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[Bangunan Segi, 33-35 Jalan Hang Lekiu, 50100, Kuala Lumpur]

[Segi College Kuala Lumpur]

[Intro to Finance]

[Financial Management]

Executive Summary In this assignment, I would like to do the financial management. There are included three types of decision. Those are finance decision, investment decision and dividend decision. Besides that, I also do about the maximize shareholders wealth.

Student Particulars

Name IC Number Student Number Course Subject Title Subject Code Mode of Study Name of Lecturer Due Date College

Kaamini A/P Kalaichelvan 920915sckl0003 Diploma in Accounting Intro to Finance 3ACC0810SEGI_COPPA

Full-Time E-Learning
Miss

Part-Time

Independent Learning

Segi College Kuala Lumpur

Declaration by student:
I, Kaamini A/P Kalaichelvan, hereby declare that the attached assignment is my own work and understand that if I am suspected of plagiarism or another form of cheating, my work will be referred to the Programme Director who may, as a result recommend to the Examinations Board that my enrolment in the programme be discontinued.

Acknowledgement of receipt

____________ Date Received

_____________ Signature of Receiving Officer

Assignment Allocation of Marks


No. 1. 2. Description of criteria adopted that will be used for the assessment of the assignment Relevance of content to assignment-Executive Summary Clear explanation of issues, which are relevant for the assignment: i. ii. iii. Relevance of information and material; Depth and quality of analysis; Identification and framing of issues and assumptions made. 40% Weightings 10% 20% Marks Allotted by Lecturer

3.

Application of the relevant principles to the issue: i. ii. iii. iv. Understanding of principles, theories and techniques; Appropriateness and depth of research; Analytical skills; Application skills.

4.

Quality of recommendations relating to problem: i. ii. Originality of idea and approach; Recommendations.

20%

5.

Presentation: i. ii. iii. Total Appropriate citation and references; Style and readability; Overall presentation.

10%

100%

Feedback on Assignment: ________________________________________________________________________ ________________________________________________________________________ ______________________________________________________________________ __________________ Date __________________ Lecturers Name 3

Table of Content

No. 1. 2. 3. 4.

Content Introduction Answers Conclusion References

Page no. 5 6-11 12 13-14

Introduction

Before I start my coursework, I would like to define about financial and financial management. Financial means a branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply, finance deals with matter related to money and the markets. Not only that, financial can help us to raise money through the issuance and sale of debt and equity. Besides that, financial management means the planning, directing, monitoring, organizing and controlling of the monetary resources of an organization.

Answers

(a) The major decisions for financial managers are investment decision, finance decision and dividend decision. The investment decision is concerned with the selection of assets in which funds will be invested by a firm. Investment decision may be defined as long term planning for making and financing proposed capital outlay. Besides that, it also means the long-range planning of allocation of funds among the various investment proposals. Another important element of investment decision is the analysis of risk and uncertainty. Since, the return on the investment proposals can be derived for a longer time in future, the investment decision should be evaluated in relation to the risk associated with it. On the other hand, the financial manager is also responsible for the efficient management of current assets. Working capital constitutes an integral part of financial management. The financial manager has to determine the degree of liquidity that a firm should possess. Working capital management refers to a trade off between liquidity and profitability. Insufficiency of funds in current assets results liquidity and possessing of excessive funds in current assets reduces profits. Hence, the finance manager must achieve a proper trade off between liquidity and profitability. In order to achieve this objective, the financial manager must equip himself with sound techniques of managing the current assets like cash, receivables and inventories.

The second important decision is financing decision. The financing decision is concerned with capital mix and capital structure of a firm. The term capital 6

structure refers to the proportion of debt capital and equity share capital. Financing decision of a firm relates to the financing mix that be decided taking into account the cost of capital, risk and return to the shareholders. Employment of debt capital implies a higher return to the share holders and also the financial risk. There is a conflict between return and risk in the financing decisions of a firm. So, the financial manager has to bring a trade off between risk and return by maintaining a proper balance between debt capital and equity share capital. On the other hand, it is also the responsibility of the financial manager to determine an appropriate capital structure. The assets of a business firm include long term assets and short term assets. Long term assets will yield a return over a period of time in future whereas short term assets are those assets which are easily convertible into cash within an accounting period. In long term, ordinary shares are issued to the owners of a company. The ordinary shares of UK companies typically have a nominal. However, it is important to understand that the market value of a company's shares has little relationship to their nominal. Besides that, in debenture, a debenture is a bond with only the full faith and credit of the company as collateral. Other than the credit rating and creditworthiness of the debtor, there is no specific collateral. The owners of these bonds, therefore, are classified as unsecured creditors. Senior debt is a debenture issue that gives senior debts holders priority over the holders of all other debenture issues in receiving interest payments and access to the companys assets in case of a bankruptcy. Not only have that, in angel investors, individuals who have a personal stake in seeing a business proposition succeeded. Angel investors tend to focus their investments on sectors in which they have a personal interest. Corporate venture capital is 7

capital provided by established companies in return for a stake in your business. In short term, usually one year or less, often used to refer to bonds. Many shortterm loans obtained from banks are self-liquidating. A self-liquidating loan is one in which the proceeds of the loans are used to acquire assets that will generate enough cash to repay the loan. Not only that, line of credit is the borrowing limit a bank sets for a firm. A line of credit is an informal arrangement. The bank may change a firms credit limit or withdraw it entirely at any time. Trade credit deferment of payment for goods or services purchased by one company from another, granted by the seller for a short period, primarily to give the buyer a means of financing inventories. Bill of exchange is a short-term financial instrument, usually with a life of ninety days, which is used to finance foreign trade; in the nineteenth century it was widely used for short-term domestic borrowing. In commercial bank loans, it commercial bank lending appears on the balance sheet as notes payable and is second in importance to trade credit as a source of short-term financing.

The third major decision is the dividend decision. Dividend decisions are concerned with the distribution of profits of a firm to the shareholders. The decision will depend upon the preferences of the shareholder, investment opportunities available within the firm and the opportunities for future expansion of the firm. The dividend pay out ratio is to be determined in the light of the objectives of maximizing the market value of the share. The dividend decisions must be analyzed in relation to the financing decisions of the firm to determine the portion of retained earnings as a means of direct financing for the future 8

expansions of the firm. Therefore, the types of dividend are ordinary shares, preference shares, cumulative preference shares and non-cumulative preference shares. Ordinary shares also have other important characteristics for the investor most of the times they are easily transferable; that is, that its possession can pass from one hand to another without any problem. Due to the facility with which they can be transferred, the market of ordinary shares is usually active and dynamic. The ordinary shares are one of the most liquid investments on the market. However, you have to have in mind that in case of bankruptcy of the society, the reclamation from part of the ordinary shareholders would be subordinated to that of the creditors and to that of the preferential shareholders. Preference is legally shares, but they are very different from ordinary shares. The economic effect of preference is more like that of bonds. The effect of these is to make the income stream from preference shares more similar to that from debt than that from ordinary shares. Most importantly, fixed dividends are similar to interest payments. However, they are legally shares and are subject to the same tax treatment. Cumulative preference shares will accumulate any dividend that is not paid when due. Any unpaid dividend is added to the amount payable the following year and no dividends can be paid on ordinary shares until the entire backlog of unpaid dividends on cumulative preference is cleared. Unless a company is in a very poor financial condition, holders of cumulative preferences can be fairly sure of getting the due pseudo-interest, although the timing is somewhat more uncertain than would be the case with bonds. Non-cumulative preference shares do not accumulate dividends that are in arrears. In the last six years, financial institutions have been issuing preferred shares as subordinate 9

capital to meet the international capital standards. The reason for this is that bank regulators want capital that ranks after the banks' deposits and gives them some flexibility in financial difficulties. Non-cumulative preferred shares meet this test as they can have their dividends suspended without penalty. The only provision on these shares is usually that common dividends cannot be paid if the preferred dividends are not being paid.

(b) Traditional finance theory has assumed that the objective of the firm is to maximize shareholders wealth. Maximize shareholders wealth is partially defined as the consumption of goods and services. While there certainly are other motivations and rewards in living a good life, requires an appropriate level of wealth or ability to consume when achieve desire of material comfort certain levels. Achieving this goal requires foregoing current consumption in order to free up funds for investment in either equity or debt securities issued by corporate or governmental agencies with the expectation that it will increase our future ability to consume. While higher rewards are more desirable, this is tempered by the reality that the risk of losing all of our investment keeps most long term investors from operating in a risk-prone manner. The importance of this objective is the goal of the firm and to maximize the wealth of the owners for whom it is being operated. The wealth of corporate owners is measured by the share price of the stock, which in turn is based on the timing of returns, their magnitude, and their risk. When considering each financial decision alternative or possible action in terms of its impact on the share price of the firms stock, financial managers should accept only those actions that are expected to increase share price because 10

share price represents the owners wealth in the firm, maximizing share price will maximize owner wealth. Two important issues related to maximizing share price are economic value added and the focus on shareholders and the motives of listed on stock exchange. A stock exchange is an organization of brokers and investment bankers which has the purpose of providing the facilities for trade. First advantages of the stock market are that it is multifunctional. Even the people who think about retirement investing use the investments into the stocks to be a great investment strategy. Beside that, it also enhances the status and financial standing of the company. Forty is increasing public awareness and public interest in the company toward it product. It also provides the company with an opportunity to implement share option schemes for their staffs. After that, it accessing to additional fund raising in the future by means of new issues of shares or other securities and facilitating acquisition opportunities by use of the companys shares and lastly offering existing shareholders a ready means of realizing their investments.

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Conclusion In conclude this assignment contains three major decisions for financial managers. These are investment decision, finance decision and dividend decision. Investment decisions are a decision to acquire assets. Most of these assets will be real assets employed within the business to produce goods or services to satisfy customer demand. In finance decision, finance is understood as provision of funds as and when needed and the essential requirement of every organization. It contains long-term finance and short-term finance. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this and it has 4 types. Those are ordinary shares, preferences share, cumulative share and non-cumulative share. Beside that, it also mentions maximize shareholders wealth. Maximize shareholders wealth is partially defined as the consumption of goods and services. While there certainly are other motivations and rewards in living a good life, Requires an appropriate level of wealth or ability to consume when achieve desire of material comfort certain levels. Beside that, stock exchange means an organization of brokers and investment bankers which has the purpose of providing the facilities for trade and lists some of importance like it multifunctional.

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Reference Books: Gitman, L. J., 2006, Principles of Managerial Finance (11th Ed.), Boston, MA: Pearson Addison Wesley. Kent Baker & Gary Powell, 2005, Understanding Financial Management: A Practical Guide, Blackwell , Australia. Neil Seitz & Mitch Ellison, 2004, Capital Budgeting and Long-Term Financing Decisions, Thomson, South-Western. Timothy James Gallagher & Joseph D.Andrew, 2000, Financial Management: Principles and Practice, Prentice-Hall, Inc. New Jersey, USA. Douglas R.Emery, John D.Finnerty & John D.Stowe, 1998, Principles of Financial Management, Prentice-Hall, Inc. New Jersey, USA.

Website Reference: The Times 100, 1995, Investment Decision, viewed 26th March 2011, <http://www.thetimes100.co.uk/theory/theory--investment-decisions--223.php> FAO Corporate Document Repository, 2011, Chapter 6 - Investment decisions Capital Budgeting, viewed 26th March 2011,

<http://www.fao.org/docrep/w4343e/w4343e07.htm> Hotfrog, 2005, Long Term Decision, viewed 27th March 2011,

<http://www.hotfrog.com/Products/Long-term-Decision> Financial Terms, 2011, Financing Decision, viewed 28th March 2011, <http://www.finance-lib.com/financial-term-financing-decision.html>

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Maps of World Finance, 1999, Dividend Decision, viewed 28th March 2011, <http://finance.mapsofworld.com/corporate-finance/investmentdecision/dividend.html> Free Article:: Tutorial, 2005, Types of Long Term Debt, viewed 29th March 2011, <http://e-articles.info/e/a/title/Types-of-Long-Term-Debt/> InvestorWords.com, 2011, Maximizing Shareholder Wealth, viewed 30th March 2011, wealth.html> Answers.com, 2011, What are the importance of maximization of shareholders wealth?, viewed 30th March 2011, <http://www.investorwords.com/tips/842/maximizing-shareholder-

http://wiki.answers.com/Q/What_are_the_importance_of_maximization_of_share holders_wealth Stephen Bainbridge, 2006, The Importance of the Shareholder Wealth Maximization Standard Font Size, viewed 30th March 2011,

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/shareholderwealt hdefense.html Ask, 2011, Maximize Shareholders Wealth, viewed 31st March 2011, http://www.ask.com/questions-about/Maximize-Shareholders-Wealth

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