Introduction to

financial management
Chapter 1

Key concepts and skills

Have a good understanding of the:
basic types of financial management
decisions and the role of the financial
manager
goal of financial management
financial implications of the different
forms of business organisation
conflicts of interest that can arise
between managers and owners
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Chapter outline
Finance: A quick look
Business finance and the financial
manager
Forms of business organisation
The goal of financial management
The agency problem and control of the
corporation
Financial markets and the corporation
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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The four basic areas of

finance
1. Corporate finance or business
finance
2. Investments
3. Financial institutions
4. International finance

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Investments
Working with financial assets such
as shares and bonds
Value of financial assets, risk
versus return and asset allocation
Job opportunities
Stockbroker
Financial advisor
Portfolio manager
Security analyst
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Financial institutions
Companies that specialise in
financial matters
Bankscommercial and investment,
credit unions, savings and loans
Insurance companies
Brokerage firms

Job opportunities
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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International finance
This is an area of specialisation within
one of the areas discussed so far.
Involves international aspects of
corporate finance or investments or
financial institutions.
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 you would benefit from
fluency in a foreign language.
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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, university
planning, day-to-day cash flow management
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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 expenditure
and financial planning
Accountant: oversees taxes, cost
accounting, financial accounting and data
processing
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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A simplified
organisational chart
Figure 1.1

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
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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?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

1-12

Forms of business
organisations
Three major forms in Australia and
New Zealand
1. Sole proprietorship
2. Partnership
General
Limited

3. Corporation

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

1-13

Sole proprietorship

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

1-14

Partnership

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Corporation

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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International corporate
forms
Joint stock companies
Public limited companies
Limited liability companies
All share:
public ownership
limited liability
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Goal of financial
management
What should be the goal of a
corporation?
Maximise profit?
Minimise costs?
Maximise market share?
Maximise the current value per share
of the companys existing stock?
Maximise the market value of the
existing owners equity?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

1-18

The agency problem

Agency relationship
Principal hires an agent to represent
their interests.
Shareholders (principals) hire managers
(agents) to run the company.

Agency problem
Conflict of interest between principal
and agent

Management goals and agency costs

Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

1-19

Do managers act in
shareholders interests?
Managerial compensation
Incentives can be used to align
management and shareholder interests.
The incentives need to be structured
carefully to make sure that they achieve
their goals.

Corporate control
The threat of a takeover may result in
better management.

Other stakeholders
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

1-20

Example: Work the

Web
The Internet provides a wealth of
information about individual
companies.
<http://au.finance.yahoo.com/> is
an excellent website.

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Cash flows between the firm

and the financial markets
Figure 1.2

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Financial markets
Cash flows to the firm
Primary vs secondary markets
Dealer vs auction markets
Listed vs private companies
Australian Securities Exchange (ASX)

Copyright 2011 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Quick quiz
What are the four basic areas of
finance?
What are the three types of financial
management decisions and what
questions are they designed to answer?
What are the three major forms of
business organisation?
What is the goal of financial
management?
What are agency problems and why do
they occur within a corporation?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Chapter 1
END

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