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EBF 1023 Basic FinanceAsas Kewangan
LECTURE 1LECTURE 1
An Introduction to Financial Management
What is Finance?
Money $ $$ $$$
Goal of the Firm
1) Profit Maximization?
this goal ignores:a) TIMING of Returns(Time Value of Money - Ch. 5)b) UNCERTAINTY of
Returns(Risk - Ch. 6)
Goal of the Firm
2) Shareholder Wealth Maximization?this is the same as:
a) Maximizing Firm Valueb) Maximizing Stock Price
Financial Goals of the Corporation
• The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price.
Factors that affect stock price
• Projected cash flows to shareholders
• Timing of the cash flow stream
• Riskiness of the cash flows
Stock Prices and Intrinsic Value
• In equilibrium, a stock’s price should equal its “true” or intrinsic value.
• To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.
• Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.
Intrinsic value VS Market price
Market price
Price
A. RM 58.00
B. RM 120.00
C. RM 385.00
D. RM 799.00
Determinants of Intrinsic Value and Stock Prices
Legal Forms of Business Organization
• Proprietorship• Partnership• Corporation
Legal Forms of Business
1) Sole Proprietorship • A business owned by a single
individual.• Owner maintains title to the
firm’s assets.• Owner has unlimited liability.
2) Partnership• Similar to a sole
proprietorship, except that there are two or more owners.
2a) General Partnership • All partners have unlimited
liability.
2b) Limited Partnership• Consists of one or more
general partners, who have unlimited liability.
• One or more limited partners (investors) whose liability is limited to the amount of their investment in the business.
Legal Forms of Business
2c) Limited Liability Company (LLC)
• Cross between a partnership and a corporation.
• Owners have limited liability, but the firm runs and is taxed like a partnership.
Legal Forms of Business
3) Corporation • A business entity that legally functions
separate and apart from its owners.• Owners’ liability is limited to the amount
of their investment in the firm.• Owners hold common stock certificates,
and ownership can be transferred by selling the certificates.
Legal Forms of Business
The Corporation and Financial Markets
The Corporation and Financial Markets
Corporation
The Corporation and Financial Markets
Corporation Investors
The Corporation and Financial Markets
Government
Corporation Investors
The Corporation and Financial Markets
cash
Government
Corporation Investors
The Corporation and Financial Markets
cash
Government
securities
Corporation Investors
The Corporation and Financial Markets
Government
cash
securities
Corporation Investors
Secondarymarkets
The Corporation and Financial Markets
Government
cash
securities
Corporation Investors
Secondarymarkets
The Corporation and Financial Markets
Government
cash
securities
Corporation Investors
Secondarymarkets
The Corporation and Financial Markets
cash Investors
Secondarymarkets
Government
securities
Cash flow
Corporation
The Corporation and Financial Markets
cash Investors
Secondarymarkets
Government
securities
Cash flow
tax
Corporation
The Corporation and Financial Markets
cash Investors
Secondarymarkets
Government
securities
Cash flow
reinvest
tax
Corporation
The Corporation and Financial Markets
cash Investors
Secondarymarkets
Government
securities
Cash flow
reinvest
tax
Corporation
dividends,etc.
Financial Markets
What is a market?
• Primary Market– Market in which new issues of a
security are sold to initial buyers.
• Secondary Market– Market in which previously
issued securities are traded.
The Corporation and Financial Markets
• Initial Public Offering (IPO)
The Corporation and Financial Markets
• Initial Public Offering (IPO)– The first time the firm’s stock is
sold to the general public.
The Corporation and Financial Markets
• Initial Public Offering (IPO)– The first time the firm’s stock is
sold to the general public.• Seasoned New Issue
The Corporation and Financial Markets
• Initial Public Offering (IPO)– The first time the firm’s stock is
sold to the general public.• Seasoned New Issue
– A new stock offering by a firm that already has stock that is traded in the secondary market.
The Corporation and Financial Markets
The importance of financial markets
• Well-functioning financial markets facilitate the flow of capital from investors to the users of capital.– Markets provide savers with returns on their money
saved/invested, which provides them money in the future.– Markets provide users of capital with the necessary funds to
finance their investment projects.
• Well-functioning markets promote economic growth.• Economies with well-developed markets perform better
than economies with poorly-functioning markets.
Types of financial institutions
• Commercial banks• Investment banks• Mutual savings banks• Credit unions• Pension funds• Life insurance companies• Mutual funds• Hedge funds
Financial Management Axioms
1) Risk - return trade-off.2) Time value of money.3) Cash - not profits - is king.4) Incremental cash flows count.5) The curse of competitive markets.6) Efficient capital markets.7) The agency problem.8) Taxes bias business decisions.9) All risk is not equal.10) Ethical dilemmas are everywhere in finance.
End of Lecture 1
Thank you for yourATTENTION !!!