2. FINANCIAL MANAGEMENT

3. Variables Affecting System Behavior SYSTEM Leadership Sources

4. BUSINESS UNIT Business unit is a sociotechnical system that processes the production factors into economical goods and services for profit. Business units have vital importance in pushing the living standarts of the public.

5. Organizing A Business Sole Proprietorships PartnershipsCorporations

6. Characteristics of Business Organizations Characteristics Sole Prop. Partner.Corp. OwnershipManagerPartnersShareholders Manager-Owner Seperation SameSame Usually Seperated Owner’s Liability UnlimitedUnlimitedLimited Taxing Personal Income Personal Income &Corporate Tax

7. Assets Real Assets:Used to produce goods & services Tangible: Machinery, factory, offices Intangible:Trade mark,patents,technical expertise Financial Assets: Claims to the income generated by real assets. Also called securities.

8. Basic Problems Capital Budgeting Decision What real should the Firm acquire? What real should the Firm acquire? Financing Decision How should cash be raised to finance real investments?

9. The Role of Financial Manager Firm’s Operations Real Assets Financial Manager Investors Money Flows

10. The Role of Financial Markets Firm’s Operations Real Assets Financial Manager Investors Money Flows Financial Markets Stock Markets Bond Markets Foreign Exchange etc. Financial Intermediaries Mutual Funds Pension Funds Financial Institutions Banks Insurance Companies

11. Goals of The Financial Management Shareholders desire wealth maximization! Shareholders desire wealth maximization! Do managers maximize shareholder wealth? Do managers maximize shareholder wealth? Max VALUE = f ( I, F ) Max VALUE = f ( I, F, D )

12. Profitability Economy of Scale Productivity

13. Units Unit PriceTOTAL Rate of Productivity Gross Total Rate of Commission Com. PaidNet Total Rate of Profitability 10 10010%1100,200%0,22109,789,78% 100101.00010%1.1000,100%1,101.098,909,89% 10001010.00010%11.0000,050%5,5010.994,509,95% 25001025.00010%27.5000,020%5,5027.494,509,98% Productivity & Profitability & Economic of Scale

14. Financial Leverage Rate of Return Cost of Debt Equity Total Source Rate of Return Cost of Debt Gross Income Debt+ Cost of debt Net Income Total Income Profitability of Invesment 010000 15%0%11500015001150015% 10000 2000015%5%230001050025001250025% 10000 2000015%20%230001200010001100010% If the cost of debt < the rate of return; the profitability of investment increases If the cost of debt > the rate of return; the profitability of investment decreases

15. Financial Leverage (Effects of Debt-Equity Ratio) Amount of Equity Amount of Debt Equity Total Source Rate of Return Cost of Debt Gross Income Debt+ Cost of debt Net Income Total Income Profitability of Invesment 010000 15%0%11500015001150015% 20000100003000015%25%3450025000-5009500-5% 10000200003000015%25%345001250020001200012% If the amount of debt < the amount of equity; the profitability of investment decreases If the amount of debt > the amount of equity ; the profitability of investment increases