Financial

Management
Lecture 1
OVER VIEW OF FINANCIAL
MANAGEMENT
CONTACT DETAILS
 Lecturer: Ngo Huu Hung
 Email add.:
hung.ngohuu@hoasen.edu.vn
Phone number: 0932444727
 Consultant time:
- You are welcome to contact me by email. I will do my
best to respond to all emails
- or by appointment
REFERENCES
 Foundation of Financial Management, Block & Hirt,
McGraw Hill, 13th edition,USA, 2009.
 Fundamentals of Corporate Finance, Brealey et al.,
McGraw Hill, 5th edition, USA, 2007.
 Other relevant materials.
Learning Outcomes
 Discuss the role and purpose of the financial management function.
 Understand and synthesize the key concepts of financial management
(leverage, working capital, current asset, M&A, company valuation,
forecast, hedging)
 Apply the financial principles to business transactions and evaluate the
financial information to support the planning and decision making.
 Evaluate performance of company under financial perspective by
analyzing financial statements. Be able to make a financial forecast for a
specific company.
 Illustrateand apply the concepts of sustainable developments in
case studies
 Soft skills
 Able to perform the team-working and result-oriented,
 Able to learn continuously.
 Good English presentation and writing.
MAIN CONTENTS FOR LECTURE 1
 What is Corporate Finance?
 Financial manager
 Agency problem
 Function of financial management
 Goals of financial management
 Role of financial markets
1. What is corporate finance?
 Corporate finance is the study of ways to answer the three questions:

- What long-term investment should the firm choose? (investment

decision/capital budgeting decision)

- How should the firm raise funds for selected investments? (financing
decision)

- Should dividends be paid? If so, how much? (dividend decision)

Example: FedEx
Investment Decision (Capital Budgeting
Decision)
 Starts with the identification of investment opportunities
(capital investment projects)
 Financial manager’s first task:
- to identify promising projects
- to decide how much to invest in each project
Financing Decision
 The financial manager’s second major task:
- to raise capital for the firm to meet its investments and
operations.
- Note that firms can finance through equity or debt. The
mix of long term debt and equity financing is called
capital structure.
2. Who is the Financial Manager?
 Financial manager can be defined as anyone responsible for
a significant corporate investment or financing decision
(Treasurer, Controller, CFO etc.).

 Treasurer is responsible for financing cash management and

relationships with banks and other financial institutions.

 Controllers have responsibilities for budgeting, accounting and

taxes whereas CFOs oversee the treasurer and controller and
sets the overall financial strategy.
3. Agency Problems
 We know that the control of a corporation lies in the hands of
managers (agents for stockholders) who are not the owners of the
corporation.
 The goal of the managers who are the agents of the owners is to
maximize the wealth of the owners.
 Note that anyone with a financial interest in the firm is a stakeholder.
Also, note that owner-managers have no conflicts of interest in their
management of the business.
 When the managers place their personal goals ahead of corporate
goals, we are bound to experience agency problem. In short,
agency issue is the conflict between personal goals and corporate
goals.
3. Agency Problems (Cont.)
 Compensation plans also help managers maximize value.
BMM cite Walt Disney Corporation as an example where
the CEO’s package had three components a base salary
of $750,000, an annual bonus of 2% of Disney’s net
income above a threshold of normal profitability and a
10-year option that allowed him to purchase 2 million
shares for $14 per share.
4. Function of Financial Management
 It is the responsibility of financial management:
- to allocate funds to current and fixed assets
- to obtain the best mix of financing alternatives
- to develop an appropriate dividend policy within the context of the
firm’s objectives
 The daily activities of financial management include:
- Credit management
- Inventory control
- Receipt and disbursement of funds
 Less routine functions encompass:
- Sales of stocks and bonds
- Establishment of capital budgeting and dividend plans
5. Form of Organization
 Sole proprietorship
 Partnership
 Corporation
6. Goals of Financial Management
 What is the correct goal?
- Survive
- Avoid financial distress and bankruptcy
- Beat the competition
- Maximize sales and market share
- Minimize costs
- Maximize profits
- Maintain steady earnings growth
6. Goals of Financial Management
 Although there are different financial goals such as
survival, maximizing profits, minimizing costs etc., the
most important goal is to maximize the wealth of the
owners.

 An
effective financial manager is one who makes
decisions on the best interest of stockholders. Managers
who ignore this objective are likely to be replaced.
Profit Vs. Wealth Maximization
 What is the difference between maximizing profits and
maximizing wealth?
 Profit maximization ignores three important issues:
(1) timing of returns
(2) Cash flows
(3) Risk
7. Roles of Financial Markets
7.1. What is financial markets?
7.2. Structure of financial markets
7.3. Role of financial markets
7.1. What is Financial Market?
A financial market is a market where securities are issued
and traded. Note that for a corporation, the stock
market is the most important financial market.
 Participants in Financial Market – individuals, financial
institutions, governments, and corporations
7.2. Structure of Financial Markets
 Primary vs. secondary markets:
• Primary market is the market where the original sale of debt and
equity securities takes place whereas in the secondary market the
securities are bought and sold after the original sale. The primary
market transaction involves the company and the buyers and the
objectives is to raise money for the company.
• Secondary market transaction does not involve the company
unlike the primary markets. This is simply the means for transferring
the ownership of the securities. The trading takes place between
the current and potential owners. The proceeds from the sale do
not go to the issuing entity but to the current owner.
7.2. Structure of Financial Markets
 Debt securities are also traded in financial markets.
Market for debt securities is known as a fixed-income
market.
 Money markets: are financial markets where short term
debt securities are bought and sold.
 Capital markets: are financial markets where long term
debt and equity securities are bought and sold.
 Other markets includes: foreign exchange market,
commodities market and derivative market.
7.3. Roles of Financial Markets
 Financial Markets have been the principal channel
through which government has carried out its activities of
stabilizing the economy by avoiding high inflation. It is
important to understand that the role of channeling
savings into investments is of prime importance to an
economy.