FINANCIAL MANAGEMENT Variables Affecting System Behavior SYSTEM Leadership Sources.

FINANCIAL MANAGEMENTFINANCIAL MANAGEMENT

Variables Affecting System Behavior

SYSTEM

LeadershipSources

BUSINESS UNITBUSINESS UNIT

Business unit is a sociotechnical system that processes the production factors into economical goods and services for profit.

Business units have vital importance in pushing the living standarts of the public.

Organizing A BusinessOrganizing A Business

Sole Sole Proprietorships Proprietorships

PartnershipsPartnerships

CorporationsCorporations

Characteristics Characteristics of Business of Business OrganizationsOrganizations

CharacteristicsCharacteristics Sole Sole Prop.Prop.

Partner.Partner. Corp.Corp.

OwnershipOwnership ManagerManager PartnersPartners ShareholderShareholderss

Manager-Owner Manager-Owner SeperationSeperation

SameSame SameSame Usually Usually SeperatedSeperated

Owner’s LiabilityOwner’s Liability UnlimiteUnlimitedd

UnlimiteUnlimitedd

LimitedLimited

TaxingTaxing Personal Personal IncomeIncome

Personal Personal IncomeIncome

Personal Personal Income Income

&Corporate &Corporate TaxTax

AssetsAssets

Real Assets:Real Assets:UsedUsed to produce goods & services to produce goods & services

Tangible: Machinery, factory, officesTangible: Machinery, factory, offices

Intangible:Trade mark,patents,technical expertiseIntangible:Trade mark,patents,technical expertise

Financial Assets:Financial Assets: Claims to the income generated by Claims to the income generated by real assets. Also called securities.real assets. Also called securities.

Basic ProblemsBasic Problems

Capital Budgeting DecisionCapital Budgeting Decision What real should the Firm acquire?What real should the Firm acquire?

Financing Decision Financing Decision How should cash be raised to finance real investments?How should cash be raised to finance real investments?

The Role of Financial ManagerThe Role of Financial Manager

Firm’s Operations

Real Assets

FinancialManager

Investors

Money Flows

The Role of Financial The Role of Financial MarketsMarkets

Firm’s Operations

Real Assets

FinancialManager

Investors

Money Flows

Financial MarketsStock MarketsBond Markets

Foreign Exchange etc.

Financial IntermediariesMutual FundsPension Funds

Financial InstitutionsBanks

Insurance Companies

Goals of The Goals of The Financial Financial ManagementManagement

Shareholders desire Shareholders desire wealth maximizationwealth maximization!!

Do managers Do managers maximize shareholder maximize shareholder wealth?wealth?

Max VALUE = f ( I, F )

Max VALUE = f ( I, F, D )

Profitability

Economy of

Scale

Productivity

UnitsUnit

Price TOTAL Rate of

ProductivityGross Total

Rate of Commission

Com. Paid Net Total

Rate of Profitability

10 10 100 10% 110 0,200% 0,22 109,78 9,78%

100 10 1.000 10% 1.100 0,100% 1,10 1.098,90 9,89%

1000 10 10.000 10% 11.000 0,050% 5,50 10.994,50 9,95%

2500 10 25.000 10% 27.500 0,020% 5,50 27.494,50 9,98%

Productivity & Profitability & Economic of Scale

Rate of Profitability

9,75%9,80%9,85%9,90%9,95%

10,00%

1 2 3 4

Financial Leverage

Rate of Return

Cost of

Debt

Debt EquityTotal

SourceRate of Return

Cost of Debt

Gross Income

Debt+Cost of

debt

Net Income

Total Income

Profitabilityof

Invesment

0 10000 10000 15% 0% 11500 0 1500 11500 15%

10000 10000 20000 15% 5% 23000 10500 2500 12500 25%

10000 10000 20000 15% 20% 23000 12000 1000 11000 10%

If the cost of debt < the rate of return; the profitability of investment increases

If the cost of debt > the rate of return; the profitability of investment decreases

Financial Leverage(Effects of Debt-Equity Ratio)

Amount of

Equity

Amount of

Debt

Debt EquityTotal

SourceRate of Return

Cost of Debt

Gross Income

Debt+Cost of

debt

Net Income

Total Income

Profitabilityof

Invesment

0 10000 10000 15% 0% 11500 0 1500 11500 15%

20000 10000 30000 15% 25% 34500 25000 -500 9500 -5%

10000 20000 30000 15% 25% 34500 12500 2000 12000 12%

If the amount of debt < the amount of equity; the profitability of investment decreases

If the amount of debt > the amount of equity; the profitability of investment increases