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Pp Chapter 1 Mahfuzah 2012

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financial management

Text of Pp Chapter 1 Mahfuzah 2012

  • 1.0 INTRODUCTION TO

    FINANCIAL MGT

  • Financial Management

    Creating economic wealthInvolves decisions such as when to introduce new product, invest in new assets, replace the new asset, loans, issuing stocks/bond etc.Most important and big areaImportant to maximize the shareholders wealth

  • FIELDS OF FINANCEMoney & Capital MarketInvestmentFinancial Management

  • 1.2 Important questions to be answeredi) What is the long term investment should you consider?ii) Where will you get the long term financing to pay back your investment?iii) How will you manage the daily activities?

  • 1.3 -1.6 SCOPE OF STUDIES1.3 Definition of finance1.3.1 Roles of financial managerLegal forms of business entityGoals of a firmMarkets and financial institutions

  • 1.3 DEFINITION OF FINANCE Art and science of managing money process, institutions, markets and instruments involved. (Gitman)Activities that earn and use of capital - collecting, using and managing. Concern with the maintenance & creation of economic value or wealth (Keown) Focuses on the decision making toward creating wealth.

  • 1.4 ROLES OF FINANCIAL MANAGERSImportant roles in making decision in a company such as:1.Capital budgeting2.Capital structure3.Working capital, short term asset & liability

  • The responsibilities of financial managers cover:Planning and forecastingMaking financing and investment decisionControlling and coordinatingDealing with financial marketsRisk management

  • FIGURE 1.1 : CASH FLOWS BETWEEN FIRM & THE FINANCIAL MRKT

    FIRM

    2. Investment

    INVESTOR

    Secondary Market

    GOVERNMENTCashSecurityCash flow TaxReinvest3. Dividend, etcPrimary Market

  • 1.5 MAJOR FORM OF BUSINESS ORGANIZATION1.5.1 SOLE PROPRIETORSHIP1.5.2 PARTNERSHIP1.5.3 CORPORATION

  • 1. Money & Capital MarketInvolves security market and financial institutions such as banks, finance companies etcKnowledge in evaluation techniquesFactors that effects the interest rateFinancial instruments such as leasing, loan, bond, stock etc

  • 2. InvestmentDecision make by the investors to invest in the securities that can give high returns

  • LEGAL FORMS OF BUSINESS ORGANIZATIONS Sole Proprietorship Partnership Corporation

  • Sole Proprietorship A business owned by a single individual. AdvantagesEasy and cheaper to formFew regulationsNo corporate tax DisadvantagesHard to obtain capitalUnlimited liabilityLacks continuity when proprietor dies

  • Partnership2 or more individual agreed to form a business in order to get profit based on agreement formal or informal (Oral Commitment/Formal Document)2 types:General partnershipLimited partnership

  • Advantages of partnershipMore available brain power and managerial skillEasy to formAble to raise capital

    Disadvantages of partnershipUnlimited liabilityDifficult to transfer ownership

  • CorporationAn entity that legally functions separate and apart from its owner Advantages Unlimited lifeEasy transfer of ownershipLimited liabilityAble to generate capitalDisadvantagesDouble taxation: corporate and individualExpensive and complex to formDifficult in making decision

  • GOALS OF THE FIRMMaximize PROFITMaximize SHAREHOLDER WEALTH

  • Maximize PROFIT

    Commonly uses by a firmIn microeconomic, this goal is a priority to increase the profitHowever, it ignores some important factors such as: 1. Uncertainty and risk 2. Timing of projects returnsWeakness of accounting profitability

  • Maximize SHAREHOLDER WEALTHi.e maximization of the price of companys existing common stockThe best decision taken is the decision that can raise the shareholders wealthMarket price of the firms stock reflects the value of the firmThe investment is suitable with the riskFinancing capital with lower cost

  • FINANCIAL MARKETS & INSTITUTIONSFinancial Market a place where the person needs capital will get it from capital suppliers.2 types: Primary market Secondary market

  • Financial Markets Primary Market A place where a security is offered for the first time. 2 types of offers in primary market; IPO and Seasoned New Issue. Secondary Market The market in which stock previously issued by the firm trades. Transaction of selling and buying stocks occur Provide liquidity for stocks Guide for investors to put a price for their investments.

  • ROLE OF FINANCIAL MARKET

    FIRM

    2. Investment

    INVESTOR

    Secondary Market

    GOVERNMENTCashSecurityCash flow TaxReinvest3. Dividend, etcPrimary Market

  • Companies Social ResponsibilitiesSocial responsibilities also important to companies; not only to maximise shareholders wealth.Social responsibilities to employees, customers, society and environment.Example; provide safe working environment, avoid pollution, produce safe product.Companies cant give priority to profit and ignores the social responsibilities.

  • Agency RelationshipsWhen an individual or more (principal) hired another individual or organization (agent) to handle a service and give power to agent to make decision.Agency relationship among;Shareholders and managerManager and debtorsAgency problem exist when there are conflict of interest between principal and agents.

  • 1. Money & Capital MarketInvolves security market and financial institutions such as banks, finance companies etcKnowledge in evaluation techniquesFactors that effects the interest rateFinancial instruments such as leasing, loan, bond, stock etc

  • 1. Money & Capital MarketInvolves security market and financial institutions such as banks, finance companies etcKnowledge in evaluation techniquesFactors that effects the interest rateFinancial instruments such as leasing, loan, bond, stock etc