1.0 INTRODUCTION TO 1.0 INTRODUCTION TO

FINANCIAL MGT FINANCIAL MGT

Financial ManagementFinancial Management

Creating economic wealth Involves 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 area Important to maximize the shareholders wealth

FIELDS OF FINANCEFIELDS OF FINANCE

1. Money & Capital Market

2. Investment

3. Financial Management

1.2 Important questions to be 1.2 Important questions to be answeredanswered

• i) 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 1.3 -1.6 SCOPE OF STUDIESSCOPE OF STUDIES

1.3 Definition of finance 1.3.1 Roles of financial manager Legal forms of business entity Goals of a firm Markets and financial institutions

1.3 DEFINITION OF FINANCE1.3 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 1.4 ROLES OF FINANCIAL MANAGERSMANAGERS

• Important roles in making decision in a company such as:

1. Capital budgeting

2. Capital structure

3. Working capital, short term asset & liability

The responsibilities of financial The responsibilities of financial managers cover:managers cover:

Planning and forecasting Making financing and investment decision Controlling and coordinating Dealing with financial markets Risk management

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

FIRM

2. Investment

INVESTOR

Secondary Market

GOVERNMENT

CashSecurity

Cash flow

Tax

Reinvest

3. Dividend, etc

1. Primary Market

1.5 MAJOR FORM OF BUSINESS 1.5 MAJOR FORM OF BUSINESS ORGANIZATIONORGANIZATION

• 1.5.1 SOLE PROPRIETORSHIP• 1.5.2 PARTNERSHIP• 1.5.3 CORPORATION

1. Money & Capital Market1. Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc

Knowledge in evaluation techniques Factors that effects the interest rate Financial instruments such as leasing, loan,

bond, stock etc

2. Investment2. Investment

Decision make by the investors to invest in the securities that can give high returns

LEGAL FORMS OF BUSINESS LEGAL FORMS OF BUSINESS ORGANIZATIONSORGANIZATIONS

Sole Proprietorship

Partnership

Corporation

Sole ProprietorshipSole Proprietorship

A business owned by a single individual. Advantages

• Easy and cheaper to form• Few regulations• No corporate tax

Disadvantages• Hard to obtain capital• Unlimited liability• Lacks continuity when proprietor dies

PartnershipPartnership

2 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 partnership• Limited partnership

Advantages of partnership• More available brain power and

managerial skill• Easy to form• Able to raise capital

Disadvantages of partnership• Unlimited liability• Difficult to transfer ownership

CorporationCorporation

An entity that legally functions separate and apart

from its owner Advantages

• Unlimited life• Easy transfer of ownership• Limited liability• Able to generate capital

Disadvantages• Double taxation: corporate and individual• Expensive and complex to form• Difficult in making decision

GOALS OF THE FIRMGOALS OF THE FIRM

Maximize PROFIT Maximize SHAREHOLDER WEALTH

Maximize PROFITMaximize PROFIT

Commonly uses by a firm In microeconomic, this goal is a priority to

increase the profit However, it ignores some important factors

such as:

1. Uncertainty and risk

2. Timing of project’s returns Weakness of accounting profitability

Maximize SHAREHOLDER WEALTHMaximize SHAREHOLDER WEALTH

i.e maximization of the price of company’s existing common stock

The best decision taken is the decision that can raise the shareholders wealth

Market price of the firm’s stock reflects the value of the firm

The investment is suitable with the risk Financing capital with lower cost

FINANCIAL MARKETS & INSTITUTIONSFINANCIAL MARKETS & INSTITUTIONS

Financial Market –a place where the person needs capital will get it from capital suppliers.

2 types:• Primary market• Secondary market

Financial MarketsFinancial 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 MARKETROLE OF FINANCIAL MARKET

FIRM

2. Investment

INVESTOR

Secondary Market

GOVERNMENT

CashSecurity

Cash flow

Tax

Reinvest

3. Dividend, etc

1. Primary Market

Companies’ Social ResponsibilitiesCompanies’ Social Responsibilities

Social 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 can’t give priority to profit and ignores the social responsibilities.

Agency RelationshipsAgency Relationships

• When 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 manager– Manager and debtors

• Agency problem exist when there are conflict of interest between principal and agents.

1. Money & Capital Market1. Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc

Knowledge in evaluation techniques Factors that effects the interest rate Financial instruments such as leasing, loan,

bond, stock etc

1. Money & Capital Market1. Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc

Knowledge in evaluation techniques Factors that effects the interest rate Financial instruments such as leasing, loan,

bond, stock etc