H1: Objectives and functions of financial
management
Which objective?
- Financial manager
o Investment decisions: in which assets?
o Financing decisions: how to finance these assets to minimize
capital cost?
o Financial planning: how to manage financial flows (in and out)?
- Objective financial management
o Maximisation of revenues, profits, profits per share, value per
share, …?
VOORBEELD
20% profitability rate, profit per share of €2 => issue
new equity and invest the proceeds in 10% bonds
=> actual profit went up but profit per share went down
o Creation of shareholder value
Value = not determined by current profit per share but
by expected future profits and the risk associated with
these profits
Efficient market = market price of a share will reflect its
value
o Critic
but is value maximization really the objective of companies,
shouldn’t we consider the broader societal context
- ESG/CSR
o Business practices that go beyond profit-making to positively
impact society: environmental social and governance (ESG),
corporate social responsibility (CSR)
o Key areas
environment, community engagement, ethical labour
practices, corporate governance
o Objectives
build trust, enhance brand reputation, ensure LT sustainability
(= society as a whole)
Different objectives: corporate performance, other
stakeholders
, o VOORBEELD
reducing carbon footprint, fair trade sourcing, supporting local
communities
Which objective, do firms really have an objective: in this course
we’ll assume that value maximization (profit) is the objective of the
firm
Corporate governance
- Meaning
o How can shareholders make sure that the management of the
company will maximise shareholder value?
o Problem: conflicts of interest between the management and
the shareholders of a company
Sometimes the best thing for management is not the
best thing for shareholders and vice versa
- The agency theory
o Agent (manager) acts in the interests of the principal
(shareholder)
o Reality: interest of agent can be different from those of the
principal
Agent may care more about his own interests
Shareholders lacks info to have full picture of what
manager is doing: manager can use the firm to pursue
his own interests at the expense of shareholder value
- Other agency relations
o Controlling shareholders VS minority shareholders: family firms
listed on a stock exchange
o Shareholders VS debtholders: max. shareholder value may be
at the expense of the value of debtholders
o Customers, suppliers, employees and the state have interests
in the firm
, H2: Basic valuation concepts
Present value and future value
- Future value
o €1000 for 1 year at 5%
Interest = 1000 x 0,05 = 50
Value after one year = principle + interest = 1050
Future value = 1000 x (1 + 0,05) = 1050
o After 2 years: 1000 x (1,05) x (1,05) = 1000 x (1,05)2 =
1102,50
o Annual interest settlement: E = B x (1 + i)t
E = end value or future value
B = present value
i = interest rate over the period
t = number of periods
(1 + i)t = discount factor
E
o Principle of compound interest: B = t
(1+i)
o VOORBEELD dia 5 – 9
Interest periodicity < 1 year
, i
- Formula: E = B x (1 + )m x n
m
n = number of years, m = ratio to a year, frequency
o The end value increases as the number of interest settlements
per year (frequency) and the number of years increase
- Continuous interest settlement: En = B x e(i x n)
o VOORBEELD dia 18, 20
- Present value
En
o With periodicity < 1 year: B = i
mx n
(1+ )
m
En
o With continuous interest settlement: B = (i x n)
e
Future and present value of a series of different CF
- Problem
in most economic problems cashflows Ct (t = 1, …, n) are received or
paid at different points in time
- Present value
o Infinite series of CF
∞ ∞
C 1 C
Equal CF = perpetuity: B=∑ =C x ∑ =
t =1 ( 1+i)
t
t=1 (1+i)
t
i
Constantly growing CF
If series of CF is not contant but grows at constant
growth rate g: C n=C 0 (1+g)n
With growth rate lower than discount rate (g < i)
∞
Ct ∞
(1+ g)
t
C1
B=∑ =C 0 ∑
x =
t =1 (1+i)
t
t=1 (1+i)
t
i−g
o Finite series (ending in year n) of CF
Equal CF = annuities:
Annuity factor (AF) = last factor by which constant
annuity flow is multiplied
- Future value
o Finite series of CF
Annuity flow: E = B x (1 + i)t
VOORBEELD dia 28
management
Which objective?
- Financial manager
o Investment decisions: in which assets?
o Financing decisions: how to finance these assets to minimize
capital cost?
o Financial planning: how to manage financial flows (in and out)?
- Objective financial management
o Maximisation of revenues, profits, profits per share, value per
share, …?
VOORBEELD
20% profitability rate, profit per share of €2 => issue
new equity and invest the proceeds in 10% bonds
=> actual profit went up but profit per share went down
o Creation of shareholder value
Value = not determined by current profit per share but
by expected future profits and the risk associated with
these profits
Efficient market = market price of a share will reflect its
value
o Critic
but is value maximization really the objective of companies,
shouldn’t we consider the broader societal context
- ESG/CSR
o Business practices that go beyond profit-making to positively
impact society: environmental social and governance (ESG),
corporate social responsibility (CSR)
o Key areas
environment, community engagement, ethical labour
practices, corporate governance
o Objectives
build trust, enhance brand reputation, ensure LT sustainability
(= society as a whole)
Different objectives: corporate performance, other
stakeholders
, o VOORBEELD
reducing carbon footprint, fair trade sourcing, supporting local
communities
Which objective, do firms really have an objective: in this course
we’ll assume that value maximization (profit) is the objective of the
firm
Corporate governance
- Meaning
o How can shareholders make sure that the management of the
company will maximise shareholder value?
o Problem: conflicts of interest between the management and
the shareholders of a company
Sometimes the best thing for management is not the
best thing for shareholders and vice versa
- The agency theory
o Agent (manager) acts in the interests of the principal
(shareholder)
o Reality: interest of agent can be different from those of the
principal
Agent may care more about his own interests
Shareholders lacks info to have full picture of what
manager is doing: manager can use the firm to pursue
his own interests at the expense of shareholder value
- Other agency relations
o Controlling shareholders VS minority shareholders: family firms
listed on a stock exchange
o Shareholders VS debtholders: max. shareholder value may be
at the expense of the value of debtholders
o Customers, suppliers, employees and the state have interests
in the firm
, H2: Basic valuation concepts
Present value and future value
- Future value
o €1000 for 1 year at 5%
Interest = 1000 x 0,05 = 50
Value after one year = principle + interest = 1050
Future value = 1000 x (1 + 0,05) = 1050
o After 2 years: 1000 x (1,05) x (1,05) = 1000 x (1,05)2 =
1102,50
o Annual interest settlement: E = B x (1 + i)t
E = end value or future value
B = present value
i = interest rate over the period
t = number of periods
(1 + i)t = discount factor
E
o Principle of compound interest: B = t
(1+i)
o VOORBEELD dia 5 – 9
Interest periodicity < 1 year
, i
- Formula: E = B x (1 + )m x n
m
n = number of years, m = ratio to a year, frequency
o The end value increases as the number of interest settlements
per year (frequency) and the number of years increase
- Continuous interest settlement: En = B x e(i x n)
o VOORBEELD dia 18, 20
- Present value
En
o With periodicity < 1 year: B = i
mx n
(1+ )
m
En
o With continuous interest settlement: B = (i x n)
e
Future and present value of a series of different CF
- Problem
in most economic problems cashflows Ct (t = 1, …, n) are received or
paid at different points in time
- Present value
o Infinite series of CF
∞ ∞
C 1 C
Equal CF = perpetuity: B=∑ =C x ∑ =
t =1 ( 1+i)
t
t=1 (1+i)
t
i
Constantly growing CF
If series of CF is not contant but grows at constant
growth rate g: C n=C 0 (1+g)n
With growth rate lower than discount rate (g < i)
∞
Ct ∞
(1+ g)
t
C1
B=∑ =C 0 ∑
x =
t =1 (1+i)
t
t=1 (1+i)
t
i−g
o Finite series (ending in year n) of CF
Equal CF = annuities:
Annuity factor (AF) = last factor by which constant
annuity flow is multiplied
- Future value
o Finite series of CF
Annuity flow: E = B x (1 + i)t
VOORBEELD dia 28
