Financial Management Lect.1 DBA Ain Shams 2015 .pdf

7/24/2019 Financial Management Lect.1 DBA Ain Shams 2015 .pdf

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Prof.Hayam Wahba

[email protected]@yahoo.co.uk

Introduction to

Financial Decisions
mailto:[email protected]:[email protected]


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What is Finance?

Introduction


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What is Finance?

Finance can be defined as the art and science

of managing money.

Finance is concerned with the process,institutions, markets, and instruments involved

in the transfer of money among individuals,

businesses, and governments.


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Basic Areas Of Finance

Corporate finance or Financial Management .

Courses ( Financial Management - Financial Decision - Financial Analysis)

Investments Courses. (Investment and portfolio Management )

Financial Markets and institutions Courses

(Stock Market, Financial Institution ,Banking

Management and Insurance)

International finance. Courses .InternationalFinance


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The Field of Finance

Financial ManagementAnalyze and forecast a firmsperformance

Evaluate investment opportu ni t ies

Financial Markets and Institutions

The flow o f funds through inst itu t ions

Markets in w hich financ ial assets are sold

Impact of interest rates on that f low offunds

Investments

Locate, select, and manage money

to produce assets


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Prof.Hayam Wahba 1-6

Focus on Practice

Professional Certifications in Finance:

Chartered Financial Analyst (CFA) Offered by the CFAInstitute, the CFA program is a graduate-level course of studyfocused primarily on the investments side of finance.

Certified Treasury Professional (CTP) The CTP programrequires students to pass a single exam that is focused on theknowledge and skills needed for those working in a corporatetreasury department.

Certified Financial Planner (CFP) To obtain CFP status,students must pass a ten-hour exam covering a wide range oftopics related to personal financial planning.


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Short terminvestment Decision

Capital

Structure

Short termFinancial Decision

Long terminvestment Decision

Working CapitalManagement


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Goal of the Firm:Maximize Shareholder Wealth

Decision rule for managers: only take actions that are

expected to increase the share price.


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1-91-9Financial Decisions MakinProf.Hayam Wahba
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Goals of The Corporation

Shareholders desire wealthmaximization

Do managers maximize

shareholder wealth?Mangers have many

stakeholders

Agency Problems represent theconflict of interest between

management and owners


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Basic Goal of the Firm

The primary financial goal of the firm is

to maximize the wealth of the firms

owners (or thevalue

of the firm). This is not the same as profits

maximization .


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Basic Goal of the Firm

The primary financial goal of the firm is

to maximize the wealth of the firms

owners (or thevalue

of the firm). This is not the same as profits

maximization .


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Profit maximization fails for anumber of reasons !!

It ignores the timing of returns

cash flows available to shareholder (Return) Risk

Profit maximization is concerned with Earningper share (EPS) , which calculated by dividingthe periods total earnings available for thefirms stockholders by the number of shares .


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Financial

Manager

Risk

Achieve Firms

Primary Goal

Makes

Decisions

Return

Evaluates

Maximizing Stock

Price

Financial

Investment

Time value

of money


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Goal of the Firm:What About Stakeholders?

Stakeholders are groups such as employees, customers,

suppliers, creditors, owners, and others who have a direct

economic link to the firm.

A firm with astakeholder focus consciously avoidsactions that would prove detrimental to stakeholders. The

goal is not to maximize stakeholder well-being but to

preserve it.

Such a view is considered to be "socially responsible."


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The Role of Business Ethics

Business ethics are the standards of conduct or moral

judgment that apply to persons engaged in commerce.

Violations of these standards in finance involve a variety

of actions: creative accounting, earnings management,misleading financial forecasts, insider trading, fraud,

excessive executive compensation, options backdating,

bribery, and kickbacks.

Negative publicity often leads to negative impacts on a

firm.


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The Role of Business Ethics:Considering Ethics

Robert A. Cooke, a noted ethicist, suggests that the

following questions be used to assess the ethical viability of

a proposed action:

Is the action arbitrary or capricious? Does the action unfairlysingle out an individual or group?

Does the action affect the morals, or legal rights of any

individual or group?

Does the action conform to accepted moral standards?

Are there alternative courses of action that are less likely to

cause actual or potential harm?


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The Role of Business Ethics:Ethics and Share Price

Ethics programs seek to:

reduce judgment costs.

maintain a positive corporate image

build shareholder confidence

gain the loyalty and respect of all stakeholders

The expected result of such programs is to positively affect

the firms share price.


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Managerial Finance Function

The size and importance of the managerial finance

function depends on the size of the firm.

In small firms, the finance function is generally

performed by the accounting department.

As a firm grows, the finance function typically evolves

into a separate department linked directly to the company

president or CEO through the chief financial officer(CFO) (see Figure 1.1)


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Managerial Finance Function:Relationship to Economics

The field of finance is closely related to economics.

Financial managers must understand the economic

framework and be alert to the consequences of varying

levels of economic activity and changes in economicpolicy.

They must also be able to use economic theories as

guidelines for efficient business operation.


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Managerial Finance Function:Relationship to Accounting

The firms finance and accounting activities are closely-

related and generally overlap.

In small firms accountants often carry out the finance

function, and in large firms financial analysts often helpcompile accounting information.

One major difference in perspective and emphasis

between finance and accounting is that accountantsgenerally use the accrual method while in finance, the

focus is on cash flows.


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Governance and Agency:Corporate Governance

Corporate governance refers to the rules, processes, and

laws by which companies are operated, controlled, and

regulated.

It defines the rights and responsibilities of the corporateparticipants such as the shareholders, board of directors,

officers and managers, and other stakeholders, as well as

the rules and procedures for making corporate decisions.

The structure of corporate governance was previously

described in Figure 1.1.


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Governance and Agency:Individual versus Institutional Investors

Individual investors are investors who own relatively small

quantities of shares so as to meet personal investment goals.

Institutional investors are investment professionals, such as banks,

insurance companies, mutual funds, and pension funds, that are paid

to manage and hold large quantities of securities on behalf of others.

Unlike individual investors, institutional investors often monitor and

directly influence a firms corporate governance by exerting pressure

on management to perform or communicating their concerns to the

firms board.


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The Agency Issue: The Threatof Takeover

When a firms internal corporate governance structure is

unable to keep agency problems in check, it is likely that

rival managers will try to gain control of the firm.

The threat of takeover by another firm, which believes itcan enhance the troubled firms value by restructuring its

management, operations, and financing, can provide a

strong source of external corporate governance.


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Grade Distribution

Weighting of Assessments

Mid-Term Exam (1) 30 %

Final Exam 50 %Assignments and attendance 20 %

Total 100 %

Prof Hayam Wahba 1-25

Financial Management Lect.1 DBA Ain Shams 2015 .pdf

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