Global Financial Crisis [(2008) US and
Europe]
 stability of the ff.started to wane
and weaken
 investment banks
 insurance companies
 mortgage banks
CAUSES/ REASONS
 misapplication of risk controls
for bad debts
 collateralization of debt
insurance and fraud
 deceleration of economic
activities
 credit crunch
EFFECTS
 European bank failures
 Declines in various stock indices
 Massive declines in the market
in the MARKET VALUE of equities
and commodities.
 Liquidity problems
 Decreased in the international
trade.
 Oct 2008, currency crisis
Implication of Crisis
 Made the contribution and role of
FM as directing firms operation,
economics operation increasingly
significant.
 Economic outcomes tends to twist
and twirl making them more
unpredictable
 interest rates and currency
exchange rate unceasingly
fluctuate
 inflation and deflation occur
 awful shortage and overage
happens
Financial managers MUST
 maintain and sustain the
economic capability of an
enterprise
 be equipped with the necessary
tools essential in finding ways and
means to cushion or hedge the
effects of significantly negative
outcomes of risk and among
other things relating to
borrowings
 Foreign exchange
 Equity & debt transactions
 Inflations
Goals of FinMan
 Synonymous to the goals of the
enterprise
 “Yield highest possible profit”
Drawbacks 3 Matrix
 Change in profit may also
mean changes in risk
 It does not fully take into
account the timing when
profit/ gain would be
received
 Accurate measuring of the
key ingredient – profit-
Goals of Fin Man –categorized as follows:
 Maximization of the value of
the firm ( Valuation
Approach)
 Maximization of
Shareholder Wealth
 Social responsibility and
Ethical Behavior
VALUATION APPROACH
The definite gauge of performance is not
yielded but more of “ how the yield is
VAUED” by the owners of the company
 main goal- maximize not profit
alone, but the overall value of
the firm
 Therefore in considering
investment proposals or
decisions
 Consider profit and among other
things
 These are as follows:
 Risk attached to the
investment proposal or
the company’s
operation;
 Time design as to when
and how the profits will
flow into the company,
which refers to when
will there be an upsurge
or decline of profit
 The quality and
reliability of the profits
reported by the firm.
Conclusion : a wise FM should take into
consideration the impact of all these to
the company’s overall valuation. If a
decision brings about a status quo or
arguments the firm’s overall value then
the decision is acceptable
MAXIMIZATION OF
SHAREHOLDERS’WEALTH
 The main focus is not so
much with the day-to-day
movements of the stock
market price, but more so
on the amplification of the
long-term wealth of the
shareholders
Expectations and Requirements made by
shareholders vary:
 1950s-1960s
o The main focus was on
increasing earnings
 1970s-1980s
o The main concern
became more
conservative by
focusing not so much
on income growth bu
on lowering risks and
high current dividend
payments
Social Responsibility and Ethical
Behavior
 It is an issue that needs to be
consider
 Question: Can a firm be socially
responsible while focusing on
maximizing the shareholder’s
wealth or maximizing the overall
value of the firm?
Answer: The cost is offset by the
increase of income generated by
increase in sales revenue
because customers tend to buy
more from companies who are
socially-responsible
Functions of Financial management
 Involves the prudent allotment
and spreading of company funds
to current and non-current
assets
 An effective and efficient
financial management entails a
well balance financing activities
 and formulating suitable
dividend policy that fit in with
the firm’s business objectives
 Some of the functions are
carried out on a daily basis like
o cash management,
o inventory management,
o credit management and
o fund receipt and
o disbursement management
 Other activities not done on a
daily basis but rather irregular
include company stock and bond
issuance, capital budgeting, and
creating dividend policies
Take Note
 While daily and regular activities
are managed, the financial
manager must be able to
balance making income and
considering the inherent risks on
the decisions made.
o The balance act
between income and
risk us referred to as
“RISK-RETURN TRADE
OFF”. ( The financial
manager must strike a
balance between the
highest possible income
with the most
reasonable amount of
risk)
o These activities plus the
balance of risk-return
trade-off are done to
achieve the
fundamental goal of
financial management,
 which is TO MAXIMIZE
THE SHAREHOLDER’S
WEALTH
FINANCIAL MANAGER’S RESPONSIBILITIES
 Forecasting and Planning
 Making Crucial Investment and
Financing Decisions
 Coordinating and Controlling
 Trade in Financial Markets
 Risk Management
ALTERNATIVE FORMS OF BUSINESS
ORGANIZATION
Sole Proprietorship
 Considered as the oldest, most
common, and simplest form of
business organization.
 This entity has only one power
and its customary feature is that
owner is inseparable from the
business
Benefits you get:
 Simple in Decision Making
Advantage
 It is easy and inexpensive to
form and subject to few
government regulations
 Owners has complete control
over the business, its operation,
and financially and legally
responsible for all the debts and
legal actions against the
business.
Disadvantage
 The proprietor has unlimited
personal liability for the payable
or financial obligations not
covered by the assets of the
business
 The life of the company is
limited to the life of its
proprietor
PARTNERSHIP
 Exists when two or more persons
combine their resources to
conduct business, earn profit,
and distribute among
themselves the results of their
operations. The contract
evidencing its existence is called
the ARTICLES OF PARTNERSHIP
Advantage
 Its low cost and ease of
formation
Disadvantage
 Similar to sole proprietorship,
unlimited liability, limited life,
difficulty of transferring
ownership since this will lead to
dissolution of the partnership
and difficulty of amassing a large
amount of capital
 Partners are liable to pay
obligations beyond their
contributions like company
debts with their personal
properties not covered by the
investments made by the
owners nor the asset of the
company (General or Unlimited
Liability Partnership)
CORPORATIONS
 This legal business entity created
by the operations of the law
 Considered separate and distinct
from its owners and executives
 The contract is called THE
ARTICLES OF INCORPORATION
o The Articles of
Incorporation presents
the rights and
limitations of the entity
Advantages
 Unlimited Life
 Changes in ownership or death
of owners do not dissolve the
corporation
 Ease of transferability of
ownership (how in the form of
buying and selling stocks)
 Limited liability (Owners are
separate and distinct from the
corporation they are not
obligated to pay financial
obligations not covered by
company assets using their
personal properties
HYBRID FORMS OF ORGANIZATION
This is what we call LLP (Limited Liability
Partnership)
 The partnership is composed of
at least one general partner and
the rest are limited partners (
limited partners do not have
control in the company
operations, they are only liable
for the amount of their
investments)
 It is called hybrid because the
organization is a partnership but
it has the benefits of a
corporation. (The owners are not
obliged to pay company debts
with their personal properties)
AGENCY RELATIONSHIPS
 Whenever a person or a group of
persons (principal) employs
another person or group of
persons (Agency) to render
services and is the same time
delegate decision making
authority to the agent, an
agency relationship exists.
AGENCY CONFLICTS
 There could be conflict of
interest if the manager is also a
partial owner of the same firm
AGENCY COSTS
 Entails costs (audit cost, which
geared toward monitoring
managerial actions and
restructuring the company that
would regulate vulnerable
managerial actions)
 Common control measures
employed by management
gearing toward stockholders
benefits. The higher the agency
costs.
CONTROL MECHANISMS
 There are a number of ways to
encourage managers to perform
for the interest of the
shareholder
o Provide Performance-
Based Incentive Plans
o Straight Involvement By
Shareholders
(Institutional)
o Takeovers
INCOME STATEMENT
 CHARACTERISTICS- begins with
an aggregate amount of sale
(revenue) that are generated at
a specific period of time.
 The separation of expenses that
categorizes such as Mngt- able to
 COGS access the relative
importance and
 Selling and Admin. Exp. appropriation of
 Depreciation the expenditure in
producing such
 Int. and Taxes levels of sales
 The various expenses that occur
in generating the sales are
subtracted in stair. Step fashion
to arrive at the net income for
the defined period
 “bottom line”
 Value of the net income
 They will know the
aggregate amount variable
to owners.
 Net income is converted from
aggregate value to Earning per
share
- EPS= net income/outstanding
share(stocks)
 EPS measure of the return
available to providers of
equity capital to the firm
o Return to the providers of
debt capital
o Interest
Appears in the income
statement as tax deductible
expense
 How to convert EPS
 Is converted to a
measure of currency
value by
= Price/ Earnings
ratio
 Income statement – reflects
only income occurring to the
 individual or business firm from
verifiable transactions as
opposed to the economist
definition of income
 Attached with evidence
Balance sheet
 Income statement provides
a summary of financial
transactions for a period of
time
 BS portrays the cumulative
results and transactions at a
point of time.
 2 broad categories
o ASSET
-Employed in the operation of
the firm
o LIABILITIES AND NET
WORTH
-Composed of sources of
financing or the employed assets
 Enlistment of asset acc.to
LIQUIDITY:
o Cash
o Marketable sec.
o AR
o Inventory
o Prepaid Exp.-future expense
that have already been paid-
o Investments- inv& Sec.&
other assets for longer than 1
operating cycle.
o PPE- adjusted for Accum.
Dep’n.
Confusing BS related items
 Retained Earnings
 Cumulative total of the
earnings of the firm
, since its beginning until
the date of the BS that has
not yet been paid to the
owners.
 Earnings that are retained
are used to
o Purchase assets
o Pay liabilities
o Throw a big party for
the manager
 Book Value of the Firm" book
value" historical value and does
not necessisarily coincide with
the market value of the owners
equity
 Composed of the various
common of equity accounts
and represents the net
contributions of the owners
to the business
 Historical Value & does not
necessarily consider with
the market value of the
owner’s equity
LIMITATIONS OF BS: INCOME TAX CONSIDERATION ( federal
 Value are reported at cost use)
 Replacement cost of some assets  Most financial decision are
particularly PPE may greatly influenced by federal income
exceed the recorded value. tax considerations”
o PERSONAL TAXES @
varying rates apply to
Sources of Firm Financing the earnings and
-in order of MATURITY properties of partners
o Corporate earnings are
 AP subject at
 NP 2 LEVELS
 Accrued Exp. – an obligation to
pay is incurred but payment has Currently the tax ratio applicable to
not been made corporate earnings are:
 Long term debt- all or majority  15% on 1st $ 25K
of the principal will be paid  18% on 2nd $ 25K
beyond the current period  30% on 3rd $ 25K
 Preferred Stock  40% on 4th $ 25K
 Common Stock  46% on taxable income owner $100K
~COMMON STOCK ACCOUNT  After tax cost of a tax deductible
o Common Stock PAR VALUE expenses is equal to the
o Capital Paid in excess of PAR (expenses) X ( 1- Tax Rate)
o Retained Earnings
 Although depreciation is non-
Sources and Uses of FUNDS STATEMENT cash expense it does not affect
Grouped as follows: cash flow by reducing taxes
a. SOURCES The reduction in cash flow for
 increase in stock holders equity taxes remitting from
 increase in liability depreciation maybe be
 decrease in asset computed by :
b. USES
 Decrease EQ Dep’n expense X tax rate
 Decrease Liability
 Increase Asset
@Sources and uses of fund may be
constructed by applying the guide lines
about comparing BS at different points in
time
 Adjustment
 Reconciliation & change in
o RE is necessary when
dividends are paid
o Net Plant and
Equipment is necessary
when Depreciable
assets are sold during
the period concerned
 Changes in every account are
include in the cash approach
 in the net working capital (
current assets less current Liab.)
approach, only non-current
changes are shown separately.
Therefore changing in net
working capital are net out
 DEPRECIATION does not generate
funds but is considered to be a
source of fund because an amount
for depreciation although no cash
flow takes place , is deducted in
deriving net income