Introduction to financial

management
Chapter 1
 Key concepts and skills
Have a good understanding of the:
basic types of financial management decisions
and the role of the financial manager
goal of financial management
financial implications of the different forms of
business organisation
conflicts of interest that can arise between
managers and owners

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-2
Slides prepared by David E. Allen and Abhay K. Singh
 Chapter outline
Finance: A quick look
Business finance and the financial manager
Forms of business organisation
The goal of financial management
The agency problem and control of the
corporation
Financial markets and the corporation

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-3
Slides prepared by David E. Allen and Abhay K. Singh
 The four basic areas of finance
1. Corporate finance or business finance
2. Investments
3. Financial institutions
4. International finance

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-4
Slides prepared by David E. Allen and Abhay K. Singh
 Investments
Working with financial assets such as
shares and bonds
Value of financial assets, risk versus return
and asset allocation
Job opportunities
Stockbroker
Financial advisor
Portfolio manager
Security analyst
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-5
Slides prepared by David E. Allen and Abhay K. Singh
 Financial institutions
Companies that specialise in financial
matters
Bankscommercial and investment, credit
unions, savings and loans
Insurance companies
Brokerage firms
Job opportunities

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-6
Slides prepared by David E. Allen and Abhay K. Singh
 International finance
This is an area of specialisation within one of
the areas discussed so far.
Involves international aspects of corporate
finance or investments or financial institutions.
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 you would benefit from fluency
in a foreign language.

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-7
Slides prepared by David E. Allen and Abhay K. Singh
 Why study finance?
Marketing
Budgets, marketing research, marketing financial
products
Accounting
Dual accounting and finance function, preparation of
financial statements
Management
Strategic thinking, job performance and profitability
Personal finance
Budgeting, retirement planning, university planning,
day-to-day cash flow management
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-8
Slides prepared by David E. Allen and Abhay K. Singh
 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?

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-9
Slides prepared by David E. Allen and Abhay K. Singh
 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 expenditure and
financial planning
Accountant: oversees taxes, cost accounting,
financial accounting and data processing

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-10
Slides prepared by David E. Allen and Abhay K. Singh
A simplified organisational chart
Figure 1.1

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-11
Slides prepared by David E. Allen and Abhay K. Singh
Financial management decisions
Capital budgeting
What long-term investments or projects should
the business take on?
Capital structure
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?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-12
Slides prepared by David E. Allen and Abhay K. Singh
Forms of business organisations
Three major forms in Australia and New
Zealand
1. Sole proprietorship
2. Partnership
General
Limited
3. Corporation

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-13
Slides prepared by David E. Allen and Abhay K. Singh
 Sole proprietorship
Advantages Disadvantages

Easiest to start Limited to life of

Least regulated owner
Single owner keeps Equity capital limited
all the profits to owners personal
Taxed once as wealth
personal income Unlimited liability
Difficult to sell
ownership interest
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-14
Slides prepared by David E. Allen and Abhay K. Singh
 Partnership
Advantages Disadvantages

Two or more owners Unlimited liability

More capital available General partnership
Relatively easy to Limited partnership
start Partnership dissolves
Income taxed once as when one partner
personal income dies or wishes to sell
Difficult to transfer
ownership

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-15
Slides prepared by David E. Allen and Abhay K. Singh
 Corporation

Advantages Disadvantages

Limited liability Separation of

Unlimited life ownership and
Separation of management
ownership and Taxation of company
management profits can be an
Transfer of ownership issue
is easy
Easier to raise capital
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-16
Slides prepared by David E. Allen and Abhay K. Singh
 International corporate forms
Joint stock companies
Public limited companies
Limited liability companies

All share:
public ownership
limited liability

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-17
Slides prepared by David E. Allen and Abhay K. Singh
 Goal of financial management
What should be the goal of a
corporation?
Maximise profit?
Minimise costs?
Maximise market share?
Maximise the current value per share of the
companys existing stock?
Maximise the market value of the existing
owners equity?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-18
Slides prepared by David E. Allen and Abhay K. Singh
 The agency problem
Agency relationship
Principal hires an agent to represent their
interests.
Shareholders (principals) hire managers
(agents) to run the company.
Agency problem
Conflict of interest between principal and agent
Management goals and agency costs
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-19
Slides prepared by David E. Allen and Abhay K. Singh
 Do managers act in shareholders
interests?
Managerial compensation
Incentives can be used to align management
and shareholder interests.
The incentives need to be structured carefully
to make sure that they achieve their goals.
Corporate control
The threat of a takeover may result in better
management.
Other stakeholders
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-20
Slides prepared by David E. Allen and Abhay K. Singh
 Example: Work the Web
The Internet provides a wealth of
information about individual companies.
<http://au.finance.yahoo.com/> is an
excellent website.

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-21
Slides prepared by David E. Allen and Abhay K. Singh
Cash flows between the firm and the
financial markets
Figure 1.2

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-22
Slides prepared by David E. Allen and Abhay K. Singh
 Financial markets
Cash flows to the firm
Primary vs secondary markets
Dealer vs auction markets
Listed vs private companies
Australian Securities Exchange (ASX)

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-23
Slides prepared by David E. Allen and Abhay K. Singh
 Quick quiz
What are the four basic areas of finance?
What are the three types of financial
management decisions and what questions
are they designed to answer?
What are the three major forms of business
organisation?
What is the goal of financial management?
What are agency problems and why do they
occur within a corporation?

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al. 1-24
Slides prepared by David E. Allen and Abhay K. Singh
Chapter 1

END

1-25