Tutorial 1

 Refer to Unit Plan, brief the students on learning objectives and learning
outcomes of this unit.
 Refer to Unit Plan, remind students on coursework assessment (mid-term test and
group assignment). Mid-Term Test will be held in Week 8 covering Topic 1 to 6
(40 multiple-choice questions).
 Arrange the students into assignment groups (minimum 4 and maximum 5 in a
group). Register their groupings on a list. Assignment groups within the same
tutorial cannot choose the same pair of listed companies.
 Brief the students on what are expected from them in assignment. Assessment
criteria are stated on mark sheet attached to the assignment handout. Remind the
students about the required format and must attach the mark sheet after the cover
page of their assignment. Due date for assignment is Week 10.
 Inform the students that they need to prepare and answer all the tutorial questions
before they attend tutorial class. Students are required to present their answers to
tutorial questions. Poor presentation and insufficient efforts in preparation will
result in penalty marks deducted from group assignment at the discretion of
lecturer and tutor.

Tutorial 2 (Topic 1)
An Overview of Financial Management

Question 1
Identify the primary characteristics of each form of legal organization.
(a) sole proprietor; (b) partnership; (c) corporation

1
Learning Outcome: Explain various fundamental concepts in finance.
Answer
(a) The sole proprietor maintains title to the firm's assets, has unlimited liability, is
entitled to the profits from the business, but must also absorb any losses realized.
This form of business is easily initiated. Termination of the business comes by
the owner discontinuing the business or upon his death.
(b) In a partnership, all general partners have unlimited liability. Each partner is
liable for the actions of the other partners. The partnership agreement dictates the
basic relationships among the partners within the firm. As with the sole
proprietorship, the partnership is terminated upon the desires of any partner within
the organization, or upon a partner's death. Under certain conditions a partner's
liability may be restricted to the amount of capital invested in the partnership.
However, at least one general partner must remain in the association for whom the
privilege of limited liability does not apply.
(c) The corporation is legally separate from its owners. Ownership of the corporation
is determined by the number of shares of common stock owned by an individual.
Since the shares are transferable, the ownership in a corporation may be easily
transferred. Investors' liability is limited to the amount of their investment. The
life of the corporation is not dependent upon the status of the investors. The death
or withdrawal of an investor does not disrupt the corporate life. However, the
cost of forming a corporation is more expensive than a proprietorship or
partnership.

Question 2
Using the following criteria, specify the legal form of business that is favoured:
(a) organizational requirements and costs
(b) liability of the owners
(c) continuity of business
(d) transferability of ownership
(e) management control and regulations
(f) ability to raise capital
(g) income taxes
Learning Outcome: Explain various fundamental concepts in finance.
Answer
(a) Organizational requirements and costs favour the sole proprietorship or possibly
the general partnership depending upon the approach taken in forming the
partnership.
(b) The corporation minimizes the liability of the owners. Also, the limited
partnership permits some of the partners the privilege of limited liability.
(c) The corporation is definitely the most favourable form of business because it
provides the continuity of the business regardless of an owner's withdrawal or
death.
(d) If ease of ownership transferability is desired, the corporation is best. However,
because of certain circumstances the owners may prefer that ownership not be
easily transferred, in which case the partnership would be the most desirable.

2
(e) The sole proprietor is able to maintain complete and ultimate control and
minimize regulations.
(f) The corporation is the strongest form of legal entity in terms of the ease of raising
capital from external investors.
(g) In regard to income taxes, it is difficult to determine which form of business is the
most advantageous. Such a selection is dependent upon individual circumstances.

Question 3
What are some of the problems involved in the use of profit maximization as the
goal of the firm? How does the goal of maximization of shareholder wealth deal with
those problems?
Learning Outcome: Recognise why shareholders’ wealth maximization is an appropriate
corporate goal.
Answer
The goal of profit maximization is too simplistic in that it assumes away the problems of
uncertainty of returns and the timing of returns. Rather than use this goal, we have
chosen maximization of shareholders' wealth—that is, maximization of the market value
of the firm's common stock—because the effects of all financial decisions are included.
The shareholders react to poor investment or dividend decisions by causing the total
value of the firm's stock to fall and react to good decisions by pushing the price of the
stock upward. In this way all financial decisions are evaluated, and all financial decisions
affect shareholder wealth.

Question 4
Describe the primary role of a Financial Manager within a firm.
Learning Outcome: Describe the roles of finance managers and how financial
management interact with other aspects of corporate management.
Answer
The primary roles of a Financial Manager would be to involve in on-going financial
analysis, planning and control, and making investment and financing decisions.

Investment decisions involve committing funds to:

Financing decisions: The assets of a company must be financed by share capital and
reserves, long-term liabilities or short-term liabilities. When a company is growing, it will
need additional finance from one or more of these sources. A finance manager must
know:
à where additional funds can be obtained and at what costs
à the effect on a company’s profitability and value of using any particular source of
funds

3
à the effect on financial risk
A company ought to be profitable, but it must be ‘liquid’ too, so that it always has enough
cash to pay for creditors and to hold inventories. Financing decisions therefore include
cash management.

Question 5
Firms often involve themselves in projects that do not result directly in profits; for
example, Maxis and Magnum frequently support public television broadcasts. Do
these projects contradict the goal of maximization of shareholder wealth? Why or
why not?
Learning Outcome: Recognise why shareholders’ wealth maximization is an appropriate
corporate goal.
Answer
The goal of shareholder wealth maximization must be looked at as a long-run goal. As
such, the public image of the firm may be of concern in as much as it may affect sales
and legislation. Thus, while these actions may not directly result in increased profits,
they may affect consumers' and legislators' attitudes – future profits may rise.

Question 6
What is agency cost? Provide two examples of agency costs. [ICSA June 2006 A(a)]
Learning Outcome: Explain what is agency problem and ways to minimise it.
Answer
Agency cost is borne by shareholders to minimize agency problem. These include the
costs incurred monitoring management behaviour, ensuring against dishonest acts of
management, and giving managers the financial incentive to maximize share price.