Introduction To Finance 2024/2025 PDF

Page | 1  COURSE NAME : INTRODUCTION TO FINANCE COURSE CODE : FIA1393 CREDIT HOURS : 3 CREDIT HOURS COURSE COORDINATOR : MADAM MONIE ANAK RAMBA ([email protected]) COURSE LECTURERS : MADAM NURUL RAFEAH BINTI MOH...

Page | 1  COURSE NAME : INTRODUCTION TO FINANCE COURSE CODE : FIA1393 CREDIT HOURS : 3 CREDIT HOURS COURSE COORDINATOR : MADAM MONIE ANAK RAMBA ([email protected]) COURSE LECTURERS : MADAM NURUL RAFEAH BINTI MOHAMED YUSUF ([email protected]) : MADAM DAYANG ERNIE NURFARAH’AIN ([email protected]) OFFICE ROOM : BLOCK 13, LEVEL 2, ACADEMIC STAFF ROOM GOOGLE CLASSROOM CODE: zmlgxgh 1.0 COURSE OUTLINE  To introduce students to financial concept and term.  To develop knowledge and understanding of the way organizations finance their operations. 2.0 COURSE LEARNING OUTCOMES Upon completion of this module, the student should be able to: 1. Explain the various types of financial markets and financial instruments. 2. Apply the concepts of financial markets and financial instruments. 3. Analyze how the financial markets and financial instruments are structured and managed. 3.0 LIST OF TOPICS Chapter 1 : Overview of Financial Management and Environment Chapter 2 : Financial Markets Chapter 3 : Money Markets and Capital Markets Chapter 4 : Time Value of Money Chapter 5 : The Feature of Stocks Chapter 6 : The Feature of Long-term Debt (Bonds) Chapter 7 : Bank and Financial Institutions 4.0 COURSE ASSESSMENTS ASSESSMENT MARKS CHAPTER REMARKS Progress Test 1 10% Chapter 1 & 2 Week 4 (13/12/2024, Friday) Progress Test 2 10% Chapter 4 Week 13 (17/2/2025 – 21/2/2025) Assignment 30% Chapter 5 Educational Board Game Chapter 6  Submission on Week 12 Chapter 7 (14/2/2025) Final 50% All Chapters included Examination TOTAL 100% Page | 2  CHAPTER 1 OVERVIEW OF FINANCIAL MANAGEMENT AND ENVIRONMENT 1.1 INTRODUCTION 1.2 WHAT IS FINANCE? 1.2.1 DEFINITION 1.2.2 TYPES OF FINANCE 1.2.3 IMPORTANCE OF FINANCE 1.2.4 PILLARS OF FINANCE 1.2.5 SOURCE OF FINANCE 1.3 FORMS OF BUSINESS ORGANISATION 1.3.1 FORMS OF BUSINESS ORGANIZATION (SUMMARY) 1.3.2 ADVANTAGES AND DISADVANTAGES OF BUSINESS ORGANIZATIONS 1.4 FINANCIAL MANAGEMENT 1.4.1 DEFINITION OF FINANCIAL MANAGEMENT 1.4.2 TYPES OF FINANCIAL MANAGEMENT 1.4.3 THE ROLE OF FINANCE MANAGER 1.5 GOAL OF THE FIRM 1.6 THE AGENCY PROBLEM 1.6.1 AGENCY RELATIONSHIP 1.6.2 AGENCY PROBLEM 1.6.3 SOLUTIONS TO MITIGATE THE AGENCY PROBLEM 1.7 FINANCIAL STATEMENTS OF A COMPANY LEARNING OUTCOME: By the end of this lesson, students will be able to: ❖ Identify the concept of finance and describe the different types of finance. ❖ Describe the forms of business organization. ❖ Explain the role of a finance manager. ❖ Analyze financial statements of a company. ❖ Define the goals of a firm. ❖ Identify the agency problem in financial management. Page | 3 1.1 INTRODUCTION Financial decision-making involves all aspects of our lives, particularly in the context of business. In today's economic world, businesses require finance to meet their needs and achieve their objectives. This is because, to ensure that business activities operate effectively and efficiently, firms must allocate sufficient resources. Consequently, finance is often referred as the "lifeblood" of a business organization. 1.2 WHAT IS FINANCE? Finance is the process by which money is transferred through financing and investing activities among various parties such as businesses, individuals, and governments. It can also be defined as the provision of money when it is needed. There are four key concepts of finance: capital, funds, money, and amounts. 1.2.1 DEFINITION  According to Khan and Jain, “Finance is the art and science of managing money”. This includes financial services (economic services provided by finance industry) and financial instruments (equity based and debt based).  Based on Oxford dictionary, the word ‘finance’ connotes ‘management of money.’ This refers to the activity of managing money, especially by a government or commercial organization.  Meanwhile, Webster’s Ninth New Collegiate Dictionary defines finance as “The science or study of the management of funds.” 1.2.2 TYPES OF FINANCE Finance can be classified into TWO major parts: (i) Private Finance  Relate to financial activities to meet requirements that includes individual finance, partnership finance and business or corporate finance. (ii) Public Finance  Relate to financial revenue and disbursement of government matters such as Central Government, State Government and Semi-Government. Page | 4 1.2.3 IMPORTANCE OF FINANCE It is important for us to have knowledge of finance and know how to apply it successfully. By having finance knowledge, we are able:  To plan, solve problem and make decision wisely.  To deal with production, marketing, personnel, operations or any other aspect of corporate efficiently.  To have a better communication among departments within the company. 1.2.4 PILLARS OF FINANCE Two pillars of finance are risk and return. (i) Risk  Chances that the real outcomes or returns are unexpected due to unforeseen circumstances. (ii) Return  Outcome from an investment and could be realized as loss or profit. 1.2.5 SOURCES OF FINANCE Sources of finance can be divided into TWO types: Sources of Finance Examples Internal sources (Capital)  Common stock  Preferred Stock External sources (Borrowing)  Short term Debt  Long term Debt Page | 5 1.3 FORMS OF BUSINESS ORGANISATION 1.3.1 FORMS OF BUSINESS ORGANIZATION (SUMMARY) There are THREE forms of business organization – Sole proprietorship, Partnership and Company. Below are the summary of the form of business organization. Table 1.3 Summary of the Form of Business Organization Aspect / Sole Proprietorship Partnership Company Characteristic (Corporation) Business Owned by one person only. Formed by two or more A legal “person” Ownership people. separate from its owner. Profit/Loss Single Owner keeps all the Share the gains and losses in Profits and losses may profits and bears all the the business impact to the losses stockholders Starting and Simplest type to start; least Relatively easy to start : Subject to various Regulation regulated (No legal Moderate regulatory(Form of regulatory requirement needed) formal agreement may be requirements. required to avoid misunderstandings) Liability Owner has unlimited liability Partners have unlimited liability Stockholders have for business debt business debt limited liability. Business Limited to the owner’s Limited to the agreement Unlimited lifespan. Lifespan lifespan. among partners. Access to Capital/equity is limited to The amount of capital/equity Easy raise capital Capital/Equity owner's personal wealth. that can be raised is limited to through stock the partner’s combined wealth. issuance. (Therefore there is possibility that the business unable to exploit new opportunities due to insufficient funds) Transfer of Difficult; requires selling the Difficult; new partnership Can be easily Ownership entire business to new needed. transferred through owners stock transactions. Partnership dissolves when one partner dies or wishes to sell Borrowing Limited to the owner's Limited; may borrow jointly or Can borrow money in Capacity personal credit. individually. its own name. Taxation Taxed once as personal Income Taxed once as Double taxation. income personal income Income taxed at the corporate rate Page | 6 1.3.2 ADVANTAGES AND DISADVANTAGES OF BUSINESS ORGANIZATION FORM OF ADVANTAGES DISADVANTAGES BUSINESS ORGANIZATION Sole  Easiest to start.  Limited to the life of Proprietorship  Least regulated. owner.  Single owner keeps all of  Equity capital limited to the profits. owner’s personal wealth.  Taxed once as personal  Unlimited liability. income.  Difficult to sell ownership. Partnership  Two or more owners.  Unlimited liability.  More capital available.  Partnership dissolves  Relatively easy to start. when one partner dies or  Income taxed once as wishes to sell. personal income.  Difficult to transfer ownership. Company  Limited liability.  Separation of ownership (Corporation)  Unlimited life. and management might  Separation of ownership cause Agency Problem & management.  Double taxation:  Transfer of ownership is  Income taxed at the easy. corporate rate.  Easier to raise capital.  Dividends taxed at personal rate.  Dividend paid are not tax deductible. Page | 7 1.4 FINANCIAL MANAGEMENT The finance function is one of the major parts of any business organization, regardless of its structure. The primary functions of finance include planning, analyzing problem and making decision. This is because finance is one of the interrelated functions which deal with personnel management, marketing, production and research. Therefore, every business concern concentrates more on the field of finance because it is a very emerging part which reflects the entire operational and profit ability position of the concern. 1.4.1 DEFINITION OF FINANCIAL MANAGEMENT Financial management can be defined as: “A process involved in attempt to obtain and allocate financial resources effectively and efficiently to achieve the firm’s goal; that is to maximize the shareholder’s wealth by maximizing the share price.” 1.4.2 TYPES OF FINANCIAL MANAGEMENT The decision function of financial management can be categorized into THREE major areas: (i) Investment Decision  How many assets to buy?  What types of assets to buy? (ii) Financing Decision  Sources of Finance?  Financing Mix? (Debt + Equity) (iii) Asset Management Decision  How to manage current assets effectively and efficiently? Page | 8 1.4.3 THE ROLES OF FINANCE MANAGER The finance manager plays a crucial role in the field of financial management. They are responsible for making significant investment and financing decisions for the firm. A finance manager must possess comprehensive knowledge in accounting, finance, economics, and management. Their role is highly critical and requires strong analytical skills to address various financial challenges. Table 1.4.3 outlines the major functions performed by a finance manager in a company. Table 1.4.3 Role of Finance Manager Roles Explanation i. Forecasting  Responsible for estimating the financial requirement Financial of the business concern. Requirements  Estimate how much finances are required to acquire fixed assets and forecast the amount needed to meet the working capital requirements in future. ii. Acquiring  After deciding the financial requirement, the finance Necessary Capital manager should concentrate on how the finance is mobilized and where it will be available. It is also highly critical in nature. iii. Investment Decision  Select the best investment alternatives and consider the reasonable and stable return from the investment.  Must be well versed (wide knowledge) in the field of capital budgeting techniques to determine the effective utilization of investment.  Concentrate on the principles of safety, liquidity and profitability while investing capital. iv. Cash Management  Present day’s cash management plays a major role in the area of finance because proper cash management is not only essential for effective utilization of cash, but it also helps to meet the short-term liquidity position of the concern. v. Interrelation with  Deals with various functional departments such as Other Departments marketing, production, personnel, system, research, development, etc.  Should have a sound knowledge (wide knowledge) not only in finance related area but also well versed in other areas.  Maintain a good relationship with all the functional departments of the business organization. Page | 9 1.5 GOALS OF THE FIRM (i) Maximization of shareholders’ wealth In a business context, shareholders are considered the owners of the company. This is because they hold an ownership interest in the company after purchasing its stock. Therefore, financial managers must take actions that benefit the shareholders and align with their interests. Generally, shareholders' wealth is reflected in the company's stock price. As the stock price rises, the firm's value increases, along with the shareholders' wealth. (ii) Profit maximization One of the short-term goals of a firm is to maximize its profit. Profit maximization involves increasing a company’s profits by determining the optimal level of output. In this process, the financial manager focuses solely on actions that yield maximum profits without considering the long-term consequences of these decisions. As a result, the financial manager may overlook potential risks and prioritize achieving higher profits above all else. 1.6 THE AGENCY PROBLEM 1.6.1 AGENCY RELATIONSHIP Shareholders are the owners of a company, meaning that the firm’s ownership lies in their hands. In larger firms, there usually exists a large spread of ownership of shareholders with varying backgrounds. Consequently, it is impractical to expect all shareholders to participate in managing and running the business. Therefore, a management team is appointed to oversee and control the firm on behalf of the shareholders. This delegation of authority grants the management team the power to operate the firm. This scenario establishes what is known as the "Principal-Agent" relationship or, more simply, the Agency Relationship. In this relationship, the principal (shareholders) engages an agent (management) to act in shareholders’ best interests. engages Shareholders Management (Principal) (Agent) Page | 10 1.6.2 AGENCY PROBLEM Since shareholders delegate the authority to the management team to control and operate the business, conflicts of interest between management and shareholders may arise. The agency problem occurs when managers prioritize their personal interests instead of focusing on maximizing shareholders' wealth. Therefore, the root cause of the agency problem lies in the misalignment of goals between the shareholders and the management. 1.6.3 SOLUTIONS TO MITIGATE THE AGENCY PROBLEM (i) Provisions in the Companies Act, 1965  The Act requires that financial statement prepared by the directors be audited by external auditors in order to ensure the financial statement present true and fair view of financial position. (ii) Shareholders selling shares and threat of ‘takeover’  The shareholders will dispose their shareholdings when they detected the management fails to act in their best interest.  The disposal of shares will caused the reduction of on share price and the firm becomes an attractive takeover target.  When takeover done by the new management team, the existing manager that acting not in the interest of shareholders will be terminate. (iii) Quarterly reporting and form audit committee  Securities Commission and Bursa Malaysia requires the company to perform quarterly reporting and setting up of audit committees  This is to ensure the company provide adequate and timely information flow to the shareholders (iv) Management remuneration and reward  The management will be rewarded with appropriate remuneration if they are able to exceed the target set by shareholders.  It is hoped that in attempting to achieve manager’s personal wealth, management would act to improve shareholders’ wealth first. Page | 11 1.7 FINANCIAL STATEMENTS OF A COMPANY In order to do financial analysis, one must extract the relevant information from the company’s financial statements. Basically, financial statements consist of: o Statement of Comprehensive Income o Statement of Financial Position o Statement of Changes in Equity o Statement of Cash Flows Each statement represents information and financial data relating to company’s current financial health, financial results for the previous year and indicators that are useful for various parties to make decisions. Therefore, the preparation and presentation of financial statements must be adhered to accounting standards issued by Malaysian Accounting Standards Board (MASB) and International Accounting Standards Board (IASB). Page | 12