26/11/2017

Pr. Sidi Mohamed RIGAR

Content of the seminars

Preliminary Chapter: An Overview Of Financial
Management

Chapter 1 : Financial Market and Institutions

Chapter 2 : Time Value of Money

Chapter 3: Risk and return

Chapter 4 : Financial Assets and their valuation

Recommended Bibliography
Brealey R. & S. Myers : « Principles of corporate Finance » McGraw
Hill Edition New York 1985-2015
Brealey R. & S. Mayers : « Principes de Gestion Financière » Pearson
Education , Paris, 2003- 2015
Ross, Westerfield and Jordan : « Fundamentals of Corporate
Finance », McGraw- Hill International Edition, 9th Edition, 2010
Berk J & P DeMarzo: « Finance d’Entreprise » Nouveaux Horizons,
2eme Edition, Paris, 2011
Topsacallian, P & J. Teuilé: « Finance » Vuibert, 2ème Edition 2013
Bodi Zvi et Robert Merton : « Finance », Nouveaux horizons, Paris,
2011
Brigham E.F & Houston J.F : » Fundamentals of Financial
Management », Concise 7th Edition, South-Western, Florida, 2011

1
 26/11/2017

Preliminary Chapter :
An Overview Of Financial Management
1776: Adam Smith : Invisible Hand
Profit maximization is the right goal for a business
The free enterprise system is the best for society
The World has changed since 1776
Firm much larger
They operate globally
Have thousand of employees
Owned by thousand or million of stockholders

Today, most Academics subscribe to following

modified version of Adam Smith Theory :
A firm principal goal should be to maximize the wealth
of its stockholders, wich means maximizing the value of
its stock
Free Enterprise is still the best Economic System for the
country as a whole : Develop products and services
However, some constraints are needed-firms should not
be allowed :
to pollute the air and water
to engage in unfair employment practices
To create monopolies to exploit consumers
Companies must prevent financial scandal and
promote Sustainable Development to increase the
global value of the Firm

Objectives of the this introductive

Chapter
Explain the role of finance in companies and the different types of jobs in
Finance

Identify the advantages and disadvantages of different forms of business

organizations

Explain the link between stock price, intrinsic value and executive
compensations

Discuss the importance of business ethics and the consequences of unethical

behavior.

Identify the potential conflict that arise within the firm between stockholders
and managers and between stockholders and bondholders and discuss the
techniques that firms can use to mitigate these potential conflicts.

2
 26/11/2017

1- What is FINANCE ?
Term with many facets : Hard to define
Finance versus Economics and Accounting :

Economists : Assets Value based on future cash flows

Accounting provides information about the likely size of

those cash flows

Finance grew out and lies between Economics and

accounting

Finance Within Organization

Board of Directors

Chief Executive Officer

CEO

Chief Operating Officer Chief Financial Officer

COO CFO

Marketing, Production, Accounting, Treasury,

Human Resources and Credit ,Legal , Capital
other Operating Budgeting and Investor
Department Realions

Corporate Finance, Capital Markets, and Investments

Finance is generally divided in three areas :
Financial Management : Corporate Finance : focuses on decisions
relating to :
How much and what types of assets to acquire
How to raise the capital needed to purchase assets
And how to run the firm so as to maximize its value

Capital Markets : Markets where interest rates, along with stock and
bond prices are determined: it encloses Financials institutions that
Supply capital to businesses : Banks, Investment banks,
Stockbrokers, mutual Funds, Insurance Companies……

Investment : relate to decisions concerning stocks and bonds and

include a number of activities : The best way to structure portfolio …

3
 26/11/2017

2- JOBS IN FINANCE
Finance prepare students for Jobs in Banking, Investments, Insurance,
Corporations, and the government

Accounting student need to know finance, marketing, management,

and human resources, they also need to understand finance for its
affects decisions in all those areas.

It’s also worth noting that finance is important for individuals

regardless of their jobs : manage retirement and saving for salaries,
manage small business …..

3- FORMS OF BUSINESS ORGANIZATION

Four main forms of business (In American Context) :
A Proprietorship : an unincorporated business owned by one
individual it have advantages and disadvantages!!
A Partnership : An unincorporated business owned by two or more
persons who decide to do business together
Corporation: Legal Entity witch is separate and distinct from its
owners and manger. In this separation that limits stockholders’
losses to the amount they invest in the firm: have unlimited lives
and it easier to transfer shares of stock
A limited Liability company LLC or limited Liability Partnership
LLP : Limited liability but
LLC : Hybrid Form between Corporation and partnership
LLP: Used for professional firms in the filed of accounting, law, architecture…

QUIZ 1
1. What is the difference between economics, finance, and accounting?

2. Who is the CFO? Where does this individual fit in the corporate
hierarchy, and what are some of his or her responsibilities?

3. What are the key differences between proprietorships, and

corporations? And what is their equivalents in the Moroccan
Context?

4. How are LLCs and LLPs related to other forms of organizations in

American context? And what happened in this area in Morocco?

5. What are some reasons the value of a business other than a small one
is generally maximized when it is organized as a corporation?

4
 26/11/2017

4- Balancing shareholders value and the

interest of Society
Find Equilibrium between Firms and Proprietor's Goals
Primary Goal of the firm: maximize its owners value
Proprietors : Short-term Goals (Money) or personal Goals
Being socially responsible is not inconsistent with
maximizing shareholder value
Good relations with employees and customers will arise
the value
To maximize value, enlightened managers need to mind
society-imposed constraints ( To Preserve environment
and to invest in community’s social needs)

5- Intrinsic values, stock prices and executive

compensations
Value Assets : The Present value of the stream of cash flows that asset
provides to its owners over time

Stock price is based on cash flows expected in future years not just in the
current year

Ideally Managers adhere to this long-run focus, but many example in

recent years where the focus for many companies shifted to the short-run

In recent Financial Crisis, many managers received huge bonuses for

engaging in risky transactions that generated short-term profits

Subsequently, the value of these transactions collapsed

In trying to reform system, regulators are looking for ways to insure the
financial institutions once again to focus on their firms’ long-run value

A growing number of Companies have used stock and stock options as

a key of part of executive pay: The hope is that by structuring
compensation this way, managers will think more like stockholders
and continually work to increase shareholders value

Despite the best of intentions, stock- based compensation does not

always work as planned: the problem of the date of executing options:
that let some managers to try to maximize the stock price on that
specific date, not over the long run

Fortunately, more executive are (must be) honest, but ever for honest
companies, it’s hard to determine the proper price of a stock

5
 26/11/2017

Determinants of Intrinsic Values and Stock Prices

Managerial Actions, The Economic Environment, Taxes and the Political

Climate

“Perceived”
“True” Investor Investor Cash “Perceived”
Cash Flows “True” Risk Risk
Flows

Stock’s Stock’s
Intrinsic Value Market Price

Market Equilibrium :
intrinsic Value = Stock Price

Explantation of the figure:

Box 1 : Many external and internal variables influence the level and
riskiness of the company’s future cash flows witch ultimately
determines the company’s stock price : Investors like higher
expected cash flows but they dislike risk

2nd Row of boxes: When we have information about company, we

can determine what we call “true” expected cash flows and true risk
from “perceived cash flows and perceived risk

3rd row of boxes : Each stock has an intrinsic value, witch is an

estimate of the stock’s “true” value as calculated by a competent
analyst who has the best available data, and market price, witch is
the actual market price based on perceived but possibly incorrect
information as seen by the marginal investor

When a stock’s actual market price is equal to its intrinsic value, the
stock is in equilibrium

6- Important Business Trends

The Increased Globalization of Business

Developments in communication and Information

Technology (IT) (Wall-Mart, IBM, Microsoft,
Amazon…;

Corporate Governance : The way the Top

Management operate and interface with stockholders

6
 26/11/2017

7- Business Ethics
As Result of the Financial Scandal (Enron…): Astrong push to improve
Business Ethics
Sabranne Oxley Bill: Sanctions to executive signed false statement,
inform students...
What Companies are doing?
Most firms have strong written code of Etical Behaviour
But When conflicts arise involving profits and ethics, ethical considerations
sometimes are so obviously important hat they dominate (Air Pollution,
Adverse Drug Reactions….
Consequences of Unethical Behavior
Unithical Behaviour can lead to a firm’s rapid decline (Enron, Worldcom...)
Some companies can avoid bunkrupty but face a damaging blow to their
reputation (Goldman Sachs, Société générale...)
How should Employees deal with unitical behaviour?
Stuck between a rock and hard place : “Doing what they should do and
possibly losing their jobs versus going along with the boss and possibly
ending up in jail”
Importance of Ethics in business and business school

8- Conflicts between Managers, Stockholders and

Bondholders
Managers versus Stockholders : Manager’s
personal’s goals may compete with shareholder wealth
maximization

Stockholders versus Bondholders :

Bondholders: Fixed payment regardless of how well the
company does
Stockholders : do better when the company does better
Bondholders attempt to protect them self by including
covenants in the bonds agreements that limit firm’s use
of additional debt and constraint managers’ actions in
other ways

QUIZ 2
1. What is management’s primary goal?

1. Is maximizing shareholder value inconsistent with being

socially responsible? Explain

1. What is the difference between a stock’s current market

and its intrinsic value?

1. Should managers estimate intrinsic value or leave that to

outside security analysts? Explain.

1. Define each of the following terms

1. Intrinsic value, market price
2. Stockholders wealth maximization
3. Sarbanes Oxley Act