sample teaching plan (principles of finance)

8/9/2019 Sample teaching plan (Principles of Finance)

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The Key principles of Finance

Title : The Key principles of finance

Instructor : Khin Ma Ma Myo

Grade Level : Level 2

Document type : Lesson Plans

Description : This teaching plan traces the basic ideas relating to the

theory of corporate finance. It outlines the key decisions relating to the

financing of a company's operations, the role and effects capital markets,

agency theory and the theory of the maximization of shareholder wealth.



Introduction

Corporate finance addresses the relationship between the financial markets

and firms. The corporate financial manager has the important task of ensuring

that they are sufficient funds available to meet all the likely needs of the

business. To do this properly, he or she requires a clear grasp both of the key

decisions related to the financing of a company's operations and the theory of

the maximization of shareholder wealth.

'The key principles of finance' teaching plan is designed for finance and

economics teachers. It is presented in three parts. Part 1 is the core of the

plan and is presented in a double-column format. The left column provides a

summary of background information, concepts and definitions that are more

fully explained in the right column.

Part 2 contains questions and exercises and is designed to assure that the

learning objectives outlined below have been met. Suggested answers are

provided.

Part 3 contains two figures of the key principles of finance. Figure 1 shows the

role of the financial manager as the link between the firm's operations and the

financial markets. Figure 2 depicts the full model of capital markets with all

sectors being connected.



Learning Objectives

'The key principles of finance' is designed to allow students to participate with

their teacher in a program about the basic principles of corporate finance. By

combining the underlying concepts and theories, the program will enable

students to do the following:

• Outline the relationship between finance and the objectives of the

organizations

• Outline the relationship between the stakeholders in an organization

• Outline agency theory

• Outline the role and effects of the capital markets

• Outline the theory of the maximization of shareholder wealth

Contents

The program consists of the following:

• presentation material (powerpoint slides)

• Hands-out (figures in part 3)

• this teaching plan



Part I: Core Plan

Introduction to Finance

To acquire real assets,

the company must

raise finance by

issuing financial

assets such as shares

or bonds.

In order to carry on business, companies to

employ real assets, both tangible and intangible.

Tangible assets are assets that physically exist

(eg. Machinery and buildings), whereas intangible

assets are assets that do not physically exist (eg.

Goodwill, trademarks and brand names).

To acquire such assets, the company must raise

finance by issuing financial assets such as shares

or bonds.

Thus, the financial manager (who is responsible

for the major investment and financing decisions)

stands between the firm's operations (for

example, the purchase of real assets, which are

then used by the firm to undertake projects in

order to generate profits) and the financial

markets (where investors hold the financial assets

issued by the firm to obtain money).

Therefore, the role of the financial manager canbe considered as a link between the firm's

operations and the financial markets and two

main questions are raised.

• What real assets should the firm

investment?

• How should the cash for the investment be

raised?



Capital budgeting

decisions consider the

choice of projects in

which the firms

should invest.

Financing decisions

consider how best to

raise the required

finance.

The first question considers the choice of projects

in which the firms should invest. As firms use real

assets to undertake projects, a firm can be

thought of as a collection of projects. The

underlying objective of the business firm is to

undertake those projects to generate revenues

and incur costs, on behalf of the owners of the

firm. Thus the firm has to estimate the future

profitability of various projects, and choose

between alternative capital assets, dates of

commencement and methods of financing. All

these decisions are also known as capital

budgeting decisions.

Alternatively, the second question considers how

best to raise the required finance. The typical

project requires a significant expenditure prior to

the receipt of the first revenues and a net

investment will be required to get the project off

the ground. How should the cash for the

investment be raised? Should the finance be

raised by issuing shares (equity finance) or by

borrowing (debt finance)? All these decisions are

also known as financing decisions.

The responsibilities for capital budgeting decisions

are normally the remit of a controller, or, in many

cases, the Chief Financial Officer (CFO). The

responsibilities for financing decisions rest with

the treasurer who looks after the company's cash,

raises new capital and maintains relationships

with banks, shareholders and other investors.



business objectives and agency theory

The divorce of

ownership from

control occurs when

the directors delegate

operational decision

making to the

executives, while

retaining control of

strategic issues.

In fact, ultimate responsibility for financial

decisions usually lie with the directors who are

acting on behalf of the shareholders who elect

them. Sometimes, the directors run the company

themselves, but quite often they hire general

managers, who are not shareholders but who are

experts in their fields, to run the company.

Most often, the directors delegate operational

decision making to the executives, while retaining

control of strategic issues. This is also known as

'the divorce of ownership from control'.

Such separation of ownership and management

has advantages such as freedom for ownership to

change without affecting operational activities and

freedom to hire professional managers. But it

may have disadvantages if the interests of the

owners and managers diverge.

When managers are motivated by objectives

which are at variance with the desires and

interests of the shareholders, the scope for

conflicts between owners and managers becomeprominent.

One theory that tries to explain the complex

relationships and conflicting objectives within an

organization is agency theory.



Agency theory, which

considers the

relationship between

a principal and an

agent of that

principal, include

issues such as the

nature of the agency

costs, conflicts of

interests and how

agents may be

motivated.

Agency theory, which considers the relationship

between a principal and an agent of that

principal, include issues such as the nature of the

agency costs, conflicts of interests and how

agents may be motivated.

Consider the relationship between the

shareholders and the management. The

shareholders are the principals who employ the

management as the agents to run the company

on their behalf. Divergence of their interests can

lead to the possibility of conflicts of interest. Such

conflicts are also referred to as principal-agent

problems.

These conflicts of interest may equally arise

between other stakeholders- junior management,

other employees, customers, suppliers,

pensioners and the state. For example, the

company's management (principals) may wish to

motivate the employees (agents) to work hard so

that the company's profits are hight and the

management receive large profit-related bonuses.

Conversely, the employees may wish to have an

easy time at work.

Such problems may be easier to resolve if all

parties share the same insights into the fortunes

of the company. So, how might the interests of a

company's management be aligned with those of

the shareholders?



The maximization of shareholder wealth

Provided that a free,

competitive, capital

market exists,

shareholders can

choose their

investments to meet

their needs for cash

flows, risks and so on.

Most modern organizations have many thousands

of individual shareholders and the objectives of

these shareholders will vary according to the

factors such as attitudes towards risk, time

preferences and consumption needs, balance

between the need for income and for capital

growth and tax positions.

How can managers and directors, acting as

agents for the ultimate owners, satisfy the

different desires of these owners? How can they

even know what these desires are?

There is a mechanism that enables this

conundrum to be solved. This is called the

market. Provided that a free, competitive, capital

market exists, shareholders can choose their

investments to meet their needs for cashflow, risk

and so on. If we assume that all shareholders

seek to be as rich as possible, then the goal of

the financial manager can be simply stated: to

increase the market value of each shareholder's

stake in firm.

This goal can be further refined to provide an

operational tool for financial management. Any

operational decision will be reflected in a pattern

of future cashflows and the market enables us to

identify the appropriate cost of capital to use in

decision-making.



The capital markets

The capital markets

are the markets in

long-term finance for

companies, such as

the stock market and

the bond market.

The presence of the

capital markets'

continuous

assessment

stimulates efficient

and provides

incentives to business

managers to improve

their performance.

The capital markets are the markets in long-term

finance for companies, such as the stock market

and the bond market. For large, publicly quoted

companies, the stock market serves as a

performance monitor. While share prices may

react to the general economy or industry-wide

factors, the basic component of the share price is

the market's perception of the particular form's

current and expected future performance.

If managers are not performing effectively,

relative to the potential of the assets under their

control, it will not be long before this is reflected

in a lower share price. This may make the firm a

bargain for a take-over bid will be made.

Business organizations are, therefore, directly

and measurably subject to the disciplines of the

financial markets. In fact, the presence of the

capital markets' continuous assessment

stimulates efficiency and provides incentives to

business managers to improve their performance.

The major key effects of the capital markets on a

firm's decisions include sound investmentdecisions that require accurate measurement of

the cost of capital, mergers and take-overs that

create threats and opportunities to be exploited,

limitations in the supply of capital that focus

attention on methods of raising finance and

externalities that require managers to determined

the appropriate role of organizations.



Part II: Questions and Answers

(1) Question: What is the role of financial management in an

organization?

Answer : Financial management involves making careful choices in

the raising of finance ( the financing decision) and in the

investment of this finance in real assets (the capital budgeting

decision).

(2) Question: What are the objectives of shareholders?

Answer : The objectives of shareholders might be to obtain a

regular dividend, to make a capital gain and to maximize the

overall return on their investment.

(3) Question: How might the interests of a company's management be

aligned with those of the shareholders?

Answer : The interests of a company's management can be aligned

with those of the shareholders by linking the management's

remuneration to the performance of the company's shares. eg. A

share option scheme

(4) Question: What is the aim of the financial manager?

Answer : The aim of the financial manager is to increase the

market value of each shareholder's stake in the firm. This means

the financial manager aims to increase the company's share priceby undertaking profitable and appropriately financed investment

opportunities

(5) Question: What information does the capital market provide to

monitor the performance of the financial manager?

Answer : The capital market provides information about the

company's share price and the prices of the company's bonds.

These are indicators of the financial manager;s performance.



Part III: Figures

Figure 1- The role of the financial manager



Figure 2- Capital markets

sample teaching plan (principles of finance)

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