Finance 220 PDF - جامعة الكويت

Ahmed Azizieh 99010549  Ch.1 Introduction Finance: The management of large amounts of money. Areas of Finance 1. Corporate Finance Take a project or not ? Is it profitable ? How to raise capital ? ( Bor...

Ahmed Azizieh 99010549  Ch.1 Introduction Finance: The management of large amounts of money. Areas of Finance 1. Corporate Finance Take a project or not ? Is it profitable ? How to raise capital ? ( Borrow – Issue new stocks ) Working capital management ( Have enough money to run the company ) 2. Investments Security Analysis Portfolio Analysis Market Analysis 3. Financial Institutions Commercial banks ( KFH – KIB – NBK ) Investments banks ( Markaz – NBK capital ) Insurance companies Why Study Finance ? ▪ Make personal decisions ( Loan, Buy a car, Investing.. etc ) ▪ All important business decisions have financial implications ▪ Your own business Ahmed Azizieh 99010549 Finance Within the Organization Board of Directors Chief Executive Officer (CEO) Chief Operating Officer (COO) Chief Financial Officer (CFO) Marketing, Production, Human Accounting, Treasury, Credit, Legal, Resources, and Other Operating Capital Budgeting, and Investor Departments Relations Forms of Business Organization 1. Sole Proprietorship : An unincorporated business owned by one individual. 2. Partnership : An unincorporated business owned by two or more persons. Advantages : 1- Subject to a few regulations. 2- Avoid corporate income taxes. Disadvantages : 1- Difficult to raise capital. 2- Unlimited liability. 3- Limited life 3. Corporations: A legal entity created by a state, and it is separate and distinct from its owners and managers. Advantages: 1- Unlimited life. 2- Limited liability. 3- Ease of raising capital. 4- Easy transfer of ownership Disadvantages: 1- Double Taxation. 2- Cost of setup. Ahmed Azizieh 99010549 Stock: is a security that represents the ownership of a fraction of the issuing corporation. ‫شراءك لسهم يعني امتالكك لجزء من الشركة‬ Value = Number of shares * Share price ،، ‫قيمة الشركة = عدد األسهم × عدد األسهم‬ Stock Prices and Shareholder Value ❖ The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price. ❖ Value of any asset is: present value of cash flow stream to owners. ❖ How can management affect stock price ? Through their investment decisions which change expectations of the firm’s future Stock Prices and Intrinsic Value In equilibrium, a stock’s price ‫ سعر السهم الحالي‬should equal its “true” or intrinsic value. ‫القيمة العادلة أو الحقيقة للسهم‬ Intrinsic value is a long-run concept. To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value. Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run. Ahmed Azizieh 99010549  ‫هاد المخطط يوضح العوامل اللي بتأثر وبتحدد سعر السهم الحالي ( توقعات المستثمرين للمخاطر‬ ‫ ويوضح أيضا العوامل اللي بتحدد السعر العادل أوالسعر الحقيقي للسهم ( المخاطر والعوائد‬، ) ‫والعوائد‬ ) ‫الحقيقية‬ stock’s intrinsic value‫ مع ال‬stock’s market price ‫وفي النهاية عالمدى الطويل حيتساوى ال‬ Intrinsic Value ‫بهي الصورة عندنا الخط االزرق المتقطع بمثل السعر العادل للسهم‬ stock’s market price ‫والخط األخضر بمثل سعر السهم‬ Overvalued ‫ هاد يعني انه السهم‬، ‫اذا كان سعر السهم الحالي أعلى من قيمته العادلة‬ Undervalued ‫ هاد يعني انه السهم‬، ‫اذا كان سعر السهم الحالي أقل من قيمته العادلة‬ Conflicts between Managers and Stockholders Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). The following factors affect managerial behavior: 1) Managerial compensation packages 2) Direct intervention by shareholders 3) The threat of firing 4) The threat of takeover Ahmed Azizieh 99010549 Conflicts between Stockholders and Bondholders Stockholders are more likely to prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders receiving fixed payments are more interested in limiting risk. Bondholders are concerned about the use of additional debt. Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions. Ahmed Azizieh 99010549