CHAPTER 1 : INTRODUCTION TO FINANCIAL MANAGEMENT .

Objektif bab :
1.
2.

3.
4. 5.

What is finance? Roles of financial manager Legal forms of business entity Goals of a firm Markets and financial institutions

What is finance??
Art and science of managing money process, institutions, markets and instruments involved. (Gitman) Activities that earn and use of capital - collecting, using and managing. Concern with the maintenance & creation of economic value or wealth (Keown) Focuses on the decision making toward creating wealth.

Fields of finance
1.
2. 3.

Money & Capital Market Investment Financial Management

Money & Capital Market

Involves security market and financial institutions such as banks, finance companies etc. Knowledge in evaluation techniques. Factors that effects the interest rate. Financial instruments such as leasing, loan, bond, stock etc.

Investment

Decision make by investors to invest in the security that can give high return.

Financial Management

Creating economic wealth. Involves decisions such as when to introduce new product, invest in new asset, replace the new asset, loans, issuing stocks/bond etc. Most important and big area. Inportant to maximise the shareholders wealth.

Roles of financial managers

Important roles in making decision in a company such as: 1. Capital budgeting 2. Capital structure 3. Working capital, short term asset & liability

The responsibilities of financial managers cover:

Planning and forecasting Making financing decision and investment. Controlling and coordinating Manage the financial markets Risk management.

Legal Forms of Buss Organization

Sole Proprietorship

Partnership
Corporation

Sole Proprietorship
A business owned by a single individual. Advantages o Easy and cheaper to form o Few regulations o No corporate tax Disadvantages o Hard to obtain capital o Unlimited liability o Difficult to transfer ownership

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 Lower cost Easy to form Ability to obtain 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 Easier to raise capital Disadvantages Double taxation: corporate earnings and dividend received Expensive and complex to form Difficult in making decision.

Goals of firm
Maximize PROFIT Maximize SHAREHOLDER WEALTH

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.

Maximize SHAREHOLDER WEALTH

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 can illustrate the valu of the company. The investment is suitable the the risk Financing capital with lower cost.

Financial market and institution

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Financial Market a place where the person needs capital will get it from capital suppliers. 2 types: Primary market Secondary market

Financial Markets

Primary Market
A place where a security is offered for the time. 2 types of offers in primary market; IPO and Seasoned New Issue.

first

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.

ROLE OF FINANCIAL MARKET

1. Primary Market

Security

Cash INVESTOR

FIRM
2. Investment

Reinvest

3. Dividend, etc

Secondary Market

Cash flow
Tax GOVERNMENT

Companies Social Responsibilities.

Social responsibilities also important to companies; not only to maximise shareholders wealth. Social responsibilities to employees, customers, society and environment. Example; provide safe working environment, avoid pollution, produce safe product. Companies cant give priority to profit and ignores the social responsibilities.

Agency R/ships

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.