FINANCIAL MANAGEMENT

(KETE307)

Nguyen Thu Hang

[email protected]

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 Outline
• Chapter 1: Introduction to Financial
Management
• Chapter 2: Financial Statement Analysis
• Chapter 3: The time value of Money
• Chapter 4: Interest rates and Bond valuation
• Mid-term test
• Chapter 5: Stock Valuation
• Chapter 6: Capital Budgeting
• Chapter 7: Return, Risk, and the Security
Market Line 2
 Assessment
• Performance +warming-up activities: 10%
• Mid-term test (30 mins-MCQ and essay
questions): 30%
• Final exam (60 mins-MCQ and essay
questions): 60%

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 Course materials
1. Ross, Westerfiled & Jordan (2019),
Corporate Finance
2. Berk DeMarzo (2019) Corporate Finance
3. CFA Program Curriculum, Level II, Volume 3,
Corporate Finance
4. CFA Program Curriculum, Level I, Volume 3,
Financial Reporting Analysis

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 CHAPTER 1
INTRODUCTION TO FINANCIAL
MANAGEMENT
( 6 hours)

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 Learning Objectives
• Four major types of firms (main advantages and
disadvantages).
• Financial decisions in corporations.
• Goal of Corporate Finance Decisions/ Goal of
CEO
• Agency problem
• Solutions to the agency problem

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 Four types of firms
 A business is an organization involved in the trade
of goods, services, or both to consumers, for profit
or not-for profit.
Types of Business Ownership
 (Sole) Proprietorships.
 Partnerships.
 Limited Liability Companies
 Corporations

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 (Sole) Proprietorship
• Is a business owned and run by one person
• Sole proprietorships are very small with few, if any,
employees.
• Although they do not account for much sales revenue in
the economy, they are the most common type of firm in
the world.
• Straightforward to set up.
• The firm can have only one owner.
• The owner has unlimited personal liability of any firm’s
debts.
• The life of a sole proprietorship is limited to the life of the
owner  It is difficult to transfer ownership of a sole
proprietorship. 8
 Partnership
• A partnership is identical to a sole proprietorship
except it has more than one owner.
• All partners are liable for the firm’s debt.
• The partnership ends on the death or withdrawal
of any single partner, although partners can avoid
liquidation if the partnership agreement provides
for alternatives such as a buyout of a deceased or
withdrawn partners.
• A limited partnership is a partnership with two
kinds of owners, general partners and limited
partners.
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 Limited Liability Companies (LLC)
• A limited liability company (LLC) is a limited
partnership without a general partner.
• All the owners have limited liability, but unlike
limited partners, they can also run the
business.

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 Corporations
• The distinguishing feature of a corporation is
that it is a legally defined, artificial being (a
judicial person or legal entity), separate from its
owners  it is solely responsible for its own
obligations.
• The owners of a corporation are not liable for
any obligations the corporation enters into.
• The corporation is not liable for any personal
obligations of its owners.
• A corporation has many of the legal powers that
people have. 11
 Ownership of a corporation
• No limit on the number of owners a
corporation can have.
• The entire ownership stake of a corporation is
divided into shares known as stock. The
collection of all the outstanding shares of a
corporation is known as the equity of the
corporation.
• Shareholders, or stockholders or equity holders
are entitled to dividend payments.

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Four types of firms

(Re: CFAI 2013, Volume 2,

SS. 4)
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 Types of U.S. Firms

Ref: Berg, Ch 1
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 Four types of U.S. firms

(Re: U.S. Bureau of Census, 2012 Statistical Abstract) 15

 Four types of firms

(Re: General Statistics Office) 16

• What is corporate finance?

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 Financial system
The Financial System
Public Finance

Financial
Market
Financial
Institutions

Corporate Finance Personal Finance

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 Financial system (cont.)
Public Finance
 Government operations to implement policy.
 Efficient resources allocation, income distribution and
economic stabilization.
Business Finance (Corporate Finance)
 Business operations to maximize owner’s wealth.
 Investing and financing decisions.
Personal Finance
 Individual or family activities.
 Maximize utilities.
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 What is corporate finance?
 Corporate Finance is the study of financial decisions in
corporations.
Types of Decisions in a Corporation
 Investment decisions.
 Financing decisions.
Which type of decisions comes first?

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21
 Ownership versus Control
of Corporations

• Corporate Management Team

– In a corporation, ownership and direct control are
typically separate.
– Board of Directors
• Elected by shareholders
• Have ultimate decision-making authority
– Chief Executive Officer (CEO)
• Board typically delegates day-to-day decision making
to CEO.

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Figure 1.2 Organizational Chart of a Typical
Corporation

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 Financial Manager

Ref: Mayers, Principles of Corporate Finance, Ch1

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 Financial Manager
• Within the corporation, financial managers are
responsible for three main tasks:
- Making investment decisions
- Making financing decisions
- Managing the firm’s cash flows.

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 Investment decisions
• Weigh the costs and benefits of all
investments and projects  Decide which of
them qualify as good uses of the money
stockholders have invested in the firm.
• Shape what the firm does and whether it will
add value for its owners.

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 Financing decisions
• Decide how to pay for the investments.
• Decide whether to raise more money from
new and existing owners by selling more
shares of stock (equity) or to borrow the
money (debt).

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 Cash Management
• Ensure that the firm has enough cash on hand
to meet its day-to-day obligations.
• Commonly known as managing working
capital.
• In a young or growing company, it can mean
the difference between success and failure.

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 Goal of Corporate Finance Decisions
Goal of CEO:
 Maximize shareholders (long-term) value.
 How?

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 Reading 1
 CFA Corporate Finance, Level II, Reading 26
• Stakeholders and corporate performance
• Profitability, profit growth, and Stakeholder
claim

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 How to maximize shareholders’ wealth?

• The best way for managers to generate the

funds for future dividend payments and to
keep the stock price appreciating is to pursue
strategies that maximize the company’s long-
run profitability and grow the profits of the
company over time.

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 Agency cost and information asymmetry

Principal-Agent Problem
 Separation between ownership and control.
 Managers act for their own self-interest, which may
substantially differs from the interest of the
shareholders.
 Manager- Shareholder conflicts, director-
Shareholder conflicts
 That imposes a cost to shareholders to monitor
managers (agency cost).

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 Reading 2
 CFA Corporate Finance, Level II, Reading 27
• Manager- Shareholder conflicts
• Director-Shareholder conflicts

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 Methods to Mitigate Principal-Agent Problem
 Ownership.
 Jensen and Meckling (1976): positive relationship between management
ownership and performance.
 Himmelberg, C. P., R. G. Hubbard, D. Palia (1999), Understanding the determinants
of managerial ownership and the link between ownership and performance,
Journal of Financial Economics 53: No significant relationship!
 Incentive pay.
 Long-term contract.
 Corporate Governance
(Refer: CFAI 2013, Volume 2, SS4)

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 Corporate Governance
 Is the system of principles, policies, procedures, and
clearly defined responsibilities and accountabilities
used by stakeholders to:
o Eliminate or reduce conflicts of interest.
o Use the company's assets in a manner consistent with
the best interests of stakeholders.

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 Corporate Governance
Effective Corporate Governance System
 Define the rights of shareholders and other important
stakeholders.
 Define and communicate to stakeholders the
responsibilities of managers and directors.
 Provide for fair and equitable treatment in all dealings
between managers, directors, and shareholders.
 Have complete transparency and accuracy in
disclosures regarding operations, performance, risk,
and financial position.
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 Corporate Governance
Effective Board of Directors
 Composition of the board, election and independence
of board members.
 Qualifications of the directors.
 Frequency of meetings.
 Responsiveness to shareholder proxy votes.
 …

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 The agency problem

Why does it arise?

• Divergence of ownership and control
• Managers’ goals differ from shareholders’
• Asymmetry of information.
What are the consequences?
• Shareholder wealth is no longer maximised.

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 Reading 3
CFA Corporate Finance, Level II, Reading 27
• Corporate governance: objectives and guiding
principles
• Corporate governance evaluation (board of
directors)
 Internal regulations on corporate governance
of VNM

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 Case 1: Divergence VS Concentration of Ownership

 Phương Xuân wants to expand her chain of fashion

shop. She may borrow or sell 30% of her equity in the
chain to raise fund.
 If Phương Xuân borrows fund (or sells equity ), $1
incremental income (or expense) from the shops will
increase Phương Xuân’s income by how much?
 Predict Phương Xuân’s behavior in each case.

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 Case 2: Management Entrenchment
Phương Xuân Corp. (100% equity) has $100 mil cash.
Corporate tax rate 25%, personal tax rate 15%. Bank-
deposit interest rate 5%. No investment opportunity is
viable.
 Should Tuấn Bách, CEO of Phương Xuân Corp. keep this
amount of cash to deposit it on a bank account or
should he pay out the money to shareholders (by
dividend)?

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 Case 2: Management Entrenchment
Phương Xuân Corp. (100% equity) has $100 mil cash.
Corporate tax rate 25%, personal tax rate 15%. Bank-
deposit interest rate 5%. There is an investment
opportunity.
 Before-tax cost of debt 8%, cost of equity 15%. Should
Tuấn Bách consider the use of debt?

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 Case 3: Shareholders VS Debtholders
 Phương Xuân Limited Liability Company has a
debt of 100 bil. on the balance sheet payable in
one year. Value of all asset is now 80 bil.
 There is one investment opportunity available:
Initial investment 50 bil. In one year there is a
probability of 30% that the return is 100 bil (win).
and 70% that the return is 0 (fail).
 Phương Xuân is the only owner and manager of
the company. Phương Xuân owns a house
whose value is 10 bil.. She also has a 10 bil
bank deposit.
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 Case 3: Shareholders VS Debtholders
1. If Phuong Xuan decides not to invest. In one year, the
value to Phuong Xuan and debtholders will be:
a/ 80 bil and 20 bil b/ 100 bil and 0 bil
c/ Other
2. If Phuong Xuan decides to invest and fail, in one year
the value to Phuong Xuan and debtholders will be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 50 bil and 0 bil d/ Other

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 Case 3: Shareholders VS Debtholders
3. If Phuong Xuan decides to invest and win. In one year,
the value to Phuong Xuan and debtholders will be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 100 bil and 50 bil d/ Other
4. If you were Phuong Xuan, what would you do?
a/ Invest b/ Do not invest
c/ Go America d/ Other

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 Case 4: Share Issues in Financial Distress
 Phương Xuân Limited Liability Company has a
debt of 100 bil. on the balance sheet payable in
one year. Value of all asset is now 40 bil.
 There is one investment opportunity available:
Initial investment 50 bil. In one year there is a
probability of 70% that the return is 100 bil (win).
and 30% that the return is 0 (fail).
 Lenders refuse to lend. Phuong Xuan can only
raise capital through equity issue.

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 Corporate governance and performance
• Duality
• Independence of board
• Board size
• Managerial ownership
• Institutional ownership
• State ownership
• Foreign Ownership
• Ownership concentration
• Block Shareholder
• …..
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• End of Chapter 1

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