Lecture Note
Financial Management Essentials
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University:
University of North Carolina at Charlotte -
Course:
FINN3120 | Financial Management Academic year:
2023
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Views:
281
Pages:
4
Author:
vandropvp
Financial Management Class Notes
Page 1
I. Introduction to Financial Management
Financial management defined: The process of planning, organizing, directing, and controlling a
firm's financial resources to achieve its goals.
Role of financial managers: Maximizing shareholder value, optimizing capital structure,
managing risk.
II. Financial Statements and Analysis
Income Statement:
Reports revenues, expenses, and net income over a specific period.
Key measures: Gross profit, operating income, net income.
Balance Sheet:
Presents assets, liabilities, and owner's equity at a specific point in time.
Helps assess liquidity, solvency, and financial position.
Statement of Cash Flows:
Summarizes cash inflows and outflows from operating, investing, and financing activities.
Analyzing cash generation and usage.
III. Time Value of Money (TVM)
Future Value (FV) and Present Value (PV):
FV: Value of money in the future after earning interest.
PV: Value of future cash flows discounted to the present. Compound Interest and Discounting:
Compound interest: Interest on both initial investment and accumulated interest.
Discounting: Reducing future cash flows to present value.
Annuities and Perpetuities:
Annuity: Series of equal cash flows over time.
Perpetuity: Infinite series of equal cash flows.
Page 2
IV. Capital Budgeting
Investment Appraisal Methods:
Payback period, net present value (NPV), internal rate of return (IRR).
NPV: Sum of discounted cash flows minus initial investment.
Capital Rationing:
Allocating limited resources to competing investment projects.
Selecting projects with highest NPV per dollar invested.
Risk and Uncertainty in Capital Budgeting:
Sensitivity analysis, scenario analysis, simulation.
Incorporating risk into project evaluations.
V. Cost of Capital and Capital Structure
Weighted Average Cost of Capital (WACC):
Weighted average of firm's cost of equity and cost of debt. Used to discount future cash flows in capital budgeting.
Optimal Capital Structure:
Balancing debt and equity to minimize cost of capital.
Trade-off between lower cost of debt and increased financial risk.
Financial Leverage and Earnings Per Share (EPS):
Financial leverage magnifies both gains and losses.
Impact on EPS due to interest expense and tax shield.
Page 3
VI. Working Capital Management
Current Assets and Current Liabilities:
Managing short-term assets (cash, inventory) and liabilities (accounts payable).
Balancing liquidity and profitability.
Cash Conversion Cycle:
Period between paying for raw materials and receiving cash from sales.
Minimizing cycle duration to optimize working capital.
Credit Policies and Receivables Management:
Setting credit terms, monitoring accounts receivable.
Balancing risk of non-payment and sales growth.
VII. Dividend Policy and Valuation
Dividend Policy Theories: Dividend irrelevance theory, dividend relevance theory.
Residual dividend approach vs. stable dividend policy.
Dividend Yield and Dividend Payout Ratio:
Dividend yield: Dividends per share divided by stock price.
Dividend payout ratio: Dividends per share divided by earnings per share.
Valuation Methods:
Dividend discount model (DDM), discounted cash flow (DCF), price-to-earnings (P/E) ratio.
Estimating intrinsic value of stocks.
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