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Introduction To Financial Management

Majed Salah
By Majed Salah
8 years ago

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  1. Introduction to Financial Management n   n  n  n  n  n  What is Finance? Goals of the Corporation Conflicts Between Managers and Shareholders Stock Prices and Intrinsic Value Describe the managerial finance function Forms of Businesses 1-1
  2. What is Finance ? n  n  Finance can be defined as the art and science of managing money. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, businesses, and governments. 1-2
  3. Corporate Organization 1-3
  4. Major Areas & Opportunities in Finance: Financial Management n  n  n  Financial Management is concerned with the duties of the financial manager in the business firm. The financial manager actively manages the financial affairs of any type of business, whether private or public, large or small, profit-seeking or not-for-profit. They are also more involved in developing corporate strategy and improving the firm’s competitive position. 1-4
  5. Responsibility of the Financial Staff Forecasting and planning n   Investment and financing decisions n  Coordination and control of Working capital n  Transactions in the financial markets n  Dividend Policy n  Managing risk n  Financial Management for the Hospitality industry Andrew, Damitio & Schmidgall ( 2005) by 1-5
  6. Financial Goals of the Corporation n   The primary financial goal is shareholder wealth maximization, which translated from stock price maximization. 1-6
  7. Financial Goals of the Corporation -   Renong Corporation -  RM 2.25/ shares An individual owns 1,000 Unit of shares -  Total Wealth : RM2.25 x 1000 Unit = RM2,250 1-7
  8. Financial Goals of the Corporation Investor ’s Wealth Maximization t0 = RM2.25/shares – Investor’s wealth RM2,250 t1 = RM3.75/shares – Investor’s wealth RM3,750 1-8
  9. Factors that affect stock price n   n  n  Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows 1-9
  10. A . Projected of cash flows to shareholders Capital gain Dividend Purchase shares @ RM2.25/shares Sell shares @ RM3.75/ shares i.e: RM0.02 for every share owned 1,000 units x RM0.02 = RM20 Capital gain: RM3.75-2.25 =RM 1.50/ shares -Net income to be distributed to shareholders -Profit Dividend Projected cash flows to s/holders share price wealth maximization materialize 1-10
  11. B . Timing of the cash flow stream Investors expect consistency in the cash flows to be received ie. dividend payment n  1-11
  12. C . Riskiness of the cash flows n  n  Must reduce the possibilities of interruption on the cash flows Possibility of interruption may arise due to mismanagement in the company Mismanagement Stock price Profit Dividend Wealth maximization 1-12
  13. Organization structure 1-13
  14. Conflicts Between Managers and Stockholders n   n  Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). This give rise to Agency Problem 1-14
  15. Example of Agency problem CEO “Denise” spent more than $2m of company money on his wife’s birthday Reduce profit Reduce dividend Reduce expected cash flow Reduce wealth maximization 1-15
  16. Source of Conflicts Between Managers and Stockholders CEO Salary RM1 .2m/ year Company’s profit (t=1) RM 10m/ yr No. of shareholders = 100 individual = RM100,000/ individual Company’s profit (t=2) After new strategy RM30m/ yr = RM300,000/ individual 1-16
  17. How minimize agency problem n   Managerial compensation plans n  n  n  Bonus Options Stock Options Direct intervention by shareholders n  The threat of Firing 1-17
  18. Stock Prices and Intrinsic Value n   In equilibrium, a stock’s price should equal its “true” or intrinsic value. 1-18
  19. Stock Prices and Intrinsic Value Stock Prices Market price (Quoted) Intrinsic value Supply & demand for the shares Projected cash flows “Market = Intrinsic” price value 1-19
  20. Stock Prices and Intrinsic Value 1-20
  21. Financial Goals of the Corporation Is stock price maximization good or bad for society ? n  Should firms behave ethically? n  1-21
  22. Should firms behave ethically n   1.  2.  Desperate attempt to maximize stock price may lead to: Window dressing Earning management 1-22
  23. Example An asset should be depreciated for 5 years , but instead it was depreciated over a 10 years life (i.e: Asset value= RM10m) -If 5 years total depreciation expense RM2m/yr -If 10 years total depreciation expense RM1m/yr 1-23
  24. Depreciation expense 5 years (RM2m/yr) Net Income 10 years (RM1m/ yr) < Net Income 1-24
  25. Example 2 & 3 n  Goods ordered but not shipped n  n  A company considers goods that have been ordered but not yet shipped to be part of revenue earned. Extended reporting period n  Companies try to meet revenue expectations by keeping their books open for few days- even a few weeks into the next reporting period in order 1-25 to generate last minute sales revenues
  26. Alternative Forms of Business Organization n   n  n  Proprietorship Partnership Corporation 1-26
  27. Proprietorships & Partnerships n  Advantages n  n  n  Ease of formation Subject to few regulations Confidentiality n  n  Can limit the amount of information that they must file. ie. can leave their competitors guessing. Flexibility n  Family member can easily decide how much they want to pay for one another without 1-27 having to worry about shareholders scrutinity
  28. Proprietorships & Partnerships n  Disadvantages n  Difficult to raise large sums of capital n  n  n  Because a private company do not sell shares or issue bonds to the public, it spends a lot more of time finding investors who are willing to risks their funds Sometimes difficult to find potential investors to invest in the company that have the same vision. Unlimited liability 1-28
  29. Corporation n   Advantages n  n  n  n  n  Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages n  n  Double taxation Cost of set-up and report filing 1-29