Lecture 1

Copyright 2011 Pearson Prentice Hall. All rights reserved.
Getting Started:
Principles of
Finance
Week 1
1-2
Slide Contents
Learning Objectives
Introduction
1.Finance: An Overview
2.Three Types o !usiness Organi"ations
#.The $oa% o the Financia% &anager
'.The Four !asic (rincip%es o Finance
)ey Ter*s
1-3
Introduction
$ive e+a*p%es o inancia% decisions aced
by corporations and individua%s.
1-4
What is Finance
Finance is the study o how peop%e and
businesses eva%uate invest*ents and raise
capita% to und the*.
1-!
"hree #uestions $ddressed %& the
Stud& of Finance:
1. ,hat %ong-ter* invest*ents shou%d the
ir* underta.e/ 0capital budgeting
decisions1
2. 2ow shou%d the ir* und these
invest*ents/ 0capital structure decisions1
#. 2ow can the ir* best *anage its cash
%ows as they arise in its day-to-day
operations/ 0working capital management
decisions1
1-'
Wh& Stud& Finance
)now%edge o inancia% too%s is critica% to
*a.ing good decisions in both proessiona%
wor%d and persona% %ives.
Finance is an integra% part o corporate
wor%d
3 2ow wi%% $&4s strategic decision to invest 56'7
*i%%ion to produce the 8hevy 9o%t re:uire the
e+pertise o dierent discip%ines within the
business schoo% such as *ar.eting;
*anage*ent; accounting; operations
*anage*ent; and inance/
1-(
Wh& Stud& Finance )cont*+
&any persona% decisions re:uire inancia%
.now%edge 0or e+a*p%e: buying a house;
p%anning or retire*ent; %easing a car1
1*2 ",-.. "/P.S
0F 12SI3.SS
0-G$3I4$"I03S
1-5
FINC-301, Chapter 1, Russel
1usiness 0rgani6ational For7s
1-18
Sole Proprietorship
It is a business owned by a sing%e individua%
that is entit%ed to a%% the ir*4s proits and is
responsib%e or a%% the ir*4s debt.
There is no separation between the business
and the owner when it co*es to debts or
being sued.
<o%e proprietorships are genera%%y inanced by
persona% %oans ro* a*i%y and riends and
business %oans ro* ban.s.
1-11
Sole Proprietorship )cont*+
Advantages:
3 =asy to start
3 >o need to consu%t others whi%e *a.ing decisions
3 Ta+ed at the persona% ta+ rate
?isadvantages:
3 (ersona%%y %iab%e or the business debts
3 8eases on the death o the proprietor
1-12
Partnership
A general partnership is an association
o two or *ore persons who co*e together
as co-owners or the purpose o operating
a business or proit.
There is no separation between the
partnership and the owners with respect to
debts or being sued.
1-13
Partnership )cont*+
Advantages:
3 @e%ative%y easy to start
3 Ta+ed at the persona% ta+ rate
3 Access to unds ro* *u%tip%e sources or partners
?isadvantages:
3 (artners joint%y share un%i*ited %iabi%ity
1-14
Partnership )cont*+
In li7ited partnerships; there are two
c%asses o partners: genera% and %i*ited.
The genera% partners runs the business
and ace un%i*ited %iabi%ity or the ir*4s
debts; whi%e the %i*ited partners are
on%y %iab%e on the a*ount invested.
One o the drawbac. o this or* is that
it is diicu%t to transer the ownership o
the genera% partner.
1-1!
Corporation
8orporation is Aan artiicia% being; invisib%e;
intangib%e; and e+isting on%y in the
conte*p%ation o the %aw.B
1-1'
Corporation )cont*+
8orporation can individua%%y sue and be
sued; purchase; se%% or own property; and
its personne% are subject to cri*ina%
punish*ent or cri*es co**itted in the
na*e o the corporation.
1-1(
Corporation )cont*+
8orporation is %ega%%y owned by its current
stoc.ho%ders.
The !oard o directors are e%ected by the
ir*4s shareho%ders. One responsibi%ity o
the board o directors is to appoint the
senior *anage*ent o the ir*.
1-19
Corporation )cont*+
Advantages
3 Liabi%ity o owners %i*ited to invested unds
3 Lie o corporation is not tied to the owner
3 =asier to transer ownership
3 =asier to raise 8apita%
?isadvantages
3 $reater regu%ation
3 ?oub%e ta+ation o dividends
1-15
,&%rid 0rgani6ations
These organi"ationa% or*s provide a cross
between a partnership and a corporation.
:i7ited lia%ilit& co7pan& 0LL81
co*bines the ta+ beneits o a partnership
0no doub%e ta+ation o earnings1 and
%i*ited %iabi%ity beneit o corporation 0the
owner4s %iabi%ity is %i*ited to what they
invest1.
1-28
,&%rid 0rgani6ations )cont*+
S-t&pe corporation provides %i*ited
%iabi%ity whi%e a%%owing the business owners
to be ta+ed as i they were a partnership 3
that is; distributions bac. to the owners
are not ta+ed twice as is the case with
dividends in the standard corporate or*.
1-21
1-22
,o; <oes Finance Fit into the Fir7=s
0rgani6ational Structure
In a corporation; the 8hie Financia% Oicer
08FO1 is responsib%e or *anaging the
ir*4s inancia% aairs.
Figure 1-2 shows how the inance unction
its into a ir*4s organi"ationa% chart.
1-23
1-24
:atest Issue on P:C in >ala&sia
1-2!
Issues in >ala&sia=s P:C
1*3 ",. G0$: 0F
",. FI3$3CI$:
>$3$G.-
1-2(
"he Goal of the Financial >anager
The goa% o the inancia% *anager *ust be

consistent with the *ission o the
corporation.
,hat is the genera%%y accepted *ission o

a corporation/
1-29
Corporate >ission
To maximize firm value shareholders

wealth (as measured by share prices)
1-25
Corporate >ission: $irasia 1erhad
1-38
Corporate >ission: >$S 1erhad
1-31
Face%ook >ission State7ent
Founded in 277';
Faceboo.4s *ission is to give peop%e the
power to share and *a.e the wor%d *ore
open and connected.
(eop%e use Faceboo. to stay connected
with riends and a*i%y; to discover what4s
going on in the wor%d; and to share and
e+press what *atters to the*.
1-32
Corporate >ission
,hi%e *anagers have to cater to a%% the
sta.eho%ders 0such as consu*ers; e*p%oyees;
supp%iers etc.1; they need to pay particu%ar
attention to the owners o the corporation i.e.
shareho%ders.
I *anagers ai% to pursue shareho%der wea%th
*a+i*i"ation; they wi%% %ose the support o
investors and %enders. The business *ay cease to
e+ist and u%ti*ate%y; the *anagers wi%% %ose their
jobsC
1-33
.thics in Finance
,hat do we *ean by =thics/
$ive e+a*p%es o recent inancia% scanda%s
and discuss what went wrong ro* an
ethica% perspective.
1-34
1-3!
.nron scandals
1-3'
.ffect of Stock Prices
1-3(
$genc& Considerations in Corporate
Finance
Agency re%ationship e+ists when one or
*ore persons 0.nown as the principa%1
contracts with one or *ore persons 0the
agent1 to *a.e decisions on their beha%.
In a corporation; the *anagers are the
agents and the stoc.ho%ders are the
principa%.
1-39
$genc& Considerations in Corporate
Finance )cont*+
$genc& pro%le7s arise when there is con%ict o
interest between the stoc.ho%ders and the
*anagers. <uch prob%e*s are %i.e%y to arise *ore
when the *anagers have %itt%e or no ownership in
the ir*.
=+a*p%es:
3 >ot pursuing ris.y project or ear o %osing jobs; stea%ing;
e+pensive per.s.
A%% e%se e:ua%; agency prob%e*s wi%% reduce the ir*
va%ue.
1-35
,o; to -educe $genc& Pro%le7s
1* >onitoring
0=+a*p%es: @eports; &eetings; Auditors; board o
directors; inancia% *ar.ets; ban.ers; credit agencies1
2* Co7pensation plans
0=+a*p%es: (eror*ance based bonus; sa%ary; stoc.
options; beneits1
3* 0thers
0=+a*p%es: Threat o being ired; Threat o ta.eovers;
<toc. *ar.et; regu%ations such as <OD1
The above wi%% he%p to reduce agency prob%e*sEcosts.

Lecture 1

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Lecture 1

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Copyright 2011 Pearson Prentice Hall. All rights reserved.

The goa% o the inancia% anager ust be

,hat is the genera%%y accepted *ission o

To maximize firm value shareholders

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