TEXT 3 NOTES — Financial Management
1. Short Summary
Financial management is the process of planning, organizing, directing, and controlling a company’s
financial resources.
The main goal of financial management is to maximize shareholder wealth. This means financial
managers try to make decisions that increase the value of the company for its shareholders.
Financial managers make decisions about:
• investment
• financing
• capital structure
• working capital
• dividend policy
• financial risk
Two important tools used to evaluate investments are NPV and IRR.
NPV helps determine whether a project adds value to the company.
IRR is the discount rate where NPV equals zero.
If a project has a positive NPV, it should usually be accepted. If a project has a negative NPV, it should
usually be rejected.
2. Key Vocabulary
Vietnamese
Word / Phrase Simple Meaning Easy Example
Meaning
Financial managing money in a quản trị tài A CFO decides how the company
management company chính should use its money.
Shareholder value owned by tài sản/của cải A good investment increases
wealth shareholders cổ đông shareholder wealth.
Investment deciding where to put quyết định đầu The company decides whether to
decision money tư build a new factory.
Financing deciding how to raise quyết định tài The company may borrow money
decision money trợ vốn or sell shares.
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Vietnamese
Word / Phrase Simple Meaning Easy Example
Meaning
decision about paying chính sách cổ A company decides whether to
Dividend policy
profits to shareholders tức pay dividends or reinvest profits.
A company uses 40% debt and
Capital structure mix of debt and equity cấu trúc vốn
60% equity.
Debt borrowed money nợ vay A bank loan is debt.
Money from shareholders is
Equity owners’ capital vốn chủ sở hữu
equity.
cost of using money/ If investors require 10%, the cost
Cost of capital chi phí vốn
funds of capital is 10%.
Cash, inventory, and accounts
short-term assets and
Working capital vốn lưu động receivable are part of working
liabilities
capital.
money moving in and A company needs enough cash
Cash flow dòng tiền
out flow to pay bills.
goods kept for sale or
Inventory hàng tồn kho Unsold products are inventory.
production
Accounts money customers owe A customer buys now and pays
khoản phải thu
receivable the company later.
ability to pay short-term tính thanh A company with enough cash has
Liquidity
bills khoản good liquidity.
put profits back into the A company reinvests profits to
Reinvest tái đầu tư
company expand.
profit paid to Shareholders receive part of the
Dividend cổ tức
shareholders company’s profit.
High debt can increase financial
Financial risk chance of financial loss rủi ro tài chính
risk.
giá trị hiện tại NPV shows whether a project
NPV Net Present Value
ròng adds value.
tỷ suất hoàn IRR is the rate where NPV equals
IRR Internal Rate of Return
vốn nội bộ zero.
rate used to value future A higher discount rate lowers
Discount rate tỷ lệ chiết khấu
money today NPV.
When NPV = 0, the project breaks
Break even no gain and no loss hòa vốn
even.
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Vietnamese
Word / Phrase Simple Meaning Easy Example
Meaning
whether something is A project with positive NPV is
Viability tính khả thi
financially workable financially viable.
3. Important Ideas to Remember
A. Goal of Financial Management
The main goal is:
Maximize shareholder wealth
This means the company should make decisions that increase its value.
Good financial decisions should consider:
• risk
• return
• market conditions
• long-term growth
• shareholder expectations
B. Capital Structure
Capital structure means the mix of:
Debt + Equity
Debt means borrowed money.
Equity means money from owners or shareholders.
A company must choose the right balance between debt and equity.
Easy memory
Capital structure = how the company funds itself.
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C. Working Capital
Working capital focuses on short-term financial management.
It includes:
• cash
• inventory
• accounts receivable
• short-term liabilities
The goal is to make sure the company has enough liquidity to operate smoothly.
Easy memory
Working capital = money needed for daily business operations.
D. Dividend Decision
A company can use profits in two main ways:
1. Pay dividends to shareholders.
2. Reinvest the money into the business.
If the company has many growth opportunities, it may reinvest profits.
If the company is mature and has limited reinvestment opportunities, it may pay dividends.
Easy memory
Growth company → reinvest profits
Mature company → pay dividends
4. NPV and IRR
A. What is NPV?
NPV = Net Present Value
NPV tells us whether an investment adds value to the company.
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Decision Rule
NPV > 0 → Accept the project
NPV < 0 → Reject the project
NPV = 0 → Break even
Easy memory
Positive NPV = good project
Negative NPV = bad project
Zero NPV = break-even project
B. What is IRR?
IRR = Internal Rate of Return
IRR is the discount rate where:
NPV = 0
On an NPV graph, IRR is the point where the NPV curve crosses the x-axis.
Easy memory
IRR = the break-even discount rate
5. How to Read an NPV Profile Graph
An NPV profile graph shows the relationship between:
• discount rate
• NPV
The vertical axis shows:
NPV
The horizontal axis shows:
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discount rate
When the curve crosses the x-axis:
NPV = 0
That point is the:
IRR
6. Formula and Rules
Rule 1: NPV Decision Rule
NPV > 0 → Accept
NPV < 0 → Reject
NPV = 0 → Break even
Rule 2: IRR Definition
IRR = discount rate where NPV = 0
Rule 3: Investment Return
Return = Profit / Initial Investment × 100
Example:
You lend your friend $500.
Your friend pays back $570 after one year.
Profit:
570 − 500 = 70
Return:
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70 / 500 × 100 = 14%
So the return is:
14%
Rule 4: Future Value with Interest
Future Value = Principal × (1 + interest rate)
Example:
You invest $500 at 10%.
Future Value = 500 × 1.10
Future Value = 550
So after one year, you will have:
$550
7. Common Traps
Trap 1: Confusing IRR with positive cash flow
IRR is not simply the point where cash flow becomes positive.
Correct meaning:
IRR is the discount rate where NPV equals zero.
Trap 2: Accepting a project with negative NPV
Do not accept a project if NPV is negative.
Correct rule:
Positive NPV → Accept
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Negative NPV → Reject
Trap 3: Over-reading the graph
An NPV profile graph shows NPV and discount rate.
It does not directly show risk unless the question gives more information.
So if the question asks about risk and the graph does not show risk, the safest answer is:
The graph does not provide information about risk.
Trap 4: Choosing short-term stock price as the dividend factor
Dividend decisions should not be based mainly on short-term stock price movement.
Better factors include:
• company growth stage
• cash reserves
• reinvestment opportunities
• shareholder expectations
Trap 5: Forgetting to compare investment options
When comparing two investments, calculate the final amount after the same time period.
Example:
Friend pays back: $570
Alternative investment at 10%:
500 × 1.10 = $550
Since 570 is greater than 550, lending to the friend gives a higher return.
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8. Mini Checklist for Questions
Before choosing an answer, ask:
1. Is the question about NPV, IRR, dividends, or investment return?
2. If NPV is positive, did I choose “accept”?
3. If NPV is negative, did I choose “reject”?
4. If the question asks for IRR, did I find where NPV = 0?
5. If comparing investments, did I compare final values after the same time period?
6. If the graph does not show risk, did I avoid assuming risk changes?
9. Super Short Version to Memorize
Financial management = managing company money to maximize shareholder wealth.
Capital structure = debt + equity.
Working capital = money for daily operations.
Dividend decision = pay shareholders or reinvest profits.
NPV > 0 → Accept.
NPV < 0 → Reject.
NPV = 0 → Break even.
IRR = discount rate where NPV = 0.
Return = Profit / Initial Investment × 100.
Future Value = Principal × (1 + interest rate).