Financial Management Lesson 1 Introduction

Learning Objectives• Going through the syllabus

• Introduction to e-lectures

• Recall the 3 basic ways businesses are organized

• Discuss the advantages and disadvantages of each type of business organization

• Understand what is double taxation

• Understand the goal of financial management is to maximize shareholders’ wealth

• Explain and discuss the links between stock prices, intrinsic values, and market equilibrium

• Discuss the conflicts between managers and shareholders and the various techniques firms can use to mitigate the conflicts

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Lecture 1 An Overview of Financial Management

AB1201: Financial Management

Lecture 1 Syllabus and An Overview of Financial Management

By: Angie Low([email protected])

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mailto:[email protected]

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Some preliminaries• Important course for students who wants to choose

Banking and Finance specialization

• Other than today’s lecture, all other lectures will be conducted online– Tutorials will still be conducted face-to-face

• Take charge of your own learning! – No more hand-holding. Here, we guide you, not force you

to learn

• Please read through syllabus carefully!!3

Syllabus > Forms of Business Organisations > Proprietorships & Partnerships > Corporations > Goal of Financial Management > Stock Price & Intrinsic Value > Agency Problems > Conclusion

Syllabus – Materials to get/buy

• Textbook: Brigham, Eugene F., Joel F. Houston, Jun-ming Hsu, Yoon Kee Kong, and Bany Ariffin,

Essentials of Financial Management, 3rd edition

• Financial Calculator– Recommended: Texas Instrument BA II Plus– Available from Eight Flags– If you are planning to use other calculators with financial functions, please refer to the NBS website for the list of approved calculator

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Syllabus – Course structure• The course will be conducted via a series of e-

lectures, online assignments, and tutorials.– Lecture will introduce students to main concepts

• Read through assigned readings

– Work on simple online assignments after reviewing the lecture

– Work on tutorial assignments which will be discussed in the tutorial class. • Tutorials reinforce the concepts taught, provide practice

opportunities, and allow students to clarify their doubts with instructors.

• Please complete tutorial questions before discussion in tutorial groups.

• Prepare Tutorial 1 for next week’s tutorial.

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Syllabus – NTU Learn• E-lecture sequences: Available on Monday of each week

– 2 instructors: Dr Chanika will go through Lectures 2 to 6, Angie will go through Lectures 7 to 11

– Forum at the end of the sequence allows you to post your questions

• Online assignments: Available after you have finished the e-lecture – Only available for two weeks (Monday of Week t to Sunday of

Week t+2)

• Lecture slides and tutorial questions

• Course-wide announcements

• Individual tutorial groups may have their own NTULearn site

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Syllabus - Assessment• Coursework assessment (40%)– Common quiz (6 Oct, 7pm) – 20%

– Online assignments – 5%

– Presentation of tutorial questions – 7%

– Group project – 8%

• Final examination – 60%

• Please refer to syllabus for more details

Assessed by tutorial instructors

Graded based on attempt

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Syllabus - What is Financial Management?

Maximise value

(L1)

Investment policy

(L7, 8, 9)

Financing policy (L10)

Dividend policy(L11)

What is value?(L2 - L6)

- Time value of money- Risk and Return- Value stocks and

bonds

Study how companies conduct their businesses in order to maximise value.

Which assets to invest in?

How will we pay for the asset?

What to do with the earnings generated by

assets?

Financial markets (L3)

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Syllabus - Why do we need to learn Financial Management?

• To help you become a better manager– To plan how a company gets funds more efficiently

– To better plan and control profit

– To better manage a company’s cash flows

• To help you improve your financial decisions that affect your daily life such as– How to get the best deal for your car loan?

– How to plan your savings for retirement?

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Outline of rest of lecture• Forms of business organization

• Goals of Corporation– Stock price and intrinsic value

• Agency problems – conflicts between managers and stockholders

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Forms of Business Organization

• Proprietorship: An unincorporated business owned by 1 individual

• Partnership: An unincorporated business owned by two or more persons

• Corporation: An incorporated business owned by many shareholders

– Legal entity separate from owners

– Ownership denoted by shares

– Can be public or private

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Proprietorships and Partnerships

• Advantages– Ease of formation

– Subject to few regulations

– No corporate income taxes

• Disadvantages– Difficult to raise capital

– Unlimited liability

– Limited life1-12 12


Corporation• Advantages

– Easy transfer of ownership

– Unlimited life

– Limited liability

– Ease of raising capital

• Disadvantages

– Cost of set-up and

report filing

– Double taxation

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Double taxation: What happens when the company makes $1 in profit?• Proprietorship/ Partnership

– $1 profit Owners Owners pay personal income tax on the $1 (e.g., 20%) Owners left with $0.80 after-tax

• Double–taxation: Corporation (U.S. system)

– $1 profit Corporation pay corporate tax (e.g., 30%) After-tax profit of $0.70 distributed to owners as dividends Owners pay dividend tax (e.g., 15%) Owners left with $0.595

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Structure of a Corporation• In FM, we focus on financial decisions

made by a publicly-traded corporation– However, most of the concepts we learn in this

course is also applicable to other forms of organizations

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Clicker question: Imagine you are the CEO of FM Corp, a publicly traded company selling FM textbooks), what do you think should be FM Corp’s goal when making financial decisions?

1. Maximize accounting profits

2. Maximize your own wealth

3. Maximize your shareholders’ wealth

4. Maximize the happiness of the students buying your textbook!


Financial Goals of the Corporation

• The primary financial goal of management is shareholder wealth maximization maximizing intrinsic value of the stock.– Note: We use the words “stock” and

“share” interchangeably

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Stock Prices and Intrinsic Value

• Stock Price: Set by the marginal investor based on her perceived value of the stock

– e.g., SIA current stock price

• Intrinsic value: An estimate of the “true” value based on best available information

– Intrinsic value is a long-run concept.

– Investors will try to estimate the intrinsic value of a stock and they may come up with different estimates.

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http://au.finance.yahoo.com/q?s=C6L.SI


• To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.

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• In equilibrium, a stock’s price should equal its “true” or intrinsic value.– Equilibrium: A situation where investors

are indifferent between buying and selling the stock

• Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.

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Clicker question: Imagine you are the CEO of FM Corp, a publicly traded company selling FM textbooks), what do you think should be FM Corp’s goal when making financial decisions?

1. Maximize accounting profits

2. Maximize your own wealth

3. Maximize your shareholders’ wealth

4. Maximize the happiness of the students buying your textbook!


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Clicker question: I own the chicken rice store in Canteen B, and hire you to run the store. Salary = $1000. Would you work very hard for me to help me make money?

1. Yes2. No


Agency problems• Managers are naturally inclined to

act in their own best interests (which are not always the same as the interest of stockholders).

• This is called agency problems – conflicts between shareholders and managers.

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Clicker question: Instead of fixed $1000, I pay you $0.50 for every plate of chicken rice you sell, would you work harder for me?

1. Less hardworking2. Same as before3. More hardworking


Solving agency problems• Managerial compensation packages– Reward managers based on long-run

intrinsic value of the company stock

• Direct intervention by shareholders• The threat of firing• The threat of takeover

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Where do we stand?• Advantages and disadvantages of different forms

of organizations

• Goal of a corporation shareholder wealth maximization maximizing intrinsic value of the stock maximizing long-run stock price

– Difference between intrinsic value and stock prices

• Agency problems between shareholders and managers

– How do we ensure managers work for the shareholders’ interest?

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Financial Management Lesson 1 Introduction

Documents

financial managementlecture

financial functions

tutorial assignments

weeks tutorial

tutorial class

lecture slides

todays lecture

lecture work