Financial Management 19 MARCH 2015

IntroductionInstructor IntroductionName : Johan Yanto SE MMEducation History Bachelor of Economics from the Tarumanagara University (1986 1990)Masters of Management from the University of Indonesia (1993 1995)Profesional Experience :Arthur Andersen Co (1990 1995) as Senior Tax ConsultantPriceWaterhouse Cooper (1995 1997) as Assistant Manager

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Instructor Introduction

Profesional Experience (continued)

PT Merck Sharp & Dohme Indonesia (1997 2000) as Financial ControllerA subsidiary of Merck & Co, an American pharmaceutical company and one of the largest pharmaceutical companies in the world. Merck headquarters is located in Whitehouse Station, New Jersey

PT. Pancaprima Ekabrothers (2000 2003) as Financial ControllerPT. Pancaprima Ekabrothers is Joint-Venture company between Liwaco company incorporated in Hong Kong and Pan Brother Group.

Baramulti Group (2003 2007) as Group Financial Controller in holding company and Finance Director in subsidiary companyBaramulti has several business lines such as coal mining, coal trading, mining services and shipping company. Baramulti has several mining operation companies; two in South Kalimantan, three in East Kalimantan, and six company in South Sumatera.*

Instructor Introduction

Profesional Experience (continued)

PT SMART Tbk / Sinarmas Group (2007 2009) as Vice President /Assistant to CEO

PT SMART Tbk is one of the largest, publicly-listed, integrated palm-based consumer companies in Indonesia. PT SMART Tbk is part of Sinarmas Group owned by the Widjaja Family.

M.P. Evans Group PLC (2009 2011) as Finance Director for Indonesian operation.

M.P. Evans Group PLC is a British company incorporated in England & Wales and listed on the London Stock Exchanges Alternative Investment Market (AIM). The Group's assets consist of oil-palm plantations (both majority and minority held) in Indonesia and Malaysia, property-development in Malaysia and beef-cattle business in Australia.*

Instructor Introduction

Profesional Experience (continued)

Samko Timber Ltd ( 2011 Feb 2015) as Chief Financial Officer.Samko Timber is a joint venture company between Sampoerna Group and Sunarko Group. It is listed on SGX-Mainboard since February 2008. Samko is majority-owned by two Indonesian families. The Putera Sampoerna family owns about 40.7% while the Sunarko family owns about 36.5%. Hence, the name Samko. Public hold about 22.8%

Sampoerna Group ( Mar 2015 Now) as Advisor

Prasetiya Mulya ( Mar 2015 Now) as part time lecturer*

IntroductionStudent IntroductionNameNick NameHobbyWhat do you expect to get from this course?Future GoalsBest quotes*

Tell me why?I don't like Mondays.Tell me why?I don't like Mondays.Tell me why?I don't like Mondays.

Song by :THE BOOMTOWN RATS

Banyak dari kita yang melihat kuliah hanya sebagai setumpuk tugas yang harus diselesaikanDengan Mindset seperti itu mereka tidak akan mendapatkan Kebahagiaan dalam kuliah.Anda harus mengubah mindset dan menjadikan anda penuh semangat dalam kuliah untuk mendapatkan KebahagiaanKebahagiaan dalam kuliah akan mendekatkan Anda kepada kesuksesan baik dalam kuliah maupun bekerja atau bisnis nanti

Chapter 1 An Introduction to Corporate Finance

Introduction to Corporate FinanceMcGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Key Concepts and SkillsKnow what the Corporate Finance isKnow the role of the financial manager in the corporationKnow what is the goal of financial managementUnderstand the different forms of business organizationUnderstand the conflicts of interest that can arise between owners and managersTake a brief look at the various types of financial markets1-*

Chapter Outline1.1 Corporate Finance and the Financial Manager1.2 Forms of Business Organization1.3 The Goal of Financial Management1.4 The Agency Problem and Control of the Corporation1.5 Financial Markets and the Corporation1-*

What Is Corporate Finance?business finance is just another name for corporate finance Corporate finance provides answers to some important questions:What long-term investments should the firm take on?Where will the firm get the long-term financing to pay for the investments?How will the firm manage its everyday financial activities? Such as collection from customers and paying suppliers1-*

The Financial ManagerFinancial managers try to answer some or all of these questionsThe top financial manager within a firm is usually the Chief Financial Officer (CFO)Treasurer oversees cash management, credit management, capital expenditures, and financial planningController oversees taxes, cost accounting, financial accounting and data processing1-*

Financial Management DecisionsCapital budgetingThe Process of planning and managing a firms long-term investment is called Capital Budgeting

What long-term investments or projects should the business take on?

Identify investment opportunity that are worth more than they cost to acquire. This means that the value of the cash flow generated by an asset exceed the cost of that asset

Examples : what product or service will the firm sell, open another plant, should we replace old equipment with newer, more advanced equipment, what type of accounting system to purchase etc.1-*

Financial Management DecisionsCapital structure

How much should the firm borrow to pay for its assets?What is the best mixture of debt and equity?The least expensive sources of funds?How and where to raise the money1-*

Financial Management DecisionsWorking capital managementHow do we manage the day-to-day finances of the firm?Examples : How much cash should we keep on hand?Should be sell on credit? If yes, who should we sell to on credit, what is the term of payment?How much inventory should we carry? 30 days? Just in time?How will we obtain any needed short-term financing?When should we pay our suppliers, etc.

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Forms of Business OrganizationThree major forms Sole ProprietorshipPartnershipGeneralLimitedCorporationLimited Liability Company(UU PT No 40 tahun 2007) Limited Liability Partnerships1-*

Sole ProprietorshipAdvantagesEasiest to startLeast regulatedSingle owner keeps all the profitsTaxed once as personal incomeDisadvantagesLimited to life of ownerEquity capital limited to owners personal wealthUnlimited liabilityDifficult to sell ownership interest1-*

PartnershipAdvantagesTwo or more ownersMore capital availableRelatively easy to startIncome taxed once as personal incomeDisadvantagesUnlimited liabilityGeneral partnershipLimited partnershipPartnership dissolves when one partner dies or wishes to sellDifficult to transfer ownership1-*

CorporationAdvantagesLimited liabilityUnlimited lifeSeparation of ownership and managementTransfer of ownership is easyEasier to raise capitalDisadvantagesSeparation of ownership and managementMay involve double taxation in some countries (income taxed at the corporate rate and then dividends taxed at the personal rate)1-*

Summary of 3 Business Forms1-*Liquidity refer to the speed and ease with which an asset can be converted to cash

Goal of Financial ManagementWhat should be the goal of a corporation?

Possible Goals

Relates to profitability : Maximize profits? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

Relates to controlling Risk : Bankruptcy avoidance, stability, survive1-*

Maximizing Shareholders Wealth = Maximizing the market value of the existing owner equityWhy is this a valid goal?Decisions are made in shareholders best interestConsiders cash flows not profitsIncorporates time dimensionDoes not consider profitability but also risk

The Agency ProblemAgency relationshipThe relationship between stockholder and managementThe relationship exists when a principal hires an agent to represent his/her interestsStockholders (principals) hire managers (agents) to run the companyAgency problemConflict of interest between principal and agentAgent may not work in the best interest of the principal1-*

Management GoalsManagement goals may be different from shareholders goalsManagement may be more interested in:Consuming expensive perksIts own survival Its independenceManagement may focus on increased growth and size rather than increasing shareholders wealth

Agency CostsCosts due to the conflict of interest between shareholders and managementDirectCorporate expenditure that benefits management but costs shareholders, e.g. country club membershipCosts to monitor management actions, e.g. auditor costsIndirectLost opportunity due to management forgoing profitable but risky projects for fear of losing job if project fails

1-*

Do Managers act in the best interest of stockholder?

It depends on 2 factors :

How closely are management goals aligned with stockholders goals? This question relates to the way manager are compensated.

Can managers be replaced if they do not pursue stockholders goals? This question relates to the control of the firm.1-*

Managing ManagersManagerial compensationIncentives can be used to align management and stockholder interestsThe incentives need to be structured carefully to make sure that they achieve their goalCorporate controlAGM/ RUPS, EGM/RUPSLBProxy fight mechanism by unhappy stockholder to act to replace existing management.The threat of a takeover may result in better managementOther stakeholdersE.g : employees, customers, suppliers, government etc.1-*

Financial MarketsPrimary marketA market where the firm sells its securities to public for the first timeSecondary marketsA market in which the securities issued by firms are tradedListed securities trade in an organized exchange, e.g. the stock market (NYSE)Over-the-counter securities are bought from or sold to a dealer

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Financial MarketsPrimary marketPublic offerings selling securities to the general publicPrivate placement a negotiated sale involving a specific buyer.Secondary marketsAuction market broker & Agent match buyer & seller. They do not own the commodity. = A Real estate agent.Dealer market Dealer buy and sell for themselves at their own risk. = Car Dealer

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Quick QuizWhat are the three types of financial management decisions?What are the three major forms of business organization?What is the goal of financial management?What are agency problems and why do they exist within a corporation?What is the difference between a primary market and a secondary market?1-*

So Thats An Introduction to Corporate Finance*

End of Chapter 1. Continue to Chapter 22-*

You Are What You Think (Anda adalah apa yang anda pikirkan)

2-*"Attitude is everything." It's what makes the difference between those who succeed and those who fail. Use self-talk to make positive changes in our attitudes and beliefs.

Self-talk can be private speech, thoughts, or external speech, all of which shape emotions and behavior for good or bad.

Self-Talk, will help us overcome stress, guilt, depression, anxiety, and anger;

Apa yang anda fikir, itulah diri anda. Jadi percayalah kepada kekuatan dan usaha anda. Bermimpilah yang besar. InsyaAllah anda akan memperolehnya.

Self-talk thru song

AKU BISAKadang ku takut dan gugupDan ku merasa ooh..ohh tak sanggupMelihat tantangan di sekitarkuAku merasa tak mampu

Namun ku tak mau menyerahAku tak ingin berputus asaDengan gagah brani aku melangkahDan ternyata aku bisa

Aku bisa aku pasti bisaKu harus terus berusahaBila ku gagal tak mengapaSetidaknya ku tlah mencobaAku bisa aku pasti bisaKu tak mau berputus asaCoba terus coba sampai ku bisaAku pasti bisa

-----Back to :******

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*******1.*1.*Emphasize that business finance is just another name for corporate finance mentioned under the four basic types. Students often get confused by the terminology, especially when different terms are used to refer to the same thing.

1.*1.*1.*Provide some examples of capital budgeting decisions: what product or service will the firm sell, should we replace old equipment with newer, more advanced equipment, etc.

Be sure to define debt and equity.

Provide some examples of working capital management: who should we sell to on credit, how much inventory should we carry, when should we pay our suppliers, etc.1.*1.*www: Clicking on the web surfer will take you to a web site (www.guidemesingapore.com) that will provide a discussion about the different forms of business organization that may be appropriate for an entrepreneur. The following pages will provide links to specific pages on the web site that provide additional information about the legal aspects of each form of business, as well as a discussion of the advantages and disadvantages. 1.*www: Click on the web surfer and scroll down for more information about sole proprietorships. 1.*www: Click on the web surfer and scroll down for more information about partnerships.

Note that unlimited liability applies to all partners in a general partnership but only to the general partners in a limited partnership.

Written agreements are essential due to the unlimited liability.

Limited partners cannot be involved in the business or else they may be deemed as general partners.1.*www: Click on the web surfer to go to a page that discusses corporations. Discuss how separation of ownership and management can be both an advantage and a disadvantage:AdvantagesYou can benefit from ownership in several different businesses (diversification)You can take advantage of the expertise of others (comparative advantage)Easier to transfer ownershipDisadvantageAgency problems if management goals and owner goals are not aligned

The Lecture Tip in the instructors manual provides additional discussion of limited liability companies and S-corporations.

1.*1.*Try to have the students discuss each of the goals above and the inherent problems of the first three goals:Maximize profit Are we talking about long-run or short-run profits? Do we mean accounting profits or some measure of cash flow?Minimize costs We can minimize costs today by not purchasing new equipment or delaying maintenance, but this may not be in the best interest of the firm or its owners.Maximize market share This has been a strategy of many of the dot.com companies. They issued stock and then used it primarily for advertising to increase the number of hits to their web sites. Even though many of the companies have a huge market share, they still do not have positive earnings and their owners are not happy.Maximize the current value of the companys stockThere is no short run vs. long run here. The stock price should incorporate expectations about the future of the company and consider the trade-off between short-run profits and long-run profits.The purpose of a for-profit business should be to make money for its owners. Maximizing the current stock price increases the wealth of the owners of the firm.This is analogous to maximizing owners equity for firms that do not have publicly traded stock.Non-profits can also follow the same principle, but their owners are the constituencies that they were created to help.

The instructors manual (IM) provides a letter to stockholders that was written by former Coca-Cola CEO Roberto Goizueta. A Lecture Tip also provides a brief discussion of an article that appeared in Fortune magazine that discusses Coke vs. Pepsi and their different philosophies on business in the early 1990s.

Another Lecture Tip addresses the implicit assumption in this goal, i.e., that investors are rational.

Use this slide to conclude the discussion in the previous slide about possible goals. Emphasize that this goal guides the 3 sets of financial management decisions of the firm:Capital budgeting the firm will take on projects that increase shareholders wealthCapital structure while debt is cheaper than equity, increasing the amount of debt increases default risk. Unlike the other goals, shareholder wealth maximization considers risk and optimizes the risk-return tradeoff.

Unlike profit maximization, in shareholders wealth maximization there is no issue of maximizing the short run or long run performance of the company, as the share price incorporates earnings expectations over the long run

Also be sure to note that this goal is not specific to corporations, but is generally applied to any form of business, including not-for-profits.

1.*1.*A common example of an agency relationship is a real estate broker in particular if you break it down between a buyers agent and a sellers agent. A classic conflict of interest is when the agent is paid on commission, so they may be less willing to let the buyer know that a lower price might be accepted or they may elect to only show the buyer homes that are listed at the high end of the buyers price range.

A Lecture Tip provides an example that illustrates conflicts may also arise between bondholders and stockholders.1.*Direct agency costs the purchase of something for management that cant be justified from a risk-return standpoint, and monitoring costs.Indirect agency costs managements tendency to forgo risky or expensive projects that could be justified from a risk-return standpoint.

A Lecture Tip provides an example that illustrates conflicts may also arise between bondholders and stockholders.1.*Incentives discuss how incentives must be carefully structured. For example, tying bonuses to profits might encourage management to pursue short-run profits and forego projects that require a large initial outlay. Stock options may work, but there may be an optimal level of insider ownership. Beyond that level, management may be in too much control and may not act in the best interest of all stockholders. The type of stock can also affect the effectiveness of the incentive. A recent issue with options backdating also seems to run counter to the purpose of aligning incentives.

Corporate control ask the students why the threat of a takeover might make managers work toward the goals of stockholders.

Other groups also have a financial stake in the firm. They can provide a valuable monitoring tool, but they can also try to force the firm to do things that are not in the owners best interests.1.*Incentives discuss how incentives must be carefully structured. For example, tying bonuses to profits might encourage management to pursue short-run profits and forego projects that require a large initial outlay. Stock options may work, but there may be an optimal level of insider ownership. Beyond that level, management may be in too much control and may not act in the best interest of all stockholders. The type of stock can also affect the effectiveness of the incentive. A recent issue with options backdating also seems to run counter to the purpose of aligning incentives.

Corporate control ask the students why the threat of a takeover might make managers work toward the goals of stockholders.

Other groups also have a financial stake in the firm. They can provide a valuable monitoring tool, but they can also try to force the firm to do things that are not in the owners best interests.1.*Video Note: This video discusses how capital is raised in financial markets and shows an open-outcry market at the Chicago Board of Trade.

Discuss the cash flows to the firm. You might have students turn to Figure 1.2 in their book to see an illustration of the cash flows. The main point is that cash comes into the firm from the sale of debt and equity. The money is used to purchase assets. Those assets generate cash that is used to pay stakeholders, reinvest in additional assets, repay debtholders, and pay dividends to stockholders.

The Lecture Tip in the IM provides an interesting example of full disclosure in a firms IPO prospectus.

Students are often confused by the fact that the NASDAQ is an OTC market. Explain that the NASDAQ market site is just a convenient place for reporters to show how stocks are moving, but that trading does not actually take place there.

You may wish to note the evolution of these particular markets, e.g., moving to publicly traded firms, emergence of electronic trading, and increased industry consolidation.

www: Click on the NYSE hyperlink to go to the web site

1.*Video Note: This video discusses how capital is raised in financial markets and shows an open-outcry market at the Chicago Board of Trade.

Discuss the cash flows to the firm. You might have students turn to Figure 1.2 in their book to see an illustration of the cash flows. The main point is that cash comes into the firm from the sale of debt and equity. The money is used to purchase assets. Those assets generate cash that is used to pay stakeholders, reinvest in additional assets, repay debtholders, and pay dividends to stockholders.

The Lecture Tip in the IM provides an interesting example of full disclosure in a firms IPO prospectus.

Students are often confused by the fact that the NASDAQ is an OTC market. Explain that the NASDAQ market site is just a convenient place for reporters to show how stocks are moving, but that trading does not actually take place there.

You may wish to note the evolution of these particular markets, e.g., moving to publicly traded firms, emergence of electronic trading, and increased industry consolidation.

www: Click on the NYSE hyperlink to go to the web site