This action might not be possible to undo. Are you sure you want to continue?
1. 2. 3. 4. 5. Explain the definition of financial management. Identify the roles of financial manager. Determine the basic forms of business as well as the advantages and disadvantages of each form of business. Identify and explain the aims of a company. Market and financial institutions.
• Finance can be defined as the art and science of managing money. Simply finance deals with matters related to money and the markets (Investorword. institutions. Finance is concerned with the process.com).WHAT IS FINANCE? • A branch of economics concerned with resource allocation as well as resource management. and governments (Gitman). businesses. acquisition and investment. • Is concerned with the maintenance and creation of economic value or wealth (Keown). and instruments involved in the transfer of money among individuals. markets. WRMAS 3 .
FIELDS OF FINANCE • • • Money & Capital Market • Involves security market and financial institutions. Investment Financial Management • Creating economic wealth • Involves decisions such as when to introduce new product. WRMAS 4 . loans. replace the new asset. issuing stocks/bond etc. invest in new assets.
profit-seeking or not-forprofit. large or small.ROLES OF FINANCIAL MANAGERS • Actively manages the financial affairs of any type of business. whether private or public. • Important roles in making decision in a company such as: – Where to invest? (Capital budgeting) – How to raise money to fund the investment? (Capital structure) – How to manage cash flows from daily operations? (Working capital) • The responsibilities of a financial managers including: – Planning and forecasting – Investment and financing decisions – Controlling and coordinating – Transaction in the financial markets – Risk management WRMAS 5 .
WRMAS 6 .
BASIC FORMS OF BUSINESS ORGANISATION • Sole Proprietorship • Partnership • Corporation WRMAS 7 .
Advantages: Ease of formation Few regulations No corporate tax Complete control and decision-making power Retention of all profits Disadvantages: Financing limitations Unlimited liability Incur all losses and debts Lacks continuity when proprietor dies WRMAS 8 .Sole Proprietorship A business owned by a single individual.
Partnerships Co-owned by 2 or more individuals agreed to form a business in order to get profit based on agreement – formal or informal (Oral Commitment/Formal Document) 2 types: . • WRMAS 9 .General partnership • All partners have unlimited liability • Are fully liable for the indebtedness incurred by the partnership.
• Limited partners (investors) cannot participate in the management of the business and their names cannot appear in the name of the firm. WRMAS 10 . share in profits and losses. • There must be at least one general partner with unlimited liability-actively manage the business.Partnership – Limited partnership • Some partners can have limited liability to cash or property they invested in the firm. receive a salary.
Partnerships Advantages: More available brain power and managerial skill Easy to form Able to raise capital Disadvantages: Unlimited liability Difficult to transfer ownership WRMAS 11 .
Corporation • Legally functions separate and apart from its owners – Corporation can sue. sell. WRMAS 12 . • Life of corporation does not depend on the status of its owners. be sued. purchase. • Shareholder’s liability is restricted to the amount of investment in company. Ownership can be easily transferred. and own property • Owners (shareholders) dictate direction and policies of the corporation.
Corporation • Advantages: – Limited liability – Easy to transfer ownership – Unlimited life (unless the firm goes through corporate restructuring such as mergers and bankruptcies) • Disadvantages: – No secrecy of information – Maybe delays in decision making – Greater regulation therefore expensive and complex to form. – Double taxation WRMAS 13 .
WRMAS 14 .
• Shareholder wealth is measured by share prices.WHAT SHOULD BE THE GOAL OF THE FIRM? • The goal of the firm is to maximize shareholder wealth. Thus. WRMAS 15 . This is equivalent to saying the goal is to maximize the price of common stock! • Note that the stock price is affected by management’s decisions affecting both risk and profit.
WRMAS 16 .
Benefits of Maximizing Shareholder Wealth • Good corporate decisions are those that create wealth for the shareholder. – Investment at acceptable level of risk – Financing capital with lower cost. WRMAS 17 . • Society benefits as scarce resources are directed to the most profitable use by businesses competing to create wealth.
Why is Shareholder Maximization NOT Profit Maximization? • Many people think the goal is to maximize profits. WRMAS 18 . profit maximization goal is unclear about the time frame over which profits are to be measured. Would this mean short-term profit. or long-term profit? • It is easy to manipulate the profits through various accounting policies. • However. • Profit maximization goal ignores risk and timing of cash flows.
FINANCIAL MARKETS & INSTITUTION • Firms that require funds from external sources can obtain them in three ways: – through a bank or other financial institution – through financial markets – through private placements WRMAS 19 .
individuals are net suppliers of funds.FINANCIAL MARKETS & INSTITUTION • Financial institutions are intermediaries that channel the savings of individuals. • In general. • The key suppliers and demanders of funds are individuals. and governments. businesses. WRMAS 20 . and governments into loans or investments. businesses. while businesses and governments are net demanders of funds.
WRMAS 21 . • Transactions in short term marketable securities take place in the money market while transactions in long-term securities take place in the capital market.FINANCIAL MARKETS & INSTITUTION • Financial markets provide a forum in which suppliers of funds and demanders of funds can transact business directly. • The two key financial markets are the money market and the capital market.
• Seasoned Offering or Seasoned New Issue -A new stock offering by a firm that already has stock that is traded in the secondary market. • The primary market is the only one in which a corporation or government is directly involved in and receives the proceeds from the transaction. – 2 types of offers in primary market: • Initial Public Offering (IPO) -The first time the firm’s stock is sold to the general public. securities are first issued through the primary market. WRMAS 22 .FINANCIAL MARKETS & INSTITUTION • Whether subsequently traded in the money or capital market.
securities then trade on the secondary markets such as the Bursa Malaysia. WRMAS 23 . • Transaction of selling and buying stocks occur • Provide liquidity for stocks • Guide for investors to put a price for their investments.FINANCIAL MARKETS & INSTITUTION • Once issued.
Primary Market Security FIRM 2. Dividend.ROLE OF FINANCIAL MARKET 1. Investment Reinvest Cash INVESTOR Secondary Market 3. etc Cash flow Tax GOVERNMENT WRMAS 24 .
provide safe working environment. produce safe product. society and environment. Example.COMPANIES’ SOCIAL RESPONSIBILITIES Social responsibilities also important to companies. customers. avoid pollution. WRMAS 25 . Social responsibilities – to employees. not only to maximise shareholders’ wealth. Companies can’t give priority to profit and ignores the social responsibilities.
– Shareholders and manager – Manager and debtors • Agency problem exist when there are conflict of interest between principal and agents. • Agency relationship among.AGENCY 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. WRMAS 26 .