CHAPTER ONE
OVERVIEW OF FINANCIAL
MANAGEMENT
• This chapter will give you an idea of what financial
management is all about. We begin with a brief
discussion of the different forms of business
organization. For corporations, management’s goal
should be to maximize shareholder wealth, which
means maximizing the value of the stock. When we say
“maximizing the value of the stock,” we mean the “true,
long-run value,” which may be different from the
current stock price. Good managers understand the
importance of ethics, and they recognize that
maximizing long-run value is consistent with being
socially responsible.
Key Objectives of Financial
Management:
• 1. Wealth Maximization: To maximize the wealth of
shareholders by increasing the value of the company.
• 2. Profit Maximization: To maximize profits by optimizing
revenue and minimizing costs.
• 3. Risk Management: To identify and manage financial
risks to ensure the stability and sustainability of the
organization.
• 4. Liquidity Management: To ensure that the
organization has sufficient liquidity to meet its short-
term obligations.
Key Functions of Financial
Management:
• 1. Financial Planning: To develop financial plans and
strategies to achieve the organization's objectives.
• 2. Financial Forecasting: To forecast future financial
outcomes, such as revenue and expenses.
• 3. Financial Budgeting: To prepare financial budgets to
allocate resources and manage costs.
• 4. Financial Analysis: To analyze financial data to
identify trends, risks, and opportunities.
• 5. Financial Decision-Making: To make financial
decisions, such as investments, funding, and dividend
payments.
Key Concepts in Financial
Management:
• 1. Time Value of Money: The concept that money
received today is worth more than money received in
the future.
• 2. Risk and Return: The concept that investments with
higher risk offer higher potential returns.
• 3. Cost of Capital: The cost of funding an organization's
activities, including debt and equity.
• 4. Financial Leverage: The use of debt to finance an
organization's activities and increase potential returns.
• 5. Dividend Policy: The decision of how much of an
organization's profits to distribute to shareholders as
Key Tools and Techniques in
Financial Management:
• 1. Financial Statements: Balance sheets, income
statements, and cash flow statements.
• 2. Ratio Analysis: The use of financial ratios to analyze
an organization's performance.
• 3. Break-Even Analysis: The calculation of the point at
which an organization's revenue equals its costs.
• 4. Discounted Cash Flow (DCF) Analysis: The calculation
of the present value of future cash flows.
• 5. Sensitivity Analysis: The analysis of how changes in
assumptions affect an organization's financial
performance.
CHAPTER TWO
TIME VALUE OF MONEY
• According to Eugene F. Brigham, the time value of
money (TVM) is the concept that describes the idea that
a dollar received today is worth more than a dollar
received in the future. This is because money received
today can be invested to earn interest or returns,
making it more valuable than the same amount of
money received at a later date.
• Importance of Time Value of Money
• 1. Informed Decision-Making: TVM helps individuals and
businesses make informed decisions about investments,
loans, and other financial transactions.
Key Components of Time Value of
Money:
• 1. Present Value (PV): The current value of a future cash
flow or amount.
• 2. Future Value (FV): The value of a current cash flow or
amount at a future date.
• 3. Interest Rate (r): The rate at which interest is earned
or paid on an investment.
• 4. Time (t): The number of periods or years over which
the investment or cash flow occurs.
TVM Formulas:
• 1. Present Value Formula: PV = FV / (1 + r)^t
• 2. Future Value Formula: FV = PV x (1 + r)^t
• 3. Net Present Value (NPV) Formula: NPV = Σ (CFt / (1 +
r)^t), where CFt is the cash flow at time t.
Types of TVM Calculations:
• 1. Single Amount Problems: Calculating the present or
future value of a single amount.
• 2. Annuity Problems: Calculating the present or future
value of a series of equal cash flows.
• 3. Uneven Cash Flow Problems: Calculating the present
or future value of a series of uneven cash flows.
• 1. Investment Analysis: Evaluating the attractiveness of
investment opportunities using TVM calculations.
• 2. Capital Budgeting: Evaluating the viability of projects
using TVM calculations.
• 3. Retirement Planning: Calculating the future value of
