Financial Management – Part I

Financial Management
 The nature, purpose, and scope of financial management
I learned that financial management is also referred to as managerial finance, corporate
finance and business finance which is a decision making process concerned with planning,
acquiring and utilizing funds.
 The relationship between financial management, accounting and economics
The relationship of financial management and accounting is that the finance manager will
make use of the accounting information in the analysis and review of the firm’s business
position in decision making. While the relationship of financial management and economics
has both the concept of micro and macroeconomics.
 The role of finance manager
Well I have learned that there are several roles that a finance manager has. Financial
Manager makes decision which involves the analysis and planning, acquisition of funds,
utilization of funds, impact on risk and return, affect the market price of common stock and
lead to shareholder’s wealth maximization.
The Framework of Financial Management
 Introduction to Macroeconomics
As already been tackled before on other subjects, we still talked about Macroeconomics
and Microeconomics which is relevant to financial management. Macroeconomics is the
study of national economy and the determination of national income, while
Microeconomics focuses on the behavior and purchasing decisions of individual and firms.
 Business Cycles
The four business cycles which includes the trough – the lowest turning point of a business
cycle, peak – the highest value reached by some quantity in a time period, expansion – the
act or process of expanding and contraction/recession – a period of economic decline or
negative growth.
Time Value of Money – money that is available at present time is worth more than the same
amount at the future.
Interest – cause of money using overtime
Principal – amount of money borrowed
Interest Expense – cost of excess resources of the borrower / cost on the part of borrower
Interest Revenue – benefit at the part of the lender
Simple Interest
Example:
P 10 000 X .10 = 1000 + 10 000 = 11 000
(Principal X Interest = Then add principal to get the amount)

Compound Interest
Example:

Year Beginning Simple Ending Beginning Compound Ending

Amount Interest Amount Amount Interest Amount
(10%) (10%)
1 1000 100 1100 1000 100 1100
2 1000 100 1200 1100 110 1210
3 1000 100 1300 1210 121 1331
4 1000 100 1400 1331 133.10 1464.10
5 1000 100 1500 1464.10 146.41 1610.51

610.51

FVn = PV(1+i)^n
= 1000(1+.10)^5 = 1610.51
 Financial Management – Part II
Financial Risk Management
 Risk Management
 Basic Principles of Risk Management
 Process of Risk Management
 Elements of Risk Management
 Potential Risk Treatments
 Areas of Risk Management
 Investment Risks
 Probability
 Value of Information
 Sensitivity Analysis
 Simulation
Here we have talked about different financial risk management that we might face when
we’re going to put up a business. This is so important because risk is inherent in any
business operation and good risk management is essential if we’re going to identify and
stop revenue leakage from our business.

Calculation of Expected Portfolio Returns

Example:
State of Probability of Stock A Stock B Stock C
Economy SOE
Boom .40 10% 15% 20%
Recession .60 8% 4% 0%

 (A = 1/3, B = 1/3, C = 1/3) (A = 50%, B = 25%, C = 25%)

Solution:
a. Portfolio Expected Return (Boom) a. Portfolio Expected Return (Boom)
= (1/3)(.10) + (1/3)(.15) + (1/3)(.20) = (.50)(.10) + (.25)(.15) + (.25)(.20)
= 3.33% + 5% + 6.67% = 0.05 + 0.0375 + 0.05
= 15% = 13.75%

b. Portfolio Expected Return (Recession) b. Portfolio Expected Return (Recession)

= (1/3)(.08) + (1/3)(.04) + (1/3)(0) = (.50)(.08) + (.25)(.04) + (.25)(0)
= 2.67% + 1.33% = 0.04 + 0.01 + 0
= 4% = 5%
 Expected Return on Portfolio = (.40 X 13.75%) + (.60 X 5%)
= 5.5% + 3%
= 8.5%

Weighted Average Cost of Capital

 Owners / Investors money – Equity (PS, CS, B) – Average Return – Cost of Equity
 Banks & Other Sources – Debt (PS, B) – Interest – Cost of Debt

Formula:
WACC = (% of Debt)(After-tax Cost of Debt) + (% of Preferred Share)(Cost of Preferred
Share) + (% of Ordinary Equity)(Cost of Ordinary Equity)
Or:
WACC = Wd X Rd (1-T) + We X Re

Example:

The following data are available for Copper Pipe Company

Source of Capital Existing Capital Structure Based on Book Specific Cost (%)
Value
Amount Proportion
Bonds (P1 000 par, P 15,000,000 30% 6.60
9.5% coupon)
Preferred Share 5,000,000 10% 10.21
(200,000 shares at
P25 par)
Ordinary Equity 20,000,000 40% 13.33
shares (1,000,000
shares at P20 par)
Retained Earnings 10,000,000 20% 13
Total P 50,000,000 100%
Solution: The WACC is computed as follows:

Proportion Specific Cost Weighted Cost of

Capital
Bonds 30% 6.6% 1.98%
Preferred Shares 10% 10.21% 1.02%
Ordinary Equity 40% 13.33% 5.33%
Shares
Retained Earnings 20% 13% 2.60%
Total 100% WACC 10.93%

Learnings and Insights

As far as I can tell, I’ve always been keen to learn. Taking up this subject gives me a lot to look
up to. I was of course excited at the start. I could really see myself comfortable learning the
topics in the subject. I was very interested to say. In the beginning of the course, I was
determined. The 10 months of studying this subject is quite an experience. I had my highs and
lows while taking up financial management. Some topics may be difficult to understand but it
just gives me more inspiration to study harder. I had some fun and despite the pressure of time
to finish and cope up with some critical lessons, the quizzes and the examinations, I was still
able to do all of this. I never forget the very essence why I was in this subject which is to learn.
Though it was kind of difficult to keep up given that I struggling a bit especially on problem
solving and computations, I remained optimistic and did not focus on just merely complying or
completing the task. I am more about what I can get from these tasks – learn from it.

Suggestions/comments
The most effective teachers vary their styles depending on the nature of the subject matter, the
phase of the course, and other factors. By so doing, they encourage and inspire students to do
their best at all times throughout the semester.
For you ma’am, I can’t suggest any more because you have taught the subject in the best way
you can and it makes us who we are today by bringing the knowledge that you have gave us. I
might just say that I know how passionate you are about teaching, but sometimes you need to
set aside ample time to yourself. If you cannot seem to find time for your hobbies and friends,
schedule time for them. If it’s in your schedule it will be done. So that you can enjoy too ma’am
as much as you give happiness to us. You may, cultivate new skills, engage and be exposed to
different kinds of experiences, and play with technology yourself in your free time. All of this
will spruce up your own teaching methods and multiply what you can give to us, your students.
Message:

Ma’am Q,

First of all, ma’am I just wanted to say thank you since then po na naging prof po namin
kayo. Sobra pong daming lessons ang natutunan namin and at the same time madami po
kaming natutunan about real life lessons and even yung mga topics naten na pwedeng ma
apply on our future jobs e naturo nyo din po. Thank you ma’am for making Financial
Management easy for us hehe, madali po namin naiitindihan ang lessons pag kayo po ang
nagtuturo and nag eenjoy po kami. Ngayon natapos na po natin yung part 1 and part 2 ng
finman hehe I hope na maging prof pa po namin kayo even sa iba pang subjects. Thank you for
all your considerations ma’am, you’re one of my favorite profs po, my most favorite <3 haha.

Mahal na mahal kita mother <3