. The student with entrepreneurial aspirations,

an understanding of finance is essential—
after all, if you can’t manage your finances, you
won’t be in business very long.

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Three Basic Questions Addressed by
the Study of Finance:
1. What long-term investments should the firm
undertake? This area of finance is generally
referred to as capital budgeting.
2. How should the firm raise money to fund these
investments? The firm’s funding choices are
generally referred to as capital structure
decisions.
3. How can the firm best manage its cash flows
as they arise in its day-to-day operations? This
area of finance is generally referred to as
working capital management.

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 1.2 THE GOAL OF THE
FINANCIAL MANAGER

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The Goal of the Financial Manager

The goal of the financial manager must be

consistent with the mission of the corporation,
which is to MAXIMIZE shareholder’s wealth.

The primary emphasis of the financial

manager is the use of CASH FLOW.

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Corporate Mission

• While managers have to cater to all the

stakeholders (such as consumers,
employees, suppliers etc.), they need to pay
particular attention to the shareholders.

• If managers fail to pursue shareholder

wealth maximization, they will lose the
support of investors and lenders. The
business may cease to exist and ultimately,
the managers will lose their jobs!

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Vision and Mission

Vision Statement
-Describes the long-run objective of your
company, usually for a time frame of five to
ten years or even longer.

Mission Statement
-Is like a road map of how to achieve the
goals set in your vision statement.

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Mission Statement-

• Describes the business objectives,

direction goals. Defines the
company business, its objective
and approach to reach the vision.

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Vision Statement-

• Vision Statement- is an aspiring description of what

you would like to achieve in the long-term future.
So we are talking about the WHERE 5 TO 15 years
and beyond is usually the time line or guidelines of
how you see it. It is something that you should be
using in order to make strategic decisions and it
should inspire our people. It is a rallying cry of
what we do ,why we do.

• a vision statement describes the desired long-term

results of your company's efforts.

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 1.3 THE FIVE BASIC
PRINCIPLES OF FINANCE

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PRINCIPLE 1:Money Has a Time
Value

• A dollar received today is worth more than a

dollar received in the future.

• We can invest the dollar received today to

earn interest. Thus, in the future, you will
have more than one dollar, as you will
receive the interest on your investment.

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PRINCIPLE 2: There is a Risk-Return
Trade-off

• We won’t take on additional risk unless we

expect to be compensated with additional
return.

• Higher the risk, higher will be the expected

return. Note expected return may not be
equal to the realized rate of return.

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PRINCIPLE 3: Cash Flows Are the
Source of Value

• Profit is an accounting concept and

measures a business’s performance.
Cash flow is the amount of cash that
can actually be taken out of the
business.

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PRINCIPLE 4: Market Prices Reflect
Information

Investors react quickly to news/information

and decisions made by managers.

Good News ==> Higher stock prices

Bad News ==> Lower stock price.

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PRINCIPLE 5: Individuals Respond
to Incentives

Managers (as agents) respond to incentives

they are given in the workplace. If their
incentives are not properly aligned with those
of the firm’s stockholders (the principal) they
may not make good decisions that are
consistent with increasing shareholder value
leading to agency costs.

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 Part 2

Firms and
the Financial
Market
 2.1 THE BASIC STRUCTURE
OF FINANCIAL MARKETS

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Three Players in the Financial
Markets

Within the financial markets, there are three

principal sets of players that interact:

– Borrowers (individuals and businesses)

– Savers (mostly individuals)
– Financial Institutions (Intermediaries) (ex.
Commercial banks)

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Three Players in the Financial
Markets

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Financial Intermediaries

Financial institutions like commercial banks,

finance companies, insurance companies,
investment banks, and investment companies
are called financial intermediaries as they
help bring together those who have money
(savers) and those who need money
(borrowers).

https://www.youtube.com/watch?v=sDq7PTS
69YY

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Money versus Capital Market

• Money market - markets for short-term

debt instruments (such as T-bills,
Commercial paper).

• Capital market - markets for long-term

debt and equity instruments (such as
Common stock, Preferred stock, Corporate
bond, U.S. Treasury bond).

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Commercial Banks – Everyone’s
Financial Marketplace

Commercial banks collect the savings of

individuals as well as businesses and then
lend those pooled savings to other
individuals and businesses. They earn
money by charging a rate of interest to
borrowers that exceeds the rate they pay to
savers.

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Financial Services Corporations

• Financial services corporation are in the lending

or financing business, but they are not commercial
banks.

• Financial Services Companies in Philippines

• 1) BancNet.
• 2) Bankard.
• 3) Beep.
• 4) MegaLink.
• 5) Expressnet.

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Insurance Companies

• Insurance companies sell insurance to

individuals and businesses to protect their
investments.

• They collect premium and hold the premium

in reserves until there is an insured loss and
then pay out claims to the holders of the
insurance contracts. These reserves are
deployed in various types of investments
including loans to individuals and
businesses.
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Insurance Companies

• The top 10 life insurance companies in the country are...

1. Philippine American Life & Gen. Ins. Co. (Philam)
2. Sun Life of Canada (Philippines), Inc. (SunLife)
3. Philippine Axa Life Insurance Corporation (AXA)
4. Manufacteres Life Insurance Co. Inc. (ManuLife)
5. BDO Life Assurance Company, Inc. (Generali Pilipinas Life)
6. Insular Life Assurance Company, Limited (Insular Life)
7. BPI-Philam Life Assurance Corporation (BPI-Philam)
8. PRU Life Insurance Corporation of the U.K. (Pru Life)
9. FWD Life Insurance Corporation (FWD Life)
10.United Coconut Planters Life Assurance Corp. (Coco Life)

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Investment Banks

Investment banks are specialized financial

intermediaries that help companies and
governments raise money and provide
advisory services to client firms when they
enter into major transactions such as mergers

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Mutual Funds and Exchange Traded
Funds (ETFs)

Mutual funds are professionally managed

according to a stated investment objective.
Individuals can invest in mutual funds by
buying shares in the mutual fund at the net
asset value (NAV).

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Security

• A security is a negotiable instrument that

represents a financial claim. It can take the
form of ownership (stocks) or a debt/bonds
agreement.

• The securities market allow businesses and

individual investors to trade the securities
issued by public corporations.

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Types of Securities

• Common stock represents equity

ownership in a corporation, provides voting
rights, and entitles the holder to profits in
the form of dividends.

• Preferred stock is an equity security. It

gives preference, relative to common
stockholders, with regard to dividends and
claim on assets.
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End of Presentation!!

• “Success is the sum of small efforts

being repeated day in and day out.” –
Robert Collier

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