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An Overview of Financial Management

The document provides an overview of financial management, covering key concepts such as the nature of finance, roles and jobs in finance, and various forms of business organization. It discusses the importance of balancing interests among shareholders, managers, and society, as well as the implications of business ethics and conflicts between stakeholders. Additionally, it highlights trends in finance, including globalization and corporate governance.

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sarahnicolejaconesbarsubia
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12 views17 pages

An Overview of Financial Management

The document provides an overview of financial management, covering key concepts such as the nature of finance, roles and jobs in finance, and various forms of business organization. It discusses the importance of balancing interests among shareholders, managers, and society, as well as the implications of business ethics and conflicts between stakeholders. Additionally, it highlights trends in finance, including globalization and corporate governance.

Uploaded by

sarahnicolejaconesbarsubia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY OF SOUTHERN MINDANAO

Chapter 1
An Overview of Financial Management
Financial Management
Learning Objectives
• Discuss the nature of finance and the main areas of the study of finance
• Discuss the role of finance and jobs in finance
• Identify the advantages and disadvantages of the different forms of
business organization
• Discuss how do managers balance shareholders’ interest, managers’
interest and the society
• Discuss the relationship of intrinsic values, stock price and executive
compensation
• Discuss important trends in finance
• Discuss business ethics in relation to finance jobs and the consequences
of unethical behavior
• Discuss conflicts between managers, stockholders’ and bondholders’
Topics
•What is Finance?
•Jobs in Finance
•Forms of business organizations
•Stock prices and shareholder value
•Intrinsic values, stock prices, and Executive
compensation
Topics
•Important business trends
•Business ethics
•Conflicts between managers, stockholders and
bondholders
What is Finance?
• Finance is a body of facts, principles, and theories
relating to raising and using money by individuals,
businesses, and governments.
What is Financial Management?
• the art and science of making right decisions for the
firm
• decision making process concerned with planning,
acquiring, and utilizing funds in a manner that
achieves the firm’s desired goals.
• also referred to as managerial finance, corporate
finance and business finance
Jobs in Finance

•Finance prepares students for jobs in banking,


investments, insurance, corporations, and
government.
Legal Forms of Business Organization
Proprietorship- owned by a single person
Advantages:
1. Ease of entry and exit
2. Full ownership and control
3. Tax saving
4. Few governments regulations
Disadvantages:
1. Unlimited liability
2. Limitation in raising capital
3. Lack of continuity
Legal Forms of Business Organization

Partnership- legal arrangement of two or more people


agree to contribute capital or services to the business
and divide the profit and losses that may be derived
therefrom
General partnership- unlimited liability for the debt
incurred by the business
Limited partnership- liability is limited to their
investment
Legal Forms of Business Organization
Partnership:

Advantages: Disadvantages:
1. Ease of formation 1. Unlimited liability
2. Additional sources of capital 2. Lack of Continuity
3. Management base 3. Difficulty of transferring
4. Tax implication ownership
4. Limitations in raising
capital
Legal Forms of Business Organization
Corporation- is an artificial being created by law and is a legal entity
separate and distinct from its owners. Owners are called
shareholders.
Advantages:
1. Limited liability
2. Unlimited life
3. Ease in transferring ownership
4. Ability to raise capital
Disadvantages:
1. Time and cost of formation
2. Regulations
3. Taxes
Stock Prices and Shareholder Value

-shareholders elects the board of directors to


select managers that well manage to maximizing
the profit shareholders wealth.
- managers have the obligation to behave
ethically, and must follow the laws
Intrinsic values, stock prices, and
Executive compensation
-If managers role is to maximizing shareholders wealth,
they must know that wealth is determined.
-The value of the any asset is the prevent value of the
stream of cashflows that the asset provides to its
owner’s overtime
-Many academic practitioners stress the important role
that executive compensation plays in encouraging
managers to focus on the proper objectives
Intrinsic values, stock prices, and
Executive compensation
Intrinsic value- an estimate of the stock’s true value
based on the accurate risk and return data
Market price- the stock value based on the perceive
but possibly incorrect information
Marginal investors- their views determine the actual
stock price
Equilibrium- situation which actual price equals the
intrinsic value
Important Business Trend
• Globalization of the Firms- investing abroad is highly
profitable
• Ever-improving Information Technology (IT)
• Corporate governance- relates to the way top
managers operate and interface with stakeholders
• Outsourcing
Business Ethics

- Business ethics can be thought as a company’s


attitude and conduct towards its employees,
costumers, community, and stockholders
Conflicts between managers, stockholders
and bondholders
Managers versus stockholder- managers personal goals
may compete with shareholders wealth maximization

Stockholders versus Bondholders- bondholders


generally receive fix payment regardless of how well the
company does, while stockholders do better when the
company does better

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