Welcome to Financial Management Class

FINANCIAL MANAGEMENT
Chowdhury Saleh Ahmed. Ph. D salehahmed4081@yahoo.com Week No. 1 3 hour

Introductory Issues
Importance and Scope of Financial Management Goal of the Firm. Organization of the Financial Management function.

Week No. 2 3 hour

The Time Value of Money

Present and Future Values Simple and Compound Interest rates Present and Future Value Interest Factors/ Curves

Week No. 3 3 hour

Valuation of Financial Instruments

Types of Loans and advances, Annuities and perpetuities Amortizing a Loan

Week No. 4 3 hour

Valuation of Long term Securities

Distinction in Valuation Concepts Rates of Returns for yield, Real versus nominal return Risk and Return Measuring Risk Concept of Probability Distribution Portfolio Risk MID TERM EXAMINATION
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Week No. 5 3 hour

Week No. 6

Week No. 7 3 hour

Risk And Returns Capital Asset Pricing Model Risk and Term Structure Risk Premium Tools of Financial Analysis and Planning Balance Sheet Ratios Income statement Ratios Du Pont Approach Tools of Financial Analysis and Planning Sustainable Growth Model Implication of Sustainable Growth Model Comparison with Du Pont

Week No. 8 3 hour

Week No. 9 3 hour

Week No.10 3 hour

Working Capital Management Working Capital Issues and Risk Financing Current Assets and Liabilities Optimal Working Capital Inventory Management Types of Inventory Costs Optimal Level of Inventory Economic Ordering Quantity Determination Capital Budgeting Techniques Principles of Valuation Financial Measures of Project Evaluation Limitations of Capital Budgeting Techniques Capital Budgeting Techniques Sensitivity Analysis Economic Analysis Implications of techniques

Week No.11 3 hour

Week No. 12 3 hour

Week No. 13 3 hour

FINAL EXAM ---------------------------------

Course Evaluation Method

Criteria
Class attendance Home Assignment/ class tests Mid term examination Final examination

% marks
10

15
30

45

Course Name: Financial Management

Hours per week: 3 Total Weeks: 14 Total Hours: 45 hours

2nd Semester: 2013 Lecture 3 hours Credits: 3

Dr. Chowdhury Saleh Ahmed

 Course Objectives:
The course aims to introduce major elements of

Financial Management to the students so as to allow them specialize in these areas.

The focus of the course will be upon identifying

major challenges faced by management in financial decision-making.

Students will also be exposed to Bangladeshs

financial management situations.

Text Book 1.Fundamentals of Financial Management (13th ed) by James C. Van Horne et.al. PHI Learning Private Ltd.

2. Corporate Finance by Stephen A. Ross et.al, McGraw-Hill International Edition, 2011

3. Financial Modeling in Corporate Management ed. By J.W. Bryant, Wiley Publication, 1982

Coverage of Lecture
Introduction Definition, Importance and Scope of Financial Management

What is Finance?
Finance is the art and science of managing money.
Finance is concerned with the process, markets and institutions involved in the transfer of money among and between individuals, businesses and governments.

What is Financial Management?

Financial Management is synonymous with the duties of the Financial Manager in the corporate office.

What are the duties of Financial Managers?

Financing decision making such as loan arrangement, equity arrangement, financial forecasting, cash management, budgeting, etc. Investment decision making such as starting a new project, expansion of existing project, etc. and Asset management decision making such as asset and liability management, portfolio management etc.

Therefore financial management means?

Studying decision-making in financing, financial investment and asset management functions of a corporate body for the benefit of the share holder and the economy at large.
Relevance of financial decision-making to balance sheet?

Importance of Financial Management

Financial Management has assumed a greater importance now-a days due to following reasons:
Size and complexity of corporate bodies have increased manifold. External factors like intense corporate competition, technological change, volatility of interest and inflation rates, fluctuating exchange rates, tax law changes

have great financial impacts. Financial managers need quicker flexibility to respond to the need.

Importance of Financial Management

A financial manager must be able to: adapt to change, raise funds, invest in assets and achieve balance between assets and liabilities wisely for benefit of the shareholders and the economy as a whole.

Schematic diagram of Financial management Department within Corporate Governance

Share holders Debt holders Customers Communities Regulators Media etc.

External Stakeholders Board

Chief Executive

CEO

Internal Stakeholders
Marketing Manager

Operations Manager

Financial Manager

Other Employees

Types of Stakeholders Shareholders

Financial Decisions Involved Dividend

Customer

Price / Discount/ Gifts/ Lotteries

Reason for Renewed Interest in Financial Management

During the earlier part of the last decade, there has been governance breakdown involving largest corporate bodies of the world (like Enron, World com, Tyco, Global crossing etc.). In USA, renewed interest in effective corporate governance and efficient financial management were manifested through Serbanes-Oxley Act, 2002

Cont.
The Act calls for: A high standard in corporate governance, and Establishment of the Public Company Accounting Oversight Board (PCAOB) for purpose of overseeing. . The PCAOB has been given the power to ensure financial management of the corporate bodies through measures like timely auditing, quality control, ethics, appointment of independent auditors, disclosure standards etc. for public companies.

Cont..
In Bangladesh and other developing countries, Securities and Exchange Commission has issued Code of Corporate governance in 2006. Code of Governance describes financial and other requirements (such as auditing, corporate governance, corporate social responsibilities (CSR) to be satisfied by the corporate bodies.

Relationship of Financial Management with Economics and Accounting Finance is closely related to Economics. Since every business firm operates within the economic principles, the financial manger must understand the economic scenario and the consequences of changes in economic principle. Financial manager must be able to use economic theories as guidelines for efficient business operation. Supply and demand analysis, profit maximizing strategies and price theory are some of the examples.

Economic Equilibrium of a Firm under Perfect Competition and Monopoly Impact of technological change

Perfect Comp(long run).

AC MC AC D=AR =MR Q Quantity MR

Price P

P Price

MC AR

Monopoly (long run)

Relationship with Accounting

Finance and accounting activities are closely related and generally overlap. In small firms, accountants often carryout finance functions. While in large firms, the functions are separate. The difference between the two is that finance involves decision-making while accounting conforms to some standards (like BAS)

 The Goal of the firm and hence of the

Financial Manager: 1. Value Creation 2. Solving the agency problem 3. Discharging corporate social responsibilities. Value Creation: Maximizing earning per share is often cited to be
the major objective of a corporate body.

Earnings per share (EPS) is that portion of profit that is attributable to shareholders (after various provisions such as incentive bonus, bad loan provision, reserve build-up, Corporate social responsibility etc.)

Profit maximization is not used as the criterion, as this can be increased by investing in FDRs, Treasury bills, share market business, speculative trading, hoarding etc. and do not necessarily measure management efficiency.

Example of Value creation goal: Associated Banc Corp.(USA)s goal is mentioned as Creating superior shareholder value is our top priority

Shortcoming of the objective of maximizing earnings per share

It does not consider risk. The two companies shares may have same Earning per share, but one firms share may be too risky to possess.

(That is while maximizing EPS, risk may be increased.)

Another limitation is that if the only objective were to maximize earning per share, the firm would never pay a dividend. It could always increase earning per share by retaining earning.
(Retained earning would raise EPS)

It is important to note that Maximizing Earning per share is not the same as maximizing share price.
The later shows final judgment of all market participants as to the value of the particular firm. It takes into account present as well as future earnings per share, the timing, duration and risk of these earnings.

Cont
The market price serves as the barometer for business performance. It indicates how well management is doing on behalf of its shareholders.

Solving Agency Problem

Management may be considered as the agents of the owners. However, the management s actions may not always match with the desires of those of the owners.

Here the optimal approach would be to reduce the agency problem by : *Incentives to Management by the owners * Monitoring/ overseeing of the Management performance * Limiting Management decision making

Corporate Social Responsibility

Finance Managers, besides maximizing earning per share must also ensure CORPORATE SOCIAL RESPONSIBILITY such as: protecting the consumer, paying fair wages to employees, maintaining fair hiring practices, safe working conditions, supporting education and environmental programs such as clean water and air etc.

Corporate Social Responsibility

That is the financial manager must not only ensure the interests of the shareholders but also that of all the stakeholders, that is society at large.

Relationship between goal of firm and kind of stakeholder

Value Creation Solving the Agency problem Corporate Social responsibility

Types of Decision Functions of a Financial Manager

Decision functions can broken down to three types: Investment decision Financing decision Asset management decision

Investment Decision
This involves how much total fixed assets needed to be held by the firm.
Balance sheet shows assets held in the left side while firms liability and are shown on the right.

Financing Decision
Here the financial manager is concerned with the makeup of right-hand side of the balance sheet that is the liability side. Experience shows that firms have divergence in holding equity vs. debt.variety Financing decisions has implication for dividend and hence on retention of fund.

Cont of Financing Decisions

The dividend paid out must be balanced with opportunity of retained earning lost from giving away divided. Once the mix of financing has been decided by board/management, the financial manager must determine how best to acquire these funds. The mechanics of getting short term loan, entering into long term loan agreements, negotiating sale of bond must be understood by the financial manager.

The End