Financial Literacy Lecture Notes 1 PDF

FINANCIAL LITERACY (ENT51126) Lecture Notes 1 Assoc. Prof. Elizabeth Vivien S. Magbata, Ph.D. Department of Financial Management College of Commerce and Business Administration AY 2024-2025 Review Lessons: What is finance? Money. Wh...

FINANCIAL LITERACY (ENT51126) Lecture Notes 1 Assoc. Prof. Elizabeth Vivien S. Magbata, Ph.D. Department of Financial Management College of Commerce and Business Administration AY 2024-2025 Review Lessons: What is finance? Money. What is financial management? Financial management is concerned with decisions about money. For individuals, as in business, it is about cash flows * how money is raised, used and kept. - personal finance - corporate finance - entrepreneurial finance - public finance Review: FOUR INTER-RELATED AREAS IN THE STUDY OF FINANCE Financial markets and institutions Investments Financial services Managerial finance  Review: FOUR INTER-RELATED AREAS IN THE STUDY OF FINANCE FINANCIAL MARKETS AND INSTITUTIONS - A place where money is exchanged Banks Insurance companies Savings and loans associations Credit unions  Review: FOUR INTER-RELATED AREAS IN THE STUDY OF FINANCE INVESTMENTS The decisions individual/business make to choose the securities to be included in the investment portfolios. Risks and returns factors (stocks and bonds) Optimal mix  Review: FOUR INTER-RELATED AREAS IN THE STUDY OF FINANCE FINANCIAL SERVICES The functions provided by organizations that deal with the management of money Provide guidance to clients on how they will manage their finances to achieve their goals (purchase of house, retirement, financial stability, budgeting, etc.  Review: FOUR INTER-RELATED AREAS IN THE STUDY OF FINANCE MANAGERIAL FINANCE Management of the company’s cash flows * Working capital * Long-term financial decisions Review: FINANCE IN NON-FINANCE AREAS ▪ Management ▪ Marketing ▪ Accounting ▪ Information systems ▪ Economics Review: Typical organizational structure Stockholders Board of Directors CEO & President General VP VP Counsel VP CFO Secretary Marketing Operations HR Treasurer Controller Review: The Treasurer vs. Controller ◻It is the Treasurer's job to ensure that the company has sufficient cash on hand to support current and future activities, and to manage financial risk. Therefore, the Treasurer will spend most of his time communicating with bankers and investors, reviewing insurance policies, managing the investment of the company's excess funds and setting credit and collection policy. ◻The Controller is primarily responsible for ensuring financial data is correct, so he typically has oversight for accounting, taxes, auditing, budgeting, payroll and internal controls. It is the Controller who typically prepares all financial reports, including SEC filings, financial statements, and tax returns. Review: Types of business organization In studying finance, it is necessary that you should know about: Sole Proprietorship Partnership Corporation One-Person Other forms Corporation ▪ LLP (OPC) ▪ LLC ▪ S Corporation Review: Ten Principles of Finance 1. The risk-return trade off ▪ Investors won’t take additional risk unless they expect to be compensated with additional return. 2. Time Value of Money ▪ A dollar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later. 3. Cash, not profits is king ▪ It is cash flows not profits that are actually received by the firm and can be reinvested. 4. Incremental Cash Flows ▪ It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on. 5. The Curse of Competitive Markets ▪ This is why it's hard to find exceptionally profitable projects. In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits. As a result, profitable projects can only be found if the market is made less competitive, either through product differentiation or by achieving a cost advantage. Ten Principles of Finance 6. Efficient Capital Markets ▪ The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently. 7. The Agency Problem ▪ A problem resulting from conflicts of interest between the manager/agent and the stockholder. Managers won't work for the owners unless it's in their best interest. The agency problem is a result of the separation between the decision makers and the owners of the firm. As a result managers may make decisions that are not in line with the goal of maximization of shareholder wealth. 8. Taxes Bias Business Decisions ▪ The cash flows we consider are the after-tax incremental cash flows to the firm 9. All risks are not equal – some can be diversified away, and some cannot. 10. Ethical behavior is doing the right, and ethical dilemmas are everywhere in finance. Review: Which should be the appropriate goal of the firm? Maximizing profit or Maximizing shareholders’ wealth Review: Agency Problem Manager as agent of the firm, must behave in the best interest of the firm ahead of his own Mechanisms to motivate managers o Managerial compensation (incentives) o Shareholders’ intervention o Hostile takeover o E.S.O.P. Review: Ethics and Finance What is ethics? ⮚A moral system or set of values that individuals must adhere to In business, who are bound by ethics? ⮚Everybody (employees, managers, owners) o CSR (paying the correct taxes, care for the environment, concern for the society as a whole) o Employees’ concern o Customers’ satisfaction o Dealing with competitors Recap: Answer the following questions Why are these concepts (covered in this presentation) important in Financial Literacy? How do these concepts help Financial Literacy? Who is the “shareholder” in the goal of finance of “shareholder wealth maximization” End of presentation