session 01 introduction to management accounting...• interaction with the financial markets •...
TRANSCRIPT
Session 01
Introduction to Financial Management
Programme : Executive Diploma in Accounting, Business & Strategy
(EDABS 2017)
Course : Corporate Financial Management (EDABS 202)
Lecturer : Mr. Asanka Ranasinghe
MBA (Colombo), BBA (Finance), ACMA, CGMA
Contact : [email protected]
Learning Outcomes
• Describe alternative views on the purpose of the business an
show the importance to any organization of clarity on thispoint;
• Describe the impact of the divorce of corporate ownership from
day-to-day managerial control;
• Explain the role of the financial manager;
• Detail the value of financial intermediaries;
• Show an appreciation of the function of the major financial
institutions and markets.
Asanka Ranasinghe MBA (Colombo), BBA (Finance), ACMA, CGMA2
What is Finance
• Finance can be defined as the science and art of managing
money.
• At the personal level, finance is concerned with individuals’
decisions about how much of their earnings they spend, how
much they save, and how they invest their savings.
• In a business context, finance involves the same types of
decisions: how firms raise money from investors, how firms
invest money in an attempt to earn a profit, and how they
decide whether to reinvest profits in the business or distribute
them back to investors.Asanka Ranasinghe MBA (Colombo), BBA (Finance), ACMA, CGMA
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Financial Management Decisions
• Capital budgeting
– What long-term investments or projects should the
business take on?
• Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management
– How do we manage the day-to-day finances of the firm?
Asanka Ranasinghe MBA (Colombo), BBA (Finance), ACMA, CGMA4
Introduction
• ‘In whose interests is the firm run?’
Asanka Ranasinghe MBA (Colombo), BBA (Finance), ACMA, CGMA5
FIRM
Creditors
Employees
Customers
Society
Shareholders
Managers
Possible Objectives of Firms
• Achieving a target market share
• Keeping employee agitation to a minimum
• Survival
• Creating an ever-expanding empire
• Maximisation of profit
• Maximisation of long-term shareholder wealth
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Shareholder Wealth
Dividends
• Shareholder Return
Capital gains
– Maximizes the net present value of a course of action to
shareholders.
– Accounts for the timing and risk of the expected benefits.
– Benefits are measured in terms of cash flows.
Fundamental objective—maximize the market value of the firm’s shares.
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Shareholder Wealth vs Profits
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Maximizing the Rupee Income of Firm
– Resources are efficiently utilized
– Appropriate measure of firm performance
– Serves interest of society also
• It Ignores the Timing of Returns
• It Ignores Risk
• In new business environment profit maximization is
regarded as
– Unrealistic
– Difficult
– Inappropriate
– Immoral
Corporate Governance
• A divorce, of ownership and control
Modern corporation has a very diffuse and fragmented set of shareholders and control often lies in the
hands of directors
• Principal–Agent problem
The separation of ownership and control raises worries that the management team may pursue
objectives attractive to them, but which are not necessarily beneficial to the shareholders
• Agency Costs
- Monitor managers’ behavior
- Create incentive schemes and controls for managers to encourage the pursuit of shareholders’ wealth
maximisation
• Corporate governance
The system by which companies are managed and controlled
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Role of a Financial Manager
• Interaction with the financial markets
• Investment
• Treasury management
• Risk management
• Strategy and value based management
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Financial System
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Financial System
Financial Institutions
Financial Markets
Financial Instruments
• Banks
• Finance
Companies
• Insurance Firms
• Pension Funds
• Shares
• Bonds
• Mortgages
• Bills of Exchange
• Stock Market
• Money Market
• Forex Market
• Government
Securities Market
Role of the Financial System
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Role of the Financial Intermediaries
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1. Risk reduction – By lending to a wide variety of individuals and businesses, FI’s
reduce the risk of a single default
1. Aggregation – By pooling many small deposits, FI’s are able to make much larger
advances than would be possible for most individuals
1. Maturity transformation – Most borrowers wish to borrow in the long term
whilst savers are unwilling to lock up their money for the long term. FI’s, by
developing a floating pool of deposits are able to satisfy both the needs of
lenders and borrowers
1. Financial intermediation – FI’s bring together lenders and borrowers through a
process known as financial intermediation
Time Value of Money
“A rupee in hand today is worth more than a rupee promised
at sometime in future”
• Impatience to consume
• Inflation
• Risk
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Simple Interest
Interest paid only on the initial principal
Example: Rs. 1,000 is invested to earn 6% per year, simple
interest.
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-Rs. 1,000 Rs. 60Rs. 60 Rs. 60
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Compound Interest
Interest paid on both the initial principal and on interest that
has been paid & reinvested.
Example: Rs. 1,000 is invested to earn 6% per year,
compounded annually.
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-Rs. 1,000 Rs. 63.60Rs. 60 Rs. 67.42
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Future Value
The value of an investment at a point in the future, given
some rate of return.
FV = future value
PV = present value
i = interest rate
n = number of periods
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Future ValueSuppose a stock currently pays a dividend of $1.10, which is
expected to grow at 40% per year for the next five years.
What will the dividend be in five years?
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Present Value
What a future sum of money is worth today, given a particular
interest (or discount) rate.
FV = future value
PV = present value
i = interest (or discount) rate
n = number of periods
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Present Value
How much would an investor have to set aside today in order to
have Rs. 20,000 five years from now if the current rate is 15%?
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Annuities
The payment or receipt of an equal cash flow per period, for a
specified number of periods.
Examples:
Student Loan Payments
Car Loan Payments
Insurance Premiums
Mortgage Payments
Retirement Savings
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Annuities• Ordinary annuity: cash flows occur at the end of each period
• Annuity Due: cash flows occur at the beginning of each period
• Future value of an annuity
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Annuities
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What is the future value of a three year ordinary annuity with a cash
flow of Rs.100 per year, earning 6%?
What is the future value of a three year annuity due with a cash flow of
Rs.100 per year, earning 6%?
Annuities
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The present value of an annuity is the sum of the present values of all
individual cash flows.
Perpetuities
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Financial instrument that pays an equal cash flow per period into the
indefinite future (i.e. to infinity).
Frequent Compounding
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Effective Annual Interest Rate (AER)
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The actual rate of interest earned (paid) after adjusting the nominal
rate for factors such as the number of compounding periods per year
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