FINANCIAL MANAGEMENT

(BWFF2033)
Name: Dr. BADRU Bazeet Olayemi
Room: 333 (SBM Building)
Office No: 04 9286896
Mobile: 0147265986
email: badru@uum.edu.my

1-1
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 ASSESSMENT METHODS
ASSESSMENTS

Percent Mode of Asst Topics Date

COURSE WORK
Individual Practices 1&2 10 Online Quiz 1-4
Class Participation 5 Random
Chat Forum 5
Reading 10 Structured questions 1-10

Group Project 20
Total 50
Mid-term test 20 MCQ 1-5
Terminal test 30 MCQ 6-10
GRAND TOTAL 100
1-2
 CHAPTER 1
I N T R O D U C T I O N T O C O R P O R AT E
FINANCE

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 KEY CONCEPTS AND SKILLS

• Define the basic types of financial management decisions and the role
of the financial manager

• Explain the goal of financial management

• Articulate the financial implications of the different forms of business

organization

• Explain the conflicts of interest that can arise between managers and
owners

1-4
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 CHAPTER OUTLINE

• Corporate Finance and the Financial Manager

• Forms of Business Organization

• The Goal of Financial Management

• The Agency Problem and Control of the Corporation

• Financial Markets and the Corporation

1-5
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 WHAT IS CORPORATE FINANCE

• Corporate finance is the study of investments decisions, financing

decisions and the management of a company (working capital
decisions).

• Some important questions that are answered using finance:

 What long-term investments should the firm/company take on?
Line of business and Capital budgeting/Investment decision

 Where will we get the long-term financing to pay for the

investment? Capital structure or financing decision

 How will we manage the everyday financial activities of the firm?

Working capital management decision 1-6
 FINANCIAL MANAGER

• A Financial manager is an agent responsible for the day to day business

activities of the company on behalf of the company owners (stockholders).
He/she tries to answer some or all the three questions stated earlier in slide 6.

• The top financial manager within a firm/company is usually the Chief

Financial Officer (CFO) and the CFO is in charge of finance activities in
the company.

• Other financial managers include:

 Treasurer – oversees cash management, credit management, capital
expenditures, and financial planning
 Controller – oversees taxes, cost accounting, financial accounting and data
processing

1-7
 FINANCIAL MANAGEMENT DECISIONS:
CAPITAL BUDGETING (CB)

• This involves the long-term investments (LTIs) or projects that is to be

undertaken by a company.

• CB is the process of planning and managing a company’s LTIs.

• In CB, the financial manager ensures that he/she identifies the investment
opportunities or projects that are worthwhile.

• Examples of capital budgeting decisions are:

 what product or service will the firm sell,
 should we replace old equipment with newer or more advanced
equipment, etc.

1-8
 FINANCIAL MANAGEMENT DECISIONS:
CAPITAL STRUCTURE
• This relates to how a company obtains and manages the long-term
financing needed to support the long-term investments available.

• A company’s capital structure is the mixture of long-term debts

and equity uses to finance it operations.
•
• When it comes to capital structure decision, the financial manager is
concern with:
 How should we pay for our assets?
 Should we use debt or equity?
 What mixture of debt and equity is the best?
Because the mixture chosen will affect both the risk and value of
the company.
1-9
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 FINANCIAL MANAGEMENT DECISIONS:
WORKING CAPITAL MANAGEMENT
• This involves the management of company’s short term assets
(inventory) and its short-term liabilities (money owned to
suppliers).

 How do we manage the day-to-day finances of the firm?

 Inventory and Credit management, such as:
 who should we sell to on credit,
 how much inventory should we carry,
 when should we pay our suppliers, etc.

• The benefit of working capital management is to ensure that the

company has enough resources to continue its operations.

1-10
FORMS OF BUSINESS ORGANIZATION

• There are three major forms of business:

 Sole Proprietorship: This is a form of business owned by a single person who
is responsible for the company’s debt and entitle to all of the company’s profit.

 Partnership: It is a business form by two or more persons for the purpose of

operating a business for profit.
• General: The partner runs the business and faces unlimited liability for the
company’s debt.
• Limited: The liability of the business debt is limited to the amount that
partners invested to the partnership business. Details on how the partnership
gains (and losses) are divided are provided in the PARTNERSHIP
AGREEMENT

 Corporation: This is a legal person separate and distinct from its owners.
• Limited Liability Company 1-11
 • In a corporation, the stockholders are the owners of the company.

• The stockholders control the company and elect board of directors.

• The board of directors select the managers.

• Managers are charged with running the corporate affairs in the

stockholders’ interest.

1-12
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 SOLE PROPRIETORSHIP

• Advantages • Disadvantages
 Easiest to start  Limited to life
 Least regulated of owner
 Single owner keeps all the  Equity capital limited to
profits owner’s personal wealth
 Taxed once as personal  Unlimited liability
income. That is there is no  Difficult to sell ownership
distinction between interest
personal and business
income.

1-13
 PARTNERSHIP
• Advantages • Disadvantages
 Two or more owners  Unlimited liability
 More capital available, but • General partnership
the amount that can be • Limited partnership
raised is limited to the  Partnership dissolves when
partners combined wealth. one partner dies or wishes
 Relatively easy to start to sell
 All Income is taxed once as  Difficult to transfer
personal income ownership
1) Note that unlimited liability applies to all partners in a general partnership
but only to the general partners in a limited partnership.
2) Written agreements are essential due to the unlimited liability.
1-14
 CORPORATION

• Advantages • Disadvantages
 Limited liability  Double taxation (income
 Unlimited life taxed at the corporate rate
 Separation of ownership and then dividends taxed at
and management the personal rate)
 Transfer of ownership is  Agency problems if
easy management goals and
 Easier to raise capital owner goals are not aligned

1-15
 GOAL OF FINANCIAL MANAGEMENT

• What should be the goal of a corporation?

 Maximize profit?
 Minimize costs?
 Maximize market share or sales?
 Maintain steady earnings growth?
 Maximize/Increase the current value of the company’s
stock? That is to add value for the owners of the company.

• Does this mean we should do anything and everything to

maximize owner/shareholder wealth?

1-16
 THE AGENCY PROBLEM
• Agency relationship is a relationship that exist when
 Principal hires an agent to represent his/her interests
 Stockholders (principals) hire managers (agents) to run the company.
This means that agency relationship is the relationship between
stockholders and management.

• The conflict of interest that arises from this relationship is referred to as

Agency problem
 Conflict of interest between principal and agent
 The cost of the conflict of interest is called Agency cost and this
cost can be direct and indirect.
 Direct cost is when the agent carryout with the purchase of
corporate expenditure that benefits management but costs the
stockholders. Indirect cost is vice versa.
1-17
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 MANAGING MANAGERS
• How can we ensure that managers act in stockholders interest?
• Managerial compensation: This is a mechanism used to align management goals
with stockholder goals.
 Incentives can be used to align management and stockholder interests. Such
incentives include associating the managers compensation with financial
performance. It can also be in form of stock option and bonuses.
 The incentives need to be structured carefully to make sure that they achieve their
goal.
• Corporate control: It is used to replace managers in case they pursue goals
different from stockholders goals. Therefore, the stockholders can hire and fire a
manager (e.g., Steve Jobs). The shareholders have ultimate control of the company.
 The threat of a takeover may result in better management.
• Proxy fight: This is a mechanism used by unhappy stockholders to replace the
company management. It is an authority to vote someone else’s stock.
• Takeover: is a mechanism use to replace managers of a poorly managed company.
• Other than the stockholders, stakeholders of the company, such as employees,
customers, suppliers etc. have claim on the cash flows of the company. 1-18
 FINANCIAL MARKETS

• A financial market is a place/market where money and credit are

exchanged. This can be money market and capital market.
 A money market is a market for short term debt instruments (1yr or
less).
 A capital market is a market for long-term financial instruments (more
than 1yr).
A financial market is also a market where debt and equity securities are
bought and sold. Equities are issued by companies solely, debt securities
are issued by both government and companies.
• The three principal set of players are borrowers (companies), savers
(investors), and financial institutions (intermediaries).

• The financial institutions bring borrowers and savers together. Examples

include commercial banks, insurance companies etc. 1-19
 FIRM CASH FLOWS:
CASH FLOWS TO AND FROM THE FIRM

1-20
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 FINANCIAL MARKET PLACE:
SECURITIES MARKETS
• A security is a negotiable instrument that represents a financial claim. This
can be in form of stock (ownership) or bond (a debt agreement).
• Securities market function as both primary and secondary markets.

• The primary market is a market in which new shares are bought and sold
by the government and corporation for the first time. In this type of market,
the corporation issue new securities to raise money that can help to finance
its business. This can be in form of public offerings and private
placements.
• Public offerings is the selling of securities to the general public
• Private placement is a negotiated sale that involves a specific buyer.

• Listing: This is an organized exchanged. Bursa Malaysia.

1-21
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
• The secondary market is a market where the trading of previously issued
securities takes place. It involves an owner or a creditor selling to another. In
this market, the issuing company does not receive any new money/financing.
 There are two kinds of secondary markets: Dealer vs. Auction markets

 Dealers: The dealers buy and sell for themselves at their own risk. The
dealers arrange trades but never own the securities traded. Similarly,
brokers and agents do not actually own the commodity that is bought or
sold, but they match buyers and sellers together.
 The dealer markets in stocks and long-term debt are called over-the-
counter securities. Specifically, most trading in debt securities take
place over the counter. NASDAQ
 Auction markets: In this market dealers have limited role because most of
the buying and selling are done in a physical location (in an exchange)
where both buyer and seller are matched together. Example: NYSE 1-22
 QUICK QUIZ

• What are the three types of financial management decisions and

what questions are they designed to answer?

• 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?
1-23
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 ETHICS ISSUES

• Is it ethical for tobacco companies to sell a product that is known to

be addictive and a danger to the health of the user? Is it relevant that
the product is legal?

• Should boards of directors consider only price when faced with a

buyout offer?

• Is it ethical to concentrate only on shareholder wealth, or should

stakeholders as a whole be considered?

• Should firms be penalized for attempting to improve returns by

stifling competition (e.g., Microsoft)?
1-24
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 END OF CHAPTER
CHAPTER 1

1-25
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.