Finance is the art and science of managing money. The fields of finance are: (1) Financial services and (2) Managerial finance. The primary concern of MGT 115 is the Managerial finance which covers financial affairs of business organizations. The financial manager is usually called the treasurer (small companies) or Chief Finance Officer (big companies).

Controller: prepares financial statement
Treasurer: analyzes and makes decisions using financial statements

Assumptions:
1. As financial manager
2. Working in a publicly held corporation
3. Efficient market

1. As financial manager
• We should think and solve problems like financial managers.
• First, we need to understand their goal: maximize shareholder’s wealth
• What represents shareholder’s wealth? Stock Prize (prize of the shares of the firm)

Difference between profit maximization and shareholder’s wealth maximization

Shareholder’s wealth maximization: considers timing, cash, and risk.

Cash Profit is not equivalent to cash. If the net income of the firm increases, it does not mean that the money of the owner increases as well. However, if the stock price increases, shareholder’s wealth also increases. If you own 100 shares and each share costs P1,000, it is equivalent to P100,000 worth of shares. If the stock price increases from P1,000 to P1,100, the wealth increases to P110,000 worth of shares.

Risk Profit maximization fails to account for risk. SWM considers risk as one of the factors in determining stock price. The higher the risk, the lower the stock price is.In addition, the greater the risk associated with receiving a future benefit, the lower the value investors place on that benefit. Stock prices, the measure of shareholder wealth, reflect the magnitude, timing, and risk associated with future benefits expected to be received by stockholders.

Some investment projects