EBF 1023 Basic Finance

Asas Kewangan
LECTURE 1
An Introduction to Financial
Management
What is Finance?
Goal of the Firm
1) Profit
Maximization?
this goal ignores:
a) TIMING of Returns
(Time Value of Money - Ch. 5)
b) UNCERTAINTY of
Returns
(Risk - Ch. 6)
Goal of the Firm
2) Shareholder Wealth Maximization?
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price
Financial Goals of the Corporation
The primary financial goal is
shareholder wealth maximization,
which translates to maximizing stock
price.
Factors that affect stock price
Projected cash
flows to
shareholders
Timing of the cash
flow stream
Riskiness of the
cash flows
Stock Prices and Intrinsic Value
In equilibrium, a stocks price should equal its
true or intrinsic value.

To the extent that investor perceptions are
incorrect, a stocks price in the short run may
deviate from its intrinsic value.

Ideally, managers should avoid actions that
reduce intrinsic value, even if those decisions
increase the stock price in the short run.
Intrinsic value VS Market price
Market price
Price


A. RM 58.00

B. RM 120.00

C. RM 385.00

D. RM 799.00
Determinants of Intrinsic Value and
Stock Prices
Legal Forms of Business
Organization
Proprietorship
Partnership
Corporation
Legal Forms of Business
1) Sole Proprietorship
A business owned by a single
individual.
Owner maintains title to the
firms assets.
Owner has unlimited liability.

2) Partnership
Similar to a sole
proprietorship, except that
there are two or more owners.
2a) General Partnership
All partners have unlimited
liability.

2b) Limited Partnership
Consists of one or more
general partners, who have
unlimited liability.
One or more limited partners
(investors) whose liability is
limited to the amount of their
investment in the business.
Legal Forms of Business
2c) Limited Liability
Company (LLC)
Cross between a
partnership and a
corporation.
Owners have limited
liability, but the firm
runs and is taxed like
a partnership.
Legal Forms of Business
3) Corporation
A business entity that legally functions
separate and apart from its owners.
Owners liability is limited to the amount
of their investment in the firm.
Owners hold common stock certificates,
and ownership can be transferred by
selling the certificates.
Legal Forms of Business
The Corporation and
Financial Markets
The Corporation and
Financial Markets
Corporation
The Corporation and
Financial Markets
Corporation Investors
The Corporation and
Financial Markets
Government
Corporation Investors
The Corporation and
Financial Markets
cash
Government
Corporation Investors
The Corporation and
Financial Markets
cash
Government
securities
Corporation Investors


The Corporation and
Financial Markets
Government
cash
securities
Corporation Investors
Secondary
markets


The Corporation and
Financial Markets
Government
cash
securities
Corporation Investors
Secondary
markets


The Corporation and
Financial Markets
Government
cash
securities
Corporation Investors
Secondary
markets
The Corporation and
Financial Markets
cash
Investors
Secondary
markets
Government
securities
Cash flow
Corporation
The Corporation and
Financial Markets
cash
Investors
Secondary
markets
Government
securities
Cash flow
tax
Corporation

The Corporation and
Financial Markets
cash
Investors
Secondary
markets
Government
securities
Cash flow
reinvest
tax
Corporation
The Corporation and
Financial Markets
cash
Investors
Secondary
markets
Government
securities
Cash flow
reinvest
tax
Corporation
dividends,
etc.
Financial Markets
What is a market?

Primary Market
Market in which new issues of a
security are sold to initial
buyers.
Secondary Market
Market in which previously
issued securities are traded.
The Corporation and
Financial Markets
Initial Public Offering (IPO)
The Corporation and
Financial Markets
Initial Public Offering (IPO)
The first time the firms stock is
sold to the general public.

The Corporation and
Financial Markets
Initial Public Offering (IPO)
The first time the firms stock is
sold to the general public.
Seasoned New Issue

The Corporation and
Financial Markets
Initial Public Offering (IPO)
The first time the firms stock is
sold to the general public.
Seasoned New Issue
A new stock offering by a firm
that already has stock that is
traded in the secondary market.


The Corporation and
Financial Markets
The importance of financial
markets
Well-functioning financial markets facilitate the flow of
capital from investors to the users of capital.
Markets provide savers with returns on their money
saved/invested, which provides them money in the future.
Markets provide users of capital with the necessary funds to
finance their investment projects.

Well-functioning markets promote economic growth.
Economies with well-developed markets perform better
than economies with poorly-functioning markets.
Types of financial institutions
Commercial banks
Investment banks
Mutual savings banks
Credit unions
Pension funds
Life insurance companies
Mutual funds
Hedge funds
Financial Management Axioms
1) Risk - return trade-off.
2) Time value of money.
3) Cash - not profits - is king.
4) Incremental cash flows count.
5) The curse of competitive markets.
6) Efficient capital markets.
7) The agency problem.
8) Taxes bias business decisions.
9) All risk is not equal.
10) Ethical dilemmas are everywhere in finance.
End of Lecture 1
Thank you for your
ATTENTION !!!