chap 1bb(aug 13)
TRANSCRIPT
-
7/29/2019 Chap 1BB(Aug 13)
1/35
FINANCIAL
MANAGEMENTChapter 1 The Corporation
-
7/29/2019 Chap 1BB(Aug 13)
2/35
Financial Management2
How people in corporations make financial
decisions?
Financial decisions?
Where, when, what, how much, howetc.
Mostly concern with three decisions:
_______decisions, _________ decisions and_________decisions.
With one goal
-
7/29/2019 Chap 1BB(Aug 13)
3/35
The Role of the Financial
Manager3
Capital budgeting: decide which L-T assets to
acquire;
Financing: decide how to pay for S-T and L-T
assets,
Working Capital: decide how to manage S-T
resources and obligations or
Dividend decision: decide on the payout ofdividend.
-
7/29/2019 Chap 1BB(Aug 13)
4/35
Cash Flows Between the Firm and
Its Stakeholders and Owners
(Parrino et al., 2012)
-
7/29/2019 Chap 1BB(Aug 13)
5/35
How the Financial Managers
Decisions Affect the Balance Sheet
(Parrino et al., 2012)
-
7/29/2019 Chap 1BB(Aug 13)
6/35
6
Learning Objectives
1. Identify the key financial decisions faced
by the financial managers;
2. Identify the basic forms of business
organisation;3. Understand the rationale of firms goal of
maximisation of shareholders wealth;
4. Understand the nature of the StockMarket.
-
7/29/2019 Chap 1BB(Aug 13)
7/35
7
The Four Types of Firms
Sole Proprietorship
Partnership
Limited Liability Company
Corporation
-
7/29/2019 Chap 1BB(Aug 13)
8/35
8
Sole proprietorshipA business owned by a single individual, unlimited
liability, limited access to capital, lack of continuity,constraints of various skills.
Advantages
Easy to create
Disadvantages
Unlimited personal liability
Limited life
Difficult to transfer ownership
Legal forms of business organisation
-
7/29/2019 Chap 1BB(Aug 13)
9/35
9
PartnershipAn association of two or more individuals joining
together as co-owners to operate a business forprofit, joint responsibility, involves partnership
agreement, better access of capital/skills, continuityof business?
All partners are personally liable for all of the firms
debts. A lender can require any partner to repay all
of the firms outstanding debts.
The partnership ends with the death or withdrawal
of any single partner.
Legal forms of business organisation
-
7/29/2019 Chap 1BB(Aug 13)
10/35
10
The Four Types of Firms
(cont'd)
PartnershipAdvantages: limited protection of owners personal
assets; more sources of equity & expertise.
Disadvantages: hard to dissolve, shared control &profit.
Limited Partnership has two types of owners.
General Partners Have the same rights and liability as partners in a
regular partnership (personally liable for firms debt
obligations.) Typically run the firm on a day-to-day basis
Limited Partners Have liability limited to their investment Have no management authority and cannot legally be involved
in the managerial decision making for the business The limited partners interest is transferable
-
7/29/2019 Chap 1BB(Aug 13)
11/35
11
The Four Types of Firms
(cont'd) Limited Liability Company (LLC)
All owners have limited liability (not personally
liable) but they can also run the business.
Can be private orpublic companies.
Known as PLC in UK.
-
7/29/2019 Chap 1BB(Aug 13)
12/35
12
The Four Types of Firms
(cont'd) Corporation
A legal entity separate from its owners
Has many of the legal powers as individuals have, such as
the ability to enter into contracts, own assets, and borrowmoney
The corporation is solely responsible for its ownobligations. Its owners are not liable for any obligation the
corporation enters into.An entity that legally functions separately and apart from
its owners, limited liability, good access of capital/skills,separation of management and ownership, ownership isdictated by the shareholdings and is transferable.
-
7/29/2019 Chap 1BB(Aug 13)
13/35
13
The Four Types of Firms
(cont'd) Corporation
Advantages: protects personal assets, no
shareholder liability for business, greater access
to sources of funds.
Disadvantages?
Formation
Corporations must be legally formed.A legaldocument is created on formation of the corporation.
-
7/29/2019 Chap 1BB(Aug 13)
14/35
14
The Four Types of Firms
(cont'd) Corporation
Ownership
Represented by shares of stock
Owner of stock is called Shareholder Stockhoder Equity Holder
Sum of all ownership value is called equity.
There is no limit to the number ofshareholders, andthus the amount of funds a company can raise byselling stock.
Owner is entitled to dividend payments.
-
7/29/2019 Chap 1BB(Aug 13)
15/35
Legal forms of business
organisation
Comparison of organisational forms
Consider:
Organisation requirements and costs
Liability of owners Continuity of business
Transferability of ownership
Management control
Ease of capital raising Income taxes
-
7/29/2019 Chap 1BB(Aug 13)
16/35
16
Ownership versus Control
of Corporations
Corporate Management Team
In a corporation, ownership and direct control are
typically separate.
Board of Directors
Elected by shareholders
Have ultimate decision-making authority
Chief Executive Officer (CEO) Board typically delegates day-to-day decision making
to CEO.
-
7/29/2019 Chap 1BB(Aug 13)
17/35
17
Figure 1.2 Organizational Chart of
a Typical Corporation
-
7/29/2019 Chap 1BB(Aug 13)
18/35
18
Ownership versus Control of
Corporations (cont'd)
Financial Manager
Responsible for:
Investment Decisions Financing Decisions
Cash (Treasury) Management or Dividend Decisions
-
7/29/2019 Chap 1BB(Aug 13)
19/35
19
Ownership versus Control of
Corporations (cont'd)
Goal of the Firm
Shareholders will agree that they are better off if
management makes decisions that maximizes the
value of their shares.
Maximisation ofshareholders wealth; orfirms
value.
-
7/29/2019 Chap 1BB(Aug 13)
20/35
Goal of the firm
Problems:
Timing of returns, eg.
Uncertainty of returns, (risk vs return,
opportunity cost of capital) eg.
Profit maximisation?
-
7/29/2019 Chap 1BB(Aug 13)
21/35
The Goal of the Firm
Do not Maximize Profit
Accounting profit differs from cash flows
Profit earned may not equal cash received
Cash not received cant be used to pay bills
The strategy ignores the timing of future cash
flows
The strategy ignores the risks associated with
having to wait for cash flows
-
7/29/2019 Chap 1BB(Aug 13)
22/35
The Goal of the Firm
Maximize Shareholders Wealth!
Future cash flows are considered
The timing of future cash flows is considered
The risks associated with having to wait to forcash flows are considered
-
7/29/2019 Chap 1BB(Aug 13)
23/35
The Goal of the Firm
Its All About Cash flow!
Positive residual cash flow may be paid to firm
owners as dividends or invested in the firm
The larger the positive residual cash flow, thegreater the value of a firm
Negative residual cash flow over the long run -
leads to bankruptcy or closing a business
-
7/29/2019 Chap 1BB(Aug 13)
24/35
Goal of the firm
How do we measure it?
Maximisation of shareholder
wealth?
-
7/29/2019 Chap 1BB(Aug 13)
25/35
Goal of the firm
refers to The maximisation of theprice/market value of the existingordinary shares which owned by
the ultimate owners - who affectsthe movement of share prices.
Maximisation of shareholderwealth?
-
7/29/2019 Chap 1BB(Aug 13)
26/35
Goal of the firm
This goal is consistent with: Maximising firm value
Maximising share value
BUTits not without its difficulties!
Maximisation of shareholder
wealth?
-
7/29/2019 Chap 1BB(Aug 13)
27/35
27
Ownership versus Control of
Corporations (cont'd)
Ethics and Incentives within Corporations
Agency Problems
Managers may act in their own interest rather than inthe best interest of the shareholders.
One potential solution is to tie managements
compensation to firm performance. (may encourage
risk-taking)
How should performance be measured?
Ownership versus Control of
-
7/29/2019 Chap 1BB(Aug 13)
28/35
28
CEO PerformanceIf a CEO is performing poorly:
shareholders can express their dissatisfaction byselling their shares. This selling pressure will drive thestock price down.
or
shareholders could pressure the board to reappoint a
new CEO. Hostile Takeover
Low stock prices may entice a Corporate Raider to buyenough stock so they have enough control to replace currentmanagement. The stock price will rise after the new
management team fixes the company.
Ownership versus Control ofCorporations (cont'd)
-
7/29/2019 Chap 1BB(Aug 13)
29/35
29
Ownership versus Control of
Corporations (cont'd)
Corporate Bankruptcy
Debt holders vs equity holders
Reorganization
Liquidation
-
7/29/2019 Chap 1BB(Aug 13)
30/35
30
The Stock Market
The stock market provides liquidity
to shareholders.
Liquidity
The ability to easily sell an asset for close to the price
you can currently buy it for
Why is it important?
-
7/29/2019 Chap 1BB(Aug 13)
31/35
31
The Stock Market (cont'd)
Public Company
Stock is traded by the public on a stock exchange.
Private Company
Stock may be traded privately.
-
7/29/2019 Chap 1BB(Aug 13)
32/35
32
The Stock Market (cont'd)
Primary Markets
When a corporation itself issues new shares of
stock and sells them to investors, they do so on
the primary market.
Secondary Markets
After the initial transaction in the primary market,the shares continue to trade in a secondary
market between investors.
-
7/29/2019 Chap 1BB(Aug 13)
33/35
33
The Stock Market (cont'd) Largest Stock Markets
New York Stock Exchange (NYSE)
Market Makers/Specialists Each stock has only one market maker
NASDAQ Does not meet in a physical location
May have many market makers for a single stock
Bid Price versus Ask Price Bid-Ask Spread
Transaction cost
-
7/29/2019 Chap 1BB(Aug 13)
34/35
Getting A Stock Price
The stock price is the market price of a stock. Using the
Bursa Malaysia website you can view the price for any
listed stock.
Getting a Price:
There are many places you can find market news, eg:
The financial section of the daily newspapers
Bursa Malaysia Website. (www.bursamalaysia.com) Your broker website may have an up-to-date list of stock
prices
Your telephone company may be able to send you
market updates via your mobile phone
-
7/29/2019 Chap 1BB(Aug 13)
35/35
The Essence of Share Prices35
What is the importance of share prices?
Why are the news focused heavily on the
movement of the share prices?
What are the factors that driving the changesin the share prices?