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Chapter 1

• Introduction
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Chapter Outline
• Finance: A Quick Look
• Business Finance and The Financial
Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of the
Corporation
• Financial Markets and the Corporation
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Introduction : BUSINESS
• Business is an entity in which skills,
energy and enterprise of owners and
partners are linked with money, its
sources and investment, and its
success is measured by wealth, or profit
the business gets.

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Introduction: FINANCE
• Finance studies money and its
management.
• It explores the allocation of resources

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Basic Areas Of Finance

• Corporate finance
• Investments
• Financial institutions
• International finance

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Corporate Finance
• It is also known as Business Finance
• It involves the management of financial
resources available to the organization.
• It deals with the management of
companies
• It is concern with acquiring, using and
investing funds.

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Investments
• Work with financial assets such as
stocks and bonds
• Value of financial assets, risk versus
return, and asset allocation
• Job opportunities
– Stockbroker or financial advisor
– Portfolio manager
– Security analyst

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Financial Institutions
• Companies that specialize in financial
matters
– Banks – commercial and investment, credit
unions, savings and loans
– Insurance companies
– Brokerage firms
• Acquisition of funds needs negotiation
with the financial institutions and financial
markets.
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Financial Institutions
1. Banks
- provide mechanism where savers can
put their excess funds through
deposits.
2. Insurance Company
- offers different products, which can be
broadly categorized into life insurance
products and non-life insurance
products.
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Financial Institutions
3. Stock Exchange
- provides a system for the trading of
equity securities of publicly listed
companies.

4. Stock Brokerage Firms

- Investing in the stock market has to
be coursed through Stock Brokerage
Firms, thru online brokers or live brokers.
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Financial Institutions
5. Mutual funds
- provides opportunities for big and
small investors to invest in financial
instruments with the help of professional
managers or financial managers.

6. Other financial institutions such as

GSIS, SSS, credit unions and investment
banks.
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Two Major Categories of

Financial Instruments
1. Equity Securities
This includes common stocks and
preferred stocks.
* Preferred stock has priority over a
commons stock in terms of cash
dividends declaration.
* But, common stockholders, as the
real owners of the company, the growth
potential of investment is unlimited.
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Two Major Categories of

Financial Instruments
2. Debt Securities
These are issued by the National
Treasury, which are forms of
indebtedness of the National
Government, those are Treasury Bonds
and Treasury Bills.
* Treasury Bills which are in the
tenors of 91 days, 182 days and 360 days.
* Treasury Bonds interest can be
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paid quarterly, and semi-annually.
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Why Study Finance?

• Marketing
– Budgets, marketing research, marketing financial
products
• Accounting
– Dual accounting and finance function, preparation
of financial statements
• Management
– Strategic thinking, job performance, profitability
• Personal finance
– Budgeting, retirement planning, college planning,
day-to-day cash flow issues
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Business Finance
• Some important questions that are
answered using finance
– What long-term investments should the firm
take on?
– Where will we get the long-term financing to
pay for the investments?
– How will we manage the everyday financial
activities of the firm?

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Major Business
Financial decisions
• Financing decision – where is money going to come from
• Investment decision – how much to invest and in what
assets

Operations Financial
markets
Financial
Investments

Financing
Manager

Until here
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Financial Manager
• To acquire the necessary funds and to
ensure that they are used effectively.
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting, and data processing

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Role of Financial Manager

1. Managing investment in non-current assets
through evaluation of capital projects.
2. Evaluating, obtaining and servicing long-
term financial requirements
3. Distributions of dividends to shareholders
4. Collection and custody of cash and
payment of bills
5. Managing investment

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Role of Financial Manager

6. Obtaining and servicing short-term finance.
7. Managing risks associated with changes in
interest rates and exchange rates.
8. Assessing the viability of growth through
acquisition of other business
9. Planning the future development of the
business
10. Development and implementation of
financial policies

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Function of Financial Manager

1a.Raising
2.Investments funds

Operations Financial Financial

1b.Obligations
(plant, Manager (stocks, debt Markets
equipment, securities) (investors)
3.Cash from
projects) operational
activities
4.Reinvesting 5.Dividends or
interest
payments

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Finance function – managing the cash flow
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Financial Managers Decision

• Capital budgeting
– What long-term investments or projects
should the business take on?

* Evaluating the size, timing and risk of

future cash flows.

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Financial Managers Decision

• Capital structure
– How should we pay for our assets?
– Should we use debt or equity? Or
combination of both or which is best?
– How much should the firm borrow?

* The financial manager should decide

exactly how and where to raise the money?

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Financial Managers Decision

• Working capital management
– How do we manage the day-to-day
finances of the firm?

* Refers to administration of the firm’s

short-term assets, including inventory, its
short-term liabilities – such as money owed
to suppliers.

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Financial decisions
Capital structure and cost of
capital

Operations Financial
markets
Financial
Investments

Financing
Manager
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Investing Decisions
• Areas to consider:
1.Things that are not intended to be sold
– fixed assets, or referred as Capital
Expenditure
2.Things specifically intended to go into
what is to be sold – Revenue
Expenditure, which as an investment
area known as working capital.
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Forms of Business Organization

• Three major forms
– Sole proprietorship
– Partnership
• General
• Limited
– Corporation

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Sole Proprietorship
Advantages Disadvantages

• Easiest to start • Limited to life of

• Least regulated owner
• Single owner • Equity capital
keeps all the profits limited to owner’s
• Taxed once as personal wealth
personal income • Unlimited liability
• Difficult to sell
ownership interest

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Partnership
Advantages Disadvantages

• Two or more • Unlimited liability

owners • General
• More capital partnership
available • Limited
• Relatively easy to partnership
start • Partnership
• Income taxed once dissolves when one
as personal income partner dies or
wishes to sell
• Difficult to transfer
ownership
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Corporation
Advantages Disadvantages

• Limited liability • Separation of

• Unlimited life ownership and
• Separation of management
ownership and • Taxation of
management company profits
• Transfer of can be an issue
ownership is easy
• Easier to raise
capital

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Main Objectives of Business

Finance
• To obtain an adequate supply of capital
for the need of the business.
• To conserve and increase the capital
through better management.
• To make profit from the use of funds
which is an overall objectives of a
business enterprise.

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Key Objectives of Financial

Management
• Create wealth for the business

• Generate cash

• Provide an adequate return of investment

bearing in mind the risk that the business
is taking and the resources invested

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Goal Of Financial Management

• What should be the goal of a corporation?
– Maximize profit
– Minimize costs
– Maximize market share
– Maximize the current value of the company’s
stock
• Does this mean we should do anything
and everything to maximize owner wealth?

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The goal of financial management

Maximizing shareholder’s wealth

Maximizing stock prices

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Cash flows between the firm and the

financial markets

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Quiz #1

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• What is business finance and

discuss briefly the function of it in a
business industry.

• How important is the financial

manager in a corporation?

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