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INTRODUCTION TO
FINANCIAL MGT
Financial Management
Creating economic wealth Involves decisions such as when to introduce new product, invest in new assets, replace the new asset, loans, issuing stocks/bond etc. Most important and big area Important to maximize the shareholders wealth
FIELDS OF FINANCE
1. Money & Capital Market 2. Investment 3. Financial Management
FIGURE 1.1 : CASH FLOWS BETWEEN FIRM & THE FINANCIAL MRKT
1. Primary Market
Security
Cash INVESTOR
FIRM
2. Investment
Reinvest
3. Dividend, etc
Secondary Market
Cash flow
Tax GOVERNMENT
2. Investment
Decision make by the investors to invest in the securities that can give high returns
Partnership
Corporation
Sole Proprietorship
A business owned by a single individual. Advantages Easy and cheaper to form Few regulations No corporate tax Disadvantages Hard to obtain capital Unlimited liability Lacks continuity when proprietor dies
Partnership
2 or more individual agreed to form a business in order to get profit based on agreement formal or informal (Oral Commitment/Formal Document) 2 types: General partnership Limited partnership
Advantages of partnership
More available brain power and managerial skill Easy to form Able to raise capital Disadvantages of partnership Unlimited liability Difficult to transfer ownership
Corporation
An entity that legally functions separate and apart from its owner Advantages Unlimited life Easy transfer of ownership Limited liability Able to generate capital Disadvantages Double taxation: corporate and individual Expensive and complex to form Difficult in making decision
Maximize PROFIT
Commonly uses by a firm In microeconomic, this goal is a priority to increase the profit However, it ignores some important factors such as: 1. Uncertainty and risk 2. Timing of projects returns Weakness of accounting profitability
i.e maximization of the price of companys existing common stock The best decision taken is the decision that can raise the shareholders wealth Market price of the firms stock reflects the value of the firm The investment is suitable with the risk Financing capital with lower cost
Financial Markets
Primary Market A place where a security is offered for the first time. 2 types of offers in primary market; IPO and Seasoned New Issue. Secondary Market The market in which stock previously issued by the firm trades. Transaction of selling and buying stocks occur Provide liquidity for stocks Guide for investors to put a price for their investments.
Security
Cash INVESTOR
FIRM
2. Investment
Reinvest
3. Dividend, etc
Secondary Market
Cash flow
Tax GOVERNMENT
Agency Relationships
When an individual or more (principal) hired another individual or organization (agent) to handle a service and give power to agent to make decision. Agency relationship among; Shareholders and manager Manager and debtors Agency problem exist when there are conflict of interest between principal and agents.