Chapter 1 & 2 - POF-1

CHAPTER 1
Major Topics: Financial Management
 Career Opportunities
 Form of Business Organization
 Goals of the Corporation
 Agency Relationship
Finance Within the Organization
Career Opportunities:
1: Money and Capital Markets
 Financial Institutions including
commercial/merchant banks, finance company,
insurance company, mutual funds, credit
company etc.
– The type of knowledge required include valuation

techniques, factors causes interest rate to , financial
institutions regulation, types of financial instruments,
and also general knowledge of business functions like
management, accounting, marketing, IT, business
communication, human resource management etc.
2.Investments
 As a Sales or Security Analyst, finance graduates will join
the brokerage firms, banks, mutual funds, insurance
companies and financial consultant firms to provide advise
to individual and institutional investors on HOW TO INVEST
their funds.
– The main functions is to advise on Sales, The Analyst of

Individual Securities, and Determining the Optimal Mix
of securities.
3. Financial Management

Greatest number of jobs available from financial
institutions as well as governmental, industries and retails.
– Responsibilities include plant expansion, issuance of different

types of securities, credit terms to customers, level of
inventory, management of working capital, dividend policy,
merger and acquisitions etc.
Form of Business Organization
 Sole Proprietorship
 Partnership
 Corporation
Form Of Business Organization:
1. Sole Proprietorship
 Advantages
- ease of formation
- subject to few regulations
- no corporate tax - individual tax
 Disadvantages
- limited life
- unlimited liability
- difficult to raise capital
Form of Business Organization:
2. Partnership
 Advantages:
- ease of formation
- less expensive to operate
- tax is base on partners rather than partnership
- easy access to more funds and skills
 Disadvantages:
- unlimited liability
- incapacitated or death of one partner will dissolve
the entire partnership.
- difficult to raise large amount of funds
3. Organization
 Advantages
- unlimited life
- easy transfer of ownership
- limited liability
- ease of raising capital - access to public funds
- more tax incentives
 Disadvantages
- high cost of set-up and report filing
- follow host of provision in the company act
Business Form
Sole Partnership Corporation

Proprietorship
Corporate Goal
Throughout this course we will hold to the

principle that the goal of corporation is to
maximize the stockholder wealth which translates
into the maximization of the price of the firm’s
common stock.
Corporate Goal:
Goal
Manager Incentive vs. Shareholder Wealth
 Shareholders elect board elect management. Management
suppose to operate for the best of the shareholder
 BUT if the shareholding is diluted, management has a great
deal of autonomy.
 Managers might pursue goals other than/in addition to the
interest of the shareholders.
 Shareholders return is at “reasonable level” rather than
“maximize level”
 However, managers in competitive environment will take
necessary actions consistent with shareholders wealth
maximization or they might be removed from their jobs
Corporate Goal
Shareholder Wealth vs. Social Responsibility

Is the maximization of shareholder wealth the ONLY
responsibility of firm?
 Are firm also responsible for the welfare of its employee,
customers and the communities at large?
 Increase in social responsibility lead to increase in cost
which effect the price of the share.
 Other firm which does not follow suit will have lower cost and
price of product/services. This will attract more capital.
 If it is made mandatory then the burden (cost) falls uniformly
on all business.
 There is a need for government and industry to corporate to
establish the rules of corporate behavior.
Corporate Goal:
Shareholder Wealth vs.. Social Welfare

Maximizing of stock price improve social welfare when:
- the firm is able to produce high-quality

goods/services at the lowest possible cost,
- developed goods/services that the customer want
and need which requires new technology, new
product and new jobs
- necessitates efficient and courteous service, well
stocked merchandise and good location.
- BUT should avoid monopoly, violating safety
standards, and meet pollution control requirements
Chapter 1 : Overview of
Financial Management.
END OF CHAPTER
The Financial Environment
 Major Topics
, Financial Markets
, Types of Financial Institutions
 Financial Markets
Physical vs. Financial Assets
Markets
Tangibles or real assets Securities

plant, real estates, computers stocks,, bond,
notes
Spot vs. Future Markets
delivery “on the spot” delivery in

some
(immediately) future dates
Money vs. Capital Markets
short-term highly long-term debt

liquid debt securities and corporate
stocks
Mortgage vs. Consumer Credit
residential, commercial autos, appliances

industrial real estates education,
personal loans
Primary vs. Secondary Markets
raise new capital trading of existing

securities
Financial Markets
“A healthy economy is dependent on
efficient transfer of funds from
people who are net savers to firms
and individuals who need capital.
Without efficient transfers, the
economy simply couldn’t function.”
 Financial Institutions
1.Direct Transfer - the business

delivers the securities to savers, and
the business will receive money from
the savers
 Financial Institutions
2. Investment Institutions : transfer of
securities is done thr’ a middleman,
investment banking house, who will
facilitates the issuance of the securities.
The company sell its stocks to the
investment banking houses who in turn sell
it to the investors. Will not keep the stock
over a long period to avoid decrease in price
 Cost of Money
 If money is invested in equity capital,
the cost associated to using this
money is called Required Return
(Rr).
Rr = Dividend Yield + Capital Gain

 Cost of Money
 If money is invested in debt capital,

the cost associated to using this
money is called Interest Rate.
END OF CHAPTER

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CHAPTER 1

Major Topics: Financial Management

– The type of knowledge required include valuation

– The main functions is to advise on Sales, The Analyst of

– Responsibilities include plant expansion, issuance of different

Sole Partnership Corporation

Throughout this course we will hold to the

- the firm is able to produce high-quality

Tangibles or real assets Securities

Spot vs. Future Markets

delivery “on the spot” delivery in

Money vs. Capital Markets

short-term highly long-term debt

Mortgage vs. Consumer Credit

residential, commercial autos, appliances

Primary vs. Secondary Markets

raise new capital trading of existing

1.Direct Transfer - the business

Rr = Dividend Yield + Capital Gain

 If money is invested in debt capital,

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