Chapter 1: objectives and functions of financial management
• The role of the financial manager:
– In which assets should the firm invest?
➢ Investment decisions
– How can/should the firm finance these assets?
➢ Financing decisions
– How should the financial flows be managed?
➢ Financial planning
• What is the objective of financial management?
➢ Revenues/profit
➢ eg. A company currently has a profitability of 20% and a profit per share of € 2
(and no debts). The company can increase its profit through a new one to raise
share capital and invest the proceeds in a new project that will yield a return of
10%.
This operation does increase the absolute profit (to 30), but relatively speaking
the profitability for shareholders (earnings per share) decreased (to 1.5). Not just
it absolute amount of profit is important, but so is the size of the investment
required to realize the extra profit.
➢ Profits per share
➢ Value per share
• The creation of shareholder value
➢ Value is not determined by the current profit per share, but by the expected
future profits and the risk associated with these profits EX: Tesla
➢ In an “efficient” market, the market price of a share will reflect its value
==>if markets are correctly priced/efficient the price of the stock exchange will
tell what the company is worth today
• Maximisation is not always the (only) objective of a company
➢ We need to take the broader societal context into account
==>EX: pharma company, should the price of their products maximalize their
value or a price that makes the product accessible for everyone
, ➢
==>responsibility of a company in a broader context
• Corporate governance
➢ thinking about the optimal management structure within a company. Through
contractual relationships will the conflicting interests of the different parties be
balanced
➢ The agency-theory
▪ The agent (manager) acts in the interests of the principal
(shareholder) -->maximalize their value
➢ In reality, the interests of the agent can be different from those of the principal
▪ The agent may care more about his own interests than those of
the principal
▪ The shareholder lacks the information to have a full picture of
what the manager is doing
• The manager can use the firm to pursue his own
interests, at the expense of shareholder value
➢ Other agency-relations in a company
▪ Controlling shareholders versus minority shareholders
• Family firms listed on a stock exchange
▪ Shareholders versus debtholders
• The debtholders (principals) make financial resources
available to management and the shareholders (agents)
• Shareholders prefer high dividends, because there is less
in the company financial resources remain which
debtholders can seize(=beslag op leggen). Shareholders
are also prone(=geneigd) to increase the risk of
investment, especially when it already goes bad with the
company. This happens at the expense of debtholders
because they then certainly not get their debt repaid.
▪ Also customers, suppliers, employees and the state have
interests in the firm
Chapter2: Basic valuation concepts
• Future value (FV)
, ➢ E = B * (1+i)
▪ E = end value or future value
▪ B = present value
▪ i = interest rate over the period
▪ t = number of periods
▪ (1 + i)^t = discount factor
➢ EX: Assume you invest € 1000 for 1 year at 5%. What will be the value after one
year?
▪ Interest = 1000 x 0,05 = 50
▪ Value after one year = principle + interest = 1000 + 50 = 1050
▪ Future value = 1000 x (1 + 0,05) = 1050
➢ If you invest this sum again for one year, what will be the value after two years?
▪ Future value = 1000 x (1,05) x (1,05) = 1000 x (1,05)2 = 1102,50
➢
Grandpa gives his youngest granddaughter a sum of € 30.000, which will be invested at an annual
interest rate of 7%
(a) How much money will the granddaughter have when she is 21 years old?
(b) What if grandpa would only give her € 20.000?
Grandpa wants his grandson, who is now 10 years old, to have the same capital as his granddaughter
when he’s 21 years old, i.e. € 124.217.
(a) What amount should grandpa invest if the annual interest rate is 7%?
(b) What if the grandson is already 15 years old?
, ➢ Future value of € 1, invested at an interest rate i for n years
➢ Present value of € 1, to be received in n years at an interest rate i
• Interest periodicity less than one year
➢ En = B * (1 + i/m)n*m
o N=number of years
o M=interest periodicity
o B = En / (1 + i/m)n*m
• The role of the financial manager:
– In which assets should the firm invest?
➢ Investment decisions
– How can/should the firm finance these assets?
➢ Financing decisions
– How should the financial flows be managed?
➢ Financial planning
• What is the objective of financial management?
➢ Revenues/profit
➢ eg. A company currently has a profitability of 20% and a profit per share of € 2
(and no debts). The company can increase its profit through a new one to raise
share capital and invest the proceeds in a new project that will yield a return of
10%.
This operation does increase the absolute profit (to 30), but relatively speaking
the profitability for shareholders (earnings per share) decreased (to 1.5). Not just
it absolute amount of profit is important, but so is the size of the investment
required to realize the extra profit.
➢ Profits per share
➢ Value per share
• The creation of shareholder value
➢ Value is not determined by the current profit per share, but by the expected
future profits and the risk associated with these profits EX: Tesla
➢ In an “efficient” market, the market price of a share will reflect its value
==>if markets are correctly priced/efficient the price of the stock exchange will
tell what the company is worth today
• Maximisation is not always the (only) objective of a company
➢ We need to take the broader societal context into account
==>EX: pharma company, should the price of their products maximalize their
value or a price that makes the product accessible for everyone
, ➢
==>responsibility of a company in a broader context
• Corporate governance
➢ thinking about the optimal management structure within a company. Through
contractual relationships will the conflicting interests of the different parties be
balanced
➢ The agency-theory
▪ The agent (manager) acts in the interests of the principal
(shareholder) -->maximalize their value
➢ In reality, the interests of the agent can be different from those of the principal
▪ The agent may care more about his own interests than those of
the principal
▪ The shareholder lacks the information to have a full picture of
what the manager is doing
• The manager can use the firm to pursue his own
interests, at the expense of shareholder value
➢ Other agency-relations in a company
▪ Controlling shareholders versus minority shareholders
• Family firms listed on a stock exchange
▪ Shareholders versus debtholders
• The debtholders (principals) make financial resources
available to management and the shareholders (agents)
• Shareholders prefer high dividends, because there is less
in the company financial resources remain which
debtholders can seize(=beslag op leggen). Shareholders
are also prone(=geneigd) to increase the risk of
investment, especially when it already goes bad with the
company. This happens at the expense of debtholders
because they then certainly not get their debt repaid.
▪ Also customers, suppliers, employees and the state have
interests in the firm
Chapter2: Basic valuation concepts
• Future value (FV)
, ➢ E = B * (1+i)
▪ E = end value or future value
▪ B = present value
▪ i = interest rate over the period
▪ t = number of periods
▪ (1 + i)^t = discount factor
➢ EX: Assume you invest € 1000 for 1 year at 5%. What will be the value after one
year?
▪ Interest = 1000 x 0,05 = 50
▪ Value after one year = principle + interest = 1000 + 50 = 1050
▪ Future value = 1000 x (1 + 0,05) = 1050
➢ If you invest this sum again for one year, what will be the value after two years?
▪ Future value = 1000 x (1,05) x (1,05) = 1000 x (1,05)2 = 1102,50
➢
Grandpa gives his youngest granddaughter a sum of € 30.000, which will be invested at an annual
interest rate of 7%
(a) How much money will the granddaughter have when she is 21 years old?
(b) What if grandpa would only give her € 20.000?
Grandpa wants his grandson, who is now 10 years old, to have the same capital as his granddaughter
when he’s 21 years old, i.e. € 124.217.
(a) What amount should grandpa invest if the annual interest rate is 7%?
(b) What if the grandson is already 15 years old?
, ➢ Future value of € 1, invested at an interest rate i for n years
➢ Present value of € 1, to be received in n years at an interest rate i
• Interest periodicity less than one year
➢ En = B * (1 + i/m)n*m
o N=number of years
o M=interest periodicity
o B = En / (1 + i/m)n*m
