asas1 intro

8/13/2019 Asas1 Intro

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CHAPTER 1 :

INTRODUCTION TOFINANCIAL

MANAGEMENT .


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Objektif bab :1. What is finance?

2. Roles of financial manager3. Legal forms of business entity

4. Goals of a firm

5. Markets and financial institutions


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What is finance??

Art and science of managing moneyprocess,

institutions, markets and instruments involved.

(Gitman) Activities that earn and use of capital - collecting,

using and managing.

Concern with the maintenance & creation ofeconomic value or wealth (Keown)

Focuses on the decision making toward creating

wealth.


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Fields of finance

1. Money & Capital Market

2.

Investment3. Financial Management


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Money & Capital Market

Involves security market and financialinstitutions such as banks, finance companies

etc. Knowledge in evaluation techniques.

Factors that effects the interest rate.

Financial instruments such as leasing, loan,bond, stock etc.


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Investment Decision make by investors to invest in

the security that can give high return.


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Financial Management

Creating economic wealth.

Involves decisions such as when to introducenew product, invest in new asset, replace thenew asset, loans, issuing stocks/bond etc.

Most important and big area.

Inportant to maximise the shareholders wealth.


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Roles of financial managers

Important roles in making decision in acompany such as:

1. Capital budgeting

2. Capital structure

3. Working capital, short term asset & liability


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The responsibilities of financialmanagers cover:

Planning and forecasting

Making financing decision and investment.

Controlling and coordinating

Manage the financial markets Risk management.


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Legal Forms of Buss Organization

Sole Proprietorship

Partnership

Corporation


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Sole Proprietorship

A business owned by a singleindividual.

Advantages

o Easy and cheaper to formoFew regulations

oNo corporate tax

Disadvantages

o Hard to obtain capital

o Unlimited liability

o Difficult to transfer ownership


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Partnership

2 or more individual agreed to form abusiness in order to get profit based on

agreementformal or informal (OralCommitment/Formal Document)

2 types:

General partnership Limited partnership


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Advantages of partnership

Lower cost Easy to formAbility to obtain capital

Disadvantages of partnership Unlimited liability Difficult to transfer ownership


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Corporation

An entity that legally functions separate and apartfrom its owner.

Advantages

Unlimited life

Easy transfer of ownership Limited liability

Easier to raise capital

Disadvantages

Double taxation: corporate earnings and dividendreceived

Expensive and complex to form

Difficult in making decision.


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Goals of firm

Maximize PROFIT

Maximize SHAREHOLDER WEALTH


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Maximize PROFIT

Commonly uses by a firm.

In microeconomic, this goal is a priority to increase the

profit. However, it ignores some important factors such as:

1. Uncertainty and risk

2. Timing of projects returns Weakness of accounting profitability.


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Maximize SHAREHOLDER WEALTH

i.e maximization of the price of companys existing

common stock.

The best decision taken is the decision that canraise the shareholders wealth.

Market price can illustrate the valu of the

company. The investment is suitable the the risk

Financing capital with lower cost.


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Financial market and institution

o Financial Marketa place where the

person needs capital will get it from

capital suppliers.

o 2 types:

Primary market Secondary market


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Financial Markets

Primary Market A place where a security is offered for the first

time. 2 types of offers in primary market; IPO and

Seasoned New Issue.

Secondary Market The market in which stock previously issued by the firm

trades.

Transaction of selling and buying stocks occur Provide liquidity for stocks Guide for investors to put a price for their

investments.


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ROLE OF FINANCIAL MARKET

FIRM

2. Investment

INVESTOR

Secondary

Market

GOVERNMENT

Cash

Security

Cash flow

Tax

Reinvest

3. Dividend, etc

1. Primary Market


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Companies Social Responsibilities.

Social responsibilities also important tocompanies; not only to maximise

shareholders wealth. Social responsibilitiesto employees,

customers, society and environment.

Example; provide safe working environment,avoid pollution, produce safe product.

Companies cant give priority to profit andignores the social responsibilities.


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Agency R/ships

When an individual or more (principal) hiredanother individual or organization (agent) to

handle a service and give power to agent tomake decision.

Agency relationship among;

Shareholders and manager Manager and debtors

Agency problem exist when there are conflict of interestbetween principal and agents.

asas1 intro

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