Chapter 1: Introduction to Financial Management

SHAREHOLDER’S
WEALTH MAXIMIZATION Presentation by: Engr. Jhon Kendrick T. Adriano
At the end of this discussion, learners will be able to:

1. have an appreciation of what the overall objective of

management should be;
2. describe the goals of the firm and explain why maximizing the
value of the firm is an appropriate goal for a business;
3. identify factors that influence the change in market price; and
4. develop self-confidence by sharing their answers and ideas with
the class.

2
 SELF-CHECK
1. How much is your daily 2. Write down all the items you
allowance? spend money on.
If not given daily, how much is your List the description and peso amount
average daily allowance? spent.

3. Compute the balance of your 4. If your answer is positive,

allowance. what do you do with the
Deduct the expenses you listed from money left?
your daily allowance. If your answer is negative, where do
you get additional money?

3
 FINANCE IN
EVERYDAY LIFE

4
 “
Activities involving decisions on where
to use your daily allowance is
FINANCE DECISION.

5
 “
FINANCE can be defined as the
science and art of managing money.
(Gitman & Zutter, 2012)

6
 “
Excess money presents an opportunity
INVESTMENTS. Investments come in many
forms that will generate income or appreciate
in the future.
(Chapter 6 – Introduction to Investments)

7
 “
BUDGETING is the act of estimating
revenue and expenses over a period of
time.
(Chapter 3 – Financial Planning and Working Capital
Management)

8
 “
When faced with financial difficulties, we look
for SOURCE OF FUNDS from people or
institutions that will give is the money we
need.
(Chapter 4 – Sources of Short-term and Long-term Funding)

9
FINANCE is concerned with decisions about:
How much
of their
earnings
they
spend?

How they How much

raise they save
additional FINANCE or how
funds they much they
need? need?

How they
invest
their
savings?
10
 FORMS OF BUSINESS ORGANIZATIONS

SOLE
PROPRIETORSHIP PARTNERSHIP CORPORATION
A business owned by A business owned by An entity created by
one person and two or more people law owned by
operated for his or her and operated for shareholders.
own profit. profit.

11
 How can you be a shareholder of a corporation?

STOCKS
Some of the big listed companies in the Philippines:
PLDT, Globe, JFC, BPI, BDO, SMC

12
 CORPORTION
PRIVATELY OWNED PUBLICLY OWNED
Privately owned corporations Companies which are publicly listed are owned
are often owned by family by unrelated investors and are traded in
members whose stocks may not organized exchanges like the Philippine Stock
be offered to outsiders unless Exchange. While there are many stockholders,
consent by the family members there is generally a group of investors or a family
is secured. which controls each listed company.
For example, in the case of BPI, the biggest
stockholder is Ayala Corporation and in the case
of BDO, it is SM Investment Corporation.

13
Is a profitable company a
successful company?
Can success be attributed to profitability only?

14
 “
Having a lot of cash has its advantages because the
company will always have enough cash to pay its
obligations.
But it also signals unhealthy company practices. It may
tell them that management has not been putting the
company’s resources into good use.

15
 “
Therefore, the overall objective of a shareholder
should be WEALTH MAXIMIZATION.

16
 How do we measure shareholder’s wealth?

Kendrick bought

10 shares of Globe Telecom

at ₱2,510 each
on September 9, 2010. This brings his investments to
₱25,100. What happens to the value of his investment if the
price goes up to ₱2,600 per share or it goes down to
₱2,300 per share?

17
 “
Shareholders’ wealth is measured based on the
CURRENT MARKET PRICE of the corporation’s stocks.
The market price changes across different periods.
Hence, the value of your investment changes in
different points on time based on the market value at
that time.

18
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY UNCONTROLLED
MANAGEMENT EXTERNAL FACTORS
1. Profitability 1. Macroeconomic
2. Having a good conditions
liquidity and 2. Political stability
reasonable leverage 3. Prospects of the
position industry where the
3. Dividends company operates
4. Competent 4. General market
management which sentiment
affects the company’s 5. Flow of foreign funds
operating efficiency invested in the
5. Coming up with Philippine Stock
corporate plans that Market (PSE)
improve the business
prospects of the
company
19
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY
MANAGEMENT

1. Profitability
2. Having a good liquidity and
reasonable leverage position
3. Dividends
4. Competent management
which affects the company’s
operating efficiency
5. Coming up with corporate
plans that improve the
business prospects of the
company

20
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY PROFITABILITY
MANAGEMENT
Profit is a measure of the financial
1. Profitability performance of a company for a period of
2. Having a good liquidity and time.
reasonable leverage position
3. Dividends
4. Competent management Although it is a major driver for increasing the
which affects the company’s value of stock, an investor should not rely on
operating efficiency
5. Coming up with corporate
profits alone. As discussed earlier, it is possible
plans that improve the that the company has profits but its cash flow
business prospects of the is negative.
company

21
COMPANY A COMPANY B
INCOME STATEMENT CASH FLOW INCOME STATEMENT CASH FLOW
Collection Collection
Sales ₱ 100,000 from ₱0 Sales ₱ 100,000 from ₱ 100,000
Customers Customers

Payment of Payment of
Less: Cost 50,000 Expenses
50,000 Less: Cost 150,000 Expenses
50,000

Net Cash Net Cash

Profits ₱ 50,000 Flow
(₱ 50,000) Profits (₱ 50,000) Flow
₱ 50,000

COMPANY C
INCOME STATEMENT CASH FLOW
Collection
Sales ₱ 100,000 from ₱ 100,000
Customers

Payment of
Less: Cost 70,000 Expenses
70,000

Net Cash
Profits ₱ 30,000 Flow
₱ 30,000
22
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY GOOD LIQUIDITY AND REASONABLE
MANAGEMENT LEVERAGE POSITION
1. Profitability Liquidity and leverage refers to the
2. Having a good liquidity and company’s management of the type and
reasonable leverage amount of assets and liabilities that it will
position
hold in the course of its operations.
3. Dividends
4. Competent management
which affects the company’s
operating efficiency
5. Coming up with corporate
plans that improve the
business prospects of the
company

23
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY DIVIDENDS
MANAGEMENT
Holders of shares receive dividends from a
1. Profitability corporation as returns on their investments
2. Having a good liquidity and in form of cash or other properties.
reasonable leverage position Companies which have better dividend
3. Dividends
policies are generally more attractive than
4. Competent management
which affects the company’s companies who do not pay out dividends.
operating efficiency
5. Coming up with corporate
plans that improve the
business prospects of the
company

24
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY COMPETENT MANAGEMENT
MANAGEMENT
Competent managers may have any of the
1. Profitability following attributes:
2. Having a good liquidity and
 Visionary
reasonable leverage position
3. Dividends  Decisive
4. Competent management
which affects the
 People-oriented
company’s operating  Inspiring
efficiency
5. Coming up with corporate
 Innovative
plans that improve the  Respected
business prospects of the
company  Experienced/Seasoned Manager

25
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY CORPORATE PLANS
MANAGEMENT
More concrete future prospects allowing
1. Profitability investors to hope for better revenues and net
2. Having a good liquidity and income.
reasonable leverage position
3. Dividends
4. Competent management
which affects the company’s
operating efficiency
5. Coming up with corporate
plans that improve the
business prospects of the
company

26
FACTORS THAT INFLUENCE MARKET PRICE
CONTROLLED BY UNCONTROLLED
MANAGEMENT EXTERNAL FACTORS
1. Profitability 1. Macroeconomic
2. Having a good conditions
liquidity and 2. Political stability
reasonable leverage 3. Prospects of the
position industry where the
3. Dividends company operates
4. Competent 4. General market
management which sentiment
affects the company’s 5. Flow of foreign funds
operating efficiency invested in the
5. Coming up with Philippine Stock
corporate plans that Market (PSE)
improve the business
prospects of the
company
27
FACTORS THAT INFLUENCE MARKET PRICE
UNCONTROLLED EXTERNAL UNCONTROLLED EXTERNAL FACTORS
FACTORS
These factors influences the general reaction
1. Macroeconomic conditions of investors in making an investment
2. Political stability decision.
3. Prospects of the industry
where the company operates
Its effect is not only to a specific company but
4. General market sentiment
5. Flow of foreign funds on all companies or a group of companies
invested in the Philippine under similar circumstances.
Stock Market (PSE)
Such factors are a result of the environment
a company operates in rather than the
decisions of the company’s management.

28
FACTORS THAT INFLUENCE MARKET PRICE
UNCONTROLLED EXTERNAL MACROECONOMIC CONDITIONS
FACTORS
Macroeconomics is the branch of economics
1. Macroeconomic conditions that studies the behavior and performance
2. Political stability of an economy as a whole. It focuses on the
3. Prospects of the industry aggregate changes in the economy such as
where the company operates
unemployment, growth rate, gross domestic
4. General market sentiment
5. Flow of foreign funds product and inflation.
invested in the Philippine
Stock Market (PSE)

https://economictimes.indiatimes.com/definition/macroeconomics

29
FACTORS THAT INFLUENCE MARKET PRICE
UNCONTROLLED EXTERNAL POLITICAL STABILITY
FACTORS
Economic growth and political stability are
1. Macroeconomic conditions deeply interconnected. Uncertainty
2. Political stability associated with an unstable political
3. Prospects of the industry environment may reduce investment and
where the company operates
the pace of economic development.
4. General market sentiment
5. Flow of foreign funds
invested in the Philippine
Stock Market (PSE)

http://blogs.worldbank.org/endpovertyinsouthasia/can-political-
stability-hurt-economic-growth

30
FACTORS THAT INFLUENCE MARKET PRICE
UNCONTROLLED EXTERNAL PROSPECTS OF THE INDUSTRY
FACTORS
Market prospects are a company's potential
1. Macroeconomic conditions future performance in a competitive
2. Political stability marketplace. In other words, a company's
3. Prospects of the industry market prospects are the company's
where the company
forecasted ability to compete in a
operates
4. General market sentiment marketplace.
5. Flow of foreign funds
invested in the Philippine
Stock Market (PSE)

https://www.myaccountingcourse.com/accounting-
dictionary/market-prospects

31
FACTORS THAT INFLUENCE MARKET PRICE
UNCONTROLLED EXTERNAL GENERAL MARKET SENTIMENTS
FACTORS
Market sentiment is the overall attitude of
1. Macroeconomic conditions investors toward a particular security or
2. Political stability financial market. Market sentiment is the
3. Prospects of the industry feeling or tone of a market, or its crowd
where the company operates
psychology, as revealed through the activity
4. General market sentiment
5. Flow of foreign funds and price movement of the securities traded
invested in the Philippine in that market.
Stock Market (PSE)

https://www.investopedia.com/terms/m/marketsentiment.asp

32
FACTORS THAT INFLUENCE MARKET PRICE
UNCONTROLLED EXTERNAL FLOW OF FOREIGN FUNDS
FACTORS
The inflows and outflows of foreign funds in
1. Macroeconomic conditions the stock market affect the demand and
2. Political stability supply of the dollar. When the market is
3. Prospects of the industry trending upward, the increasing inflow of
where the company operates
foreign funds will cause the peso to
4. General market sentiment
5. Flow of foreign funds appreciate against the dollar. Conversely,
invested in the Philippine when the market is falling, the increase in
Stock Market (PSE) demand for dollar by outflow of foreign
portfolio will cause the peso to depreciate.

https://business.inquirer.net/232989/exchange-rates-affect-stock-
market

33
 Given the factors that influence market price,

HOW WILL THE COMPANY

ENSURE THAT SUCH
OBJECTIVES WILL BE
ACHIEVED?
34
 “
FINANCIAL MANAGEMENT deals with decisions
that are supposed to maximize the value of
shareholders’ wealth.
(Cayanan, 2017)

35
 CONTINUATION OF
OUR DISCUSSION
NEXT MEETING. ;)
Next Topic: Roles of a Financial Officer,
Financial System and Financial Instruments
Sources:
Cayanan and Borja (2017). Business Finance. Rex Bookstore

36