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2ACC0810N
Lecture 1
LEARNING OBJECTIVES
INTRODUCTION
COMPOUNDING
EXAMPLE OF COMPOUNDING
FV = 20 (1.06)^5 = 26.76
DISCOUNTING
DISCOUNTING
PV =
FV
(1 + I)^n
PV = present value
FV = future value
i = discount rate
n = number of years until the cash flow
occurs
EXAMPLE
PV = 1200/(1.1)^1 = 1091
Alternatively, we can convert our present
value of 1000 into a future value:
FV = 1000 (1.1)^1 = 1110
CORPORATE OBJECTIVES
SHAREHOLDER WEALTH
MAXIMISATION
NPV A
Linking
NPV
to
SHWM
NPV B
NPV C
1
Corporate
Net
Present
Value
2
NPV D
1: NPV is POSITIVE
2: This link relies on
market
efficiency
3: Share price taken
as
Share Price
3
SHWM
IS SHAREHOLDER WEALTH
ALWAYS MAXIMISED?
NOT Always
Agency problem
CONSEQUENCES OF AN AGENCY
PROBLEM
OPTION 1: DO NOTHING
Leaving managers to their own devices
is problematic:
Given human nature, managers will
engage in suboptimal behaviour.
No action is not really an option.
OPTION 2: MONITORING
Problems associated with monitoring:
Auditor/ special report
Costly in terms of both time and money.
Who will pay? Large shareholders? What about
free-riding smaller investors?
Some managerial actions are hard to follow.
May drive bad managers underground.
profits
share price (e.g. via share options).
Corporate governance
Monitor the activities of management
Internal controls (financial reporting and accountability)
Transparency
The role of non-executive directors
Threat of firing manager
Bring in new investor to set up new policy
SUMMARY
SUMMARY
SUMMARY
SUMMARY
SUMMARY
WORKSHOP
Investment
Every investor has risk preference, each will invest
according to his/her risk preference. Investment is
allocating resource to a business/investment .
Investor will look for high return of investment.
The concept of risk and return is the higher the risk
the higher the return. Investor will use different
evaluation method to evaluate the return of
investment.
1.WHAT ARE THE FUNCTIONS AND AREAS OF RESPONSIBILITY UNDER THE CONTROL OF THE FINANCIAL
MANAGER?
Financing decision
a)Internal-company retain earning,
working capital
b)External- share issue, bank
borrowing.
Finance manager source for the
cheapest source of financing.
1.WHAT ARE THE FUNCTIONS AND AREAS OF RESPONSIBILITY UNDER THE CONTROL OF THE FINANCIAL
MANAGER?
Dividend policy
Return to shareholders(owner). Management will
decide how much to pay dividend, sometime once a
year or 2 or 3 time a year. Interim dividend , final
dividend.
How much to pay depend on company bank balance
available and also depend on how much the
company need for working capital and investment
activities. And listed company will usually pay the
same dividend everyyear
3. CAL THE PV OF A CASH FLOW OF RM10,000 THAT YOU RECEIVED IN 3 YEARS TIME USING A
DISCOUNT OF 15% P.A.
Year 0----------------------------------Year 3
PV---------------------------------------Future
cash
flow(RM10,000)
PV=FV
(1 + i)
= 10,000/(1.15)^3
= 6,575.16