financial management i_chapter 1

7/27/2019 Financial Management I_Chapter 1

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Financial Management I

BBPW 3103Chapter 1

Introduction


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Finance

Is money transfer process troughindividuals of organization

Financial decision are made based

on basic concepts, principles andfinancial theories that can dividedinto 3 categories Investment decision related to assets

Financial decision related to liabilitiesand equity

Management decision related tooperating decision and daily financialdecision of the company


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Finance (cont.)

Financial decision involves a few aspects offinancial analysis as follow:-

Should the company carry out theproject?

Will the investment be successful? How to fund the investment?

Which the best funding decision?

Does the company have enough cash for

daily operation? What the level of inventory to be kept?

To which customer should the companyoffer credit?

What is the optimal dividend policy?

Should the takeover be continued?


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Roles of Finance Manager

Making Investment andFinancing Decision

Identify the quantity of assets to

be bought in short-term and long-term

Identify how to finance the assets

Making Financial Planning andForecasts Make plans for the company

future to ensure that the company

is operating efficiently.


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Roles of Finance Manager

(cont.)

Control and Coordination

Cooperate with the othermanagers

Dealing With Financial Market Dealing with money market and

capital market

Money Market : Deal a short-terminstrument such as T-Bills,Certificate of Deposits

Capital Market : Deal a long-terminstruments


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Objective of Financial

Management

Maximising Profit

Main company objective is to

maximising company profit

Company profit is measured by

the Earning Per Share that is

= Net Profit Ordinary Share

Issued (Unit)


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Management (cont.)

This objective is not accurate and is

rarely used as a company objective due

to these 3 reasons

Cash Inflow & Outflow : Non-cash item must

be added to the profit

Timing Return : This refer to time the

company will received return from project.

For example

Project Year1 Year2

A RM100K -

B - RM100K

Risks : The hire risk of the investment, the

higher return will be get by the company


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Management (cont.)

Maximising ShareholdersWealth

Finance manager need to

increase value of company thatwill directly increase in value ofshareholder

When the price of the share

increase, the value of thecompany also increase and returnto the shareholders will beincrease.


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Agency Problems

Relationship of the agency occurs

when one @ more individuals

(principal) hire another individuals

(agent) to perform service behalf ofthe principal.

Agent will make any decision that

related to the company

In financing, relationship agency

involved shareholders (principal) and

manager (agent)


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Agency Problems (cont.)

Manager must maximisingshareholders wealth.

In real situation, many decisionmade by the manager are related to

the personal interest and not tomaximise shareholders wealth.

Different objectives betweenmanager and shareholder make

Agency Problems The shareholder must control and

coordinate any decision made by themanager


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Types of Business

Organisation

Sales Proprietor Owned by 1 individual

Easy to establish

No need to have high capital resources Business not governed by several

regular

Profit is not taxable. Only incomesubject to personal tax

Financial status can be kept confidential

Disadvantages Difficult to get higher capital

Unlimited liabilities


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Types of Business

Organisation (cont.)

Partnership

Owned by 2-20 partners

Types of partnership

General : Have unlimited liabilities Limited : Have limited liabilities

In generally, all partnership haveunlimited liabilities. If the company

fail to pay the creditors, thepartner must settle the companydebts using their own property


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Types of Business


Partnership (cont.)

Advantages

Easily formed and low formation cost

More capital can be acquired

Only company profit subject to tax

not partner income

Partner have variety of expertise and

skills

Business risk and liabilities can be

shared among the partners


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Types of Business


Partnership (cont.)

Disadvantages

Company can be dissolved upon the

death, withdrawal @ bankruptcy ofone of the partners

Decision making more difficult

compare to sole proprietor

Partner have unlimited liabilities

Company risk must be borne by all

partners. A mistake made by one

partner will bind the other partners


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Financial Market

Financial market is a medium

that connects the capital

depositor and borrower.

There are 2 main financial

market:-

Money market

Capital market


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Financial Market (cont.)

Money Market

Is a market that traded short-term

instrument

Have a low default risk and easy

to redeemed

For Example : T-Bills, Commercial

Notes, Certificate of Deposit andBanker Accpetance


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Financial Market (cont.)

Capital Market

Is a market that traded long-terminstrument

Higher risk than money market For examples : Bond, Preference

Share and Ordinary Share

Traded in 2 types of market Main Market : Market that sell new

instrument to acquire capital

Secondary Market : Market forinstrument that have been issued

and traded among investors

financial management i_chapter 1

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