Upload
amin-rasyidi
View
34
Download
0
Tags:
Embed Size (px)
Citation preview
Financial Management
Lecture 1:An Introduction to Financial Management
About Me• Salim Darmadi• Kediri, 9 December 1982• Married• Sukamaju Baru, Cimanggis, Depok• Bapepam-LK, Capital Market Research Division• STAN: D-III Accounting (2004)• STAN: D-IV Accounting (2006)• Master of Commerce in Finance
The University of Queensland, Brisbane (2010)• [email protected]• +62 81310172465
2
Today’s Agenda
• Introduction• Questionnaire on “Financial Literacy”• Course profile• Rules• Why studying Finance?• Lecture 1: An Introduction to Financial
Management
3
Questionnaire on Financial Literacy
• Independent research• Title: “Financial Literacy of College Students:
The Role of Finance Course”• Please put your best efforts to answer the
questions• Do not indicate your name on the
questionnaire• 15 minutes
4
Course Profile
• The syllabus will be distributed • Textbook: Keown et al. (2005), “Financial
Management: Principles and Application”, 10th edition, Prentice Hall
• Assessment:40% Mid-exam40% Final exam20% Quizzes and Assignments
5
Rules
1. Be proactive2. Keep motivated 3. Show mutual respect
6
7
Rules
During the lecture, students are expected:• to respect the lecturer and their fellow students• to dress according to the code• to be punctual• to pay their full attention to the lecture
(What if I am sleepy?)• not to eat (drinking water is permitted)• not to talk to each other unless permitted• to keep away from your (bloody hell) cell phones and
gadgets.8
Rules
In learning activities:• Read your textbook; do not make the lecture notes the only
source of learning• Discuss the materials with your fellow students• Revise the materials at home, do not wait until mid- and final-
exams• Prepare yourselves for the quizzes (held 2-3 times during the
semester)• Show your integrity
9
Why Studying Finance?
One of the characteristics of andragogy: Adults are willing to learn something if they can benefit from it.•Finance is very much related to accounting as your major.•Knowledge on finance may be required when you work for the government (Ministry of Finance, BPK, BPKP, etc).•Knowledge on finance is very beneficial in your personal/family financial planning.
10
Lecture 1: Introduction to Finance
• Definition and decisions of finance• Goal of the firm• Legal forms of business organization• Corporation and financial market• Ten principles that form the basics of finance
11
Definition of finance
Financial management is concerned with the maintenance and creation of economic value or wealth.
The examples of financial decisions:•When to introduce a new product?•When to invest in new assets?•When to replace existing assets?•When to borrow from banks?•When to issue stocks or bonds?•When to extend credit to a customer?•How much cash to maintain?
12
Goal of the Firm
In microeconomics: Maximization of profit
This “too-simplified goal” ignores:• the uncertainty and risk of the firm’s projects• the timing of the project’s return• the cost of funds provided by the firm’s
shareholders (owners)
13
Goal of the Firm
In finance: Maximization of the shareholder’s wealth• This means: Maximization of the market value of existing common shares•Good decisions lead to increasing stock price•Poor decisions lead to decreasing stock price•Lessons from Enron
14
Legal Forms of Business Organizations
1. Sole proprietorship• A business owned by a single individual• Owner maintains title to the firm’s assets• Owner has unlimited liability
2. Partnership• Similar to a sole proprietorship, except that
there are two or more owners15
Legal Forms of Business Organizations
General partnership• All partners have unlimited liabilityLimited partnership• Consists of one or more general partners, who have unlimited
liability, and• One or more limited partners (investors) whose liability is
limited to the amount of their investment in the business.Limited liability company (LLC)• A cross between a partnership and a corporation• Owners have limited liability• The firm is run like a partnership
16
Legal Forms of Business Organizations
3. Corporation• A business entity that legally functions separate and apart from its
owners.• Owners’ liability is limited to the amount of their investment in the
firm.• Owners hold common stock certificates, and ownership can be
transferred by selling the certificates.• Large and growing firms choose corporate form for one reason:
ease in raising capital ideal business entity in terms of attracting new capital
• Unitary board vs. Two-tier board • Figure 1-1
17
Corporation and Financial Market
18
cash Investors
Secondarymarkets
Government
securities
Cash flow
reinvest
tax
Corporation
dividend,etc.
Corporation and Financial Market
1. Primary market: Market in which new issues of a security are sold to initial buyers.Initial public offering (IPO): The first time the firm’s stock is sold to the general public.Seasoned new issue: A new stock offering by a firm that already has stock that is traded in the secondary market.
2. Secondary market: Market in which previously issued securities are traded.
19
Ten Principles
1. Risk-return trade-off• We will not take on additional risk unless we expect
to be compensated with additional return.• High risk, high return2. Time value of money• A dollar received today is worth more than a dollar
received in the future.• It is better to receive money earlier.• Cost-benefit analysis is used.
20
Ten Principles
3. Cash (not profit) is king• Cash flows, not profits, are actually received by the
firm and can be reinvested.• Cash flows and accounting profit may not be the
same. Why?4. Incremental cash flows• It is the difference between “if the project is taken”
and “if the project is not taken.”• Is it worth to accept a new project?
21
Ten Principles
5. The curse of competitive markets• It is hard to find exceptionally profitable projects
(Recall the concept of “perfectly-competitive market” in microeconomics)
• Product differentiation or cost advantage6. Efficient capital markets• Under EMH, publicly-available information is
reflected in stock prices.• The markets are quick and the prices are right.
22
Ten Principles
7. Agency problem• Managers may not behave in the best interests of the
shareholders.• Managers have other incentives: salary, personal wealth,
prestige, job security.• Examples of agency problem8. Taxes bias business decisions• After-tax incremental cash flows should be considered.• Government can use taxes to implement certain policies.
23
Ten Principles
9. All risk are not equal• Some risk can be diversified away; diversification can
reduce risk.• Don’t put all of your eggs in one basket.• It is often difficult to measure risk.10. Ethical dilemmas are everywhere in finance• Some are commonly agreed, some need personal
judgment.• Is ethics relevant? Unethical behavior eliminates trust
(lesson from Enron and Arthur Andersen).
24
Next Week (Lecture 2)
Chapter 2• Understanding financial statements, taxes,
and cash flowsChapter 3• Evaluating a firm’s financial performance
Homework• Revise Chapter 1
25