‫جامعة القدس المفتوحة‬

‫عمادة الدراسات العليا والبحث العلمي‬

‫برنامج ماجستير‪Accounting and Finance‬‬
‫اسم المساق ورقمه ‪)6595(Advanced Financial Management‬‬
‫المحاضرة الول‬
‫عنوان المحاضرة‬
‫‪An Overview of Financial Management and‬‬
‫‪Financial Environment‬‬
‫إعداد ‪Prof. Marwan Darwish‬‬

‫الفصل الدراسي الثاني ‪2024/2023‬م‬

 ‫مخرجات التعلم‬
Objective

1. Finance and Financial Management

2. The Corporate Life Cycle: The legal forms of business
3. The Primary Objective of the Corporation: Explain why wealth maximization , rather than profit maximization is the main
firm’s goal
4. An Overview of the Capital Allocation Process
5. Financial Securities and The Cost of Money
6. Financial Institutions
7. Financial Markets
8. Trading Procedures in Financial Markets
9. Types of Stock Market Transactions
10.The Secondary Stock Markets
11.Stock Market Returns
12. Understand the relation between Accounting and Finance
 What is Finance and Financial management ?

• Finance is the art and science of managing

money
• Financial management concern with the
duties of Financial managers in the business
firm
 The Key Attributes of Successful Companie

All successful companies are able to accomplish two main goals:

1. They identify, create, and deliver products or services that are highly valued by
customers so highly valued that customers choose to purchase them from the company
rather than from its competitors.
2. All successful companies sell their products/services at prices that are high enough to
cover costs and to compensate owners and creditors for their exposure to risk.

•
1. successful companies have skilled people at all levels inside the company, including
leaders, managers, and a capable workforce.
2. successful companies have strong relationships with groups outside the company.
3. successful companies have enough funding to execute their plans And support their
operations.
 The Corporate Life Cycle
•

•
• Alternative Forms of Business Organization:
• Sole proprietorship
• Partnership
• Corporation
 Sole Proprietorship

• A business owned by one individual

• part of the proprietor’s personal income
• Advantages:
• Ease of formation
• Subject to few regulations
• No corporate income taxes
• Disadvantages:
• Limited life
• Unlimited liability
• Difficult to raise capital
 Partnership

 Tow or more persons associated to conduct a noncorporate business for profit.

 The same advantages and disadvantages as a sole proprietorship.

Example: Limited liability company(LLC)
 Corporation

• Legal entity created by state laws, and separated from owners and managers.

• Advantages:
• Unlimited life
• Easy transfer of ownership
• Limited liability
• Ease of raising capital
• Disadvantages:
• Double taxation
• Charter and Bylaws difficulties (Cost of set-up and report filing)
 What is an Initial Public Offering (IPO) market?

An IPO Market is a subset of the primary market.

Firms “go public” by offering shares of their stock to
the public for the first time.
 Agency Relationships

• An agency relationship exists whenever a principal hires an agent to act on their behalf.

• Within a corporation, agency relationships exist between:

• Shareholders and managers

• 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
 Goals of the Firm

•Create products / services highly valued by customers.

•Sell products at price cover costs and compensate owners and creditors for risks.
•Maximize profit
•The primary goal is shareholder wealth maximization, which translates to
maximizing stock price.

The Primary Objective of the Corporation: Value Maximization

• Shareholders are the owners of a corporation, and they purchase stocks
because they want to earn a good return on their investment without undue
risk exposure.
• In most cases, shareholders elect directors, who then hire managers to run
the corporation on a day to day basis. Because managers are supposed to
be working on behalf of shareholders, they should pursue policies that
enhance shareholder value.
• that management’s primary objective should be Maximization stockholder
wealth
 Does profit maximization equal stock price maximization?

• No, there is generally a high correlation between EPS,

cash flow, and stock price, but today’s stock price relies
not only on current earnings, but future earnings and
cash flows.
• Some actions may increase earnings, yet cause stock
price to decrease (and vice versa).
 Stock Price Maximization and Social Welfare

• If a firm attempts to maximize its fundamental stock price, is this good or bad for society?
• In general, it is good. Aside from such illegal actions as fraudulent accounting, exploiting
monopoly power, violating safety codes, and failing to
• meet environmental standards, the same actions that maximize fundamental stock prices
also benefit society.
• Here are some of the reasons:
• 1. To a large extent, the owners of stock are society.
• 2. Consumers benefit.
• 3. Employees benefit.
 Managerial Actions to Maximize Shareholder Wealth

• Any financial asset, including a company’s stock, is valuable only to the extent that it
generates cash flows
• 2. the timing of cash flows matters cash received sooner is better.
• 3. investors are averse to risk, so all else equal, they will pay more for a stock whose cash
flows are relatively certain than for one whose cash flows are more risky.
• Cash flows depend on three factors: 1) sales revenues, (2) operating costs and taxes, and
(3) required investments in operating capital
free cash flows (FCFs)
 An Overview of the Capital Allocation Process

• Three Primary Ways Capital Is Transferred Between Savers and Borrowers:

• Direct transfer
• Investment banking house
• Financial intermediary
• There are three important characteristics of the capital allocation process:
• 1. new financial securities are created.
• 2. financial institutions are often involved.
• 3. allocation between providers and users of funds occurs in financial markets
An Overview of the Capital Allocation Process
 Financial Securities and the Cost of Money

• Financial securities are simply pieces of paper with contractual provisions that entitle their
owners to specific rights and claims on
• specific cash flows or values. Debt instruments typically have specified payments and a
specified maturity.
 Fundamental Factors That Affect the Cost of Money

• The four most fundamental factors affecting the cost of money are:
• 1. production opportunities,
• 2. time preferences for consumption
• 3. risk
• 4. inflation.
 Economic Conditions and Policies That Affect the Cost of Money

• Economic conditions and policies also affect the cost of money. These include:
1. Federal Reserve policy
2. the federal budget deficit or surplus
3. the level of business activity
4. international factors, including the foreign trade balance, the international
5. business climate, and exchange rates.
 Financial Institutions

• Here are the major categories of financial institutions:

• 1. Investment banking houses
• 2. Commercial banks
• 3. Financial services corporations
• 4. Savings and loan associations (S&Ls)
• 5. Mutual savings banks
• 6. Credit unions
• 7. Life insurance companies
• 8. Mutual funds
• 9. Traditional pension funds
• 10.Hedge funds
 Types of Financial Markets

• Financial markets bring together people and organizations needing money with those having
surplus funds.
• There are many different financial markets in a developed economy. Each market deals with a
somewhat different type of instrument, customer, or geographic location.
• Here are some of the major types of markets:
• 1. Physical asset markets
• 2. Spot markets and futures markets
• 3. Money markets
• 4. Mortgage markets
• 5. World, national, regional, and local markets
• 6. Primary markets
• 7. Private markets
 Trading Procedures in Financial Markets

• The vast majority of trading occurs in the secondary markets. Although there are many
secondary markets for a wide variety of securities, we can classify their trading
procedures along two dimensions: location and method of matching orders.
• • A secondary market can be either a physical location exchange computer/telephone
network.
• • The second dimension is the way orders from sellers and buyers are matched.
• 1. This can occur through an open outcry
• 2. In a dealer market
• 3. The third method of matching orders is through a network (ECN) or a auction system
or electronic communications
 Types of Stock Market Transactions

• Because the primary objective of financial management is to maximize the firm’s

stock price, knowledge of the stock market is important to anyone involved in
managing a business. We can classify stock market transactions into three distinct
types .
• • Whenever stock is offered to the public for the first time, the company is said to be
going public. This primary market transaction is called the initial public offering
(IPO) market.
• If a company decides to sell (or issue) additional shares to raise new equity capital,
this is still a primary market, but it is called a offering. Trading in the outstanding
shares of established, publicly owned companies is a secondary market transaction
 The Secondary Stock Markets

• The two leading U.S. stock markets today are the New York Stock Exchange and
the Nasdaq stock market.
• New York Stock Exchange (NYSE) members. It then merged with Archipelago, a
publicly traded company that was one of the world’s largest ECNs.
• • The National Association of Securities Dealers (NASD) that licenses brokers
and oversees trading practices. The computerized network used by the NASD is
known as the NASD Automated Quotation System, or Nasdaq started as just a
quotation system, but it has grown to become an organized securities market with
its own listing requirements.
 Liquidity

• “Liquidity” is the ability to trade quickly at a net

price (that is, after any commissions) that is
very close to the security’s recent market
value.
 Competition in the Secondary Markets

• There is intense competition between the

NYSE and most of the largest companies trade
on the NYSE, the market capitalization of
NYSE-traded stocks is much higher than
Nasdaq. Since 3 trillion compared with $3.6
trillion in 2005 for stocks traded on Nasdaq
 Competition in the Secondary Markets

• Figure 1-3 shows the relative gains in value made by composite stock indexes of the
• two markets during the past 13 years. Although an investor would have ended up
• with roughly the same wealth, the Nasdaq
• by the technology boom and bust around the turn of the century
• Composite Index was much more affected
Stock Market Returns
 Stock Market Returns

• The results of foreign investments depend in part on what happens to the exchange
rate. Indeed, when you invest overseas, you are making two bets:
• (1) that foreign stocks will increase in their local markets.
• (2) that the currencies in which you will be paid will rise relative to the dollar.
 What is the relationship to Accounting?

• Cash flows basis – Accrual basis

• Decision Making
 ‫الواجب البيتي‪:‬‬
‫عنوان فرعي‪:‬‬ ‫‪‬‬
‫‪............................................‬‬
‫‪...............................................‬‬
‫‪...............................................‬‬
‫‪...............................................‬‬
‫‪...............................................‬‬
‫‪...............................................‬‬
‫شك اًر لحسن استماعكم‬