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1. Eugene F. Brigham, Joel F. Houston, Yao-Min Chiang, Hon-Sing Lee and Bany Ariffin, Essentials of Financial Management, Cengage Learning, 2nd edition, 2010 [EUGENE]
2. Financial Management : Core Principles and Applications, 3rd Edition Ross Westerfield Faffe and Jordan (2011) [ROSS]
1 Introduction to Financial Management 2 Fundamental Concepts in Financial Management : Free Cash Flow; Financial Planning and Forecasting 3 Financial Assets and Time Value of Money; Interest Rates, Risk and Rates of Return 4 Bonds and Stock Valuations 5 Cost of Capital 6 Cash Flow Estimation and Risk Analysis 7 Capital Structure and Leverage MID TERM TEST (S01,SO2,SO3) Venue: LT-2, AC1 Date and Time:
18/10/2012 (Thursday) 6:30pm-8:30pm 8 Guest Lecture (1):Treasury and Valuation 9 Guest Lecture (2): Enterprise Risk Management 10 Dividends and Share Repurchase 11Guest Lecture (3):Merger and Acquisitions* 12 Working Capital Management Group Project Presentations
Know the main concerns of corporate financial management
Identify the goal of financial management Enumerate the financial benefits and
drawbacks of differing forms of business organization
Understand the conflicts of interest that can arise between owners and managers
Comprehend that corporate organizations are enhanced by financial markets
Revisit the core principles of corporate finance
1.1 What is Corporate Finance?
1.2 The Corporate Firm
1.3 The Goal of Financial Management
1.4 The Agency Problem and Control of the Corporation
1.5 Financial Markets
1.6 Core Principles of Finance
1.7 Regulations
1-4
Corporate Finance addresses the following key questions:
1. What long-term investments should the firm
choose?
2. How should the firm raise funds for the selected investments?
3. How should short-term assets be managed and financed?
4. How is risk managed?
5. How to comply with regulations?
1-5
Concerns the _____, _____, and _______ of assets with some overall goal in mind.
Keeps track of resources in terms of dollars Primary concern is the
firm and its operations
Focus on corporations
1-8
Financing
(Raising Capital)
Financial Management
Capital Budgeting
Risk Management
Corporate Governance
1 - 8
1-9
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Total Value of Assets:
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
Total Firm Value to Investors:
1-
10
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
What long-term investments should the firm choose?
1 - 11
Capital Budgeting: Selecting the best projects in which to invest the firm’s
resources
The capital budgeting process consists of three steps. Step 1 - Identifying potential investments
Step 2 - Analyzing those investments to identify which will create shareholder value
Step 3 - Implementing and monitoring the investments selected in Step 2
1 - 12
1-
13
How should the
firm raise funds
for the selected
investments?
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
Businesses can raise money in 2 ways: ◦ Externally from investors or creditors
Venture capital
Initial public offering (IPO)
Money market
Long-term debt
◦ Internally by retaining operating cash flows
Most common method
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14
1 - 14
1 - 15
Primary vs. secondary market transactions or offerings
Most financing from internal rather than external sources.
Most external financing is debt.
Financial intermediaries declining as a source of capital for large firms
Securities markets growing in importance 1 - 15
The Financial Management Function
Managing daily cash inflows and outflows
Forecasting cash balances
Building a long-term financial plan
Choosing the right mix of debt and equity
1 - 16 1-
16
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17
How should short-term assets be managed and financed?
Net
Working
Capital
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
Current Assets
Fixed Assets
1 Tangible
2 Intangible
1-
18
How should the firm raise funds for the selected investments?
Shareholders’
Equity
Current
Liabilities
Long-Term
Debt
Current Assets
Fixed Assets
1 Tangible
2 Intangible
1-
19
The value of the firm can be
thought of as a pie.
The goal of the manager is
to increase the size of the
pie.
The Capital Structure
decision can be viewed as
how best to slice the pie.
If how you slice the pie affects the size of the pie,
then the capital structure decision matters.
50%
Debt
50%
Equity
25%
Debt
75%
Equity
70%
Debt 30%
Equity
Identifying, measuring, and managing all types of risk exposures
Some risks are insurable, and some risks can be reduced through diversification.
Financial instruments like forwards, futures, options, and swaps may also be used to hedge market risks such as interest-rate, price, and currency fluctuations.
1 - 20
Hires and promotes qualified, honest people, and structures employees’ financial incentives to motivate them to maximize firm value
In practice the incentives of stockholders, managers, and other stakeholders often conflict.
Dimensions of corporate governance: ◦ Board of directors
◦ Securities and Exchange Commission
◦ Sarbanes-Oxley Act of 2002
1 - 21
Board performance and structure
Risk management
Internal control
Related-party transaction disclosure
Other indicators: quality leaders with strong ethical values
Ref: A Plus August 2011 Championing good governance, President’s message (HKICPA)
22
The Financial Manager’s primary goal is to increase the value of the firm by:
1. Selecting value creating projects
2. Making smart financing decisions
1-
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optimal firm size?
specific assets to be acquired?
assets (if any) to be reduced or eliminated?
Most important of the key decisions.
1-
25
Source: Servaes and Tufano, “CFO Views on the Importance and Execution of the Finance Function” (Deutsche Bank,
2006).
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26
Chairman of the Board and Chief Executive Officer (CEO)
President and Chief Operating Officer (COO)
Vice President and Chief Financial Officer (CFO)
Treasurer Controller
Cash Manager
Capital Expenditures
Credit Manager
Financial Planning
Tax Manager
Financial Accounting
Cost Accounting
Data Processing
Board of Directors
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27
Cash flow from firm (C)
Taxes (
D)
Government
Retained cash flows (F)
Invests
in assets
(B)
Dividends and debt payments (E)
Current assets
Fixed assets
Short-term debt
Long-term debt
Equity shares
Ultimately, the firm
must be a cash
generating activity.
The cash flows from
the firm must exceed
the cash flows from
the financial markets.
Firm Firm issues securities (A) Financial
markets
The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.
However, businesses can take other forms.
1-
28
The Sole Proprietorship The Partnership ◦ General Partnership ◦ Limited Partnership