FINANCIAL MANAGEMENT Requirements: 1. The final grade will be
determined by the final exam (written exam max 50 points/ % of the
final grade = 50% 2. Theattendance and class participation of each
individual is essential for assessment / The seminar performance
(presence, test and activity max 20 points) / % of the final grade
= 20%
3. Each student will have to present two homework to be
evaluated in laboratorclasses/twohomework2x(max15)=30points/%of the
final grade = 30% Minimum passing requirements: Submission of two
homework Scoring 50% out of total points Professor:Gheorghe
Militaru / [email protected] Assistant Professor:PhD student
Ioanid Alexandra INFORMATION ABOUT THE PROJECT NPV is defined as
the present value of the stream of expected net cah flows from the
project minus the projects net investment / A project is accepted
if its NPV is greater than or equal to zero IRR the discount rate
that equals the present value of the expected net cash flows from a
project with the present value of the net investment PI the ratio
of the present value of expected net cash flows over the life of
the project to the net investment/ If a project has a PI equal to
or greaterthan 1,0, it is acceptable PP is the period of time
required for the cumulative cash inflows (net cash flows) from a
project to equal the initial cash outlay The two homework: I. An
analysis of financial ratios using the balance sheet and financial
statement (profit and loss account) of a company; II. Capital
budgeting decision criteria- Net Present Value (NPV), Internal Rate
of Return (IRR), Profitability Index (PI) and Payback Period (PP).
MAINTOPICSTO BE COVERED (half-year / semester) Balance Sheet,
Financial Statement and Cash Flow Financial Statements Analysis and
Long-Term Planning Discounted Cash Flow Valuation How to Value
Bonds and Stocks Net Present Value and Other Investment Rules Risk
Analysis, Cost of Capital and Capital Budgeting Dividends and Other
Payouts Leasing Option and Corporate Finance Short-Term Finance and
Planning Mergers and Acquisitions Financial Distress
(Bankruptcy,Reorganization,The Marginal Firm) BIBLIOGRAPHY
(recommendations): 1. Ross, S.A., Westerfied, R.W, Jaffe, J., and
Jordan, B.D., Modern Financial Management, McGraw-Hill, 2008 2.
Brealey, R.A., Fundamentals of Corporate Finance (Third Edition),
McGraw-Hill, 20013. Militaru, Gh., Management financiar. Aplicatii,
Ed. POLITEHNICA Press, Bucuresti, 2013 FINANCE FINANCE Financial
Management Financial Economics Investments Personal Finance Public
Finance Business Finance Corporate Finance Financial Markets
Financial Institutions Financial Instruments Capital Markets Money
Markets Securities Analysis Portfolio Theory Market Analysis
Behavioral Finance Finance has a strategic role within the company
through raise funds, invest in assets and manage them wisely. A
firmsvalueis dependentonitsgrowthopportunities,whichinturnare
dependent on the firms ability to attract capitalIMPORTANCE OF
FINANCIAL MANAGEMENT Finance is about the efficient use of money
for firms or individuals Objective of Financial Management:
Maximization of shareholders/owners wealth, and this means
maximizing the firms stock price Shareholders wealth is defined as
the present value of the expected future returns to owners of the
firm (e.g., the market value of the shareholders common stock
holdings) The market value of a firms stock is determined by the
magnitude, risk, and timing of the cash flows, the firms is
expected to generate (investments, financing or dividend) Major
areas of business finance: Financial analysis and planning
(forecasting the future- income and expenses) Working capital
management (short-term assets and liabilities) Capital Budgeting (
what assets to buy) Capital structure (how the firm finances its
operations) DIAGNOSING THE FINANCIAL HEALTH OF A BUSINESS What will
you learn? How to evaluate the performance of a business with
reference to its financial reports How to conduct financial
analysis by integrating information across its balance sheet,
income statement and cash flow statement How to identify early
warning signs of potential financial difficulties in a business How
to assess risks in a business by reference to its financial reports
How to identify the assumptions and estimates that are made by
managers in constructing their financial reports and assess the
implications for interpreting the performance of a business How to
measure and interpret the sustainable growth rate of a business How
to measure the operating cash cycle of a business and assess the
implications for the funding needs of the business How to determine
if a firm is generating appropriate returns on its assets and for
its owners CONTEXT The goal of financial managementis to maximize
the current value per share of the existing sock CONTEXT ASSETS
Firms must manage four types of assets to be successful: Physical
assets buildings, land, furniture, computers, vehicles, equipment,
and so on Financial assets cash, financial resources, stocks, bonds
or debts, and so on Intellectual property assets -patents,
operating processes, copyrights, trademarks, information systems,
designs, and so on Human assets individuals with their talents,
capabilities, experience, professional expertise, relationships,
and so on Human capital is the collective value of the
capabilities, knowledge, skills, life exeprinces, and motivation of
an organizational workforce Intellectual capital reflects the
thinking, knowledge, creativity, and decision making that people in
organization contribute Real assets assets used to produce goods
and services (tangible machinery, equipments, other are intangible-
trademarks, patents or technical expertise)FINANCIALASSETS
Financialassetsreferstotheincomegeneratedbyrealassets(the company
sells financial assets to obtain the necessary money) Example: If a
company borrows money from the bank (the bank has a financial
asset) the financial assets gives it a claim to a stream/series of
interest payments andto repayment of the loanThe companys real
assets need to produce enough cash to satisfy these claims !!!
Financial markets Firms operations Company 12 34
Financialmarketsmarketsinwhichfinancialassetsaretraded/marketsin
which the company raises cash1. The flow start when financial
assets are sold to raise cash 2. The cash is used to purchase the
real assets used in the firms operations 3. Later, if the company
does well, the real assets generate enough cash inflow to more than
repay the initial investment 4. The cash is either reinvested or
returned to the investors who contributed the money in the first
place FINANCIALASSETS Firm invests in assets Current assets Fixed
assets Financial markets: Short-term debt Long-term debt Equity
shares Government Total Value of the Firm to Investors in the
Financial Markets Total Value of Assets Cash for securities issued
by the firmTaxes Retained cash flows Dividendsand debt payments
Cash flow from firm CASH FLOW FROM THE FIRM TO THE FINANCIAL
MARKETS AND BACKAGAIN FINANCIAL DECISIONS FINANCIAL DECISIONS:
I.Capital budgeting making and managing expenditures on long-lived
assets / the firms investment (how much money should the firm
invest/ which assets to buy. and how to pay for them) II.The firms
capital structure represents the proportions of the firms financing
from current and long-term debt and equity
III.Networkingcapitalisdefinedascurrentassetsminuscurrentliabilities.
There is often a mismatch between the timing of cash inflows and
cash outflows during operating activities.Financial managers must
attempt to manage the gaps in cash flow- short-term finance Capital
structure decision the choice of the long-term financing mix
Capital markets the markets for long-term financing Financing
decision how to raise the money to pay for investments in real
assets Capital refers to the firms sources of long-term financing
ORGANIZING A BUSINESS
Thefirmisawayoforganizingtheeconomicactivityofmanyindividuals.A
basic problem is how it raise cash Form of business organization:
The sole proprietorship is a business owned by one person /
allprofitsof the business are taxed as individual income
Advantages: this business form is easy and inexpensive to establish
Disadvantages: (1) the owner of the firm has unlimited personal
liability for all debts, and (2) the owner has difficulty raising
funds to finance growth (sole proprietorships generally are small)
The partnership two or more people can get together/ each partner
provide a certain percentage of the funds necessary to run the
business/ the partners share in the profits (or losses) of the
business: Advantages:low cost and ease of formation Disadvantages:
(1) unlimited liability, (2) limited life of the organization, (3)
difficulty of transferring ownership, and (4) difficulty of raising
large amounts of capital ORGANIZING A BUSINESS The partners can
potentially lose all of their personal assets, even assets not
invested in the business (each partner is liable for the businesss
debts) !!!!!!!!! Corporations is a legal entitycreated by a state,
and it is separate and distinct form its owners and managers
Advantages:(1) unlimited life (business can continues after its
original owners and managers are deceased),(2) easy transferability
of ownership interest (e.g., shares of stock can be transferred for
more easily),(3) limited liability (losses are limited to the
actual funds invested)
Disadvantages:(1)corporateearningsmaybesubjecttodoubletaxation(theprofitofthe
corporation is taxed and then dividends are taxed again as income
to the stockholders), (2) setting up a corporation is more complex
and time-consuming than for a proprietorship or a partnership The
value of any business will be maximized if it is organized as a
corporation for the following reasons: Limited liabilities reduces
the risks borne by investors the lower the firms risk, the higher
its value A firms value is dependent on its growth opportunities,
which in turn are dependent on the firms ability to attract
capital. Corporations can attract capital more easily than other
kind of businesses. ORGANIZING A BUSINESS Hybrid forms of
organization 1.Limited partnership limited partners are liable only
for the amount of their investment in the partnership, while the
general partners have unlimited liability
2.Limitedliabilitypartnership(LLP)wherepartnersenjoylimitedliabilitywithregardtothe
businesss liabilities LLP - generalpartnership all partners agree
to provide some fraction of the workand cash and share the profits
and losses.Each partner is liable for all of the debts of the
partnership/ general partners have unlimited for all debts Agency
problem
Anagencyrelationshipariseswhereveroneormoreindividuals,calledprincipals,hireanother
individual or organization, called an agent, to perform some
services and delegate decision-making An agency problem is a
potential conflict of interests that can arise between a principal
and an agent. Two important agency relationships are (1) those
between the owners of the firm and its management and (2) those
between the managers, acting for stockholders, and the debt-holders
SOURCES OF CAPITAL How a company can obtain financing (financing
methods): Debt Financing / obtaining borrowed funds for the company
(usually a loan) / debt
financingrequiresthatsomeassetbeusedascollateral(e.g.,car,house,orland)/
commercial banks
!Theentrepreneurneedtopaybacktheamountoffundsborrowedaswellasafee
expressed in terms of the interest rate (the funds are repaid from
the resulting salesand profit)
EquityFinancingdoesnotrequirecollateralandofferstheinvestorsomeformof
ownership position in the venture ! Usually, an entrepreneur meets
financial needs by employing a combination of debt and equity
financing Internally generated funds can come from several sources
within the company : profits, sale of assets (little-used assets),
reduction in working capital, extended payment terms, and accounts
receivable ! A final method of internally generating funds is
collecting bills (accounts receivable) more quickly SOURCES OF
CAPITAL Personal funds (new ventures) are the least expensive funds
in terms of cost and control. They are essential in attracting
outside funding, particularly form
banks,privateinvestors,andventurecapitalists(entrepreneurneedtobe
committed to the venture)
Familyandfriendsareacommonsourceofcapitalforanewventure. Family and
friends provide a small amount of equity funding for new ventures
(if is in form of equity financing - the family and friends have an
ownership position in the new venture)
Venturecapitalisalong-terminvestment.Ineachinvestment,theventure
capitalist takes an equityparticipationthrough stock, warrants, and
convertible securities and has an active role in the monitoring of
each portfolio company,
bringinginvestment,financingplanning,andbusinessskillstothefirm(equity
participation taking an ownership position) SOURCES OF CAPITAL
Business angels are entrepreneurial individuals who provide capital
in return for a proportion of the company equity.They take a high
personal risk and provide not only finance but experience and
business skills Crowdfunding is the practice of funding a project
or venture by raising monetary contributions from a large number of
people, typically via the internet The crowdfunding model
includes:the project initiator who proposes the idea to be funded,
individuals/groups who support the idea, and a moderating
organization (the platform) that brings the parties together Cash
flow from operations depends largely on two factors: (1) accounts
receivable (money owed by customers) and accounts payable (money
owed to suppliers) FINANCIAL MARKETS
Firmsoffertwobasictypesofsecurities(certificates)toinvestors.Corporatesecurities
represent claims against the assets and future earnings of the
firm:
(1) debt securities contractual obligations to repay corporate
borrowing
(2)equitysecuritiessharesofcommonstockandpreferredstockthatrepresentnon-contractualclaims
to the residual cash flow of the firm
Financialmarketsarevehiclesthroughwhichfinancialassetsarebought,sold,andtraded.
They are composed of the money markets and the capital markets:
Money markets are for debt securities that will pay off in the
short term (usually less than one year)
Capitalmarketsareforlong-termdebt(withamaturityofoveroneyear)andforlong-term
shares The primary market is used when corporations and governments
initially sell securities ( a company sells securities to raise
cash)
Secondarymarketsprovidethemeansfortransferringownershipofcorporatesecurities/
one owner or creditor selling to another a security Question and
topics for discussion Question: What are the differences between
the operating income, capital gainsincome, and dividend income of a
corporation? Application:During the past year , Star Inc., had
sales of 3 million RON, cost of goods sold of 1.8 million RON,
operating expenses of 0.8 million RON, and interest expenses of 0.2
million RON. Star Inc. paid common stock dividends of 0.1 million
RON during the year.What is the gross profit margin, operating
earnings before interest and taxes and earnings before tax (taxable
income)?
