ACST101 Week 1

Introduction

Welcome to ACST101
Associate Professor Kathy Walsh
Course related questions: iLearn (peer to
peer)
Confidential questions: acst101@mq.edu.au
Consultation: See iLearn
Teaching assistant: Veronica Chen

ACST101 Description
This unit provides an introduction to the pricing of financial instruments and
the functions of the Australian financial system. Students apply mathematical
concepts in valuing a range of financial assets including loans, bonds,
shares and investments. They also increase their financial literacy by
learning about financial institutions, financial markets, risks and regulation.
Spreadsheet skills are introduced throughout the unit. A background of HSC
Mathematics or equivalent numerical competency is assumed. Students who
have not studied the necessary mathematics are advised to complete
Mathematics 123 (MATH123) before enrolling in ACST101. The concepts
developed in this unit are required in subsequent actuarial studies and
finance units. The unit also provides a practical introduction to finance for
students not planning to continue with study in the area.

ACST101
Kickstart getting ready for the semester
Ilearn - Course outline and Assessment
Redesigned course: Significantly different from
2014
Tutorials
PAL

In class polling
Go to b.socrative.com (or download the student
app)
You will see a welcome screen
Enter the room number: ACST101
Join room room sized is limited
Enter your name (anonymous)
You will have an opportunity to answer questions
in real time

iLearn: Maths preparation test

ACST101 Learning Outcomes

Identify and explain fundamental concepts of finance
Apply fundamental concepts of finance to current affairs
and real life situations
Calculate time value of money problems
Evaluate financial information using a spreadsheet
Explain the relationship between risk and return
Identify the risks and major functions and regulation of
financial markets

Assessment
Name
Multiple choice
quizzes
Class Tests
Final Examination

Weighting Due
20%

11:59pm Monday Weeks 4 to 12

30%

During lectures in Weeks 5 and 10

50%

University Examination Period

Lecture 1: Learning Objectives

1.
2.
3.
4.
5.
6.
7.

Identify the key financial decisions facing the financial manager

of any company
Identify the basic forms of business organisation used in
Australia, and review their respective strengths and weaknesses
Describe the typical organisation of the financial function in a
large company
Explain why maximising the current value of the companys
shares is the appropriate goal for management
Discuss how agency conflicts affect the goal of maximising
shareholder value
Explain why ethics is an appropriate topic in the study of
corporate finance.
Identify and use basic excel functions

The objective of managers

Should be to maximise the wealth of the
shareholders
A company also has other stakeholders that
rely on it, for example:

Managers: salaries, bonuses

Employees: wages
Creditors: interest & principle
Suppliers: pay for goods/services
Government: tax

The role of the financial manager

A firm generates cash flows by selling the
goods and services produced by its
productive assets and human capital
When the cash flows generated from the
productive asset exceed the cash outflows
(such as operating cash flows) the remaining
cash is called residual cash flows
The company can choose to pay any profit to
the owners as a cash dividend, or reinvest
the cash in the business

Cash flow diagram

Basic Sources of Funds

Make a profit by selling a product for more
than it costs to produce.
Borrow money bank loans, bonds (debt
funding)
Sell part of the company in the form of
shares to investors (equity funding)

The role of the financial manager

It is all about cash flows:

A company is unprofitable when it fails to

generate sufficient cash inflows to pay operating

expenses, creditors and tax.
Firms that are unprofitable over time will be
forced into bankruptcy by their creditors
In bankruptcy, the company will either be
reorganised, or the companys assets will be
liquidated

The role of the financial manager

Three fundamental decisions in financial
management:
1. The capital budgeting decision:
Which productive assets should the firm buy?
2. The financing decision:
How should the firm finance or pay for assets?
3. Working capital management decisions:
How should day-to-day financial matters be managed?

Legal forms of business organisation

Sole Trader:
Is the simplest type of business to start and the least
regulated
Keeps all the profits from the business
Doesnt share decision making
All company income is taxed as personal income
Has unlimited liability for all business debts and other
obligations of the company

Legal forms of business organisation

Partnership:
Has the same basic advantages and disadvantages
as a sole trader
Has access to more capital, knowledge, experience
and skills
When a transfer of ownership takes place the
partnership is terminated, and a new partnership is
formed
The problem of unlimited liability can be avoided in a
limited partnership

Legal forms of business organisation

Company:
Is a legal entity. In a legal sense, it is a person
distinct from its owners
The owners of a company are its shareholders
A major advantage of the company form of
business is that shareholders have limited liability
Heavily regulated by the Australian Securities and
Investments Commission (ASIC) and corporate
regulations (Corporations Act 2001)

The goal of the company

What should management
maximise?
Minimising risk or maximising profits

without regard to the other is not a

successful strategy

The goal of the company

Why not maximise profits?
Under creative accounting, a decision that increases

profits under one set of accounting rules can reduce it

under another.
Accounting profits are not necessarily the same as cash
flows
Profit maximisation does not tell us the timing cash flows
are to be received
Profit maximisation ignores the uncertainty or risk
associated with cash flows

The goal of the company

Maximise the value of the companys
share price
When analysts and investors determine the

value of a companys share price, they consider

The size of the expected cash flows
The timing of the cash flows
The riskiness of the cash flows.

Major factors affecting share prices

The goal of the company

Can management decisions affect share
prices?
YES!!!
There are many factors that can affect this:
Short term
Advertising campaign

Long term
Investing in new product lines

Agency conflicts:
Ownership and control
For large companies, the ownership of the firm

is spread over a number of shareholders and

the companys owners may effectively have little
control over management
Management may make decisions that benefit
their self-interest rather than those of the
shareholders

Agency conflicts:
Agency relationships
An agency relationships arises whenever one

party, called the principal, hires another party,

called the agent
Agents have a fiduciary duty to shareholders to
put shareholders interests above their own

Agency conflicts:
Do managers really want to maximize the
share price?
Shareholders own the company, but managers

control the money and have the opportunity to

use it for their own benefit
Agency Costs
The costs of the conflict of interest between the
companys owners and its management

Agency conflicts:
Aligning the interests of management
and shareholders
Board of directors
Management Compensation
Managerial labour market
The takeover market
An Independent Board of Directors

The importance of ethics

in business
The law is not enough
Ethicists argue that laws and

market forces are not enough

Serious Consequences
Legal cost of ethical mistakes can

be extremely high

Excel skills
Gantt Chart
plan out a project or a series of tasks

Excel Skills
cell formatting
insert - columns and rows
relative references
printing - scaling, portrait, landscape
Freeze panes

Summary
Identify the key financial decisions facing the
financial manager of any company
Strengths, weaknesses of the basic forms of
business organisation
Corporate goal should be about maximising the
current value of the company's share
Presence of agency conflicts affect the goal of
maximising shareholder value
Ethics are important in the study of corporate
finance
Excel skills

Coming up
Lecture: Time Value of Money
If maths is not your first language please do
some revision before next week.

Weekly compulsory online quizzes (quiz

one can be used as a diagnostic)
In class test in week 5