FM

• Finance is the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.
• Financial Management (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 manage the firm.
• 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.
• Investments - It concerns decisions about stocks and bonds and include number of activities.
• a.       Security analysis through the use of fundamental analysis and technical analysis in finding the true values of the 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.
• Accounting department typically falls under the control of the CFO. This further illustrates the link among finance, economics, and accounting.
• 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 - Profit maximization does not consider risk or uncertainty, whereas wealth maximization does
• WHY NOT MAXIMIZE PROFIT?

  Accounting profits cannot be measured accurately - The reported accounting profits are mere estimates of how much net income was generated for a particular period.
• 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.  
• Determining the intrinsic value of the stock is too difficult to determine. For one reason is that there are so many methods on how to compute the intrinsic value the stock. From the valuation of stock, it will result to several intrinsic values. What more if we include other variables like corporate action, the economic environment, political environment of the country, and international economic outlook.
• The intrinsic value of the stock differs from different people. Since the intrinsic value is based on estimates, different people with different data and different perspective about the future will give different intrinsic values of the company.
• For a marginal investor, the intrinsic value is compared to the actual market price to determine if the stock is undervalued or overvalued. It is said to be overvalued when the actual market price is higher than the intrinsic value and it is said to be undervalued when the actual market price is below the intrinsic value.
• Managerial actions – Expansion, investment, innovation, capital expenditures
• Economic environment – GDP, GNP, Inflation rate, unemployment rate, Interest rate
• Taxes – Corporate tax
• Political climate – political unrest, just like what is happening now in Hong Kong
• Investments It entails an outflow of resources with the expectations of a benefit in the form of cash inflows in the near future. The investment decision is the most important of the three distinct types of decisions when it comes to value creation. Investment becomes the firm’s life support in continuing its existence. Examples: Kodak, and Nokia.
• Financing - The financial manager finds ways to finance the activities of the firm. The finance manager must know where to outsource its funds. Short-term or long-term debt or equity financing must be considered. It considers the best possible financing mix or capital structure of the company. The main idea under financing decision is to look for resources that will give the company the lowest weighted average cost of capital (WACC). WACC is defined as the minimum required rate of return on an investment. It helps the firm to maintain or increase its stock price from its current market price. 
• Dividends are the retained earnings distributed to stockholders.
• A sound dividend policy is a good financial signal to the market that continually assesses the company.
• Firms with a good history of dividend payment have a better potential of luring investors.
• Dividend declaration reflects a profitable status for the company.
• Companies with earnings retention have more funds for investment, indicating the growth potential of the company.
• The decision whether to pay or not to pay dividends relies mainly on the decision made by the board of directors through the advice given by the finance manager.
• CONTROLLER AND TREASURER

  
• Risk Return Trade-Off

  It is worthy 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 ORGANIZATIONS

  1.       Sole Proprietorship

  2.       Partnership

  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.
• Limited Liability Company (LCC) - It is a hybrid between a partnership and a corporation.
• Limited Liability Partnership - It is used for professional firms in the fields of accounting, law, engineering, architecture, and others.
• Both LCC and LLP provide limited liability but are taxed like partnerships.
• AGENCY THEORY

  A potential conflict of interest between the stockholders and managers.
• 1.       Stockholder and Manager

  ·         Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders).

  ·         But the following factors affect managerial behavior:

  -          Managerial compensation packages

  -          Direct intervention by shareholders

  -          The threat of firing

  -          The threat of takeover
• 1.       Stockholders and Creditors

  ·         Stockholders are more likely to prefer riskier projects because they receive more of the upside if the project succeeds.  By contrast, bondholders receive fixed payments and are more interested in limiting risk.

  ·         Bondholders are particularly concerned about the use of additional debt.

  ·         Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions.
• MISCONCEPTIONS OF FINANCIAL MANAGEMENT

  ·         Financial management is accounting.

  ·         Financial management is a review of mathematics.

  ·         Financial management is a branch of statistics.