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Finman Reviewer

The document outlines the fundamentals of finance, including areas such as financial management, capital markets, and investments. It discusses key concepts like stocks, bonds, Weighted Average Cost of Capital (WACC), and the role of financial managers in maximizing stockholder wealth. Additionally, it covers the risk-return trade-off, forms of business organization, agency theory, and cost-volume-profit analysis.

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Kyle Allen Gonzales
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6 views4 pages

Finman Reviewer

The document outlines the fundamentals of finance, including areas such as financial management, capital markets, and investments. It discusses key concepts like stocks, bonds, Weighted Average Cost of Capital (WACC), and the role of financial managers in maximizing stockholder wealth. Additionally, it covers the risk-return trade-off, forms of business organization, agency theory, and cost-volume-profit analysis.

Uploaded by

Kyle Allen Gonzales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Finance

- It is the system that includes the circulation of money, the granting of credit,
the making of investments, and the provision of banking facilities.
Areas of Finance
1. Financial management
- (also Corporate Finance). Focuses on decisions relating to how much and
what types of assets to acquire, how to raise the capital needed to purchase
assets and how to the firm.
2. Capital markets.
- Capital markets It refers to markets (Money market and capital market). In
the money market we are talking about T-Bills. Time deposits, foreign
exchange, treasury bills, overnight markets or overnight borrowings. Then the
capital markets where we talk about primary and secondary where the likes
of stocks and bonds are issued.
3. Investments. It concerns decisions about stocks and bonds and include a
number of activities.
a. Security analysis using fundamental analysis and technical analysis
in finding the true values of security
b. Portfolio theory that deals with the best structure or combination of
stocks and bonds with the lowest risk
c. Market analysis that deals with the issues of stocks and bonds are
overvalued or undervalued at any given time.
d. Behavioral finance where the psychology of investing is examined.
Stocks
- Represent ownership shares in a company. When you buy a stock, you
become a shareholder and own a portion of that company. Stocks are also
known as equities and entitle the owner to a share of the company's profits,
often distributed as dividends, and the right to vote in certain company
decisions.
Bonds
- are financial instruments representing a loan made by an investor to a
borrower, typically a government, municipality, or corporation. Bonds are a
type of fixed-income security, meaning they provide regular, predictable
interest payments over a specific period.
Weighted Average Cost of Capital (WACC)
- WACC is the average rate of return required by a company’s investors,
weighted by the proportion of equity and debt in the company’s capital
structure.
Firm’s Goal
- To maximize stockholder’s wealth is through the value of their ordinary share.
Why not maximize profit?
- A change in profit is also a change in risk.
- Accounting profits cannot be measured accurately.
Intrinsic value
- is said to be the true value of the stock.
- Its market value is estimated by a marginal investor who conducted a
security analysis.
- too difficult to determine
Role of Financial Managers
1. Investments - It entails an outflow of resources with the expectations of a
benefit in the form of cash inflows in the near future.
2. Financing - The financial manager finds ways to finance the activities of the
firm.
3. Dividend Policy - It is equally important to know what sound dividend policy
is good financial signal to the market that continually assesses the company.
Dividends
- is the retained earnings distributed to stockholders.
Risk Return Trade-Off
- It is worth to note that an increase in return is coupled by a corresponding
increase of risk. It cannot be expected that whatever financial decision is
made will immediately favor the firm or individuals.
- Investment in stocks has always been a popular venue of parking excess cash
because of its high return.
Forms of Business Organization
1. Sole Proprietorship
2. Partnership
a. Limited Liability Company (LCC) – It is a hybrid between a partnership
and a corporation
b. Limited Liability Partnership – It is used for professional firms in the
fields of accounting, law, engineering, architecture, and others.
Note: Both LCC and LLP provide limited liability but are taxed like
partnerships.
3. Corporation
- It is an artificial being created by operation of law
- having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
AGENCY THEORY (1. Stockholders and Managers / 2. Stockholders and
Creditors)
- A potential conflict of interest between the stockholders and managers.
Stockholders
- are more likely to prefer riskier projects, because they receive more of the
upside if the project succeeds.
Bondholders
- receive fixed payments and are more interested in limiting risk. (ex. Covenant
bonds agreements)
Misconceptions of Financial Management
- Financial Management is accounting.
- Financial Management is a review of mathematics.
- Financial Management is a branch of statistics.

Cost-Volume-Profit (CVP) Analysis


- analysis estimates how changes in costs (variable and fixed), sales
volume and price affect a company’s profit
break-even point (BEP)
- at which point of zero profit (meaning no profit or no loss)
- total revenue equals cost of goods sold and operating expenses.
Variable costs
- include direct materials, direct labor, variable FOH, variable selling expenses
and variable administrative expenses.
Fixed costs
- include fixed FOH, fixed selling expenses and fixed administrative expenses.
margin of safety
- is the units sold or revenue earned above the BEP volume
Operating leverage
- is the use of fixed costs to get higher percentage changes in profit as sales
changes.
- is concerned with the relative mix of fixed costs and variable cost in an
organization.
- The greater the degree of operating leverage, the more that changes in
changes will affect operating income

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