Financial Management Notes - Financial Management Class 1...

Financial Management
Class 1
 Commercial paper:
o short term financial paper
o short term IOU by large well-known & highly rated corporation
 Basis points
o bp= 1/100 of a percent
o 100bp= 1%
 Overnight rate
o the rate at which banks borrow each other overnight
o commercial banks do not borrow from central bank
- borrow from central bank means your banks is not doing well
- no one borrows at the bank of Canada rate, works as the benchmark,
raise the rate, pass to the citizens
 4 Principles of Finance
o If it don’t jingle it don’t count
o Risk is the possibility that bad or good things may happen
- Finance is forward looking, and accounting is backward looking
o The greater the risk the greater the expected reward
o A $1 today is worth more than a $1 tomorrow
 Financial manager Investment decisions
o Capital Budgeting
- What to spend money on, what do we invest in
o Capital Structure
- How to get the money to invest
o Capital Analysis
- What is something worth
o Working Capital Management
- Managing the day to day cash flows
o Risk Management
- Managing the possibility that bad or good things may happen
 Goals of the Financial Manager
o Maximize Shareholder Wealth
o Triple Bottom Line
When you make decisions, you consider 3 aspect impact:
- Economic
- Environmental
- Society
- Measurement

- Subjectivity
- Trade-offs
With triple bottom line there is always trade-offs
o Maximize Utility
o Maximize Earnings
o Maximize Cash Flow
 Difference between stakeholders & shareholders
o Stakeholders
Who have an interest in a company’s affairs
o Shareholders
Who owns shares in a company
Legally, the goal is max the shareholders wealth , get the share price as high as
possible
 Benefit Corporation (B Corp)
A corporation that is not legally bound to solely take into account the economic interests
of its shareholders (can operate under triple bottom line); the economics do not legally
have to be sole basis for its decisions
 Corporate governance:
How the company is organized from a governance point of view
The objective of the company is followed
Agency Issue
Managers do not behave in the best interest of shareholders
 Maximize Shareholders Wealth

Value of the firm has 2 components:
- MAXIMIZE Free cash flow
- MINIMIZE WACC
o WACC : how much that will cost the company to do the investment, to get that
money
o Weighted Average Cost of Capital (WACC): the rate of return required by
investors
o Market risk: the risk will going on in the broad market
CFO cannot control with the market risk, they can only adjust to
cope with risk
 Forms of Business Organization
 Cost (and hassle) to set up
 Liquidity and marketability
 Ability to raise capital
 Taxation
 Control issues
 Liability
o Sole Proprietorship: an unincorporated business owned by one individual
 Control everything
 Subject to few government regulations
 Easy and inexpensive to set up
 All the taxes are personal taxes
 unlimited personal liability for the business’s debts
