Financial Management Lecture for MBA students

1. Financial
Management

2. Introduction
• Finance differ completely from accounting.
• Every organization has its own organizational
chart .
CEO
----- ----- CFO
FinanceAccounting

3. CFO tasks/objectives
 1 - Financial Analysis:
TOOLS a. Sources & Uses of money (not cash).
b. Financial Ratios.
c. Net work of Ratios.
d. Modern technique of analysis
 2- Financial Forecasting:
Does every organization has to forecast??
TOOLS
a. Forecasted Financial Position.
b. Percentage of sales method.
c. Linear Regression Analysis.
MVA
EVA

4. CFO tasks/objectives (cont).
3- Financial Planning & Control:
Does every organization has to plan and control??
TOOLS
a. Budgeting
b. Breakeven analysis.
 4- Financial Hierarchy:
TOOLS
a. Sources of Finance.
b. Costs of Finance.
c. WACC….( weighted average cost of capital)

5. CFO tasks/objectives (cont).
5- Investment& Financial decisions:
2cases
Under uncertaintyUnder certainty
Capital Budgeting
Investment Profitability analysis
using
Discounted Cash flow
methods
PBPSRP NPV IPR

6. CFO tasks/objectives (cont).
6- Asset Management
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1- Types of Companies.
2- Types of shares.
3- Types of Capital.
4- Shares VS bonds..
5- Financial Statements..
6- Value of shares.
7- Agency Relationship Problems.

7. Types of Companies
1- Sole Trader / Sole Proprietorship:
Extremely flexible ….. Can take quick decisions
Two main problems:
1- No Separate legal entity.
2- Unlimited Liabilities.
- Company always ended by collapsing
when the owner dies.

8. Types of Companies (cont)
2- Partnership:
• (&)………… always stands for a partnership.
• Min (2) Max (20).
2 types of partnership
Active Silent
Limited LiabilityCopy & paste of
solo trader
N.B: S.A.E is a kind of partnership (lack of continuity)

9. Types of Companies (cont)
3- Corporate:
• Joint stock companies .
Types
(LTD) limited (PLC) public limited company
• Friends & Family Business
• Controlled.
• Trading shares in the stock market.
• Not easily controlled.
• IPO( Initially Public Offering)…….. For
first time to issue stocks in market.

10. Types of Companies (cont)
4- Holding Company:
It is not for production, just owner of subsidiaries
(companies).
ROLE: to improve the industry it works in.

11.  Regarding the
Corporate…………………………..
Shareholders elect BOD ( Board of
director) to be responsible for the
performance of the corporate and to
guarantee their profit at its maximum
value.
 AGM ( annual general meeting)… as
BOD represents the performance of the
corporate, consequently, the
shareholders either vote for or against
the continuity of the BOD.
Corporate

12. Types of Capital
1- Authorized Capital:
Divided to equal values= shares= votes= decision takers.
- Capital market authority.
N.B: authorized capital is the ceiling.
2- Paid in Capital:
It is 10% cash of the authorized capital.
Capital = Equity + Long term Liability
Working Capital = Current Asset - Current Liabilities

13. Types of Shares
1- Common / ordinary shares:
- One share= one vote, it can be treated either among
family (limited) or in the market
- Entitled to receive rate of gain (dividends) either through:
1- consistent shareholders
2- hit and run
2- Preferred Shares:
It has some sort of privilege as:
1- Predetermined rate of return.
2- When liquidation they take their money before the
ordinary shareholders.
N.B: not sharing in voting.

14. Types of Shares (cont)
3- Accumulated preferred shares:
• If the company can’t pay the preferred share,
for ex: if the dues of preferred shares is 1.5 M, and
the company pay only 1.2 M, SO by the next year the
preferred shares dues are =[1.5+0.3+(0.3+rate of %)],
it means it is accumulated.
• Upon distribution in the next year the priority will
be as following:
Accumulated Preferred shares.
Preferred shares.
Common shares.
FIRST
SECOND
THIRD

15. Types of Shares (cont)
1- Accumulated preferred shares is considered as
subtype of the preferred shares
2- the preferred shares are callable after (x ) years
3- Consequently, preferred shares are in between
ownership and debts.
4- If after the x years and it is the time for the
preferred shares to be called , and the company
can't pay it back so the owners have the right to
sell those PS outside the exchange market.

16. Types of Shares (cont)
Preferred shares Transferrable to Common shares
In this case the, the…………..
BUT, it has not to exceed the authorized capital (ceiling)

17. Why do the company
issue preferred shares??

18. Common Shares
• Ownership.
• Dividends.
• No maturity date.
• In between ownership
and debts.
• Interest.
• Has no maturity date.
Bonds
• IOU ……………..?
• Creditors.
• Way of getting money
from public or giving
certain money through
document.
• Interest .
• Has a maturity date.
• It is a crystal clear loan.
The Difference between
shares and bonds
Preferred Shares

19. 1- Preferred shares are more
expensive but of low risk .
2- If there is a risk so, no
need for bonds

20. The Golden Rule
Short Short
Long Long

21. Agency relationship
problems
Shareholders Hire BOD
Its
job
To maximize
Wealth
To maximize
Profit

22. BOD Vs Shareholder
Problem 1

23. BOD Vs creditors
Problem 2
• BOD always deceive banks to shows them that
they are of lower risk taker , BUT when they grasp
the money they become more risk taker
more risk = more return
Return is needed by BOD to continue business
and satisfy shareholders by giving them more
dividends.

24. Financial position
Financial
Position
Balance
Sheet
Replaced by

25. Sales
COGS
-----------------
Gross Profit
Expenses
-----------------
EBIT
Interest
----------------
EBT
Taxes
--------------
Net Profit
Preferred share
--------------------------------
Net Distributable Profit
Dividends
-----------------------------
Retained Earning
-
-
-
-
-
-
Income Statement
P&L

26. 1- Fixed Assets:
1- Land
2- Equipment
3- Building
4- Machine
5- Intangible Asset
6 – Long term investment
1
Financial position

27. 2- Current Asset:
1- Cash
2- Inventory
3- Debtors
4- A/R
2
Financial position (cont)
1 + = Total Assets

28. Financial position (cont)
3- Owner Equity:
1- Retained Earning
2- Paid in capital / Common shares.
3- Reserves.
N.B: Monetary equity = O/E + Preferred shares
N.B: R/E is belonging to company as a separate
entity and never goes to shareholders except on one
condition “Liquidation” of the company and after
repaying all the company debts.
3

29. Financial position (cont)
4- Long Term Liabilities:
1- Long Term Loans.
2- Long Term Bonds.
5- Current Liabilities:
1- Short term bonds& loan.
2- A/P or N/P.
3- Creditors or Supplier.
4- Accrual expenses.
4
5

30. 1 3 4+ = + +
Balance Equation
Total Assets M/E L.T.L S.T.L
DebtsCapital

31. Values of shares
1- Bar/ Nominal / face:
IPO/SPO/TPO/FPO……….. Usually 10 LE
2- Market Value:
It has no relation to the bar value.
3- Book value:
[Nominal value + ]
This value is considered as a measure of the wealth
regardless the market value
O/E
Number of shares

32. 4- Fair value ( fair stock):
Also called (the difference in asset reevaluation)
or (asset reevaluation premium).
- It is done only in two condition:
1- Going public.
2- Exiting one of the partner.
Values of shares