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1.lecture 01 FM2

The document outlines an introductory course on Financial Management, covering key topics such as finance basics, financial environment, investment decisions, and the role of financial management in maximizing shareholder wealth. It discusses various business organization forms including sole proprietorships, partnerships, corporations, and limited liability companies, along with their advantages and disadvantages. Additionally, it emphasizes the importance of corporate social responsibility and the relationship between management and shareholders.

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hussaingillani6762
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18 views36 pages

1.lecture 01 FM2

The document outlines an introductory course on Financial Management, covering key topics such as finance basics, financial environment, investment decisions, and the role of financial management in maximizing shareholder wealth. It discusses various business organization forms including sole proprietorships, partnerships, corporations, and limited liability companies, along with their advantages and disadvantages. Additionally, it emphasizes the importance of corporate social responsibility and the relationship between management and shareholders.

Uploaded by

hussaingillani6762
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Financial

Management

Lecture 01
Introduction to the Course

• What we are going to study:


“ the Basics of Finance & Management ”
-How they outsource their money
-How they manage their finances
-The best utilization of their money
-The return earned through its efficient management
Course Outline
1. FINANCE INTRODUCTION
2. THE FINANCIAL ENVIRONMENT
3. TIME VALUE OF MONEY
4. FINANCIAL STATEMENT ANALYSIS
5. BOND VALUATION
6. STOCK VALUATION
7. RISK & RETURN
8. COST OF CAPITAL
9. TARGET CAPITAL STRUCTURE
10. CAPITAL BUDGETING TECHNIQUES
11. LEVERAGE & BUSINESS RISK
12. WORKING CAPITAL CONCEPTS & POLICY,
13. DIVIDEND POLICY
14. MERGER
Suggested Readings
1. Fundamental of Financial Management, Latest
Edition by Eugene F. Brigham latest Edition
2. Fundamental of Financial Management by Van Horne
3. Fundamental of Corporate Finance by Brealy and
Myers
4. Corporate Finance By Ross Westerfield Jordan
5. Gitman, Lawrence J., Chad J. Zutter, (2018) Principles
of Managerial Finance (14th ed.) Addison-Wesley,
Reading MA.
6. MyFinance Lab add-in
What is Finance?
• Managing the large amount of Money
(Dictionary Definition)

Finance is:
“attaining the amount of money, using it by
investing and gaining return on your
investment”
Finance (Interrelated
1.Financial Managementareas)
(Decisions within the org)

2. Investment
( Institutional and
individual decisions)
3. Financial Markets and
Institutions
(Money Market, Capital
Markets, Banks and other F.Is)
The Role of
Financial Management
• What is Financial Management?
• The Goal of the Firm
• Organization of the Financial
Management Function
What is Financial
Management?

Concerns the acquisition,


financing and management of
assets with some overall goal
in mind.
Investment Decisions
Most important of the three decisions.

• What is the optimal firm size?


• What specific assets should be acquired?
• What assets (if any) should be reduced or
eliminated?
Financing Decisions
Determine how the assets (LHS of balance
sheet) will be financed (RHS of balance
sheet).
• What is the best type of financing?
• What is the best financing mix?
• What is the best dividend policy?
• How will the funds be physically acquired?
Asset Management
Decisions
• How do we manage existing assets efficiently?
• Financial Manager has varying degrees of
operating responsibility over assets.
• Greater emphasis on current asset management
than fixed asset management.
What is the Goal
of the Firm?

Maximization of
Shareholder Wealth!
Value creation occurs when we
maximize the share price for current
shareholders.
Shortcomings of
Alternative Perspectives
Profit Maximization
 Maximizing a firm’s earnings after taxes.
Problems
• Could increase current profits while harming firm
(e.g., defer maintenance, issue common stock to
buy T-bills, etc.).
• Ignores changes in the risk level of the firm.
Shortcomings of
Alternative Perspectives
Earnings per Share Maximization
 Maximizing earnings after taxes divided by
shares outstanding.
Problems
• Does not specify timing or duration of expected
returns.
• Ignores changes in the risk level of the firm.
• Calls for a zero payout dividend policy.
Strengths of Shareholder
Wealth Maximization
• Takes account of: current and future profits and
EPS; the timing, duration, and risk of profits and
EPS; dividend policy; and all other relevant
factors.
• Thus, share price serves as a barometer for
business performance.
The Modern Corporation

Modern Corporation

Shareholders Management

There exists a SEPARATION between owners


and managers.
Role of Management

Management acts as an agent for the


owners (shareholders) of the firm.

• An agent is an individual authorized by


another person, called the principal, to
act in the latter’s behalf.
Agency Theory

 Jensen and Meckling developed a


theory of the firm based on agency
theory.
• Agency Theory is a branch of economics
relating to the behavior of principals and
their agents.
Agency Theory
• Agency relationship
• Agency conflict
• Agency cost
Agency Theory

• Principals must provide incentives so that


management acts in the principals’ best
interests and then monitor results.

• Incentives include stock options, perquisites,


and bonuses.
• Examples
Social Responsibility
• Corporate Social Responsibility is the
integration of business operations and values,
whereby the interests of all stakeholders
including investors, customers, employees,
the community and the environment are
reflected in the company's policies and
actions.
Social Responsibility

• Wealth maximization does not preclude the


firm from being socially responsible.
• Assume we view the firm as producing both
private and social goods.
• Then shareholder wealth maximization
remains the appropriate goal in governing the
firm.
Organization of the Financial
Management Function
Board of Directors

President
(Chief Executive Officer)

Vice President VP of Vice President


Operations Marketing
Finance
Organization of the Financial
Management Function

VP of Finance
Treasurer Controller
Capital Budgeting Cost Accounting
Cash Management Cost Management
Credit Management Data Processing
Dividend Disbursement General Ledger
Fin Analysis/Planning Government Reporting
Pension Management Internal Control
Insurance/Risk Mngmt Preparing Fin Stmts
Tax Analysis/Planning Preparing Budgets
Preparing Forecasts
The Business and
Financial Environments

• The Business Environment


• The Financial Environment
The Business
Environment
There are FOUR basic forms of
business organization:
• Sole Proprietorships
• Partnerships
• Corporations
• Limited Liability Corporation
Sole Proprietorship

Advantages Disadvantages
• Simplicity • Unlimited liability
(single owner) • Hard to raise
• Low setup cost additional capital
• Quick setup • Transfer of
• Single tax filing on ownership difficulties
individual form
Unlimited Liability
• Unlimited liability means that owners can be
held personally accountable for a business's
debt
Partnership

Partnership - A business form in


which two or more individuals
act as owners.

There are two types of partnerships:


•General Partnership
•Limited partnership
Types of Partnerships

General Partnership -- All partners


have unlimited liability and are liable
for all obligations of the partnership.
Limited Partnership -- Limited partners have
liability limited to their capital contribution
(investors only). At least one general partner is
required and all general partners have unlimited
liability.
Summary for Partnership
Advantages Disadvantages
• Can be simple • Unlimited liability for the
• Low setup cost, higher than general partner
sole proprietorship • Difficult to raise
• Relatively quick setup additional capital, but
• Limited liability for limited easier than sole
partners proprietorship
• Transfer of ownership
difficulties
The Business
Environment
Corporation - A business form
legally separate from its
owners.
• An artificial entity that can own assets and
incur liabilities.
• Business income is accounted for on the
income tax form of the corporation.
Summary for Corporation

Advantages Disadvantages
• Limited liability • Double taxation
• Easy transfer of • More difficult to
ownership establish
• Unlimited life • More expensive to
• Easier to raise large set up and maintain
quantities of capital
Limited Liability Company
(LLC)
Generally, LLC will possess only the
first two of the following four standard
corporation characteristics
• Limited liability
• Centralized management
• Unlimited life
• In Pakistan LLCs are known as private
companies that end with Pvt. Ltd. They should
have at least Rs. 100,000 as their minimum paid
up capital.
Summary for LLC
Advantages Disadvantages
• Limited liability • Limited life
• Eliminates double (generally)
taxation
• No restriction on
number or type of
owners
• Easier to raise additional
capital
Financial Environment
• Businesses interact continually with the
financial markets.
• Financial Markets are composed of all
institutions and procedures for bringing buyers
and sellers of financial instruments together.

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