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FINMAN1
Introduction
to Finance
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CONTENTS
o Fundamentals: Definitions and Areas
o Forms of Business Organization

o The Financial Organization

o Ten Principles of Finance

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Fundamentals
Definitions, Areas, and Careers

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What is
Finance?

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Definition
The study of how individuals,
institutions, governments, and
businesses acquire, spend, and manage
money and other financial assets.

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Areas of Finance
Application
× Corporate Finance
× Personal Finance
× Public Finance
Studies
× Financial Management
× Capital Markets and Institutions
× Investments
Career Path
× Financial Management
× Financial Services

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The Financial
Organization

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THE FINANCE ORGANIZATION

Where does Financial Management fit into an organization?
× The size and importance of the managerial finance function
depends on the size of the firm.
× In small firms, the finance function is generally performed by
the accounting department.
× As a firm grows, the finance function typically evolves into a
separate department linked directly to the company president
or CEO through the chief financial officer (CFO)..

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Forms of Business
Organization

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What are the

forms of
businesses in the
Philippines?
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Forms of Businesses
Sole Proprietorship Partnership Corporation
A form of business A contract where A corporation is an
owned by an two or more people artificial being created
individual and owner bind themselves to by operation of law,
maintains title to contribute money, having the right of
assets and profits. property or industry succession and the
into a common fund powers, attributes, and
and divide the profits properties expressly
among themselves. authorized by law or
incidental to its
existence.
(Civil Code Art. 1767)

(Revised Corporation Code

Section 2)

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Ten Principles of
Finance

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Principle 1: Money has

Time Value
× A peso received today is worth more than a peso
received in the future.
× Opportunity Cost
× Decision-making

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Principle 2: Cash Flows

are the Source of Value
× Accounting profits are not equal to cash flows.
× Cash flow, and not profits, drive the value of a
business.

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Principle 3: There is
Risk-Return Trade-Off
× Investors will not take on additional risk unless
they expect to be compensated with additional
reward or return.
× The higher the risk, the higher the return

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Principle 4: Share Prices

Reflect Information (EMH)
× Capital Markets – markets that sell long-term securities
× In an efficient market, the market prices of all traded
assets (such as stocks and bonds) fully reflect all
available information at any instant in time.
× We assume markets are quick, and the prices are right
× Efficient Market Hypothesis (EMH)
× Stock prices are a useful indicator of the value of the
firm.

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Principle 4: Share Prices

Reflect Information (EMH)
× Example: Zoom Stocks

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Principle 5: Owners’ and

Managers’ Interests may Differ
× The Agency Theory is a branch of economics relating to the
behavior of principals and their agents.
× In a corporate setting, the management acts as an agent for
the owners/shareholders (principal) of the firm. Thus, the
principals must provide incentives so that management acts in
the principals’ best interests and then monitor results.
× Agency Problems arise when managers place personal goals
ahead of the goals of shareholders. In this case, managers
may make decisions that are not consistent with the goal of
maximizing shareholder wealth.
× To mitigate such problem use Agency Cost
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Principle 6: Curse of
Competitive Markets
× Bound by the Law of Supply and Demand
× The more competitive the market, the laws dictate the prices
and easy entry.
× Profit Saturation

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Principle 7: Incremental Cash

Flows
× It’s the what changes that counts.
× Additional cash flows

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Principle 8: Tax bias Business

Decisions
× Taxes vary
× It may cause bias in business decision due to possible
changes in data once tax is applied
× Always use post-tax amounts

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Principle 8: Tax bias Business

Decisions

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Principle 9: All risk are not equal

× There are two kinds of risk:
× systematic risk and
× unsystematic risk

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Principle 10: Ethical Dilemmas

are everywhere in Finance
× Business Ethics and Finance
× Business ethics are the standards of conduct or moral judgment
that apply to persons engaged in commerce.
× Several Ethical dilemmas in business decisions.
× Violations of these standards in finance involve a variety of
actions
× Sound ethical standards are important for business and personal
success. Unethical decisions can destroy shareholder wealth
(ex. Enron scandal).
× Ethical behavior is doing the right thing!
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Thanks!
Any questions?

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