Lecture001 IBF
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Transcript of Lecture001 IBF
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7/28/2019 Lecture001 IBF
1/14
1/8/2013
1
Jamil Ahmed
Assistant Professor
Financial Services Industry in
UK
In UK industry accounts for about a
proportion of National Output as the whole of
Manufacturing Industry (2008). The growth is still amazing after 2008
financial crises. It contributed $200 billions,
accounting for 10% of total economic output.
1-2
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$1,068,232,095
$479,673,700
$149,121,474
$2,808,013,079
Size of Payroll (000s)
1,292,081
2,584,427
622,908
1,011,973
Number of Firms in the U.S.
Corporation
S-Corporation
Partnership
SoleProprietorship
Scope of Financial Sector
Source: U.S. Census 2008 SUSB Annual Data
What is Finance?
At the macro level, finance is the study of financial
institutions and financial markets and how they operate
within the financial system in both the Local and global
economies.
At the micro level, finance is the study of financialplanning, asset management, and fund raising for
businesses and financial institutions.
Financial management can be described in brief using
the following balance sheet.
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What is Finance?
Assets: Liabilities & Equity:
Current Assets Current Liabilities
Cash & M.S. Accounts payable
Accounts receivable Notes Payable
Inventory Total Current Liabilities
Total Current Assets Long-Term Liabilities
Fixed Assets: Total Liabilities
Gross fixed assets Equity:
Less: Accumulated dep. Common Stock
Goodw ill Paid-in-capital
Other long-term assets Retained Earnings
Total Fixed Assets Total EquityTotal Assets Total L iabi li ties & Equity
Working
CapitalWorking
Capital
Investment
Decisions FinancingDecisions
Macro Finance
Areas of Specialization in Finance
Financial Markets
Markets of users and savers of funds.
Financial Services
Design and delivery of financial advice and
products to individuals, businesses, government.
Managerial Finance
Financial management of business firms.
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Basic Forms of Business
Organization
Sole Proprietorship
Owned by one person, operated for personal profit.
Partnerships
Owned by two or more people, operated for joint
profit.
Corporations
Legal entity, owned by individuals, operated forjoint profit.
Sole Proprietorship
STRENGTHS:
Low organizational cost
Income taxed once as
personal income
Independence
Secrecy
Ease of dissolution
WEAKNESSES:
Unlimited liability
Limited funding
Proprietor must be all
Difficult to develop staffcareer opportunities
Lack of continuity on
death of proprietor
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PartnershipsSTRENGTHS:
Improved fundingsources
Increased managerialtalent
Income split bypartnership contract,taxed as personalincome
WEAKNESSES:
Unlimited liability to
all partners
Partnership dissolved
upon death of partner
Difficult to liquidate or
transfer ownership
1-10
What is a Corporation?
Corporation-A business organized as a
separate legal entity owned by stockholders.
Types of Corporations:Public Corporations
Private Corporations
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Corporations
STRENGTHS: Owners liability limited
Large capitalization
possible, greater funding
Ownership readily
transferable
Indefinite life
Professional management
WEAKNESSES: Higher tax rates/Double
Taxation
Expensive organization
Greater governmentregulation
When publicly traded,lacks secrecy
Improper corporate
structures may lead toAgency Problems
1-12
Corporate Organization Chart
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Goals of The Corporation
Managers/Investors forced to make decisions and choices inthe harsh environment.
All must therefore be very clear about the purpose of the
organization and its imperative for the management teams to be
aware of, respect and contribute to the objectives.
Achieving Target Market Share.
Keeping Employees at peace.
Survival.
Creating an Industrial Empire.
Maximization of profit.
Maximization of Shareholders Wealth.
1-14
Goals of The Corporation
Wealth maximization vs. profit maximization:
Prospects: Identical profits by two firms but one is valued
more and other less by shareholders. As profits fails to
reflect the relative potential of two firms.
Risk: Same profits and same future prospectus. But the
returns of one firms have a greater variability.
Accounting Problems
Communications
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The Ethics of Maximizing Value
Does value maximization justify unethical behavior?
Recent examples:
Enron
WorldCom
Bernard Madoff
1-16
Agency Problem
Do managers really maximize value?
Agency Problems
Managers are agents for stockholders, but the
managers may act in their own interests rather than
maximizing value
Shareholders vs. Stakeholders
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Agency Problem
Different Information Stock prices vs. returns
Dividend Policy
Financing Decisions
Different Objectives Managers vs.
shareholders
Top managers vs. lower
managers
Stockholders vs. banks
and lenders
1-18
Agency Problem Solutions
Compensation plans
Board of Directors
Blockholders
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Agency Problem Solutions
Takeovers
Specialist Monitoring
Legal and Regulatory Requirements
1-20
4A. Cash reinvested in the firm
4B. Cash returned to investors
Role of the Financial Manager
Financial
Manager
(1)(2)
(3)
(4a)
(4b)Real assets
Investors
Financial
Assets
Firms
Operations
1. Cash raised from investors (how?)
2. Cash invested in firm
3. Cash generated by operations
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The Flow of Capital:Closely Held Corporations
2-22
The Flow of Capital:
Public Corporations
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Financial Markets
Financing Decision
Source of Funds (Capital)
Capital Structure
2-24
The Flow of Capital:Public Corporations
Financial Market:Market where securities are issued and traded.
Primary Market:
Market for the sale of new securities by corporations.
Secondary Market:Market in which previously issued securities are traded among
investors.
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Financial Markets
Initial Public Offering (IPO):First offering of stock to the general public.
Fixed-Income Market:Market for debt securities
2-26
Information Provided by
Financial Markets:
Commodity Prices
Interest Rates
Company Value
Cost of Capital
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Function of Financial Markets
Transport cash across time
Risk transfer and diversification
Liquidity
Payment mechanism
Provide information
2-28
Financial Intermediaries
Mutual FundAn investment company that pools the savings of many
investors and invests in a portfolio of securities
Hedge FundA private investment pool, open to wealthy or institutional
investors, that is only lightly regulated and therefore can pursue
more speculative policies than mutual funds
Pension FundFund set up by an employer to provide for employees
retirement