financial management lect.1 dba ain shams 2015 .pdf
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Prof.Hayam Wahba
[email protected]@yahoo.co.uk
Introduction to
Financial Decisions
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What is Finance?
Introduction
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What is Finance?
Finance can be defined as the art and science
of managing money.
Finance is concerned with the process,institutions, markets, and instruments involved
in the transfer of money among individuals,
businesses, and governments.
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Basic Areas Of Finance
Corporate finance or Financial Management .
Courses ( Financial Management - Financial Decision - Financial Analysis)
Investments Courses. (Investment and portfolio Management )
Financial Markets and institutions Courses
(Stock Market, Financial Institution ,Banking
Management and Insurance)
International finance. Courses .InternationalFinance
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The Field of Finance
Financial ManagementAnalyze and forecast a firmsperformance
Evaluate investment opportu ni t ies
Financial Markets and Institutions
The flow o f funds through inst itu t ions
Markets in w hich financ ial assets are sold
Impact of interest rates on that f low offunds
Investments
Locate, select, and manage money
to produce assets
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Focus on Practice
Professional Certifications in Finance:
Chartered Financial Analyst (CFA) Offered by the CFAInstitute, the CFA program is a graduate-level course of studyfocused primarily on the investments side of finance.
Certified Treasury Professional (CTP) The CTP programrequires students to pass a single exam that is focused on theknowledge and skills needed for those working in a corporatetreasury department.
Certified Financial Planner (CFP) To obtain CFP status,students must pass a ten-hour exam covering a wide range oftopics related to personal financial planning.
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Short terminvestment Decision
Capital
Structure
Short termFinancial Decision
Long terminvestment Decision
Working CapitalManagement
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Goal of the Firm:Maximize Shareholder Wealth
Decision rule for managers: only take actions that are
expected to increase the share price.
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1-91-9Financial Decisions MakinProf.Hayam Wahba
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Goals of The Corporation
Shareholders desire wealthmaximization
Do managers maximize
shareholder wealth?Mangers have many
stakeholders
Agency Problems represent theconflict of interest between
management and owners
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Basic Goal of the Firm
The primary financial goal of the firm is
to maximize the wealth of the firms
owners (or thevalue
of the firm). This is not the same as profits
maximization .
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Basic Goal of the Firm
The primary financial goal of the firm is
to maximize the wealth of the firms
owners (or thevalue
of the firm). This is not the same as profits
maximization .
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Profit maximization fails for anumber of reasons !!
It ignores the timing of returns
cash flows available to shareholder (Return) Risk
Profit maximization is concerned with Earningper share (EPS) , which calculated by dividingthe periods total earnings available for thefirms stockholders by the number of shares .
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Financial
Manager
Risk
Achieve Firms
Primary Goal
Makes
Decisions
Return
Evaluates
Maximizing Stock
Price
Financial
Investment
Time value
of money
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Goal of the Firm:What About Stakeholders?
Stakeholders are groups such as employees, customers,
suppliers, creditors, owners, and others who have a direct
economic link to the firm.
A firm with astakeholder focus consciously avoidsactions that would prove detrimental to stakeholders. The
goal is not to maximize stakeholder well-being but to
preserve it.
Such a view is considered to be "socially responsible."
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The Role of Business Ethics
Business ethics are the standards of conduct or moral
judgment that apply to persons engaged in commerce.
Violations of these standards in finance involve a variety
of actions: creative accounting, earnings management,misleading financial forecasts, insider trading, fraud,
excessive executive compensation, options backdating,
bribery, and kickbacks.
Negative publicity often leads to negative impacts on a
firm.
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The Role of Business Ethics:Considering Ethics
Robert A. Cooke, a noted ethicist, suggests that the
following questions be used to assess the ethical viability of
a proposed action:
Is the action arbitrary or capricious? Does the action unfairlysingle out an individual or group?
Does the action affect the morals, or legal rights of any
individual or group?
Does the action conform to accepted moral standards?
Are there alternative courses of action that are less likely to
cause actual or potential harm?
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The Role of Business Ethics:Ethics and Share Price
Ethics programs seek to:
reduce judgment costs.
maintain a positive corporate image
build shareholder confidence
gain the loyalty and respect of all stakeholders
The expected result of such programs is to positively affect
the firms share price.
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Managerial Finance Function
The size and importance of the managerial finance
function depends on the size of the firm.
In small firms, the finance function is generally
performed by the accounting department.
As a firm grows, the finance function typically evolves
into a separate department linked directly to the company
president or CEO through the chief financial officer(CFO) (see Figure 1.1)
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Managerial Finance Function:Relationship to Economics
The field of finance is closely related to economics.
Financial managers must understand the economic
framework and be alert to the consequences of varying
levels of economic activity and changes in economicpolicy.
They must also be able to use economic theories as
guidelines for efficient business operation.
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Managerial Finance Function:Relationship to Accounting
The firms finance and accounting activities are closely-
related and generally overlap.
In small firms accountants often carry out the finance
function, and in large firms financial analysts often helpcompile accounting information.
One major difference in perspective and emphasis
between finance and accounting is that accountantsgenerally use the accrual method while in finance, the
focus is on cash flows.
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Governance and Agency:Corporate Governance
Corporate governance refers to the rules, processes, and
laws by which companies are operated, controlled, and
regulated.
It defines the rights and responsibilities of the corporateparticipants such as the shareholders, board of directors,
officers and managers, and other stakeholders, as well as
the rules and procedures for making corporate decisions.
The structure of corporate governance was previously
described in Figure 1.1.
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Governance and Agency:Individual versus Institutional Investors
Individual investors are investors who own relatively small
quantities of shares so as to meet personal investment goals.
Institutional investors are investment professionals, such as banks,
insurance companies, mutual funds, and pension funds, that are paid
to manage and hold large quantities of securities on behalf of others.
Unlike individual investors, institutional investors often monitor and
directly influence a firms corporate governance by exerting pressure
on management to perform or communicating their concerns to the
firms board.
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The Agency Issue: The Threatof Takeover
When a firms internal corporate governance structure is
unable to keep agency problems in check, it is likely that
rival managers will try to gain control of the firm.
The threat of takeover by another firm, which believes itcan enhance the troubled firms value by restructuring its
management, operations, and financing, can provide a
strong source of external corporate governance.
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Grade Distribution
Weighting of Assessments
Mid-Term Exam (1) 30 %
Final Exam 50 %Assignments and attendance 20 %
Total 100 %
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