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Copyright

2007 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin0

Topic1Introduction to

Financial

Management

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Key Concepts and Skills

Know the basic types of financialmanagement decisions and the role of

the financial manager

Know the financial implications of thedifferent forms of business organization

Know the goal of financial management

Understand the conflicts of interest that

can arise between owners and

managers

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Basic Areas Of Finance

Corporate finance

Investments

Financial institutions International finance

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Investments

Work with financial assets such as

stocks and bonds

Value of financial assets, risk versus

return and asset allocation

Job opportunities

Stockbroker or financial advisor

Portfolio manager

Security analyst

http://www.careers-in-business.com/

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Financial Institutions

Companies that specialize in financial

matters

Bankscommercial and investment, credit

unions, savings and loans

Insurance companies

Brokerage firms

Job opportunities

http://www.careers-in-business.com/

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International Finance

This is an area of specialization within each of

the areas discussed so far

It may allow you to work in other countries or

at least travel on a regular basis Need to be familiar with exchange rates and

political risk

Need to understand the customs of othercountries and speaking a foreign language

fluently is also helpful

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Why Study Finance?

Marketing Budgets, marketing research, marketing financial

products

Accounting Dual accounting and finance function, preparation

of financial statements

Management

Strategic thinking, job performance, profitability Personal finance

Budgeting, retirement planning, college planning,day-to-day cash flow issues

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Business Finance

Some important questions that are

answered using finance

What long-term investments should the firm

take on?

Where will we get the long-term financing to

pay for the investment?

How will we manage the everyday financialactivities of the firm?

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Financial Manager

Financial managers try to answer some or all

of these questions

The top financial manager within a firm is

usually the Chief Financial Officer (CFO) Treasureroversees cash management, credit

management, capital expenditures, and financial

planning

Controlleroversees taxes, cost accounting,financial accounting, and data processing

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Simplified Organizational Chart

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Financial Management

Decisions Capital budgeting

What long-term investments or projectsshould the business take on?

Capital structure How should we pay for our assets?

Should we use debt or equity?

Working capital management How do we manage the day-to-day

finances of the firm?

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Forms of Business Organization

Three major forms

Sole proprietorship

Partnership

General

Limited

Corporation

Limited liability company

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Sole Proprietorship

Advantages

Easiest to start

Least regulated

Single owner keeps

all the profits

Taxed once as

personal income

Disadvantages

Limited to life of owner

Equity capital limited to

owners personalwealth

Unlimited liability

Difficult to sell

ownership interest

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Partnership

Advantages

Two or more owners

More capital available

Relatively easy to

start

Income taxed once as

personal income

Disadvantages

Unlimited liability

General partnership

Limited partnership

Partnership dissolves

when one partner dies

or wishes to sell

Difficult to transferownership

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Corporation

(Limited Companies)Advantages

Limited liability

Unlimited life Separation of

ownership and

management

Transfer of ownershipis easy

Easier to raise capital

Disadvantages

Separation of

ownership andmanagement (agency

problem)

Double taxation

(income taxed at the

corporate rate and

then dividends taxed

at personal rate)

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International Corporations

In Thailand we have:

Private Limited Company - regulated by the Civil and Commercial

Code

Public Limited Company - regulated by the Public Company Act

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Goal Of Financial Management

What should be the goal of a corporation? Maximize profit?

Minimize costs?

Maximize market share?

Maximize the current value of thecompanys stock?

A more general financial managementgoal: Maximize the market value of the existing

owners equity.

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Goal Of Financial Management

Does this mean we should do anything andeverything to maximize owner wealth? No

A company must follow regulations against

corporate accounting fraud and financial

malpractice. In Thailand the companies are regulated by:

The Securities and Exchange Commission (SEC): capital

market supervisory agency with the status of an independent

state agency

The Stock Exchange of Thailand (SET): provide trading

services of listed securities

Institute of Certified Accountants and Auditors of Thailand

(ICAAT)

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The Agency Problem

Agency relationship

Principal hires an agent to represent their interest

Stockholders (principals) hire managers (agents)

to run the company Agency problem

Conflict of interest between principal and agent

Management goals and agency costs

Direct costs: compensation and perquisites; cost

of monitoring

Indirect costs: cost of sub optimal decisions

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Managing Managers Managerial compensation

Incentives can be used to align management and

stockholder interests

The incentives need to be structured carefully to make

sure that they achieve their goal

Corporate control Control of the firm rest with stockholders

Elect board of directors, who hires and fires management

Proxy fighta group solicits proxies in order to replace

the existing board The threat of a takeover may result in better management

Other stakeholders: employees, suppliers,

customers, government...

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Financial markets and the corporation

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Financial Markets

Cash flows to the firm

Primary vs. secondary markets Dealer vs. auction markets

Listed vs. over-the-counter securities

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Financial Markets

Primary Market

The market in which securities (stock

and bonds) are sold by the company.

Secondary Markets

The market where securities that have

already been issued are traded

between investors.

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Financial Markets

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Trading of debt and equity securities

Dealers buy and sell for themselves, at their own risk

Dealer markets in stocks and bonds are called over-

the-counter (OTC) markets.

Auction markets are different from dealer markets in

two ways:

Trading in a given auction exchange takes place at

a single site on the floor of the exchange (like SET).

Transaction prices of shares are communicated

almost immediately to the public.

Stocks that trade on an organized exchange (or

market) are said to be listed on that exchange