Chapter 1

Introduction to Financial Management

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Key Concepts and Skills

Know the basic types of financial management
decisions and the role of the financial manager
Know the goal of financial management
Know the financial implications of the different forms of
business organization
Understand the conflicts of interest that can arise
between owners and managers

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Outline

Finance: A Quick Look

Business Finance and The Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation
Hong Kong Asian Financial Centre
Nobel Prize in Economics

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Facebook

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Up to now

Source: Yahoo!Finance
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Whats finance? (write down your own answer)

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Basic Areas Of Finance

Investments

Financial
institutions

Corporate
finance

International
finance

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Corporate finance
We will cover some in the rest of this course.
It is the task of providing the funds for a corporation's
activities.
Capital structure and dividend policy
Long-term financing (Initial public offering, long-term
debt etc.)
Short-term finance (cash management, credit
management etc.)
Mergers and acquisitions, financial distress etc.
MTR & KCRC

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Investments
Work with financial assets such as stocks and bonds
Hedge fund, private equity, real estates, etc.
Value of financial assets, risk versus return and asset
allocation
My research areas
Short selling
Index revisions
Corporate Name Changes

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Financial Institutions
Companies that specialize in financial matters
Banks commercial and investment (U.S. history),
credit unions, savings and loans
Insurance companies
Brokerage firms

Citigroup, Pingan Insurance/Shenzhen Dev bank

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US Investment Bank History

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International Finance
This is an area of specialization among all of the areas
discussed so far
It may allow you to work in other countries or at least
travel on a regular basis
Need to be familiar with exchange rates and political risk
Need to understand the customs of other countries and
speaking a foreign language fluently is also helpful
I will teach FIN3240 Multinational Finance in the Spring
semester.

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Job Opportunities

My friends in the industry: i-Bank, Hedge fund, Com bank,

Brokerage
Stories after the 2008 crisis
Image of the industry, Philanthropy

Financial
planners
Investment
Banks

Real Estate

Insurance
Corporate
Finance

Commercial
Banks
Money
Manager

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Credit Analyst, Loan Officer, Branch

Commercial Banks (CB)
provide banking services to individuals, Manager, Trust Officer, Mortgage
Banker
small businesses and large
organizations.

Corporate Finance (CF)

professionals work for a company to
help it find money to run the business,
grow the business, make acquisitions,
plan for it's financial future and
manage cash on hand.

Treasurer, Financial Analyst, Credit

Manager, Cash Manager, Benefits
Officer, Controller, Investor Relations
Officer

Financial Planners (FP)

help individuals plan their financial futures. How are you going to cover your
retirement needs? What do you have to do today to put your children through
college? Most planners go solo or work within smaller practices.
Source: http://cob.sfsu.edu/finance/resources_paths.cfm

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Insurance (IN)
help individuals and businesess manage risk
to protect themselves from catastrophic
losses and to anticipate potential risk
problems.

Actuary, Agent Broker, Claims Adjuster,

Service Representatives, Loss Control
Specialist, Underwriter, Risk Manager

Investment Banks (IB)

help companies and governments issue
securities, help investors purchase securities,
manage financial assets, trade securities and
provide financial advice.

Corporate Finance, Project Finance, Mergers

& Acquisitions, Structured Finance Trading
Derivatives Advisory, Equity and Fixed
Income Research International
Sales/Emerging Markets, Public Finance
Retail Brokerage Institutional Sales Ratings
Analyst

Money Managers (MM)

hold stocks and bonds for institutional
clients and are on the buy side of
Wall Street.

Portfolio Manager, Investment

Advisory, Portfolio MarketingMutual Fund Analyst, Hedge
Fund Trader

Real Estate (RE)

includes title insurance, construction,
mortgage banking, property
management, appraisals, brokerage
and leasing, real estate development.

Residential Agent/Broker,
Commercial Sales Appraisal,
Property Management,
Development & Construction
Entrepreneur

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Why Study Finance?

Marketing
Budgets, marketing research, marketing financial
products
Accounting
Dual accounting and finance function, preparation of
financial statements
Management
Strategic thinking, job performance and profitability
Personal finance
Budgeting, retirement planning, college planning, dayto-day cash flow issues
,

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Business Finance
Some important questions that are answered using
finance
What long-term investments should the firm take on?
Where will we get the long-term financing to pay for
the investment?
How will we manage the everyday financial activities
of the firm?

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Financial Manager
Financial managers try to answer some or all of these
questions
The top financial manager within a firm is usually the
Chief Financial Officer (CFO)
Treasurer oversees cash management, credit
management, capital expenditures and financial
planning
Controller overseas taxes, cost accounting, financial
accounting and data processing
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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?

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Forms of Business Organization

Sole proprietorship: is a business owned by one person.
Partnership is similar to a proprietorship, except for two
or more owners (partners)
Good: keeps all the profits
Bad: has unlimited liability
No distinction between personal and business income
The life of business is limited to the owners life span
The potential to raise the equity is limited
Unable to exploit new opportunities
Difficulty of transferring ownership
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Corporation
A corporation is a legal person separate and distinct
from its owners, and it has many of the rights, duties,
and privileges of an actual person.
Corporations can borrow money and own property, can
sue and be sued, and can enter into contracts etc.
Large
Corporations

Stockholders

Managers

elect

elect

Board of Directors
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Advantages of corporations
Ownership can be readily transferred
The life of the corporation is not limited
Corporation borrows money in its own name, i.e., the
stockholders have limited liability for corporate debts
Can sell new shares to raise capital
General Electric has 10 billion shares outstanding and
4 million shareholders
Disadvantages: Double taxation to the stockholders

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Goal of Financial Management

What should be the goal of a corporation?
1. Maximize profit?
2. Minimize costs?
3. Maximize market share?
4. Maximize the current value of the companys stock?
Does this mean we should do anything and everything to
maximize owner wealth?
Social responsibilities

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Organization

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Cheung Kong
( http://www.ckh.com.hk/eng/index.htm )
Source: Annual Report 2009

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Cash flow

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The Agency Problem ()

Agency relationship
Principal hires an agent to represent their interest
Stockholders (principals) hire managers (agents) to
run the company
Agency problem
Conflict of interest between principal and agent
Management goals and agency costs

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Managing Managers
Managerial compensation
Incentives can be used to align management and
stockholder interests
The incentives need to be structured carefully to
make sure that they achieve their goal
Corporate control
The threat of a takeover may result in better
management
Other stakeholders
Media, regulator, individual

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Hostile takeover
A bidder makes a tender offer to the dispersed
shareholders of the target firm,
If they accept this offer, acquires control of the target firm
and so can replace, or at least control, the management.
Takeovers typically increase the combined value of the
target and acquired firm (AT>A+T), indicating that profits
are expected to increase afterwards.

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Hostile Takeover Methods

Tender offer
A public bid for a large
chunk of the targets
stock at a fixed price.
The offer has a time limit,
with other provisions.

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Proxy fight
To convince the
shareholders to vote out
current management or
the current board of
directors in favor of a tem
that will approve the
takeover.

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Effectiveness of takeover
Takeovers are sufficiently expensive that only major
performance failures are likely to be addressed.
Acquisitions can increase agency costs when bidding
management overpay for acquisitions that bring them
private benefits of control. (Richard Li acquires HKT)
Takeovers requires a liquid capital market, which give
bidders access to vast amounts of capital on short
notice.
Hostile takeovers are politically an extremely vulnerable
mechanism, since they are opposed by the managerial
lobbies.
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Example: Microsoft vs Yahoo in 2008.2

Microsoft wants to buy Yahoo.
If Yahoo owns 30% of their stock with the other 70%
being owned by individuals or institutions.
Microsoft can attempt a hostile takeover by buying stock
from all the individuals until they own more than 30% of
Yahoo stock.
Microsoft first offered $44.6 billion which Yahoo has not
accepted. The deadline has passed.
Next step: proxy fight.
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What options do they have?

Yahoo
Buying back their own
stocks.
A provision in a CEOs
contract.
Staggered board of
directors drags out the
takeover process.
Issue dual-class stock.

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Microsoft
Keep the takeover in
news and publicize this
merger as much as
possible.
Proxy fight.

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Another proxy fight example

H&Ps takeover of Compaq in 2002.
The deal was valued at $25 billion, but H&P reported spent
huge sums on advertising to sway shareholders.
Eventually about 51% of shareholders voted in favor of the
merger.

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David Webb

http://webb-site.com/
http://webb-site.com/articles/pick2009.asp

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Hong Kong Asian Financial Centre

Monetary / HK$ pegged with US$
Financial Services and the Treasury Bureau
http://www.fstb.gov.hk/eng/sfst/main.html
SFC http://www.sfc.hk/sfc/html/TC/
HKMA http://www.info.gov.hk/hkma/index.htm
Banking http://www.hkab.org.hk
Equity market http://www.hkex.com.hk
Professional / Education http://www.hksi.org/

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Financial Center
Hong Kong vs New York, London, Tokyo, Shanghai,
Singapore

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Nobel Prize winners & Finance

1990

1997

2013

Markowitz:
Portfolio selection (1952)
Miller:
MM theory (1958)
Sharpe:
CAPM (1964)

Black-Scholes model (1973)

Fama:
Efficiency market hypothesis (1970)
Three-factor model (1993)
Shiller:
Behavioral finance (1981)

http://www.nobelprize.org/

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