Topic1 : 0 Topic1 Introduction to Financial Management Key Concepts and Skills : 1 Key Concepts and Skills Know the basic types of financial management decisions and the role of the financial manager
Know the financial implications of the different forms of business organization
Know the goal of financial management
Understand the conflicts of interest that can arise between owners and managers Chapter Outline : 2 Chapter Outline Finance: A Quick Look
Business 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 Basic Areas Of Finance : 3 Basic Areas Of Finance Corporate finance
International finance Investments : 4 Investments Work with financial assets such as stocks and bonds
Value of financial assets, risk versus return and asset allocation
Stockbroker or financial advisor
Security analyst Financial Institutions : 5 Financial Institutions Companies that specialize in financial matters
Banks – commercial and investment, credit unions, savings and loans
Job opportunities International Finance : 6 International Finance This is an area of specialization within each of the areas discussed so far
It may allow you to work in other countries or at least travel on a regular basis
Need to be familiar with exchange rates and political risk
Need to understand the customs of other countries and speaking a foreign language fluently is also helpful Why Study Finance? : 7 Why Study Finance? Marketing
Budgets, marketing research, marketing financial products
Dual accounting and finance function, preparation of financial statements
Strategic thinking, job performance, profitability
Budgeting, retirement planning, college planning, day-to-day cash flow issues Business Finance : 8 Business Finance Some important questions that are answered using finance
What long-term investments should the firm take on?
Where will we get the long-term financing to pay for the investment?
How will we manage the everyday financial activities of the firm? Financial Manager : 9 Financial Manager Financial managers try to answer some or all of these questions
The top financial manager within a firm is usually the Chief Financial Officer (CFO)
Treasurer – oversees cash management, credit management, capital expenditures, and financial planning
Controller – oversees taxes, cost accounting, financial accounting, and data processing Simplified Organizational Chart : Simplified Organizational Chart 10 Financial Management Decisions : 11 Financial Management Decisions Capital budgeting
What long-term investments or projects should the business take on?
How should we pay for our assets?
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances of the firm? Forms of Business Organization : 12 Forms of Business Organization Three major forms
Limited liability company Sole Proprietorship : 13 Sole Proprietorship Advantages
Easiest to start
Single owner keeps all the profits
Taxed once as personal income Disadvantages
Limited to life of owner
Equity capital limited to owner’s personal wealth
Difficult to sell ownership interest Partnership : 14 Partnership Advantages
Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income Disadvantages
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership Corporation(Limited Companies) : 15 Corporation(Limited Companies) Advantages
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital Disadvantages
Separation of ownership and management (agency problem)
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate) International Corporations : International Corporations In Thailand we have:
Private Limited Company - regulated by the Civil and Commercial Code
Public Limited Company - regulated by the Public Company Act 16 Goal Of Financial Management : 17 Goal Of Financial Management What should be the goal of a corporation?
Maximize market share?
Maximize the current value of the company’s stock?
A more general financial management goal:
Maximize the market value of the existing owner’s equity. Goal Of Financial Management : 18 Goal Of Financial Management Does this mean we should do anything and everything to maximize owner wealth? No
A company must follow regulations against corporate accounting fraud and financial malpractice.
In Thailand the companies are regulated by:
The Securities and Exchange Commission (SEC): capital market supervisory agency with the status of an independent state agency
The Stock Exchange of Thailand (SET): provide trading services of listed securities
Institute of Certified Accountants and Auditors of Thailand (ICAAT) The Agency Problem : 19 The Agency Problem Agency relationship
Principal hires an agent to represent their interest
Stockholders (principals) hire managers (agents) to run the company
Conflict of interest between principal and agent
Management goals and agency costs
Direct costs: compensation and perquisites; cost of monitoring
Indirect costs: cost of sub optimal decisions Managing Managers : 20 Managing Managers Managerial compensation
Incentives can be used to align management and stockholder interests
The incentives need to be structured carefully to make sure that they achieve their goal
Control of the firm rest with stockholders
Elect board of directors, who hires and fires management
Proxy fight – a group solicits proxies in order to replace the existing board
The threat of a takeover may result in better management
Other stakeholders: employees, suppliers, customers, government... Financial markets and the corporation : 21 Financial markets and the corporation Financial Markets : 22 Financial Markets Cash flows to the firm
Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter securities Financial Markets : 1-23 Financial Markets Primary Market
The market in which securities (stock and bonds) are sold by the company.
The market where securities that have already been issued are traded between investors. Financial Markets : 1-24 Financial Markets Trading of debt and equity securities : 1-25 Trading of debt and equity securities Dealers buy and sell for themselves, at their own risk
Dealer markets in stocks and bonds are called over-the-counter (OTC) markets.
Auction markets are different from dealer markets in two ways:
Trading in a given auction exchange takes place at a single site on the floor of the exchange (like SET).
Transaction prices of shares are communicated almost immediately to the public.
Stocks that trade on an organized exchange (or market) are said to be listed on that exchange