Financia

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Financial
Management
Manage
Chapter one ment

( FMI ) Romario
RomarioKhaled
Khaled
2024 01271535731
01271535731
01149154059
01149154059
Financial Management [CHAPTER ONE]

Chapter 1
INTRODUCTION TO FINANCIAL MANAGEMENT

Learning objective
1-Definition of Finance.
2-Financial Activities/Decisions and the Role of the Financial Manager.
3-The Goal of the Firm.
4-The Main Principles of Finance

1- what is Finance.
Finance can be defined as the science and art ,of managing (allocating)
( money/ funds/capital )over time.
It is the study of how individuals and businesses evaluate investments (investment
decision) and how to raise funds ( finance decision ) to finance them.
- Finance, also, is related to how individuals and businesses make choices between
current spending ( spending ) or receiving money at the present time
versus sometime in the future.(saving )

1-2 Are Finance exercised with individual or business ?.

- Finance function can be exercised at the individual level and at a business level

Individual level Business level (Corprate Finance )

how an individual manages his/her money -planning and managing long term
investment (capital budgeting)
decisions about how much of their earnings - managing long term sources of funds
they (that is the mix between debt and equity)
(spend, save and how they invest their (capital structure),
savings.)
- managing the firm working capital
(short term investment (current assets)
and
(short-term sources of funds (current
liabilities)
and safeguarding that the firm in good
liquidity position to maintain its day-to-day
operations.
- Finance is concerned with the decision-
making process, financial institutions,
financial markets, and financial instruments

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Financial Management [CHAPTER ONE]

1-3 What is the Career Opportunities in Finance ?

There are only two Career opportunity ( Financial management Or Services )

Financial management Financial Services

It is concerned with design and delivery of financial advice and
the tasks, duties and activities of financial products for different economic
the financial manager working in a sectors of the economy
business. such as
(CFO) individuals, businesses, and government.
( consulting Services )
1-4 What is The organizational level of the finance function ?
- In small firms, the finance function, may be performed by the company owner, or its
president or the accounting department
- In large firms, the finance function typically develops into a separate department or
sectorand is headed by Chief Financial officer (CFO) who reports directly to the president
of the firm (CEO) .
(CFO) is managing all the firm’s financial activities through two main offices of the firm:
A. Treasurer: which is responsible for the financial affairs/activities such as cash
management, credit management, capital expenditure, raising funds, financial planning,
management of foreign currencies, and
B. Controller: which is responsible for the accounting affairs/activities such as taxes,
preparing financial statements, cost control

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Financial Management [CHAPTER ONE]

Most common MCQ and (T&F) of this part and Exams

A financial analyst is responsible for maintaining and controlling the firm's daily cash
1 balances. Frequently manages the firm's short-term investments and coordinates short- FALSE
term borrowing and banking relationships.(Finance )
Finance is concerned with the process institutions, markets, and instruments involved in
2 the transfer of money among and between individuals, businesses and government. TRUE
3 Financial services are concerned with the duties of the financial manager(Management ) FALSE
Financial managers actively manage the financial affairs of many types of business-
4 financial and non-financial, private and public, for-profit and not-for-profit. TRUE
5 In large companies, the project finance manager is responsible for coordinating the assets
FALSE
and liabilities of the employees' pension fund.( Treasurer )
6 The corporate controller typically handles the accounting activities, such as tax
management, data processing, and cost and financial accounting. TRUE
7 Managerial finance is concerned with design and delivery of advice and financial products
FALSE
to individuals, business, and government (Services )
8 The corporate treasurer typically handles the both cost accounting and financial FALSE
accounting.(Control)
9 Managerial finance
A.) involves tasks such as budgeting, financial forecasting, cash management, and funds
procurement. A
B) involves the design and delivery of advice and financial products.
C) recognizes funds on an accrual basis.
D) devotes the majority of its attention to the collection and presentation of financial dat
1 Finance can be defined as
0 A) the system of debits and credits.
B) the science of the production, distribution, and consumption of wealth. C
C.) the art and science of managing money.
D) the art of merchandising products and services.
1 Financial service
1 A) is concerned with the duties of the financial manager.
B.) involves the design and delivery of advice and financial products.
C) provides guidelines for the efficient operation of the business. B
D) handles accounting activities related to data processing.
1 Career opportunities in financial services include all of the following EXCEPT
2 A) investments. B) real estate and insurance.
C.) capital expenditures management. D) personal financial planning C
1 ________ is concerned with the duties of the financial manager in the business firm.
3 A) Financial Services B) Financial Manager
C.) Managerial Finance D) None of the above C
1 ) The treasurer is commonly responsible for
4 A) taxes. B) data processing. C
C.) making capital expenditures. D) cost accounting.
1 The treasurer is commonly responsible for
5 A) taxes. B) data processing. C
C.) making capital expenditures. D) cost accounting.
1 The controller is commonly responsible for
6 A) managing cash. B.) financial accounting. B
C) managing credit activities D) financial planning.

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Financial Management [CHAPTER ONE]

2-Financial Activities/Decisions and the Role of the Financial Manager.

2-1-Financial Activities/Decisions

Second Perspective
Tactical Decision Strategic Decision
- Short term Investment Decision - Long term Investment Decision
( Current Assets ) ( Long term Assets )
- Short term Financial Decision - Long term Financial Decision
( short term Debt) ( Long term Debt)

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Financial Management [CHAPTER ONE]

2-2 - The Role of the Financial Manager.

- Developing strategic and tactical financial plans,
- Participating in formulating corporate strategy and implementing the financial strategy,
- Looking for the most efficient short /long sources of funds,
- Making strategic investment decisions (long term investment decisions),
- Making strategic financing decisions (long term financing decisions),
- Analyzing and evaluating continuously the financial position of the firm,
- Managing working capital, which includes management of the firm’s current (short
term) assets and liabilities and ensuring that the firm has sufficient resources to maintain
its day-to-day operations,
- Managing risk,
- Managing pension fund,
- Managing foreign exchange affairs.
1 Financial analysis and planning is concerned with analyzing the mix of assets and liabilities. FALSE
Financing decisions deal with the left-hand side of the firm's balance sheet and involve the
2 FALSE
most appropriate mix of current and fixed assets.
3 Managerial finance
A.) involves tasks such as budgeting, financial forecasting, cash management, and funds
procurement.
B) involves the design and delivery of advice and financial products. A
C) recognizes funds on an accrual basis.
D) devotes the majority of its attention to the collection and presentation of financial data.
The key role of the financial manager is
4 A.) decision making. B) the presentation of financial
statements.
A
C) the preparation of data for future evaluation. D) the collection of financial data.
5 The key activities of the financial manager include all of the following EXCEPT
A) making financing decisions. B) financial analysis and planning. C
C.) managing financial accounting. D) making investment decisions.
6 Included in the primary activities of the financial manager are
A) financial analysis and planning. B) making investment decisions.
C) making financing decisions. E.) all of the above. E
7 Making investment decisions includes all of the following EXCEPT
A) inventory. B) fixed assets.
C) accounts receivable. D) notes payable. D
8 Making financing decisions includes all of the following EXCEPT
A) determining the appropriate mix of short-term and long-term financing.
B) deciding which individual short-term sources are best at a given point in time. C
C.) analyzing quarterly budget and performance reports.
9 The financial manager's investment decisions determine
A.) both the mix and the type of assets found on the firm's balance sheet.
B) both the mix and the type of liabilities found on the firm's balance sheet. A
C) both the mix and the type of assets and liabilities found on the firm's balance sheet.
D) both the mix and the type of short-term and long-term financing.
1 The financial manager's financing decisions determine
0 A) both the mix and the type of assets found on the firm's balance sheet.
B.) the most appropriate mix of short-term and long-term financing. B
C) both the mix and the type of assets and liabilities found on the firm's balance sheet.

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Financial Management [CHAPTER ONE]

3-The Goal of the Firm.

3 – 2 – the problem of profit maximization

is the Lack of information on Profit maximiza

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3-3 Ethical and Agency Considerations in Corporate finance

4-The Main Principles of Finance

1- Principle number one: Money has a time value
The Inflation Risk and Time Value of money (1000 $ Now or 1000 $ after one Year)
Money Have Value is Deal inversely With Time and Inflation SO 1000 $ now is best than 1000 $
Tomorrow
2 - Principle number two: There is a risk-return tradeoff
Individuals would not take on additional risk unless they expect to be compensated with
additional return. This principal is based on the concept that individuals are risk averse.
Risk : “ is possibility of loss “ (price of Credit ) Cost of Capital .
Return : “ is The Price of Risk “
- Higher Risk expected higher return but decrease assets price
3 - Principle number three: Cash flows are the source of value
Profit : is an accounting concept designed to measure a firm’s performance over period.
Cash flow : is the amount of cash that has been taken over the same period.
4 - Principle number four: Market prices reflect information
- Investors react to new information through buying and selling securities.
- The efficiency of the market states that the prices of securities fully and fairly reflect all
relevant available information.
- Market efficiency therefore refers to both the speed and quality of the price adjustment
to new information.
- only new information that causes prices to change.

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Financial Management [CHAPTER ONE]

Difference between Financial Institution and Market

1 To achieve the goal of profit maximization for each alternative being considered, the financial True
manager would select the one that is expected to result in the highest monetary return
2 The wealth of corporate owners is measured by the share price of the stock. True
3 Risk and the magnitude and timing of cash flows are the key determinants of share price, which True
represents the wealth of the owners in the firm.
4 A high earnings per share (EPS) does not necessarily translate into a high stock price. True
5 The profit maximization goal ignores the timing of returns, does not directly consider cash flows, True
and ignores risk.
6 An increase in firm risk tends to result in a higher share price since the stockholder must be False
compensated for the greater risk
7 Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of False
return on investments of higher risk
8 The primary goal of the financial manager is C
A) minimizing risk. B) maximizing profit.
C.) maximizing wealth. D) minimizing return
9 Corporate owner's receive realizable return through
A) earnings per share and cash dividends.
B.) increase in share price and cash dividends.
B
C) increase in share price and earnings per share.
D) profit and earnings per share
10 The wealth of the owners of a corporation is represented by
A) profits. B) earnings per share. C
C.) share value. D) cash flow.
11 Wealth maximization as the goal of the firm implies enhancing the wealth of
A) the Board of Directors. B) the firm's employees. D
C) the federal government. D.) the firm's stockholders.
12 Profit maximization as a goal is not ideal because it does NOT directly consider
A.) risk and cash flow. B) cash flow and stock price. A
C) risk and EPS. D) EPS and stock price.

13 Profit maximization as the goal of the firm is not ideal because

A) profits are only accounting measures. C
B) cash flows are more representative of financial strength.
C.) profit maximization does not consider risk.
D) profits today are less desirable than profits earned in future years.

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14 Profit maximization fails because it ignores all EXCEPT

A) the timing of returns. B
B.) earnings per share.
C) cash flows available to stockholders.
D) risk.

15 Cash flow and risk are the key determinants in share price. Increased risk, other things remaining
the same, results in A
A.) a lower share price.
B) a higher share price.
C) an unchanged share price.
D) an undetermined share price
16 A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs
$35,000 and is expected to provide earnings over a three-year period as described below.

Based on the profit maximization goal, the financial manager would choose
A) Asset 1.
B.) Asset 2.
C) Asset 3.
D) Asset 4.
17 A financial manager must choose between three alternative investments. Each asset is expected to
provide earnings over a three-year period as described below. Based on the wealth maximization A
goal, the financial manager would

A) choose Asset 1.
B) choose Asset 2.
C) choose Asset 3.
D) be indifferent between Asset 1 and Asset 2.

18 The likelihood that managers may place personal goals ahead of corporate goals is called the True
agency problem.
19 The board of directors is responsible for managing day-to-day operations and carrying out the False
policies established by the chief executive officer.
20 The president or chief executive officer is elected by the firm's stockholders and has ultimate False
authority to guide corporate affairs and make general policy.
21 If a company's managers are NOT owners of the company, then they are B
A) dealers. B) agents.
C) outsiders. D) brokers.

23 The conflict between the goals of a firm's owners and the goals of its non-owner managers is A
A) the agency problem. B) incompatibility.
C) serious only when profits decline. D) of little importance in most large U.S. firms.
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24 The true owner(s) of the corporation is (are) the C

A) board of directors. B) chief executive officer.
C) stockholders. D) creditors.
25 The responsibility for managing day-to-day operations and carrying out corporate policies belongs B
to the
A) board of directors.
B) chief executive officer.
C) stockholders.
D) creditors.
26 In a corporation, the members of the board of directors are elected by the C
A) chief executive officer.
B) creditors.
C) stockholders.
D) employees.

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