notes about advanced accounting MBA STUDENTS

this chapter is useful for students in business accounting with specialization in finance background

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

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

3. 1-3
IntroductionIntroduction
Me
– Personal
– Education
– Professional
Now You
– Background (Name, Home location)
– Life goals
– What do you want from this subject

4. 1-4
My Background- My Background- WorkWork
Associate Professor, KAU – (2013-current)
Senior Lecturer, Swinburne University of Technology,
Australia (2010-2012, currently on leave)
Post Doctoral Research Fellow: RMIT University,
Australia (2008-2010)
Lecturer: Faculty of Business Administration, Universiti
Tun Abdul Razak, (2004-2007)
Research Assistant: National University of Malaysia and
International Islamic University of Malaysia.
Graduate Research Assistant: National University of
Malaysia, Malaysia, (1997-2003)

5. 1-5
IntroductionIntroduction
Now Your turn
– Background (Name, Home location)
– Life goals
– What do you want from this subject?

6. 1-6
Subject OverviewSubject Overview - Objectives- Objectives
To familiarize the student with the concept of finance and
the role financial managers.
Recognize the ten different principles of financial
management.
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.
How to calculate both present value and future value, the
value of bonds, and the major financial ratios.

7. 1-7
Subject OverviewSubject Overview--Learning MethodsLearning Methods
Lectures (interactive).
Tutorials (class exercise).
– Problem solving Group (home
work)

8. 1-8
Subject Overview - Subject Overview - AssessmentAssessment
Individual assignments
– Class Participation Activities (10%)
– 2 Quizzes (15%)
– Mid-term exam (15%)
– Final exam (40%)
Group assignments
– Homework (20%)
Total = 100%

9. 1-9
Subject Overview – Subject Overview – Course MaterialsCourse Materials
Recommended textbook
Ross/ Westerfield/ Jordan (2010),
Fundamentals of Corporate Finance, 9
th

Edition, McGraw-Hill/ Irwin, NY, USA (any
edition can be used).
Other References; (Journals, Reports,
Websites, E. Library…etc.)
Lecture slides

10. 1-10
The Firm and the
Financial Manager
Dr. Mazharul Islam

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

12. 1-12
What is Financial What is Financial
Management?Management?
Financial Management 
means
planning, organizing, directing and
controlling the financial activities
of the organization.
(
ينعي ةيلاملا ةرادلإا
طيطختلا
لاو

ميظنت

لا و
هيج
,وت

,و
ةرطيسلا

ةمظنملل ةيلاملا ةط,شنلأا,ىلع
)
It refers the efficient and effective management 
of
money (funds) in such a manner as to achieve the
goals of the organization.
Dr. Mazharul Islam

13. 1-13
“It is necessary to understand
these principles in order to
understand finance.”
Ten Principles of Financial ManagementTen Principles of Financial Management
Dr. Mazharul Islam

14. 1-14
We won’t take on additional risk unless we
expect to be compensated with additional
return.
Investment choices have different
amounts of risk and expected returns.
The more risk an investment has, the
higher its expected return will be.
Principle 1: The Risk-Principle 1: The Risk-
Return Trade-offReturn Trade-off
Dr. Mazharul Islam

15. 1-15
A dollar received today is worth more than
a dollar received in the future.
Because we can earn interest on money
received today, it is better to receive
money earlier rather than later.
Principle 2: The Time Principle 2: The Time
Value of MoneyValue of Money
Dr. Mazharul Islam

16. 1-16
Cash Flow, not accounting profit,
is used as our measurement
tool.
Cash flows, not profits, are
actually can be reinvested.
Principle 3: CashPrinciple 3: Cash——
Not ProfitsNot Profits——Is KingIs King
Dr. Mazharul Islam

17. 1-17
The incremental cash flow is the
difference between the projected
cash flows if the project is
selected, versus what they will
be, if the project is not selected.
Principle 4: Incremental Principle 4: Incremental
Cash FlowsCash Flows
Dr. Mazharul Islam

18. 1-18
It is hard to find exceptionally profitable
projects
If an industry is generating large profits,
new entrants are usually attracted. The
additional competition and added capacity
can result in profits being driven down to
the required rate of return.
Product Differentiation, Service and Quality
can separate products from competition
Principle 5: The Curse of Principle 5: The Curse of
Competitive MarketsCompetitive Markets
Dr. Mazharul Islam

19. 1-19
The markets are quick and the
prices are right.
The values of all assets and
securities at any instant in time
fully reflect all available
information.
Principle 6: Efficient Principle 6: Efficient
Capital MarketsCapital Markets
Dr. Mazharul Islam

20. 1-20
Managers won’t work for the owners
unless it is in their best interest
A agency problem resulting from conflicts
of interest between the manager/agent and
the stockholder/owners.
 Managers may make decisions that are not in
line with the goal of maximization of
shareholder wealth.
Principle 7: The Principle 7: The
Agency ProblemAgency Problem
Dr. Mazharul Islam

21. 1-21
The cash flows we consider
are the after-tax incremental
cash flows to the firm as a
whole.
Principle 8: Taxes Bias Principle 8: Taxes Bias
Business DecisionsBusiness Decisions
Dr. Mazharul Islam

22. 1-22
Some risk can be diversified
away, and some cannot
The process of diversification
can reduce risk, and as a result,
measuring a project’s or an
asset’s risk is very difficult.
Principle 9: All Risk is Principle 9: All Risk is
Not EqualNot Equal
Dr. Mazharul Islam

23. 1-23
Each person has his or her own
set of values, which forms the
basis for personal judgments
about what is the right thing
Principle 10: Ethical Behavior is Doing Principle 10: Ethical Behavior is Doing
the Right Thing, and Ethical Dilemmas the Right Thing, and Ethical Dilemmas
Are Everywhere in FinanceAre Everywhere in Finance
Dr. Mazharul Islam

24. 1-24
Investment Decisions (Capital Budgeting)
(Investment decisions 
revolve around how to best
allocate money to maximize their value.)
Financing Decisions (Capital Structure)
(Financing decisions 
revolve around how to pay for
investments
 and expenses)
Asset Management Decisions
(Working Capital Management Decisions)
Decisions of Financial Decisions of Financial
ManagerManager

25. 1-25
Investment DecisionsInvestment Decisions
how, when, where and how much money will be
spent on investment opportunities.
A firm has many options to invest their funds but
firm has to select the most appropriate assets for
investment which will bring maximum benefit for
the firm.
What specific assets should be acquired?
What assets (if any) should be reduced or
eliminated?
Dr. Mazharul Islam

26. 1-26
Investment DecisionsInvestment Decisions
What specific assets should be
acquired?
What assets (if any) should be
reduced or eliminated?
Dr. Mazharul Islam

27. 1-27
Financing DecisionsFinancing Decisions
A company can raise finance from various
sources such as by issue of shares,
debentures or by taking loan and advances.
These sources of finance can be divided into
two categories: owners fund (no risk involve)
and borrowers fund (risk involve).
Find the least expensive sources of fund.
Determine how the assets will be financed.Determine how the assets will be financed.
Dr. Mazharul Islam

28. 1-28
Financing DecisionsFinancing Decisions
What is the best type of financing?
Mix type financing.
What is the best financing mix?
Mixer debt and equity.
What is the best dividend policy?
Paying a consistent percentage of net earnings.
How will the funds be physically
acquired?
Dr. Mazharul Islam

29. 1-29
Asset Management Asset Management
DecisionsDecisions
How do we manage existing assets
efficiently?
Financial Manager has varying degrees
of operating responsibility over assets.
Greater emphasis on current asset
management than fixed asset
management.
Dr. Mazharul Islam

30. 1-30 1-30
Interrelationship of the decisions Interrelationship of the decisions
made by a Financial Managermade by a Financial Manager

31. 1-31
What are the Goals of the What are the Goals of the
Firm? Firm? (General Goals)(General Goals)
Dr. Mazharul Islam
Survival
Avoid financial distress and bankruptcy
Beat the competition
Maximize sales or market share
Minimize costs
Maximize profits
Maintain steady earnings growth.

32. 1-32
Shortcomings of these Shortcomings of these
General GoalsGeneral Goals
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 Treasury-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.
ProblemsProblems
Dr. Mazharul Islam
So it is necessary to find a goal that can encompass
both profitability and risk.

33. 1-33
The Real Goal of The Real Goal of
the Firmthe Firm
Maximization of Maximization of
Shareholder Wealth!Shareholder Wealth!
Shareholders’ wealth can be
measured as the current
value per share of existing
shares.
Dr. Mazharul Islam

34. 1-34
Strengths of Shareholder Strengths of Shareholder
Wealth MaximizationWealth Maximization
Takes account of: current and future current and future
profits and EPSprofits and EPS; the timing, the timing,
duration, and risk of profitsduration, and risk of profits; dividend dividend
policypolicy; and all other relevant factors.
Thus, share priceshare price serves as a
barometer for business performance.
Dr. Mazharul Islam

35. 1-35
The Modern OrganizationThe Modern Organization
There exists a SEPARATION
between owners and managers.
Modern Organization
Shareholders Management
Dr. Mazharul Islam

36. 1-36
Role of ManagementRole of Management
An agentagent is an individual
authorized by another person,
called the principal, to act in the
latter’s behalf.
Management acts as an agentagent
for the owners (shareholders)
of the firm.
Dr. Mazharul Islam

37. 1-37
Agency TheoryAgency Theory

Agency TheoryAgency Theory is a branch of
economics relating to the
behavior of principals and their
agents.
Jensen and Meckling developed
a theory of the firm based on
agency theoryagency theory.
Dr. Mazharul Islam

38. 1-38
Agency TheoryAgency Theory
Incentives include stock optionsstock options,,
perquisitesperquisites,, and bonusesbonuses.
Principals must provide incentivesincentives
so that management acts in the
principals’ best interests and then
monitormonitor results.
Dr. Mazharul Islam

39. 1-39
Social ResponsibilitySocial Responsibility
Wealth maximization does not stop the
firm from being socially responsiblesocially responsible.
Assume we view the firm as producing
both private and social goods.
Then shareholdershareholder wealthwealth maximizationmaximization
remains the appropriate goal in
governing the firm.
Dr. Mazharul Islam

40. 1-40
Organization of the Financial Organization of the Financial
Management Function Management Function
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations
Vice President
Marketing
Vice President
Finance
Dr. Mazharul Islam

41. 1-41
Treasurer
Capital Budgeting
Cash Management
Credit Management
Dividend Disbursement
Fin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning
Organization of the Financial Organization of the Financial
Management Function 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