1.

INTRODUCTION TO

FINANCIAL MGT

Financial Management
Creating economic wealth Involves decisions such as when to introduce new product, invest in new assets, replace the new asset, loans, issuing stocks/bond etc. Most important and big area Important to maximize the shareholders wealth

FIELDS OF FINANCE
1. Money & Capital Market 2. Investment 3. Financial Management

1.2 Important questions to be answered

i) What is the long term investment should you consider? ii) Where will you get the long term financing to pay back your investment? iii) How will you manage the daily activities?

1.3 -1.6 SCOPE OF STUDIES

1.3 Definition of finance 1.3.1 Roles of financial manager Legal forms of business entity Goals of a firm Markets and financial institutions

1.3 DEFINITION OF FINANCE

Art and science of managing money process, institutions, markets and instruments involved. (Gitman) Activities that earn and use of capital collecting, using and managing. Concern with the maintenance & creation of economic value or wealth (Keown) Focuses on the decision making toward creating wealth.

1.4 ROLES OF FINANCIAL MANAGERS

Important roles in making decision in a company such as: 1. Capital budgeting 2. Capital structure 3. Working capital, short term asset & liability

The responsibilities of financial managers cover:

Planning and forecasting Making financing and investment decision Controlling and coordinating Dealing with financial markets Risk management

FIGURE 1.1 : CASH FLOWS BETWEEN FIRM & THE FINANCIAL MRKT
1. Primary Market

Security

Cash INVESTOR

FIRM
2. Investment

Reinvest

3. Dividend, etc

Secondary Market

Cash flow
Tax GOVERNMENT

1.5 MAJOR FORM OF BUSINESS ORGANIZATION

1.5.1 SOLE PROPRIETORSHIP 1.5.2 PARTNERSHIP 1.5.3 CORPORATION

1. Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc Knowledge in evaluation techniques Factors that effects the interest rate Financial instruments such as leasing, loan, bond, stock etc

2. Investment
Decision make by the investors to invest in the securities that can give high returns

LEGAL FORMS OF BUSINESS ORGANIZATIONS

Sole Proprietorship

Partnership
Corporation

Sole Proprietorship
A business owned by a single individual. Advantages Easy and cheaper to form Few regulations No corporate tax Disadvantages Hard to obtain capital Unlimited liability Lacks continuity when proprietor dies

Partnership
2 or more individual agreed to form a business in order to get profit based on agreement formal or informal (Oral Commitment/Formal Document) 2 types: General partnership Limited partnership

 Advantages of partnership
More available brain power and managerial skill Easy to form Able to raise capital Disadvantages of partnership Unlimited liability Difficult to transfer ownership

Corporation
An entity that legally functions separate and apart from its owner Advantages Unlimited life Easy transfer of ownership Limited liability Able to generate capital Disadvantages Double taxation: corporate and individual Expensive and complex to form Difficult in making decision

GOALS OF THE FIRM

Maximize PROFIT Maximize SHAREHOLDER WEALTH

Maximize PROFIT
Commonly uses by a firm In microeconomic, this goal is a priority to increase the profit However, it ignores some important factors such as: 1. Uncertainty and risk 2. Timing of projects returns Weakness of accounting profitability

Maximize SHAREHOLDER WEALTH

i.e maximization of the price of companys existing common stock The best decision taken is the decision that can raise the shareholders wealth Market price of the firms stock reflects the value of the firm The investment is suitable with the risk Financing capital with lower cost

FINANCIAL MARKETS & INSTITUTIONS

Financial Market a place where the person needs capital will get it from capital suppliers. 2 types: Primary market Secondary market

Financial Markets

Primary Market A place where a security is offered for the first time. 2 types of offers in primary market; IPO and Seasoned New Issue. Secondary Market The market in which stock previously issued by the firm trades. Transaction of selling and buying stocks occur Provide liquidity for stocks Guide for investors to put a price for their investments.

ROLE OF FINANCIAL MARKET

1. Primary Market

Security

Cash INVESTOR

FIRM
2. Investment

Reinvest

3. Dividend, etc

Secondary Market

Cash flow
Tax GOVERNMENT

Companies Social Responsibilities

Social responsibilities also important to companies; not only to maximise shareholders wealth. Social responsibilities to employees, customers, society and environment. Example; provide safe working environment, avoid pollution, produce safe product. Companies cant give priority to profit and ignores the social responsibilities.

Agency Relationships
When an individual or more (principal) hired another individual or organization (agent) to handle a service and give power to agent to make decision. Agency relationship among; Shareholders and manager Manager and debtors Agency problem exist when there are conflict of interest between principal and agents.

1. Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc Knowledge in evaluation techniques Factors that effects the interest rate Financial instruments such as leasing, loan, bond, stock etc

1. Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc Knowledge in evaluation techniques Factors that effects the interest rate Financial instruments such as leasing, loan, bond, stock etc