Summary FIN2601_ STUDY NOTES.

FIN2601_ STUDY NOTES. FIN2601 - Financial Management. Define the functions of a finance manager A financial manager actively manages the financial affairs of any type of business, whether financial or nonfinancial, private or public, large or small, profit-seeking or not-for-profit. Discuss the legal forms of business organisation Sole Proprietorships  Owned by one person for own profit.  Has unlimited liability Partnerships  Owned by two or more people and operated for profit  Established by a written contract known as articles of partnership  All partners have unlimited liability Corporations  An artificial being created by law.  Called a ―legal entity,‖ a corporation has the powers of an individual.  The owners of a corporation are its stockholders Other Limited Liability Organisations  The most popular are limited partnership (LPs),S Corporations (S corps),limited liability corporations (LLCs), and limited liability partnerships (LLPs).  Owners enjoy limited liability, and they typically have fewer than 100 owners. Describe the managerial finance function and its relationship to economics and accounting The size and importance of the managerial finance function depend on the size of the firm. In small firms, the finance function is generally performed by the accounting department. As a firm grows, the finance function typically evolves into a separate department linked directly to the company president or CEO through the chief financial officer (CFO). Reporting to the CFO are the treasurer and the controller. Treasurer (the chief financial manager) Is commonly responsible for handling financial activities, such as: ‒ financial planning and fund raising, FIN2601 NOTES / / Page 2 ‒ making capital expenditure decisions, ‒ managing cash, ‒ managing credit activities, ‒ managing the pension fund, and ‒ Managing foreign exchange. External focus Controller (the chief accountant) Typically handles the accounting activities, such as ‒ corporate accounting, ‒ tax management, ‒ financial accounting and ‒ Cost accounting. Internal focus Relationship to economics The primary economic principle used in managerial finance is marginal cost-benefit analysis, the principle that financial decisions should be made and actions taken only when the added benefits exceed the added costs. Relationship to accounting There are two basic differences between finance and accounting: ‒ Emphasis on cash flow ‒ Decision making. Emphasis on cash flows ‒ The accountant operates on an accrual basis ‒ The financial manager, operates on a cash basis Decision making ‒ Accountants collect and present financial data. ‒ Financial managers evaluate the accounting statements, develop additional data, and make decisions on the basis of their assessment of the associated return and risks. Explain the goal of the enterprise and finance-related concepts such ascorporate governance and the agency problem MAXIMISE PROFIT  Corporations commonly measure profits in terms of earnings per share (EPS).  Cash flows available to shareholders will be a priority for a firm with a goal of profit maximisation. FIN2601 NOTES / / Page 3 MAXIMISE SHAREHOLDER WEALTH  The goal of the firm is to maximise the wealth of the owners as evidenced by stock price.  Financial managers should accept only those actions that are expected to increase stock price. What about stakeholders?  Stakeholders are groups such as employees, customers, suppliers, creditors, owners and others who have a direct economic link to the firm. CORPORATE GOVERNANCE  The system used to direct and control a corporation by defining the rights and responsibilities of the key corporate participants. Individual versus institutional investors  Both individual and institutional investors hold the stock of most companies, but the institutional investors tend to have much greater influence on corporate governance than individuals. THE AGENCY ISSUE An agency problem results when managers, as agents for owners, place personal goals ahead of corporate goals. There is a great likelihood that manager may place personal goals ahead of corporate goals. Two factors – market forces and agency costs – serve to prevent or minimise agency problems. Market forces – major shareholders, particularly institutional investors exert pressure on management to perform, by communicating their concerns to the firm‘s board. Agency costs–These are the costs of maintaining a corporate governance structure that monitor managers‘ actions and provides incentives for them to act in the best interest of owners. For an example stock options and performance plans. Financial institutions and markets FINANCIAL INSTITUTIONS  Financial institutions serve as intermediaries by channelling into loans or investments the savings of individuals, businesses, and governments.  They actively participate in the financial markets as both suppliers and demanders of funds. FIN2601 NOTES / / Page 4 FINANCIAL MARKETS  Financial markets are forums in which suppliers of funds and demanders of funds can transact directly. Two ways of raising money  Private placement involves the sale of a new security issue, typically bonds or preferred stock, directly to an investor or group of investors.  Public offering is the nonexclusive sale of either bonds or stocks to the general public. Securities are initially issued in the primary market then they go into secondary market. Primary market.