Financial Management

and Investment
Dr. Tamer Mohamed Shahwan
Professor of Finance and Banking,
Department of Management, Faculty of Commerce,
Zagazig University
English Section Coordinator, Faculty of Commerce,
Zagazig University
Ph.D. in Business Administration, Humboldt University of
Berlin, Germany

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

1
 Chapter 1: The Role of
Managerial finance
Chapter Outline:
1.1 What is Financial Management?
1.2 The Goal of the Firm
1.3 Organization of the Financial Management
1.4 Forms of Business organizations
1.5 Financial Markets

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

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 Objectives
After studying chapter 1, you should be able to:
1. Explain what is the Financial Management?
2. Describe “Financial Management” in terms of the three
major decisions areas that confront the financial
manager.
3. Identify the primary activities of the financial manager
and why the role of the financial manager today is so
important.
4. Describe the legal forms of business organization.
5. Describe the nature of the principal-agent relationship
between the owners and managers.
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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 1.1 What is Financial
Management?
It is concerned with the acquisition, financing, and management of
assets with some overall goal in mind.
It is concerned with investment decisions, finance decisions, and
asset management decisions to maximize the market value of
owners’ equity.
Accordingly, Financial Management addresses the following three
questions:
1. What long-term investments should the firm engage in?
(Investment Decisions or / Capital Budgeting).
2. How can the firm raise the money for the required investments?
(Financing Decisions or / Capital Structure).
3. How much short-term cash flow does a company need to pay its bills?
(Asset Management Decision or/ working Capital Management).
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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The Balance-Sheet Model of the Firm
Total Value of Assets: Total Firm Value to Investors:

Current
Current Liabilities
Assets
Long-Term
Debt
Fixed Assets
1 Tangible Shareholders

2 Intangible ’ Equity

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

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The Balance-Sheet Model of the Firm
The Capital Budgeting Decision
Current
Liabilities
Current Assets

Long-Term
Debt

Fixed Assets What long-term

investments Shareholders’
1 Tangible should the firm
Equity
2 Intangible engage in?

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-5
The Balance-Sheet Model of the
Firm
The Capital Structure Decision
Current Current
Liabilities
Assets

How can the Long-Term

firm raise the Debt
Fixed Assets money for the
1 Tangible required
investments? Shareholders
2 Intangible
’ Equity

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

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The Balance-Sheet Model of the
Firm

The Net Working Capital Investment Decision

Current
Net
Working
Liabilities
Current
Capital
Assets Long-Term
How much Debt
Fixed Assets
short-term cash
1 Tangible flow does a
Shareholders
company need
2 Intangible to pay its bills? ’ Equity

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-7
 Capital Structure
The value of the firm can be thought
of as a pie.
The goal of the manager is to 70%
25%50%30%
increase the size of the pie. Debt
DebtDebt
Equity
75%
50%
The Capital Structure decision can be Equity
viewed as how best to slice up a the pie.

If how you slice the pie affects the size of the pie,
then the capital structure decision matters.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-8
The Financial Manager
To create value, the financial manager should:
1. Try to make smart investment decisions.
2. Try to make smart financing decisions.
3. Be concerned with the management of
current assets than with that of fixed
assets. In other words, he must be keen to
create a positive Net Working Capital.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-9
 Career Opportunities in
Finance: Financial Services
Financial Services is the area of finance concerned
with the design and delivery of advice and financial
products to individuals, businesses, and
governments.
Career opportunities include:
• banking
• personal financial planning
• Investments
• real estate
• insurance
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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Career Opportunities in
Finance: Managerial Finance
Managerial finance is concerned with the duties of the
financial manager working in a business.
Financial managers administer the financial affairs of
all types of businesses—private and public, large and
small, profit-seeking and not-for-profit. Tasks include:
• developing a financial plan or budget
• extending credit to customers
• evaluating proposed large expenditures
• raising money to fund the firm’s operations.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-11
Career Opportunities in
Finance: Managerial Finance
(cont.)
 The recent global financial crisis and subsequent responses by
governmental regulators, increased global competition, and rapid
technological change also increase the importance and complexity
of the financial manager’s duties.

 Increasing globalization has increased demand for financial

experts who can manage cash flows in different currencies and
protect against the risks that naturally arise from international
transactions.
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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 Focus on Practice
Professional Certifications in Finance:
◦ Chartered Financial Analyst (CFA) – Offered by the CFA Institute, the CFA
program is a graduate-level course of study focused primarily on the
investments side of finance.

◦ Certified Treasury Professional (CTP) – The CTP program requires students to

pass a single exam that is focused on the knowledge and skills needed for
those working in a corporate treasury department.

◦ Certified Financial Planner (CFP) – To obtain CFP status, students must pass a
ten-hour exam covering a wide range of topics related to personal financial
planning.
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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 1.3 The Goal of the Firm

Efficient financial management requires the existence

of some objectives or goals as follows:
Profit maximization by maximizing a firm’s earnings
after taxes.
Maximizing the current value per share of the
existing stock.
Maximize the market value of the existing owners’
equity.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

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 Profit Maximization
Although the profit maximization would probably
be the most commonly cited business goal, but
it suffers many disadvantages:
1. It is not a very precise objective (e.g. Do we
mean profits this year?, Do we mean
something like accounting net income or
earnings per share?).
2. This goal does not tell us the appropriate
trade-off between current and future
profits.
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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 Maximizing Stock Value

The goal of maximizing the value of the stock

avoids the problem associated with the previous
goal. However, Maximizing Stock value is not a
proper goal for each type of corporations which
have no traded stock.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-16
 Maximizing the Market
Value of the Equity

This goal will fit for each type of corporations. It

does not matter whether the business is a
proprietorship, a partnership, or a corporation.
Accordingly, The traditional answer regarding the
goals of the financial managers is that the
managers of the corporation are obliged to make
efforts to maximize the value of the firm and by
doing so maximize the wealth of its owners.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-17
 Review Questions

1. What is the goal of financial management?

2. What are some shortcomings of the goal of
profit maximization?
3. What are the major areas in finance?

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-18
 The Firm and the Financial
Markets
Firm Firm issues securities (A) Financial
markets
Invests
Retained
in assets cash flows (F)
(B)
Short-term debt
Current assets Cash flow Dividends and Long-term debt
Fixed assets from firm (C) debt payments (E)
Equity shares

Taxes (D)

The cash flows from

Ultimately, the firm the firm must exceed
must be a cash Government the cash flows from
generating activity. the financial markets.
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-19
Corporate Securities as
Contingent Claims on Total
Firm Value
The basic feature of a debt is that it is a promise by the
borrowing firm to repay a fixed dollar amount of by a
certain date.
The shareholder’s claim on firm value is the residual
amount that remains after the debtholders are paid.
 If the value of the firm is less than the amount
promised to the debtholders, the shareholders get
nothing.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-20
 1.4 Forms of Business
Organization
The Sole Proprietorship
The Partnership
◦ General Partnership
◦ Limited Partnership
The Corporation
Advantages and Disadvantages
◦ Liquidity and Marketability of Ownership
◦ Control
◦ Liability
◦ Continuity of Existence
◦ Tax Considerations
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-21
Legal Forms of Business
Organization
• A sole proprietorship is a business owned by
one person and operated for his or her own
profit.
• A partnership is a business owned by two or
more people and operated for profit.
• A corporation is an entity created by law.
Corporations have the legal powers of an
individual in that it can sue and be sued, make
and be party to contracts, and acquire
property in its own name.
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-22
A Comparison of Partnership
and Corporations
Corporation Partnership

Liquidity Shares can easily be Subject to substantial

exchanged. restrictions.

Voting Rights Usually each share gets General Partner is in charge;

one vote limited partners may have
some voting rights.

Taxation Double Partners pay taxes on

distributions.
Reinvestment and Broad latitude All net cash flow is
dividend payout distributed to partners.

Liability Limited liability General partners may

have unlimited liability.
Limited partners enjoy
limited liability.
Continuity Perpetual life Limited life

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-23
Separation of Ownership
and Control

Board of Directors

Debtholders

Shareholders
Management

Debt
Assets
Equity
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-24
 Do Shareholders Control
Managerial Behavior?
 Shareholders vote for the board of directors, who in
turn hire the management team.
 Contracts can be carefully constructed to be incentive
compatible.
There is a market for managerial talent—this may
provide market discipline to the managers—they can
be replaced.
 If the managers fail to maximize share price, they may
be replaced in a hostile takeover.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-25
1.5 Financial Markets
Primary Market
◦ When a corporation issues securities, cash flows from
investors to the firm.
◦ Usually an underwriter is involved. Two types of transactions
can be done: Public offerings vs. a Private placement.
◦ It refers to the original sale of securities by governments and
corporations.
Secondary Markets
◦ Involve the sale of “used” securities from one investor to
another.
◦ Securities may be exchange traded or trade over-the-counter
in a dealer market.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-26
Financial Markets

Investors
Stocks and
Firms Bonds securities

Money Bob Sue

money

Primary Market
Secondary
Market

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY 1-27