Lesson1 Intro[1]

8/8/2019 Lesson1 Intro[1]

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Chapter 1Chapter 1

An Introduction toAn Introduction toFinancial ManagementFinancial Management


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Learning ObjectivesLearning Objectives

Finance and the primary activities inFinance and the primary activities in

financial managementfinancial management

The goal of a financial managerThe goal of a financial manager

The three forms of business & financialThe three forms of business & financial

marketsmarkets

The factors affecting share priceThe factors affecting share price The agency problem and roles of ethicsThe agency problem and roles of ethics


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What is Finance?What is Finance?

Finance can be defined as the art andFinance can be defined as the art and

science of managing moneyscience of managing money-- What doesWhat does

this mean?this mean? Finance is concerned with the process,Finance is concerned with the process,

institutions, markets, and instrumentsinstitutions, markets, and instruments

involved in the transfer of money amonginvolved in the transfer of money amongindividuals, businesses, and governments.individuals, businesses, and governments.


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FinanceFinance-- OverallOverall

Assets: Liabilities & Equity:

Current Assets Current Liabilities

Cash & M.S. Accounts payable

Accounts receivable Notes Payable

Inventory Total Current Liabilities

Total Current Assets Long-Term Liabilities

Fixed Assets: Total Liabilities

Gross fixed assets Equity:Less: Accumulated dep. Common Stock

Goodw ill Paid-in-capital

Other long-term assets Retained Earnings

Total Fixed Assets Total Equity

Total Assets Total Liabilities & Equity

ABC CompanyBalance Sheet

As of December 31, 19xx

WorkingCapital

Working

Capital

InvestmentDecisions

Financing

Decisions

Macro Finance


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Primary Activities ofPrimary Activities of

the Financial Managerthe Financial Manager


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CashCash -- not profitsnot profits -- is kingis king

INCOME STATEMENT SUMMARY

ACCRUAL CASH

Sales RM100,000 RM 0

Less: Costs (80,000) (80,000)

Net Profit/(Loss) RM 20,000 RM(80,000)


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Goal of the FirmGoal of the Firm

2) ShareholderWealth2) ShareholderWealth

Maximization?Maximization?

this is the same as:this is the same as:

a) Maximizing Firm Valuea) Maximizing Firm Value

b) Maximizing Stock Priceb) Maximizing Stock Price


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Goal of the FirmGoal of the Firm

Maximize ShareholderWealth!!!

It can also be described using the following flow chart:It can also be described using the following flow chart:


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Legal Forms of BusinessLegal Forms of Business

1) Sole Proprietorship1) Sole Proprietorship

A business owned by a single individual.A business owned by a single individual.

Owner maintains title to the firms assets.Owner maintains title to the firms assets.

Owner has unlimited liability.Owner has unlimited liability.

2) Partnership2) Partnership

Similar to a sole proprietorship, exceptSimilar to a sole proprietorship, except

that there are two or more owners.that there are two or more owners.


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3) Corporation3) Corporation-- Sdn Bhd & BhdSdn Bhd & Bhd

A business entity that legally functionsA business entity that legally functions

separate and apart from its owners.separate and apart from its owners. Owners liability is limited to the amountOwners liability is limited to the amount

of their investment in the firm.of their investment in the firm.

Owners hold common stock certificates,Owners hold common stock certificates,

and ownership can be transferred byand ownership can be transferred by

selling the certificates.selling the certificates.

Legal Forms of BusinessLegal Forms of Business


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Basic Forms of Business OrganizationBasic Forms of Business Organization


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Primary MarketPrimary Market

Market in which new issues of aMarket in which new issues of a

security are sold to initial buyers.security are sold to initial buyers.

Secondary MarketSecondary Market

Market in which previously issuedMarket in which previously issued

securities are traded.securities are traded.

The Corporation and FinancialThe Corporation and Financial

MarketsMarkets


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The AgencyThe Agency ProblemProblem

In theory, managers would agree withIn theory, managers would agree withshareholder wealth maximization.shareholder wealth maximization.

However, managers are also concerned withHowever, managers are also concerned with

their personal wealth, job security, fringetheir personal wealth, job security, fringebenefits, and lifestyle.benefits, and lifestyle.

This would cause managers to act in waysThis would cause managers to act in ways

that do not always benefit the firmthat do not always benefit the firm

shareholders.shareholders.

Documents

Lesson1 Intro[1]