C
FINANCIAL MANAGEMENT
2024-2025
This summary consists of all topics discussed in the course Financial Management, taught by professor Deloof at the
faculty of FBE at the University of Antwerp.
1
,CHAPTER 1. Objectives and functions of financial management
1. The role of the financial manager
The financial manager has to make 3 decisions within the firm
● investment decisions
○ In which assets should the firm invest?
○ calculate the value of different possible projects and decide which to invest in
● financing decisions
○ How can/should the firm finance these assets?
○ e.g. debts, equity …
○ determine the fixed financial costs of the company and the financial risk
● financial planning
○ How should the financial flows be managed?
○ make sure there is enough money at all times
○ make sure there is not too much money: pile of cash that does not yield leads to a low ROI
2. The objective of financial management
Maximisation of
● revenues, but then you don’t take into account the costs
● profits, but then you don’t take into account how much each shareholder has invested
→ profits go to the shareholders so we have to relate the profits to the amount invested
● profits per share, but then you don’t take into account the amount of risk each share holds
● value per share
Value per share = positively affected by the expected future profits and by the risk associated with these profits
● stock price = how much investors are willing to pay per share
→ gives you an estimate of the value of the stock
● current market price = determined by the expected profits in the future, so we have to take this
into account, rather than the earnings today
𝑝𝑟𝑜𝑓𝑖𝑡
Profitability = 𝑒𝑞𝑢𝑖𝑡𝑦
2.1 The creation of shareholder value
Shareholder value is not determined by the current profit per share, but by the expected future profits and the risk
associated with these profits.
● more uncertainty about the future profits lead to a higher risk
● in an “efficient” market, the market price of a share will reflect its value
Shouldn’t companies also take into account the broader societal context?
● traditionally, we say that the company’s objective is to maximize the value of the shares
● for a number of years, companies have been claiming to have a broader objective: ESG
→ ESG = Environmental, Social and Governance
2
,Objectives reported by companies themselves
● society as a whole has become equally as important as corporate performance over the years
● company objectives go beyond the maximization of the value per share, as customers are more
important than shareholders according to the ranking
In this course, we’ll assume that value maximization is the objective of the firm.
3. Corporate governance
Corporate governance can be interpreted in many different ways. We look at it from the perspective of the
shareholders of the firm (narrow perspective).
Corporate governance = the governance of the firm so that the shareholders can make sure that the management
of the company will maximize the shareholder value
→ problem: conflicts of interest between the management and the shareholders of a company
The agency-theory
● the agent (manager) acts in the interest of the principal (shareholder)
● in reality, the interests of the agent can be different from those of the principal
○ agent may care more about his own interest than those of the principal (eg. own prestige)
○ principal lacks the information to have a full picture of what the agent is doing
→ manager can use firm to pursue his own interests, at the expense of shareholder value
Other agency-relations in a company
● controlling shareholders ⇔ minority shareholders (eg. family firms listed on a stock exchange)
○ family owners control the firm, but may have different interests than minority
shareholders
○ minority shareholders assume that the family shareholders take actions that are good for
all shareholders, not only for themselves
● shareholders ⇔ debtholders
○ debtholders want to receive interest on their debts to be paid
→ maximizing shareholder value may be at the expense of the value of the debtholders
○ shareholders can take money for themselves (dividends), leaving less for debtholders
● also customers, suppliers, employees and the state have interests in the firm
3
, PART 1: VALUATION PRINCIPLES
CHAPTER 2. Basic valuation concepts
1. Present value and future value
𝑡
𝐸 = 𝐵 · (1 + 𝑖)
● E = end value = future value
● B = present value
● i = interest rate over the period
● t = number of periods
𝑡
● (1 + 𝑖) = discount factor
𝐸
𝐵= 𝑡
(1+𝑖)
Principle of compound interest = earning interest on both the initial principal and the accumulated interest over time
Future value of €1, invested at an interest rate i for n years
→ the longer the period and the higher the interest rate, the higher the future value
Present value of €1, to be received in n years at an interest rate i
→ the longer the period and the higher the interest rate, the lower the present value
4
FINANCIAL MANAGEMENT
2024-2025
This summary consists of all topics discussed in the course Financial Management, taught by professor Deloof at the
faculty of FBE at the University of Antwerp.
1
,CHAPTER 1. Objectives and functions of financial management
1. The role of the financial manager
The financial manager has to make 3 decisions within the firm
● investment decisions
○ In which assets should the firm invest?
○ calculate the value of different possible projects and decide which to invest in
● financing decisions
○ How can/should the firm finance these assets?
○ e.g. debts, equity …
○ determine the fixed financial costs of the company and the financial risk
● financial planning
○ How should the financial flows be managed?
○ make sure there is enough money at all times
○ make sure there is not too much money: pile of cash that does not yield leads to a low ROI
2. The objective of financial management
Maximisation of
● revenues, but then you don’t take into account the costs
● profits, but then you don’t take into account how much each shareholder has invested
→ profits go to the shareholders so we have to relate the profits to the amount invested
● profits per share, but then you don’t take into account the amount of risk each share holds
● value per share
Value per share = positively affected by the expected future profits and by the risk associated with these profits
● stock price = how much investors are willing to pay per share
→ gives you an estimate of the value of the stock
● current market price = determined by the expected profits in the future, so we have to take this
into account, rather than the earnings today
𝑝𝑟𝑜𝑓𝑖𝑡
Profitability = 𝑒𝑞𝑢𝑖𝑡𝑦
2.1 The creation of shareholder value
Shareholder value is not determined by the current profit per share, but by the expected future profits and the risk
associated with these profits.
● more uncertainty about the future profits lead to a higher risk
● in an “efficient” market, the market price of a share will reflect its value
Shouldn’t companies also take into account the broader societal context?
● traditionally, we say that the company’s objective is to maximize the value of the shares
● for a number of years, companies have been claiming to have a broader objective: ESG
→ ESG = Environmental, Social and Governance
2
,Objectives reported by companies themselves
● society as a whole has become equally as important as corporate performance over the years
● company objectives go beyond the maximization of the value per share, as customers are more
important than shareholders according to the ranking
In this course, we’ll assume that value maximization is the objective of the firm.
3. Corporate governance
Corporate governance can be interpreted in many different ways. We look at it from the perspective of the
shareholders of the firm (narrow perspective).
Corporate governance = the governance of the firm so that the shareholders can make sure that the management
of the company will maximize the shareholder value
→ problem: conflicts of interest between the management and the shareholders of a company
The agency-theory
● the agent (manager) acts in the interest of the principal (shareholder)
● in reality, the interests of the agent can be different from those of the principal
○ agent may care more about his own interest than those of the principal (eg. own prestige)
○ principal lacks the information to have a full picture of what the agent is doing
→ manager can use firm to pursue his own interests, at the expense of shareholder value
Other agency-relations in a company
● controlling shareholders ⇔ minority shareholders (eg. family firms listed on a stock exchange)
○ family owners control the firm, but may have different interests than minority
shareholders
○ minority shareholders assume that the family shareholders take actions that are good for
all shareholders, not only for themselves
● shareholders ⇔ debtholders
○ debtholders want to receive interest on their debts to be paid
→ maximizing shareholder value may be at the expense of the value of the debtholders
○ shareholders can take money for themselves (dividends), leaving less for debtholders
● also customers, suppliers, employees and the state have interests in the firm
3
, PART 1: VALUATION PRINCIPLES
CHAPTER 2. Basic valuation concepts
1. Present value and future value
𝑡
𝐸 = 𝐵 · (1 + 𝑖)
● E = end value = future value
● B = present value
● i = interest rate over the period
● t = number of periods
𝑡
● (1 + 𝑖) = discount factor
𝐸
𝐵= 𝑡
(1+𝑖)
Principle of compound interest = earning interest on both the initial principal and the accumulated interest over time
Future value of €1, invested at an interest rate i for n years
→ the longer the period and the higher the interest rate, the higher the future value
Present value of €1, to be received in n years at an interest rate i
→ the longer the period and the higher the interest rate, the lower the present value
4
