1-1 Dr. Mazharul Islam FINA 252 FINA 252 Basics of Financial Management INTRODUCTORY CLASS AUGUST 2015 Week 1 AUGUST 2015 Week 1

1-2 Lesson Plan u Introduction – ( Me and You)-15 minutes u Subject Overview – 25 minutes u Important Instructions- 10 Minutes u Discussion on Topic 1: The role of Financial Management. Dr. Mazharul Islam

1-3 Introduction u Me – Personal – Education – Professional u Now You – Background (Name, Home location) – Life goals – What do you want from this subject Dr. Mazharul Islam

1-4 My Background- Work z Associate Professor, KAU – (2012-current) z Senior Lecturer, Swinburne University of Technology, Australia ( , currently on leave) z Research Officer: RMIT University, Australia ( ) z Lecturer: Faculty of Business Administration, Universiti Tun Abdul Razak, ( ) z Research Assistant: National University of Malaysia and International Islamic University of Malaysia. z Graduate Research Assistant: National University of Malaysia, Malaysia, ( ) Dr. Mazharul Islam

1-5 Introduction u Now Your turn – Background (Name, Home location) – Life goals – What do you want from this subject? Dr. Mazharul Islam

1-6 Subject Overview - Objectives u To familiarize the student with the concept of finance and the role financial managers. u Recognize the ten different principles of financial management. Explain why the role of the financial manager today is so important. u To understand the concept of corporate world, time value of money, financial statements and cash flow, tradeoff between risk and return, difference between simple interest and compound interest, financial ratios and their limitations. u How to calculate both present value and future value, the value of bonds, and the major financial ratios. Dr. Mazharul Islam

1-7 Subject Overview-Learning Methods u Lectures (interactive) u Tutorials – Problem solving Group (in class and at home) Dr. Mazharul Islam

1-8 Subject Overview - Assessment u Individual assignments – Class Participation Activities (10%) – 2 Quizzes (15%) (This exam will cover chapter 1 and 2) – Mid-term Exam (25%) (This exam will cover chapter 3 and 4) – Final exam (40%) (This exam will cover chapter 5, 6, 7, 8, and 16) u Group assignments – Homework (10%) Total = 100% Dr. Mazharul Islam

1-9 Subject Overview – Course Materials u Recommended textbook Ross/ Westerfield/ Jordan (2010), Fundamentals of Corporate Finance, 9 th Edition, McGraw-Hill/ Irwin, NY, USA. u Other References; (Journals, Reports, Websites, E. Library…etc.) I may ask students to get information and/or data from the internet, in some suitable subjects. This will be part of evaluating the student performance. u Lecture slides Dr. Mazharul Islam

1-10 Chapter 1 The Role of Financial Management Dr. Mazharul Islam

1-11 Chapter Objectives u What is Financial Management? u What are the Decisions that Financial Manager must be Concern? u The Goal of the Firm. u Organization of the Financial Management Function. u Understand the agency problems. Dr. Mazharul Islam

1-12 What is Financial Management? Financial Management means planning, organizing, directing and controlling the financial activities of the organization. It refers the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. Dr. Mazharul Islam

1-13 Investment Decisions u What is the optimal firm size? u What specific assets should be acquired? u What assets (if any) should be reduced or eliminated? Most important of the three decisions. Dr. Mazharul Islam

1-14 Financing Decisions u What is the best type of financing? u What is the best financing mix? u What is the best dividend policy? u How will the funds be physically acquired? Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). Dr. Mazharul Islam

1-15 Asset Management Decisions u How do we manage existing assets efficiently? u Financial Manager has varying degrees of operating responsibility over assets. u Greater emphasis on current asset management than fixed asset management. Dr. Mazharul Islam

1-16 Interrelationship of the decisions made by a Financial Manager

1-17 What is the Goal of the Firm? (General Goals) Dr. Mazharul Islam u Survival u Avoid financial distress and bankruptcy u Beat the competition u Maximize sales or market share u Minimize costs u Maximize profits u Maintain steady earnings growth.

1-18 Shortcomings of these General Goals u These goals are either associated with increasing profitability or reducing risk.  Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.).  Does not specify timing or duration of expected returns.  Calls for a zero payout dividend policy.  They are not consistent with the long-term interests of shareholders. Problems Dr. Mazharul Islam So it is necessary to find a goal that can encompass both profitability and risk.

1-19 The Real Goal of the Firm Maximization of Shareholder Wealth! Shareholders’ wealth can be measured as the current value per share of existing shares. Dr. Mazharul Islam

1-20 Strengths of Shareholder Wealth Maximization current and future profits and EPSthe timing, duration, and risk of profits and EPS dividend policy u Takes account of: current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors. share price u Thus, share price serves as a barometer for business performance. Dr. Mazharul Islam

1-21 The Modern Organization There exists a SEPARATION between owners and managers. Modern Organization ShareholdersManagement Dr. Mazharul Islam

1-22 Role of Management agent u An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf. agent Management acts as an agent for the owners (shareholders) of the firm. Dr. Mazharul Islam

1-23 Agency Theory u Agency Theory u Agency Theory is a branch of economics relating to the behavior of principals and their agents. agency theory u Jensen and Meckling developed a theory of the firm based on agency theory. Dr. Mazharul Islam

1-24 Agency Theory stock options, perquisites, bonuses u Incentives include stock options, perquisites, and bonuses. incentives monitor u Principals must provide incentives so that management acts in the principals’ best interests and then monitor results. Dr. Mazharul Islam

1-25 Social Responsibility socially responsible u Wealth maximization does not preclude the firm from being socially responsible. u Assume we view the firm as producing both private and social goods. shareholder wealth maximization u Then shareholder wealth maximization remains the appropriate goal in governing the firm. Dr. Mazharul Islam

1-26 Organization of the Financial Management Function Board of Directors President (Chief Executive Officer) Vice President Operations Vice President Marketing Vice President Finance Dr. Mazharul Islam

1-27 Treasurer Capital Budgeting Cash Management Credit Management Dividend Disbursement Fin Analysis/Planning Pension Management Insurance/Risk Mngmt Tax Analysis/Planning Organization of the Financial Management Function Vice President of Finance Controller Cost Accounting Cost Management Data Processing General Ledger Government Reporting Internal Control Preparing Fin Stmts Preparing Budgets Preparing Forecasts Dr. Mazharul Islam