FINANCIAL MANAGEMENT AND ITS

ENVIRONMENT, AN OVERVIEW
 THE TOPICS
1. THE KEY ATTRIBUTES FOR SUCCESS
2. THE CORPORATE LIFE CYCLE
3. THE PRIMARY OBJECTIVE OF CORPORATIONS
4. THE ROLE, THE GOAL, THE AGENCY PROBLEM
5. FINANCIAL : THE MARKET , THE INSTITUTION
6. SECONDARY MARKET
7. THE STOCK MARKET
 THE TOPICS

8. THE COST OF MONEY AND INTEREST RATE LEVEL

9. THE DETERMINANTS OF MARKET INTEREST RATE
10.THE TERM STRUCTURE OF INTEREST RATE
11.WHAT DETERMINES THE SHAPE OF THE YIELD CURVE
12.INTERNATIONAL RISK FACTORS
13.ECONOMIC FACTORS THAT INFLUENCE INTEREST
RATE LEVELS
14.A PREVIEW OF WHAT IS AHEAD
 1. THE KEY ATTRIBUTES

1. IT HAS SKILLED PEOPLE

2. IT HAS STRONG RELATIONSHIP WITH
GROUP OUTSIDE THE COMPANY
3. IT HAS ENOUGH CAPITAL TO EXECUTE
THEIR PLANS AND SUPPORT THEIR
OPERATION
 2. THE CORPORATE LIFE CYCLE
STARTING UP : PROPRIETORSHIP
• ADVANTAGE : EASILY AND INEXPENSIVE
FORMED, FEW REGULATIONS, PERSONAL
INCOME TAX
• DISADVANTAGE : DIFFICULT TO FIND CAPITAL
NEED FOR GROWING, UNLIMITED
PERSONAL LIABILITY FOR BUSINESS’S DEBT,
LIMITED LIFE
 2. THE CORPORATE LIFE CYCLE

A PARNERSHIP
1. ADVANTAGE : LOW COST AND EASY TO
FORMATE, A PART OF PERSONAL INCOME TAX
2. DISADVANTAGE : UNLIMITED LIABILITY, LIMITED
LIFE, DIFFICULT FOR TRANSFER OWNERSHIP,
DIFFICULTY RAISING LARGE CAPITAL
 2. CORPORATE LIFE CYCLE
A CORPORATIONS
• ADVANTAGE : UNLIMITED LIFE, EASY
TRANSFERABLE OF OWNERSHIP,LIMITED
LIABILITY
• A GROWING CORPORATIONS : AGENCY’S
PROBLEM
 3. THE PRIMARY OBJECTIVE : VALUE
MAXIMIZATION
•THE GOAL : STOCKHOLDER WEALTH MAXIMIZATION BY MAXIMIZING
MARKET STOCK PRICE WHICH REFLECTS ALL RELEVAN
INFORMATION—THE FUNDAMENTAL PRICE
•STOCK PRICE MAXIMIZATION VS SOCIAL WELFARE, IS IT GOOD ?
THE STOCK HOLDER ARE A MEMBER OF SOCIETY, CONSUMERS
BENEFIT BECAUSE IT REQUIRES EFFICIENCY, LOW COST AND HIGH
QUALITY RPODUCT, EMPLOYEE BENEFIT
•MANAGER ACTIONS TO MAXIMIZE STOCKHOLDER’S WEALTH----
CREATE THE FIRM’S VALUE BY GENERATING CASH FLOW FOR NOW
AND THE FUTURE, THE FREE CASH FLOW. THE FCW’S
DETERMINANTS : SALES REVENUE, OPERATING COST AND REQUIRED
INVESTMENT IN OPERATION
 4. THE ROLE OF FINANCIAL MANAGER

•IT USSUALLY ASSOCIATED WITH THE TOP

OFFICER OF THE FIRM, THE MOST IMPORTANT
JOB IS TO CREATE VALUE OF THE FIRM BY
CREATING MORE CASH THAN IT USES
•HOW ? TRY TO SELL BONDS AND STOCKS AND
OTHER FINANCIAL INSTRUMENTS THAT RAISE
MORE CASH THAN THEY COST
 4. THE GOAL OF FINANCIAL
MANAGEMENT

•MAXIMIZING THE CURRENT VALUE PER

SHARE OF THE EXISTING STOCK
•HOW ? SURVIVE, AVOID FINANCIAL DISTRESS,
BEAT THE COMPETITION, MAXIMIZE MARKET
SHARE, MINIMIZE COST, MAXIMIZE PROFIT,
MAINTAIN A STEADY EARNING GROWTH
 4. THE AGENCY PROBLEM, CONTROL OF
THE CORPORATION

•WHENEVER SOMEONE (PRINCIPAL)

HIRES ANOTHER (AGENT) TO REPRESENT
HIS/HER INTEREST, THIS PROBLEM MAY
APPEAR
•IT COULD BE MINIMIZED BY
CONTROLLING
 5. FINANCIAL MARKET

IT BRINGS TOGETHER PEOPLE

AND ORGANIZATIONS NEEDING
MONEY WITH THOSE HAVING
SURPLUS FUND
 5.TYPES OF MARKET
• PHYSICAL ASSET MARKET, TANGIBLE REAL
ASSET MARKET : AUTO, COMPUTERS, REAL
ESTATE ETC
• FINANCIAL ASSET MARKET : DEAL WITH
STOCK, BOND, NOTES, MORTGAGE AND OTHER
FINANCIAL INSTRUMENTS
• SPOT MARKET AND FUTURE MARKET : ASSET
ARE BEING SOLD FOR ON THE SPOT DELIVERY
OR IN THE FUTURE
 5.TYPES OF MARKETS
• MONEY MARKETS : MARKET FOR SHORT TERM,
HIGHLY LIQUID, DEBT SECURITIES
• CAPITAL MARKETS : MARKET FOR INTERMEDIATE OR
LONG TERM DEBT AND CORPORATE STOCK---THE
NEW YORK STOCK EXCHANGE
• MORTGAGE MARKET : DEAL WITH LOANS ON
RESIDENTIAL, AGRICULTURAL, COMMERCIAL AND
INDUSTRIAL REAL ESTATE
• CONSUMERS CREDIT MARKET : LOAN FOR AUTO,
APLIANCES, EDUCATION, VACATION, ETC
 5.TYPES OF MARKETS
• PRIMARY MARKET : THE MARKET WHICH
CORPORATIONS RAISE NEW CAPITAL
• IPO MARKET : SUBSET OF THE PRIMARY
MARKET
• SECONDARY MARKETS : MARKET IN WHICH
EXISTING, ALREADY OUTSTANDING,
SECURITES ARE TRADED AMONG INVESTOR
• PRIVATE MARKET VS PUBLIC MARKET
 5. FINANCIAL INSTITUTIONS
• COMERCIAL BANK, TRADITIONAL DEP STORE OF
FINANCE
• SAVING AND LOAN ASSOCIATION (S&L ) :
TRADITIONALLY SERVED INDIVIDUAL SAVERS
• MUTUAL SAVING BANKS : SIMILAR WITH S&L
OPERATED IN NORTH EASTERN STATE
• CREDIT UNION : COOPERATIVE ASSOCIATION WHOSE
MEMBER ARE SUPPOSED TO HAVE A COMMON
BOND, SUCH AS BEING EMPLOYEES OF THE SAME
FIRM
 5. FINANCIAL INSTITUTIONS
• LIFE INSURANCE COMPANIES : TAKE SAVINGS IN THE FORM OF
PREMIUM, INVEST THESE FUND IN STOCK, BOND, REAL ESTATE AND
MORTGAGE AND MAKE PAYMENT TO BENEFICIARIES
• MUTUAL FUND : ARE CORPORATION THAT ACCEPT MONEY FROM
SAVERS AND THAN USE THIS FUND TO BUY FINANCIAL
INSTRUMENTS, POLL FUND AND REDUCE RISKS BY
DIVERSIFICATIONS
• PENSION FUND : ARE RETIREMENT PLANS FUNDED BY
CORPORATION OR GOVERNMENT AGENCIES FOR THEIR WORKERS
AND ADMINISTRATED GENERALLY BY THE TRUST DEPARTEMENT OF
COMMERCIAL BANK OR BY LIFE INSURANCE. PENSION FUND INVEST
PRIMARILY IN BOND, STOCK, MORTGAGE AND REAL ESTATE
 6. SECONDARY MARKET

1. PHYSICAL LOCATION EXCHANGE OR COMPUTER/TELEPHONE

NETWORK : New York Stock Exchange, The American Stock
Exchange (AMEX), The Chicago Board or Trade (CBOT) trades
future and options, the Tokyo Stock Exchange are physical
locations exchange. NASDAQ which trades US Stock is a network
link of computer, The Market for Treasury Bond and Foreign
Exchange are conducted via telephone or computer network
2. THE WAY ORDER DIMENSIONS WHERE SELLERS AND BUYERS
ARE MATCHED : AN OPEN OUTCRY AUCTION SYSTEM, THROUGH
DEALERS OR BY AUTOMATED ORDER MATCHING. OUTCRY
AUCTION IS : CBOT
 6. SECONDARY MARKET

3. THE THIRD METHOD OF MATCHING ORDERS

IS THROUGH AN ELECTRONIC
COMMUNICATIONS NETWORK (ECN) : THE
PARTICIPANTS POST THEIR ORDER TO BUY
AND SELL ANG THE ECN MATCHES ORDE
 7. THE STOCK MARKET
TWO LEADING STOCK MARKET :
• The New York Stock Exchange (NYSE) : own
building, limited number of members
• The Nasdaq Stock Market : is a self regulatory
body that licences brokers and oversees
trading practices, computerized network
 8. THE COST OF MONEY AND INTEREST
RATE LEVEL
INTEREST RATE, COST OF EQUITY
1. FACTORS THAT AFFECT THE COST OF MONEY :
PRODUCTION OPPORTUNITY, TIME
PREFERENCE ON CONSUMPTION, RISK AND
INFLATION
2. THE LEVEL OF INTEREST RATE WILL VARY : 1.
ECONOMIC ACTIVITY, CURRENT RATE OF
INFLATION, EXPECTATION ABOUT FUTURE
RATE OF INFLATION
 9. THE DETERMINANTS OF MARKET
INTEREST RATE
Nominal/Quoted Rate = r = rFR + DRP + IP + MRP
• rFr = Risk Free Rate, T Bills
• IP = Inflation Premium = average expected
inflation rate over the life of security
• DRP = Default Risk Premium = risk that a
borrower will default, principal and interest
• MRP = Maturity Risk Premium = the longer the
higher
 10. THE TERM STRUCTURE OF INTEREST
RATES
DESCRIBES THE RELATIONSHIP BETWEEN
LONG AND SHORT TERM INTEREST RATE
• YIELD CURVE REPRESENTS INTEREST RATE IN
DIFFERENT MATURITY
• HISTORICALLY, IN MOST YEARS, LONG TERM
RATE HAVE BEEN ABOVE SHORT TERM, YIELD
CURVE UPWARD SLOPE, A NORMAL TYIELD
CURVE
11. DETERMINANTS THE SHAPE OF YIELD
CURVE
YIELD OF TREASURY BOND MATURES IN t YEARS :
rt = r + IP + MRP
• r = real risk free rate, vary based changes on
economy and demogaphics, IP = Inflation Premium,
MRP = Maturity Risk Premium
YIELD ON CORPORATE BOND MATURES IN t YEARS :
rct = r + IP + MRP + DRP + LP
• DRP = DEFAULT RISK PREMIUM, LP = LIQUIDITY
PREMIUM
 12. INTERNATIONAL RISK FACTORS

• COUNTRY RISK : RISK THAT ARISE FROM

INVESTING OR DOING BUSINESS IN
PARTICULAR COUNTRY. IT DEPENDS ON ITS
ECONOMY, SOCIAL, POLITICAL AND
REGULATORY SYSTEMS
• EXCHANGE RISK RATE : RISK THAT ARISE
FROM DIFFERENT MONEY
 13. ECONOMIC FACTORS INFLUENCES
INTEREST RATE LEVEL

1. FEDERAL RESERVE POLICY

2. BUDGET DEFICIT OR SURPLUSES
3. INTERNATIONAL TRADE, DEFIOCIT OR
SURPLUSES
4. BUSINESS ACTIVITY