Introduction from basics to explain differnet types of financial manager decisions

1. FINANCIAL MANAGEMENT

2. Variables Affecting System Behavior
SYSTEM
Leadership
Sources

3. BUSINESS 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.

4. Organizing A Business
Sole Proprietorships
Partnerships
Corporations

5. Characteristics of Business
Organizations
Characteristics Sole
Prop.
Partner. Corp.
Ownership Manager Partners Shareholders
Manager-Owner
Seperation
Same Same Usually
Seperated
Owner’s Liability Unlimited Unlimited Limited
Taxing Personal
Income
Personal
Income
Personal
Income
&Corporate
Tax

6. Assets
Real Assets:Used to produce goods & services
Tangible: Machinery, factory, offices
Intangible:Trade mark,patents,technical expertise
Financial Assets: Claims to the income generated by real
assets. Also called securities.

7. Basic Problems
Capital Budgeting Decision
What real should the Firm acquire?
Financing Decision
How should cash be raised to finance real investments?

8. The Role of Financial Manager
Firm’s
Operations
Real Assets
Financial
Manager
Investors
Money Flows

9. The Role of Financial Markets
Firm’s
Operations
Real Assets
Financial
Manager
Investors
Money Flows
Financial Markets
Stock Markets
Bond Markets
Foreign Exchange etc.
Financial Intermediaries
Mutual Funds
Pension Funds
Financial Institutions
Banks
Insurance Companies

10. Goals of The Financial Management
 Shareholders desire
wealth maximization!
 Do managers maximize
shareholder wealth?
Max VALUE = f ( I, F )
Max VALUE = f ( I, F, D )

11. Profitability
Economy
of
Scale
Productivity

12. Units
Unit
Price TOTAL
Rate of
Productivity
Gross
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

13. Financial Leverage
Rate of
Return
Cost of
Debt
Debt Equity
Total
Source
Rate of
Return
Cost of
Debt
Gross
Income
Debt+
Cost of
debt
Net
Income
Total
Income
Profitability
of
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

14. Financial Leverage
(Effects of Debt-Equity Ratio)
Amount of
Equity
Amount of
Debt
Debt Equity
Total
Source
Rate of
Return
Cost of
Debt
Gross
Income
Debt+
Cost of
debt
Net
Income
Total
Income
Profitability
of
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