Topic 1: Overview of Business Finance

Learning Outcomes
what is business finance? major financial decisions forms of business organization goals of business finance financial managers and financial markets
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What is Business Finance?

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What is Business Finance?

business finance is the study of ways to address the following issues (known as financial decisions) major financial decisions 1. 2. 3. 4. 5.
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Capital Budgeting Decision

capital budgeting: process of planning and managing a firms long term investments in terms of sorts of buildings, machinery and equipment (investment decision) identify investment opportunities that will create value for the firm choose among investment projects with specified criteria optimal mix of long term assets
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Capital Budgeting Decision

give some examples of investment projects 1. 2. 3.

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Financing Decision
financing: how a firm obtains the long term financing it needs to support its long-term investments through a mix of long term debt and equity (corporate financing and capital structure) how much to raise in terms of debt and equity? what are the least expensive sources of funds? give some examples of sources of funds 1. 2. 3.
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Dividend Policy
dividend policy: how a firm decides how much to pay back to shareholders through dividends or share repurchase (payout policy) two uses of net income 1. 2.
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Working Capital Management Decision

working capital management: working capital refers to a firms current assets and current liabilities day-to-day activity to ensure a firm has sufficient resources to continue its operations and avoid costly interruptions involve a number of activities related to a firms receipt and disbursement of cash avoid a cash flow or liquidity problem
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Working Capital Management Decision

give some examples of working capital management activities 1. 2. 3.

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Risk Management Decision

risk management: how to identify, measure, manage and monitor the risks facing a firm give some examples of risks faced by a firm 1. 2. 3. out of scope of this course
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Forms of Business Organizations

a business organization or firm is an individual or a group of individuals working together with a common objective of profit maximization legal forms of business organization 1. 2. 3.

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Sole Proprietorship
sole proprietorship: a business owned and run by an individual tax implication: proprietorships profits and personal income are reported in the same tax returns advantages 1. 2. 3.
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Sole Proprietorship
disadvantages 1. 2. 3. 4.

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Partnership
partnership: a business owned by two or more owners through entering a partnership agreements general partnership: all partners share in gains and losses and all have unlimited liabilities limited partnership general partners contribute funds to the firm and run it and have unlimited liability
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Partnership
limited partners contribute funds only without actively participating in the firms business and have limited liability tax implication: share of partnerships profits and personal income are reported in the same tax returns advantages 1. 2. 3.
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Partnership
disadvantages 1. 2. 3. 4.

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Corporation
corporation/limited company: a business as a legal person separate and distinct from its owners with rights, duties and privileges as a natural person borrow money and own property can sue and be sued can enter into contracts be a partner in a partnership can own stocks
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Corporation
forming a corporation involves preparing articles of incorporation and a set of bylaws (known as Articles of Association in Hong Kong) Articles of Association: rules for the internal management and operations of the company, e.g. powers and duties of company officers, accounts and audits and provisions mainly concerned with relationship between company and outsiders
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Corporation
separation of ownership (shareholders) and management (hired professional managers) shareholders elect board of directors in the annual general meeting to oversee management management runs the corporations affairs in the shareholders interests
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Corporation
source: Sa Sa Notice of AGM

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Corporation
tax implications tax on a corporate level, i.e. corporate income tax (profits tax in Hong Kong) tax on an individual level, i.e. tax on dividends (no such tax in Hong Kong)

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Corporation
advantages 1. 2. 3. disadvantage 1.

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Types of Companies
company private company

public company listed company can offer shares to general public

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cannot offer governmentshares to owned company general public

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Procedures to Set Up a Company in Hong Kong

check whether proposed name is the same as or too similar to a name already appearing on the index of company names prepare and print the draft articles of association execute the declaration of compliance (declaration confirming that all the requirements for registration is complied) check once again whether proposed name is alright

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Procedures to Set Up a Company in Hong Kong

submit the registration documents to the Companies Registry which issues a certificate of incorporation first board meeting should be held as soon as possible to enable company to start business print the article of association application for a business registration certificate

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Procedures to Set Up a Company in Hong Kong

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Procedures to Set Up a Company in Hong Kong

prepare company name plate, common seal, company chop, statutory books (directors, company secretaries, members, books of account) and stationary with company logo, name and address

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Registration of Business Firms in Hong Kong

Companies Registry (www.cr.gov.hk) application for formation of company annual return comply with Companies Ordinance, e.g. annual general meeting, preparation of company minutes, preparation of audited annual report
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Registration of Business Firms in Hong Kong

Business Registration Office of the Inland Revenue Department (www.ird.gov.hk) certificate of business registration for sole proprietorships, partnerships and corporations on annual basis Business Registration Ordinance

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Goals of Business Finance

objective: maximize profits or shareholders wealth subject to principal-agent (agency) problem: management acts in own interests at expense of shareholders illegal and unethical actions taken by management known as corporate misgovernance (mitigated by corporate governance structure of corporation) corporate social responsibility
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Agency Problem
shareholders are principals and managers are agents agents owe fiduciary duties to principals and should act in the best interests of principals however, in reality, there is always a conflict of interests between them and managers tend to act in their own interests
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Agency Problem
give some examples of an agency problem 1. 2. 3. 4. 5.

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Agency Problem

private jet luxurious office

huge bonus

company car nepotism

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cronyism
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Corporate Mis-governance
corporate mis-governance: misconduct by Board or management of a company towards members, e.g. fraud, misfeasance, failures to adhere to duties of disclosure corporate governance: how a firm is directed and controlled in the best interest of different stakeholders such as shareholders, creditors, etc. appoint independent non-executive directors set up Audit Committee, Remuneration Committee, Nomination Committee and so on under the Board of Directors
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Corporate Mis-governance

source: Speech of SFCs Chairman to the Chamber of Hong Kong Listed Companies, Towards Better Corporate Governance, 13 December 2013

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Corporate Mis-governance

source: China Economic Review

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Corporate Social Responsibility

corporate social responsibility: a firm integrates social and environmental concerns in its business operations and in its interaction with business relevant groups on a voluntary basis responsible entrepreneurship voluntary initiatives going beyond legal requirements and contractual obligations activities to benefit employees, business relevant groups (i.e. society) or environment positive contribution to individual target groups regular activities rather than one-time events
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Corporate Social Responsibility

sales

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The Financial Managers

the chief financial officer (CFO) is the top officer of a firm responsible for its finance activity the financial controller handles cost and financial accounting, tax payments and management information systems the treasurer manages a firms cash and credit, its short-term and long-term financial planning, and its capital expenditures
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The Financial Managers

Board of Directors Chairman of the Board and Chief Executive Officer (CEO) President and Chief Operating Officer (COO) Vice President and Chief Financial Officer (CFO)

Treasurer
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Controller
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The Financial Managers and Flows of Funds

direct finance financial markets firms operations financial managers outside investors financial intermediaries indirect finance
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Financial Intermediaries
a financial institution stands between deficit units and surplus units by facilitating the transfer of funds from one to the other a commercial bank accepts deposits from depositors and makes loans to individual and corporate borrowers

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Financial Markets
primary market: new securities are issued to raise capital (financing or fund raising market) a corporation can go public by listing on a stock exchange and it becomes a listed company public offering: new securities are offered to general public, e.g. an initial public offering (IPO), seasoned offering private placement: new securities are sold to a selective group of investors, usually institutional and high net worth investors
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Financial Markets
secondary market: already-issued securities are traded among investors (trading market) facilitate primary market by providing liquidity to already-issued securities help to discover prices for new securities

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