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8/13/2019 Asas1 Intro
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CHAPTER 1 :
INTRODUCTION TOFINANCIAL
MANAGEMENT .
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Objektif bab :1. What is finance?
2. Roles of financial manager3. Legal forms of business entity
4. Goals of a firm
5. Markets and financial institutions
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What is finance??
Art and science of managing moneyprocess,
institutions, markets and instruments involved.
(Gitman) Activities that earn and use of capital - collecting,
using and managing.
Concern with the maintenance & creation ofeconomic value or wealth (Keown)
Focuses on the decision making toward creating
wealth.
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Fields of finance
1. Money & Capital Market
2.
Investment3. Financial Management
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Money & Capital Market
Involves security market and financialinstitutions such as banks, finance companies
etc. Knowledge in evaluation techniques.
Factors that effects the interest rate.
Financial instruments such as leasing, loan,bond, stock etc.
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Investment Decision make by investors to invest in
the security that can give high return.
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Financial Management
Creating economic wealth.
Involves decisions such as when to introducenew product, invest in new asset, replace thenew asset, loans, issuing stocks/bond etc.
Most important and big area.
Inportant to maximise the shareholders wealth.
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Roles of financial managers
Important roles in making decision in acompany such as:
1. Capital budgeting
2. Capital structure
3. Working capital, short term asset & liability
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The responsibilities of financialmanagers cover:
Planning and forecasting
Making financing decision and investment.
Controlling and coordinating
Manage the financial markets Risk management.
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Legal Forms of Buss Organization
Sole Proprietorship
Partnership
Corporation
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Sole Proprietorship
A business owned by a singleindividual.
Advantages
o Easy and cheaper to formoFew regulations
oNo corporate tax
Disadvantages
o Hard to obtain capital
o Unlimited liability
o Difficult to transfer ownership
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Partnership
2 or more individual agreed to form abusiness in order to get profit based on
agreementformal or informal (OralCommitment/Formal Document)
2 types:
General partnership Limited partnership
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Advantages of partnership
Lower cost Easy to formAbility to obtain capital
Disadvantages of partnership Unlimited liability Difficult to transfer ownership
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Corporation
An entity that legally functions separate and apartfrom its owner.
Advantages
Unlimited life
Easy transfer of ownership Limited liability
Easier to raise capital
Disadvantages
Double taxation: corporate earnings and dividendreceived
Expensive and complex to form
Difficult in making decision.
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Goals of firm
Maximize PROFIT
Maximize SHAREHOLDER WEALTH
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Maximize PROFIT
Commonly uses by a firm.
In microeconomic, this goal is a priority to increase the
profit. However, it ignores some important factors such as:
1. Uncertainty and risk
2. Timing of projects returns Weakness of accounting profitability.
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Maximize SHAREHOLDER WEALTH
i.e maximization of the price of companys existing
common stock.
The best decision taken is the decision that canraise the shareholders wealth.
Market price can illustrate the valu of the
company. The investment is suitable the the risk
Financing capital with lower cost.
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Financial market and institution
o Financial Marketa place where the
person needs capital will get it from
capital suppliers.
o 2 types:
Primary market Secondary market
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Financial Markets
Primary Market A place where a security is offered for the first
time. 2 types of offers in primary market; IPO and
Seasoned New Issue.
Secondary Market The market in which stock previously issued by the firm
trades.
Transaction of selling and buying stocks occur Provide liquidity for stocks Guide for investors to put a price for their
investments.
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ROLE OF FINANCIAL MARKET
FIRM
2. Investment
INVESTOR
Secondary
Market
GOVERNMENT
Cash
Security
Cash flow
Tax
Reinvest
3. Dividend, etc
1. Primary Market
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Companies Social Responsibilities.
Social responsibilities also important tocompanies; not only to maximise
shareholders wealth. Social responsibilitiesto employees,
customers, society and environment.
Example; provide safe working environment,avoid pollution, produce safe product.
Companies cant give priority to profit andignores the social responsibilities.
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Agency R/ships
When an individual or more (principal) hiredanother individual or organization (agent) to
handle a service and give power to agent tomake decision.
Agency relationship among;
Shareholders and manager Manager and debtors
Agency problem exist when there are conflict of interestbetween principal and agents.