ch1 financial management.pptx Ayman Alkhazaleh_e23df9e94393b97352998a472bf38c6b.pptx

Introduction to Financial Management Dr. Ayman Alkhazaleh CH: 1 - Financial Management - Dr. 1 Ayman Alkhazaleh a. Define finance, its major areas and opportunities available in this field, and the legal forms of business organizat...

Introduction to Financial Management Dr. Ayman Alkhazaleh CH: 1 - Financial Management - Dr. 1 Ayman Alkhazaleh a. Define finance, its major areas and opportunities available in this field, and the legal forms of business organization. b. Describe the managerial finance function and its relationship to economics and accounting. c. Identify the goal of the firm and understand why shareholders' wealth maximization is preferred over other goals. d. Identify the primary activities of the financial manager. e. Explain the goal of the firm, Corporate governance, the role of ethics, and the agency issue. 2 1  Introduction to Financial Management 1. What is Finance? Finance: the management of large amounts of money, especially by governments or large companies, it includes activities like investing, borrowing, lending, budgeting, saving, and forecasting. 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. ‫يهتم بالعملية والمؤسسات واألسواق واألدوات المستخدمة في تحويل األموال بين األفراد والشركات والحكومات‬. 3 2 2. Major Areas and Opportunities in Finance:‫ا لمجا التوا لفرص‬ A. Financial Services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and government. Career opportunities include banking, personal financial planning, investments, real estate, and insurance. B. Managerial finance is concerned with the duties of the financial manager in the business firm. The financial manager actively manages the financial affairs of any type of business, whether private or public, large or small, profit-seeking or not-for- profit. They are also more involved in developing corporate strategy and improving the firm’s competitive position 4 3 3.Types of finance: a) Personal finance: it is the process of planning and managing personal financial activities such as income generation, spending, saving, investing. b) Corporate Finance: it involves the financial aspect of businesses where in sources of funds are determined, existing assets invested, excess profits distributed. It also includes the tools and analysis utilized to prioritize and distribute financial resources. c) Public finance: it is the management of a country's revenue, expenditures, and debt load thought various government and quasi-government institutions. Examples,/government. 5 4  4. Legal Forms of Business Organization‫منظمات‬CC‫ة ل‬C‫ي‬C‫لقانون‬CC‫ل‬C ‫ ا‬C‫كا‬C‫الش‬CC‫ا‬ ‫ل‬CC‫العما‬CC‫ا‬ Forms of Business Organizations: A. Sole Proprietorships: A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership. Liability: The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them. 6 5 B. Partnerships: A partnership is a business owned by two or more persons who contribute resources into the entity. The partners divide the profits of the business among them selves. Liability: In general partnerships: all partners have unlimited liability. In limited partnerships: creditors cannot go 7 after the personal assets of the limited partners. 6 c. Corporations: A corporations: it is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock. Stockholders: enjoy limited liability and have limited involvement in the company's operations. The board of directors, an elected group from the stockholders, controls the activities of the corporation. 8 7 Strengths and Weaknesses of the Common Legal Forms of Business Organization 9 8 5. Corporate Organization 10 9 6. The managerial finance function Managerial finance functions are: 1-Investing decision: it is the managerial decision regarding investment in long-term proposals. It includes the decision concerned with acquisition, modification and replacement of long-term assets such as plant, machinery, equipment, land and buildings. Because the future benefits are not known with certainty, long-term investment proposals involve risks. The financial manager should estimate the expected risk and return of the long-term investment and then should evaluate the investment proposals in terms of both expected returns and risk. The financial manager accepts the proposal only if the investment maximizes the shareholders wealth. 11 1 0 2- Financing decision or capital structure decision: It is concerned with determining the sources of funds and deciding upon the proportionate mix of funds from different sources. The sources of long-term funds include equity capital and debt capital. A particular combination of debt and equity may be more beneficial to the firm than any others. The financial manager should decide an optimal structure of debt and equity capital. 12 1 1 3-Dividend decision: It is about the allocation of earnings to common shareholders. It is concerned with deciding the portion of earnings to be allocated to common shareholders. The financial manager has three alternatives regarding dividend decision: Pay all earnings as dividend Retain all earnings for reinvestment Pay certain percentage of earning and retain the rest for reinvestment. 13 1 2 4-Working capital decisions: Refers to the commitment of funds to current assets and deciding on their financing pattern. It refers to the current assets investment and financing decision. Investment in current assets affects firm's profitability and liquidity. More investment in current assets enhances liquidity. Liquidity refers to the capacity to meet short-term obligation of the firm. 14 1 3 Financial Activities 15 1 4 7. The Prime Firm Objective: As the shareholders own the firm, they are entitled to the profits of the firm. Shareholder wealth is the appropriate goal of a business firm in a capitalist society as it is a private ownership of goods and services. Those individuals own the means of production to make money. When business managers try to maximize the wealth of their firm, they are actually trying to increase the company's stock price. As the stock price increases, the value of the firm increases, as well as the shareholders' wealth. Consequently, many companies encourage employees to become shareholders. In fact, some businesses offer shares of stock to their employees at a discount through an Employee Stock Purchase Plan (ESPP). 16 1 5 8. The main functions of Financial Manager: a. Treasury: has responsibility in daily cash or operational cash arrangement. This means he needs to plan, regulate, and supervise any financial aspect related to operational activities such as Working Capital. b. Capital Budgeting: he is responsible in arrangement of fixed asset, or projects. c. Capital structure: to arrange the left side of balance sheet, the capital structure is about maintaining the right side, i.e. financing the company including liabilities and equity. 17 1 6 9. The goals of the firm: The goals of the firm: it is described as "maximization of shareholders' wealth via: A- Profit Maximization: it is always used as a goal of the firm in microeconomics. Focus on short term goal to be achieved with in a year. It stresses on the efficient use of capital resources. Some people believe that the firm’s objective is always to maximize profit. To achieve this goal, the financial manager would take only those actions that were expected to make a major contribution to the firm’s overall profits. For each alternative being considered, the financial manager would select the one that is expected to result in the highest monetary return. 18 1 7  But is profit maximization a reasonable goal? No. It fails for a number of reasons: It ignores the following: 1. The timing of returns: Because the firm can earn a return on funds it receives, the receipt of fund sooner rather than later is preferred. 2. Cash flows available to stockholders: Profit do not necessarily result in cash flows available to the stockholders. Owners receive cash flow in the form of either cash dividends paid or the proceeds from selling their shares for a higher price than initially paid. (Capital Gains). 3. Risk: Profit maximization also disregards risk. The chance that actual outcomes may differ from those expected. A basic premise in managerial finance is that a tradeoff exists between return (cash flow) and risk Return and risk are , in fact, the key determinants of share price, which represents the wealth of the owners in the firm. 19 1 8 B- Maximize Shareholder Wealth: The goal of the firm, and therefore of all managers and employees, is to maximize the wealth of the owners for whom it is being operated. The wealth of corporate owners is measured by the share price of the stock, which in turn is based on timing of returns (cash flows), their magnitude, and their risk. Maximize Shareholder Wealth: Why? Because maximizing shareholder wealth properly considers cash flows, the timing of these cash flows, and the risk of these cash flows. 20 1 9 C- Revenue growth: to increase revenue, management should plan to: Increase the number of customers. Increase the average transaction size. Increase the frequency of transactions per customer. Raise the prices when ever possible. 21 2 0 D- Increase Shareholders value by: Increase unit price. Increasing the price of your product, assuming that you continue to sell the same amount, or more, will generate more profit and wealth. Sell more units. Increase fixed cost utilization. Decrease unit cost. Optimal decision: it is the one that brings the firm closest to its goal. 22 2 1 E. Short - term goals: Liquidity. Profitability. 23 2 2 The process of shareholder wealth maximization can be described using the following flow chart: 24 2 3 10. The Role of business Ethics: Ethics is the standards of conduct or moral judgment‫ي‬C‫ألخالق‬CC‫لحكم ا‬CC‫لسلوكأو ا‬CC‫ير ا‬C‫اي‬C‫ع‬C‫م‬ - have become an overriding issue in both our society and the financial community. - Ethical violations attract widespread publicity Negative publicity often leads to negative impacts on a firm 25 2 4 Robert A. Cooke, a noted ethicist, suggests that the following questions be used to assess the ethical viability of a proposed action: ‫ اس تخدام األس ئلة التالي ة لتقيي م الجدوى األخالقي ة‬،‫ عال م األخالق الشهي ر‬،‫ كوك‬.‫يقترح روبرت أ‬ ‫لإلجراء المقترح‬: Does the action unfairly single out‫ ي سته دف‬an individual or group? Does the action affect the morals, or legal rights of any individual or group? Does the action conform‫ ي تواف ق‬to accepted moral standards? Are there alternative courses of action that are less likely to cause actual or potential harm? CH: 1 - Financial Management - Dr. 26 2 Mohammed D. Othman 5 Cooke suggests that the impact of a proposed decision should be evaluated from a number of perspectives: ‫يقترح كوك أنه ينبغي تقييم تأثير القرار المقترح من‬ ‫عدد من وجهات النظر‬: Are the rights of any stakeholder being violated? Does the firm have any overriding duties to any stakeholder? Will the decision benefit any stakeholder to the detriment of another stakeholder? If there is a detriment to any stakeholder, how should it be remedied, if at all? What is the relationship between stockholders and stakeholders? 27 2 6 Ethics programs seek to: reduce litigation and 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 firm's share price. 28 2 7 End of Chapter-1 29