bbpw3103_t1.pdf
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Outline Notes
PROGRAM BBA, BIM, BHRM, BAC, BEC, BMKT, BTRM, BHM
MODULE BBPW3103
FINANCIAL MANAGEMENT I
TUTORIAL
SESSION
T1
TOPIC 1
TOPIC 2
TOPIC 3
Introduction
Subtopics:
1. Finance
2. Roles of a Financial Manager
3. Objectives of Financial Management
4. Agency Problems
Analysis of Financial Statements
Subtopics:
1. Annual Report and Users of Financial Statements
2. Financial Ratio Analysis
3. Conducting a Complete Ratio Analysis
4. Weaknesses of Financial Ratios
Time Value of Money
Subtopics:
1. Concept of Compounding and Future Value
2. Concept of Discounting and Present Value
3. Future and Present Values of a Series Cash Flows
4. Compounding and Discounting More than Once a Year
LEARNING
OUTCOMES
Topic 1:
• Identify the areas of finance and its importance to businesses
• Explain the four main roles of financial manager in a company
• Discuss the main objective of financial management
• Examine the relationship in agency problem
Topic 2:
• Explain the importance of financial statements to different groups of users
• Calculate the ratios for liquidity, asset management, leverage, profitability
and market value
• Evaluate a company’s performance based on financial ratios and the DuPont
analysis
• Explain the weaknesses of financial ratio analysis
Topic 3:
• Apply the concept of compounding and discounting in determining future
value and present value of money
• Differentiate between ordinary annuity and annuity due
• Calculate the future and present value of money for non-annual
compounding periods
INSTRUCTIONAL
ACTIVITIES
Topic 1:
• Identify the areas of finance and its importance to businesses.
• Discuss the four main roles of a financial manager.
• Compare and contrast the goals of profit maximisation and shareholder
wealth maximisation.
• Explain the agency problem faced by owners of a business.
Topic 2:
• Explain the purpose of financial statement analysis.
• Distinguish among liquidity, asset management, leverage, profitability, and
market value ratios.
• Demonstrate by using relevant examples (companies) on how to calculate the
financial ratios.
• Explain the relationships among the several categories of ratios in
determining the health of a business.
• Discuss the weaknesses/limitations of ratios analysis.
Topic 3:
• Explain what is meant by time value of money.
• Explain the mechanics of compounding and discounting.
• Demonstrate by using relevant examples on how to calculate the future value
of a lump sum and present value of a future lump sum (both methods,
manual solution using formula and using financial tables).
• Demonstrate by using financial tables on how to solve compounding and
discounting of more than once a year questions
• Explain what is meant by annuity.
DIAGNOSTIC
EXERCISE
(5-10 minutes to
ensure basic
understanding
of topic)
Topic 1:
1. Why is knowledge of finance important even to learners in other business
disciplines?
2. What is meant by agency problem? How can this problem be either prevented
or minimised?
3. Why is the maximisation of wealth viewed as superior to that of profit
maximisation as a business objective?
Topic 2:
1. What is the purpose of financial statement analysis?
2. Provide an example of how financial statements can be used internally by the
managers of a company?
3. Identify information that may be useful to investors and shareholders.
4. Based on the five categories of financial ratios, perform ratio analysis of a
company listed on Bursa Malaysia. Explain the significance of the ratios
calculated. Are there any limitations when performing the ratio analysis?
Or other
exercises
prepared
by face to
face
tutors
Topic 3:
1. What is the relationship between the time value of money and inflation?
2. Compare simple interest to compound interest.
3. What is an annuity? Give examples of annuities.
4. Suppose you were considering depositing RM50,000 in one of three banks, all
of which pay 4% interest; BA Bank compounds annually, AP Bank compounds
semi annually and TR Bank compounds daily. Which bank would you choose?
Why?
WORKED EXAMPLES FOR TOPIC 1
Questions & Answers Extra Notes
1 What are the main roles of a financial manager?
Solution:
i. Make decisions for short-term and long-term
investment and financing
ii. Financial planning and forecast
iii. Control and coordination
iv. Dealings in financial market
2 Suggest ways for business owners to solve principal-agent
problem.
Solution:
To minimise agency problem, company’s owners i.e. the
shareholders will have to bear the costs of agency and control
the actions of the managers. Among steps that can be taken
includes providing compensation or incentives based on the
company’s achievement. The shareholders may introduce
incentive plans for managers that link their remuneration to
the performance of the business. A common form of
incentive plan is to give managers share options. In this way,
the interests of managers and shareholders will become
more closely aligned.
WORKED EXAMPLES FOR TOPIC 2
Questions & Answers
1 RCR Balance Sheet
31 December 2011
(Ringgits in Thousands)
Cash RM 200 Accounts payable RM 205
Receivables 245 Notes payable 425
Inventory 625 Other current liabilities 115
Total current assets RM1,070 Total current liabilities RM 745
Net fixed assets 1,200 Long-term debt 420
Ordinary share 1,105
Total assets RM2,270 Total liabilities and equity RM2,270
RCR Income Statement
for Year Ended 31 December 2011
(Ringgits in Thousands)
Sales RM2,400
Cost of sales 1,834
Gross profit RM 566
Selling expenses 175
General and administrative expenses 216
Earnings before interest and taxes (EBIT) RM 175
Interest expense 35
Earnings before taxes (EBT) RM 140
Taxes (40%) 56
Net income (NI) RM 84
Required:
i. Calculate the current ratio
ii. Calculate the debt ratio
iii. Calculate the return on total assets and return on equity
Method/Solution:
.1.44 = 745
1,070 =
sliabilitieCurrent
assetsCurrent = ratioCurrent ×
Debt ratio = Total liabilities = 1,165 = 0.51 = 51%.
Total assets 2,270
3.70%. = 0.0370 = 2,270
84 =
assets Total
incomeNet =ROA
%.60.70760.0105,1
84
equity rs'Shareholde
incomeNet ====ROE
WORKED EXAMPLES FOR TOPIC 3
Questions & Answers Extra Notes
1 Assuming you deposit RM22,500 into a savings account that
offers an interest rate of 12% per annum, how much will it be
worth in 2 years if interest is compounded:
i. annually
ii. semiannually
Method/ Solution:
i. annually
Manual solution using formula: FVn = PV(1 + i)n
FVn = PV(1 + i)n
F2 = 22,500 (1 + 0.12)2
= 28,224
Using financial table:
FVn = PV(FVIFi,n)
FVn = PV((FVIF12%,2)
FV2 = 22,500 (1.245)
= 28,012.50
ii. semiannually
Manual solution using formula: FVn = PV(1 + i/2)nx2
FVn = PV(1 + i/2)nx2
F2 = 22,500 (1 + 0.12/2)2x2
= 28,395
Using financial table:
FV = PV(FVIFi,n)
FV = PV((FVIF12%/2,2x2)
FV = 22,500 (1.262)
= 28,395
Refer to Attachment A of BBPW3103
Module: Financial Schedule for Future Value
Interest Factor
Refer to Attachment A of BBPW3103
Module: Financial Schedule for Future Value
Interest
Exercises for Topic 1
1 Identify the primary activities of a financial manager.
2 Explain why maximising value of a firm is an appropriate goal
for a business?
3 Describe the nature of the principle-agent relationship
between the owners and managers of a corporation.
Exercises for Topic 2
1 Teguh Sdn. Bhd. has sales of RM10,000,000, net income of
RM450,000, total assets of RM4,000,000 and shareholders’
equity of RM2,000,000.
You are required to calculate the followings:
i. Profit Margin
ii. Return on assets
iii. Return on equity
Answer: i. 4.5%
ii. 11.3%
iii. 22.5%
2 Last year 2011, Saphire Sdn. Bhd. had sales of RM300,000 and a net income of RM20,000, and its year-end assets were RM200,000. The company’s total debt to total assets ratio was 40%. Based on the Du Pont equation, calculate the company's return on equity (ROE).
Answer: 28.13%
Exercises for Topic 3
1 RM1,000 is invested at 10% compounded semi-annually for
three years. Calculate its future value.
Answer: RM1,340
2 Amran has RM10,000 in a savings account that offers 10%
interest rate compounded annually. He plans to withdraw the
money within 5 years. Determine the amount he can withdraw
every year from the account if he makes the withdrawal:
i. at the beginning of every year
ii. at the end of every year.
Answer: i. RM2,398.02
ii. RM RM2,637.83
3 David deposits RM3,000 at the end of every six months into a
savings account for 5 years. The bank pays 14% interest
compounded semi-annually. How much money will David have
at the end of year 5?
Answer: RM41,448