FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT
Jan 11, 2016
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