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FM chap 1.pptx
1. Prof. Dr. Salman Masood Sheikh
M.Com, MBA, M.Phil, PhD, FCMA, FPFA, ACPA, AM-IFMP,
AITM, BAFA (UK), AIFA (UK), MIPA (AUS), EOMS (US)
PhD Islamic Banking and Finance
Fellow Cost and Management Accountant (FCMA),
Fellow Public Finance Accountant (FPFA),
Associate Certified Public Accountant (ACPA),
Associate of Institute of Financial Markets (AM-IFMP),
Associate of Institute of Taxation Management (AITM),
Associate Member – BAFA (UK)
Associate Financial Accountant – (UK)
Associate Public Accountant – (Australia)
Certified EOMS Professional (USA)
Professor / Dean, Faculty of Economics and Commerce
Superior University, Lahore
Professional Experience: 8 Years as Manager Accounts and Finance
Academic Experience: 20 Years (Teaching Finance and Accounts)
Contact # 0300-6337009
E-mail ID: dean.fec@superior.edu.pk
Introduction
of
Resource
Person
3. Key Concepts and Skills
▶ Know the basic types of financial management decisions and the
role of the financial manager
▶ Know the financial implications of the different forms of business
organization
▶ Know the goal of financial management
▶ Understand the conflicts of interest that can arise between owners
and managers
▶ Understand the various types of financial markets
4. Chapter Outline
▶ Corporate 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
6. Finance?
▶ A branch of economics concerned with resource allocation as well as
resource management, acquisition and investment. Simply, finance
deals with matters related to money and the markets.
▶ A foremost concept in finance concerns how individuals interact in
order to allocate resources (capital) and/or shift consumption across
time by borrowing or investing.
7. Financial Manager
▶ 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 – oversees taxes, cost accounting, financial
accounting and data processing
8. Hypothetical Organization Chart
Cash Manager Credit Manager
Capital Expenditures Financial Planning
Treasurer
Tax Manager
Cost Accounting
Manager
Financial Accounting
Manager
Data Processing
Manager
Controller
Vice President and
Chief Financial Officer (CFO)
President and Chief
Operations Officer (COO)
Chairman of the Board and
Chief Executive Officer (CEO)
Board of Directors
9. Duties of Finance Manager
▶ 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?
10. Corporate Finance 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?
11. Forms of Business Organization
▶ Three major forms of Business Organization
▶ Sole proprietorship
▶ Partnership
▪ General
▪ Limited
▶ Corporation / Company
12. Sole Proprietorship
❑ Advantages
❖ Easiest to start
❖ Least regulated
❖ Single owner keeps all the
profits
❖ Taxed once as personal
income
❑ Disadvantages
❖ Limited to life of owner
❖ Equity capital limited to
owner’s personal wealth
❖ Unlimited liability
❖ Difficult to sell ownership
interest
13. Partnership
Advantages
❖ Two or more owners
❖ More capital available
❖ Relatively easy to start
❖ Income taxed once as
personal income
Disadvantages
❖ Unlimited liability
❖ Partnership dissolves when
one partner dies or wishes
to sell
❖ Difficult to transfer
ownership
14. Corporate (Company)
❑ Corporations are the most common form of business organization, and
one which is chartered by a state and given many legal rights as an
entity separate from its owners. This form of business is characterized
by the limited liability of its owners, the issuance of shares of easily
transferable stock, and existence as a going concern. The process of
becoming a corporation, called incorporation, gives the company
separate legal standing from its owners and protects those owners from
being personally liable in the event that the company is sued (a
condition known as limited liability).
❑ A company is defined as an artificial judicial person, having a perpetual
secession and a common seal with the limited liability upto the shares of
the owners invested in amount.
15. Company
Advantages
❖ Limited liability
❖ Unlimited life
❖ Separation of ownership and
management
❖ Transfer of ownership is easy
❖ Easier to raise capital
Disadvantages
❖ Separation of ownership and
management
❖ Double taxation (income
taxed at the corporate rate
and then dividends taxed at
the personal rate)
16. Most Important Goal Of Company
What should be the goal of a corporation?
▪ Survival?
▪ Avoid Financial distress and Bankruptcy?
▪ Maximize profit?
▪ Minimize costs?
▪ Maximize market share?
▪ Maximize the current value of the company’s stock?
(Maximization of Shareholder’s Wealth)
17. Financial Goals of the Corporation
▪ The primary financial goal is shareholder wealth maximization —
a function of future cash flow and risk.
▪ In reality, this is maximizing intrinsic value
▪ For now we will assume that this is synonymous with
maximizing the market value, i.e., stock price maximization.
18. Market Vs. Intrinsic values
❑ Market values are what investors are willing to either buy
or sell an asset for, based on investors’ expectations of
future performance.
▪ Market values are very often publicly observed, e.g., the
transactions in the stock markets.
❑ In contrast, intrinsic values are usually considered as
private estimates of what something, e.g., a common
stock, is actually worth.
▪ Intrinsic value is not something that you can prove.
▪ If ten analysts are asked to value IBM stock, then there
will likely be ten different intrinsic value estimates!
19. The Agency Concept and Control
of Corporation
Agency Relationship
❑ Principal hires an agent to represent his/her interests
❑ Stockholders (principals) hire managers (agents) to run
the company
Agency Problem
❑ Conflict of interest between principal and agent
❑ For example: Investment with Increase in market share
and Risk
20. Agency Cost
❑ Cost of conflict of interest between stockholders and
management.
Types of Agency Cost
Direct
❑ Corporate Expenditure that benefits the Management but
costs the shareholders
❑ Expense that arise from the need to monitor
Management Actions
Indirect
❑ Lost Opportunity
Management Goals & Agency Cost
21. 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
❑ Hiring and firing of Managers through Elections
❑ The threat of a takeover may result in better management
Other Stakeholders
22. Code of Corporate Governance
By
Securities and Exchange Commission
of Pakistan (SECP)
