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  1. Unit 1 Introduction to Financial Management The role of a Financial Manager BSR2A/BLB2A Unit 1 - The role of a financial manager

  2. Learning Outcome • Demonstrate an ability to identify the basic types of financial management decisions and relate them to the role of the financial manager

  3. Assessment Standards 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 organisations • 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. The role of a Financial Manager Chapter Outline • Corporate Finance and the Financial Manager • Forms of Business Organisation • The Goal of Financial Management • The Agency Problem and Control of the Corporation • Financial Institutions, Financial Markets and the Company

  5. Corporate 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?

  6. 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) • - oversees cash management, credit management, capital expenditures and financial planning • - oversees taxes, cost accounting, financial accounting and data processing

  7. FIGURE 1.1: A SIMPLIFIED ORGANISATIONSAL CHART

  8. FINANCIAL MANAGEMENT DECISIONS • Capital budgeting: The process of planning and managing a firm’s long-term investments • - What long-term investments or projects should the business take on? • Capital structure: The mixture of debt and equity maintained by a firm • - How should we pay for our assets? • - Should we use debt or equity? • Working capital management: A firm’s short-term assets and liabilities • - How do we manage the day-to-day finances of the firm?

  9. FORMS OF BUSINESS ORGANISATIONS • Three major forms in South Africa • Sole proprietorship is a business owned by a single individual • Partnership a business formed by between two and twenty individuals or entities • Corporation is a business created as a distinct legal entity composed of one of more individuals or entities. Also known as a limited liability company

  10. 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 HOMEWORK • Tabulate the disadvantages and advantages of • partnerships and • companies

  11. GOAL OF A FINANCIAL MANAGER • What should be the goal of a corporation? • Maximise profit? • Minimise costs? • Maximise market share? • Maximise the current value of the company’s shares? • Does this mean we should do anything and everything to maximise owner wealth?

  12. THE AGENCY PROBLEM • Agency relationship • Principal hires an agent to represent their interest • Shareholders (principals) hire managers (agents) to run the company • Agency problem • Conflict of interest between principal and agent • Management goals and agency costs

  13. Managing Managers • 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 goal • Corporate control • The threat of a takeover may result in better management • Other stakeholders

  14. Financial Markets • Cash flows to the firm • Primary vs. secondary markets • Dealer vs. auction markets • JSE • NYSE

  15. FIGURE 1.2:CASHFLOWS BETWEEN FIRM AND FINANCIAL MARKETS

  16. CLASS EXERCISE • In partnerships, owners have unlimited liability and may have to cover debts of other less financially sound partners (True / False). • Which of the following legal forms of organisation is most expensive to organise? • A) Sole proprietorships. • B) Partnerships. • C) Corporations. • D) Limited partnership.

  17. CLASS EXERCISE • In partnerships, owners have unlimited liability and may have to cover debts of other less financially sound partners. • ANSWER: TRUE • Which of the following legal forms of organisation is most expensive to organise? • A) Sole proprietorships. • B) Partnerships. • C) Corporations. • D) Limited partnership.

  18. CLASS EXERCISE • When considering each financial decision alternative or possible action in terms of its impact on the share price of the company’s shares, financial managers should accept only those actions that are expected to increase the firm's profitability (True / False). • The profit maximisation goal ignores the timing of returns, does not directly consider cash flows, and ignores risk (True / False).

  19. CLASS EXERCISE • When considering each financial decision alternative or possible action in terms of its impact on the share price of the company’s shares, financial managers should accept only those actions that are expected to increase the firm's profitability (True / False). • Answer: FALSE • The profit maximisation goal ignores the timing of returns, does not directly consider cash flows, and ignores risk (True / False). • Answer: TRUE

  20. CLASS EXERCISE • The primary goal of the financial manager is • A) minimising risk. • B) maximising profit. • C) maximising wealth. • D) minimising return.

  21. CLASS EXERCISE • The primary goal of the financial manager is • A) minimising risk. • B) maximising profit. • C) maximising wealth. • D) minimising return.

  22. CLASS EXERCISE • What do you think happened to the share price of Apple when Steve Jobs, the CEO of Apple, passed away? • It would decrease because of the perceived increased risk because of lack of near-term leadership. • It would increase because of the perceived increased risk because of lack of near-term leadership. • It would decrease because of the perceived decreased risk because of lack of near-term leadership • It would increase because of the perceived decreased risk because of lack of near-term leadership

  23. CLASS EXERCISE • What do you think happened to the share price of Apple when Steve Jobs, the CEO of Apple, passed away? • It would decrease because of the perceived increased risk because of lack of near-term leadership. • It would increase because of the perceived increased risk because of lack of near-term leadership. • It would decrease because of the perceived decreased risk because of lack of near-term leadership • It would increase because of the perceived decreased risk because of lack of near-term leadership

  24. Preparation for next lecture: • Unit 2: Time Value of Money • NB!!! Remember your calculator

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