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  • 7/28/2019 Lecture001 IBF

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    1/8/2013

    1

    Jamil Ahmed

    Assistant Professor

    Financial Services Industry in

    UK

    In UK industry accounts for about a

    proportion of National Output as the whole of

    Manufacturing Industry (2008). The growth is still amazing after 2008

    financial crises. It contributed $200 billions,

    accounting for 10% of total economic output.

    1-2

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    1-3

    $1,068,232,095

    $479,673,700

    $149,121,474

    $2,808,013,079

    Size of Payroll (000s)

    1,292,081

    2,584,427

    622,908

    1,011,973

    Number of Firms in the U.S.

    Corporation

    S-Corporation

    Partnership

    SoleProprietorship

    Scope of Financial Sector

    Source: U.S. Census 2008 SUSB Annual Data

    What is Finance?

    At the macro level, finance is the study of financial

    institutions and financial markets and how they operate

    within the financial system in both the Local and global

    economies.

    At the micro level, finance is the study of financialplanning, asset management, and fund raising for

    businesses and financial institutions.

    Financial management can be described in brief using

    the following balance sheet.

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    1-5

    What is Finance?

    Assets: Liabilities & Equity:

    Current Assets Current Liabilities

    Cash & M.S. Accounts payable

    Accounts receivable Notes Payable

    Inventory Total Current Liabilities

    Total Current Assets Long-Term Liabilities

    Fixed Assets: Total Liabilities

    Gross fixed assets Equity:

    Less: Accumulated dep. Common Stock

    Goodw ill Paid-in-capital

    Other long-term assets Retained Earnings

    Total Fixed Assets Total EquityTotal Assets Total L iabi li ties & Equity

    Working

    CapitalWorking

    Capital

    Investment

    Decisions FinancingDecisions

    Macro Finance

    Areas of Specialization in Finance

    Financial Markets

    Markets of users and savers of funds.

    Financial Services

    Design and delivery of financial advice and

    products to individuals, businesses, government.

    Managerial Finance

    Financial management of business firms.

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    Basic Forms of Business

    Organization

    Sole Proprietorship

    Owned by one person, operated for personal profit.

    Partnerships

    Owned by two or more people, operated for joint

    profit.

    Corporations

    Legal entity, owned by individuals, operated forjoint profit.

    Sole Proprietorship

    STRENGTHS:

    Low organizational cost

    Income taxed once as

    personal income

    Independence

    Secrecy

    Ease of dissolution

    WEAKNESSES:

    Unlimited liability

    Limited funding

    Proprietor must be all

    Difficult to develop staffcareer opportunities

    Lack of continuity on

    death of proprietor

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    PartnershipsSTRENGTHS:

    Improved fundingsources

    Increased managerialtalent

    Income split bypartnership contract,taxed as personalincome

    WEAKNESSES:

    Unlimited liability to

    all partners

    Partnership dissolved

    upon death of partner

    Difficult to liquidate or

    transfer ownership

    1-10

    What is a Corporation?

    Corporation-A business organized as a

    separate legal entity owned by stockholders.

    Types of Corporations:Public Corporations

    Private Corporations

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    Corporations

    STRENGTHS: Owners liability limited

    Large capitalization

    possible, greater funding

    Ownership readily

    transferable

    Indefinite life

    Professional management

    WEAKNESSES: Higher tax rates/Double

    Taxation

    Expensive organization

    Greater governmentregulation

    When publicly traded,lacks secrecy

    Improper corporate

    structures may lead toAgency Problems

    1-12

    Corporate Organization Chart

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    1-13

    Goals of The Corporation

    Managers/Investors forced to make decisions and choices inthe harsh environment.

    All must therefore be very clear about the purpose of the

    organization and its imperative for the management teams to be

    aware of, respect and contribute to the objectives.

    Achieving Target Market Share.

    Keeping Employees at peace.

    Survival.

    Creating an Industrial Empire.

    Maximization of profit.

    Maximization of Shareholders Wealth.

    1-14

    Goals of The Corporation

    Wealth maximization vs. profit maximization:

    Prospects: Identical profits by two firms but one is valued

    more and other less by shareholders. As profits fails to

    reflect the relative potential of two firms.

    Risk: Same profits and same future prospectus. But the

    returns of one firms have a greater variability.

    Accounting Problems

    Communications

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    1-15

    The Ethics of Maximizing Value

    Does value maximization justify unethical behavior?

    Recent examples:

    Enron

    WorldCom

    Bernard Madoff

    1-16

    Agency Problem

    Do managers really maximize value?

    Agency Problems

    Managers are agents for stockholders, but the

    managers may act in their own interests rather than

    maximizing value

    Shareholders vs. Stakeholders

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    Agency Problem

    Different Information Stock prices vs. returns

    Dividend Policy

    Financing Decisions

    Different Objectives Managers vs.

    shareholders

    Top managers vs. lower

    managers

    Stockholders vs. banks

    and lenders

    1-18

    Agency Problem Solutions

    Compensation plans

    Board of Directors

    Blockholders

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    Agency Problem Solutions

    Takeovers

    Specialist Monitoring

    Legal and Regulatory Requirements

    1-20

    4A. Cash reinvested in the firm

    4B. Cash returned to investors

    Role of the Financial Manager

    Financial

    Manager

    (1)(2)

    (3)

    (4a)

    (4b)Real assets

    Investors

    Financial

    Assets

    Firms

    Operations

    1. Cash raised from investors (how?)

    2. Cash invested in firm

    3. Cash generated by operations

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    2-21

    The Flow of Capital:Closely Held Corporations

    2-22

    The Flow of Capital:

    Public Corporations

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    2-23

    Financial Markets

    Financing Decision

    Source of Funds (Capital)

    Capital Structure

    2-24

    The Flow of Capital:Public Corporations

    Financial Market:Market where securities are issued and traded.

    Primary Market:

    Market for the sale of new securities by corporations.

    Secondary Market:Market in which previously issued securities are traded among

    investors.

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    2-25

    Financial Markets

    Initial Public Offering (IPO):First offering of stock to the general public.

    Fixed-Income Market:Market for debt securities

    2-26

    Information Provided by

    Financial Markets:

    Commodity Prices

    Interest Rates

    Company Value

    Cost of Capital

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    Function of Financial Markets

    Transport cash across time

    Risk transfer and diversification

    Liquidity

    Payment mechanism

    Provide information

    2-28

    Financial Intermediaries

    Mutual FundAn investment company that pools the savings of many

    investors and invests in a portfolio of securities

    Hedge FundA private investment pool, open to wealthy or institutional

    investors, that is only lightly regulated and therefore can pursue

    more speculative policies than mutual funds

    Pension FundFund set up by an employer to provide for employees

    retirement