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Financial Management Dr.Amr Soliman
Faculty of Commerce & Business Administration Economics Department
Certified trainer & coordinator : Pathways to Higher Education Project Certified trainer: International Labour Organization
Know About Business (KAB) Project
An Overview of Financial Management
Role of financial management
Career opportunities Forms of business organization Goals of the corporation Issues of the new millenium
CHAPTER 1 An Overview of the Financial System .
to move funds from people who have surplus funds (savers or lenders) to people who have shortage of funds (investors or borrowers). . This function could be undertaken directly or indirectly. In other words. The basic function of both is to channel funds from one side to another in the economy.Financial System The Financial System consists of “financial markets” and “financial intermediaries”.
These institutions borrow funds from lenders and then lend them to borrowers. Financial Intermediaries: they are the institutions through which funds could be provided indirectly from lenders to borrowers.Financial System Financial Markets: they are the channel through which funds could be provided directly from lenders to borrowers by buying and selling securities (financial instruments). .
mutual funds and saving associations.Financial System Financial intermediaries include banks. insurance companies. Financial intermediaries also provide funds by buying securities in the financial markets. pension funds. .
Interest Rate Dividends (Profits) Bond Stock Financial System . Banks Funds (Loans) Funds Savers (Lenders): •Households. •Businesses. •Governments. Funds (Loans) “Direct Finance” Financial Markets Funds (Shares) Spenders (Borrowers): •Households or Individuals •Businesses. •Foreigners.“Indirect Finance” Interest Rate •Financial Interest Rate Funds (Deposits) Intermediaries •C. (Firms) •Governments. •Foreigners.
Components of the Financial Markets A market: is a point of contact where two sides come together to make exchange. and price. Sellers (Supply). Any market has four components: demand (buyers). supply (sellers). Therefore. the components of financial markets are: . Service (or good) and Price. The market does not necessarily mean a location where buyers and sellers meet. good or service. Like any market. the main components of the financial system is Buyers (Demand).
Components of the Financial Markets Demand (Buyers): they are investors or borrowers of money. which are returns to savers but costs to borrowers. who have surplus of funds. Supply (sellers): they are savers or lenders of money. . who have shortage of funds. Price: prices paid for the services of money are interests (or dividends). Service: it is the service of money. (Note: savers are not giving up their money but rather they are giving up the right of using it for a specific period).
This type also includes other financial intermediaries (insurance companies.Classification of Financial Markets We have three types of financial markets: Commercial banks: They constitute a market to exchange money between lenders and borrowers indirectly. pension funds. They do not meet each other. mutual funds and saving associations) .
The major security markets in the world are in New York. London and Tokyo. Exchange is usually done through brokers. .Classification of Financial Markets Security Market (Stock Exchange): It is a center place where all buyers and sellers of securities (bonds and equities) meet together to exchange their securities.
Classification of Financial Markets Foreign Exchange Market: It is the market where buyers and sellers meet to exchange foreign currencies. .
Money and Capital markets. . Primary and Secondary Markets.Structure of Financial Markets We can also classify financial markets into four classifications: Debt and Equity markets. Exchange and over-the-counter markets.
. securities are sold only at their face values (value written on the bond).Primary and Secondary Markets Primary Markets Primary markets are the financial markets where securities are sold to initial buyers. they deal with securities (bonds and stocks) when they are issued for the first time. In these markets. This means.
which may be higher or lower than the face value depending on the demand and supply forces. . which in turn depends on the financial position of the company. In such markets.Primary and Secondary Markets Secondary Markets Secondary Markets are markets where previously-issued securities are resold. securities are traded at their market value.
Exchanges and Over-The-Counter Markets The secondary markets can be organized in two ways: exchange markets and Over-The-Counter (OTC) markets. Over-The-Counter (OTC) Markets: They are markets where dealers at different locations declare prices of their securities and stand ready to buy and sell securities “over the counter” at these prices to anyone who comes to them. . Exchanges: Exchanges are markets where buyers and sellers (or their brokers) meet together in a central location to trade securities at market prices. This means. Because OTC dealers are in computer contact and know the prices set by one another. prices are not set by demand and supply forces. the OTC market is very competitive and not very different from a market with an organized exchange.
Money and Capital Markets Money Markets: Money market is the financial market where only short-term debt instruments are traded. . Capital Markets: Capital market is the financial market where longer-term (with maturity of more than one year) debt and equity instruments are traded.
when a final payment of the face value is made. Intermediate term: if maturity is between one year and ten years Long term: if maturity is ten years or longer. Maturity date is the expiration date of the debt instrument. debt instruments may be: Short term: if maturity is less than one year. such as bonds. .Debt and Equity Markets Debt Markets: Debt markets are the financial markets concerned with financing through issuing debt instrument. A bond is a “contractual agreement by the borrower to pay the holder of the instrument a fixed payment periodically (interest payment) until a specified date (maturity date). According to their maturity.
This is because it does not matter whether the corporation made losses or profits. so they are the first claimants to the issuing company in cases of liquidation or bankruptcy. the relationship between the bond-holder and the bond-issuer will end. in all cases.Debt and Equity Markets Debt Markets: Bonds involve no risk. and the face value will be repaid at the maturity date. A fixed interest is paid periodically. . At the maturity date. Bond holders are lenders. Bonds are issued by corporations or governments.
which means that it is not fixed. if a company issued one million shares and you own one share. . Equities (or stocks) give periodic payments to their holders. you are entitled to one-millionth of the firm's net income and onemillionth of the firm's assets). These payments are called dividends. (For example. Common stocks (shares): are claims to share in the net income and assets of a business. These dividends are a specific percentage of the corporation’s net income (or profits).Debt and Equity Markets Equity Markets Equity Markets are the financial markets concerned with financing through issuing equities such as common stocks (shares).
Equities are issued by corporations only. . Equities holders are the last claimants to the issuing company in cases of liquidation or bankruptcy. However. Equities involve risks. The relationship between the shareholder and the issuing company will never end until the former sells his shares or the company is liquidated or bankrupt. equities are considered long term securities. because firms might achieve profits or losses.Debt and Equity Markets Equity Markets Equities involve no maturity. as they do not have a maturity date.
What three questions does financial management seek to answer? What causes a company to have a particular stock value? How can managers make choices that add value to their companies? How can managers ensure that their companies don’t run out of cash while executing their plans? .
Career Opportunities in Finance Institutions and capital markets Investments Financial management .
Alternative Forms of Business Organization Sole proprietorship Partnership Corporation .
Sole Proprietorship Advantages: Ease of formation Subject to few regulations No corporate income taxes Disadvantages: Limited life Unlimited liability Difficult to raise capital .
.Partnership A partnership has roughly the same advantages and disadvantages as a sole proprietorship.
Corporation Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Double taxation Cost of set-up and report filing .
Goals of the Corporation The primary goal is shareholder wealth maximization. . Should firms behave ethically? YES! Do firms have any responsibilities to society at large? YES! Shareholders are also members of society. which translates to maximizing stock price.
employment goes up in: firms that make managers into owners firms that were owned by the government but that have been sold to private investors . On average.Is maximizing stock price good for society. and customers? Employment growth is higher in firms that try to maximize stock price. employees.
Fortune lists the most admired firms.Consumer welfare is higher in capitalist free market economies than in communist or socialist economies. In addition to high stock returns. these firms have: high quality from customers’ view employees who like working there .
Factors that Affect Stock Price Amount of cash flows expected by shareholders Timing of the cash flow stream Risk of the cash flows .
Three Determinants of Cash Flows Sales Current level Short-term growth rate in sales Long-term sustainable growth rate in sales Operating expenses Capital expenses .
production processes. use of technology. geographic market. marketing strategy) Financing decisions (choice of debt policy and dividend policy) The external environment .Factors that Affect the Level and Risk of Cash Flows Decisions made by financial managers: Investment decisions (product lines.
Financial Management Issues of the New Millenium Use of computers and electronic transfers of information The globalization of business .
agency relationships exist between: Shareholders and managers Shareholders and creditors .Agency Relationships An agency relationship exists whenever a principal hires an agent to act on his or her behalf. Within a corporation.
Shareholders versus Managers Managers are naturally inclined to act in their own best interests. But the following factors affect managerial behavior: Managerial compensation plans Direct intervention by shareholders The threat of firing The threat of takeover .
In the long run.Shareholders versus Creditors Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors. such actions will raise the cost of debt and ultimately lower stock price. .
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