Sesi 1 Pengantar Manajemen Keuangan(1)

8/19/2019 Sesi 1 Pengantar Manajemen Keuangan(1)

1/13


2/13

08/02/20

5

Financial Institutions

Companies that specialize in financial matters

Banks – commercial and investment, credit unions,

savings and loans

Insurance companies

Brokerage firms

Job opportunities

6

International Finance

This is an area of specialization within each of the

areas discussed so far

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;

speaking a foreign language fluently is also helpful

7

Why Study Finance?

Marketing

Budgets, marketing research, marketing financial products

Accounting

Dual accounting and finance function, preparation ofnanca statements

Management

Strategic thinking, job performance, profitability

Personal finance

Budgeting, retirement planning, college planning, day-to-day cash flow issues

8

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 investments?

How will we manage the everyday financial activities

of the firm?


3/13

08/02/20

9

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 expenditures, and financial

planning

Controller – oversees taxes, cost accounting, financial

accounting, and data processing

10

Financial Management Decisions

Capital budgeting

What long-term investments or projects should thebusiness 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 thefirm?

11

Goal Of Financial Management

What should be the goal of a corporation?

Maximize profit?

Minimize costs?

Maximize market share?

Maximize the current value of the company’s stock?

Does this mean we should do anything and

everything to maximize owner wealth?

Balance Sheet Model of the Firm

Current Assets

Total Value of Assets:

Current

Liabilities

Long-Term

Total Firm Value to Investors:

Fixed Assets

1 Tangible

2 Intangible Shareholders’Equity

Debt


4/13

08/02/20

The Capital Budgeting Decision

Current Assets

Current

Liabilities

Long-Term

Fixed Assets

1 Tangible

2 Intangible

Shareholders’

Equity

e t

What long-terminvestmentsshould the firmchoose ?

The Capital Structure Decision

Current Assets

Current

Liabilities

Long-Term

How should the

firm raise funds

for the selected

investments?Fixed Assets

1 Tangible

2 Intangible

Shareholders’

Equity

e t

Short-Term Asset Management

Net

Working

Current

Liabilities

Long-Term

Current Assets

How should short-term assets bemanaged and

financed ?

Capital

Shareholders’Equity

e t

Fixed Assets

1 Tangible

2 Intangible

Capital Structure

The value of the firm can be

thought of as a pie.

The goal of the manager is

to increase the size of the

50%

Debt

25%

Debt

70%

Debt30%

E uit

pie.

The Capital Structure

decision can be viewed as

how best to slice the pie.

If how you slice the pie affects the size of the pie,

then the capital structure decision matters.

50%

Equity

75%

Equity


5/13

08/02/20

The Financial Manager

The Financial Manager’s primary goal is to increase

the value of the firm by:

• Selectin value creatin ro ects

• Making smart financing decisions

The Firm and the Financial Markets

Retainedcash flows (F)

Invests

in assets

(B)Short-term debt

Firm Firm issues securities (A) Financial

markets

Cash flowfrom firm (C)

T a x e s

( D )

Government

Dividends anddebt payments (E)

Current assets

Fixed assetsLong-term debt

Equity shares

Ultimately, the firm

must be a cash

generating activity.

The cash flows from

the firm must exceed

the cash flows from

the financial markets.

The Goal of Financial Management

What is the correct goal ?

Maximize profit?

Minimize costs?

Maximize market share?

Maximize shareholder wealth?

Managerial Goals

Managerial goals may be different from

shareholder goals

Expensive perquisites

Survival

Independence

Increased growth and size are not necessarily

equivalent to increased shareholder wealth


6/13

08/02/20

Managing Managers

Managerial compensation

Incentives can be used to align management and stockholder

interests

The incentives need to be structured carefully to make sure

t at t ey ac ieve t eir inten e goa

Corporate control

The threat of a takeover may result in better management

Other stakeholders

Financial Markets

Primary Market

Issuance of a security for the first time

Secondary Markets

Securities may be traded in either a dealer or auction

market

NYSE

IDX

Financial Markets

InvestorsStocks and

Bondsirms

Secondary

Market

money

securitiesSueBobMoney

Primary Market

Primary and secondary markets

Primary market – primary issues of securities aresold, allows governments, banks, corporations toraise money by directly selling financial instrumentsto the public.

econ ary mar et – a ows investors to tra efinancial instruments between themselves.Secondary transactions take place.


7/13

08/02/20

25

The Agency Problem

Agency relationship

Principal hires an agent to represent its interests

Stockholders (principals) hire managers (agents) torun the company

gency pro em

Conflict of interest between principal and agent

Management goals and agency costs

26

Managing Managers

Managerial compensation

Incentives can be used to align management and

stockholder interests

The incentives need to be structured carefully to make

sure t at t ey ac ieve t eir goa

Corporate control

The threat of a takeover may result in better

management

Other stakeholders

Financial decisions

Financing decision – where is money going to come from

Investment decision – how much to invest and in what assets

Operations Financial

markets

Financial

Manager

I nv e s t m en t s

F i n an c i n g

Financial decisions

Capital structure and cost of

capital

Operations Financial

markets

Financial

Manager

I nv e s t m en t s

F i n an c i n g


8/13

08/02/20

The goal of financial management

Maximizing shareholder’s wealth

Maximizing stock prices

Objectives for financial manager

Maximizing earnings and earnings growth

Maximizing return on investments and return on

equity

Financing decisions

Financingdecisions

Internal corporatefinancing

External sourcesof funds

Retainedearnings

Direct financing(financial markets

Instruments)

Stocks

Debt instruments(bonds, CPs etc.)

Indirect financing(financial

Intermediaries)

Loans

Financial markets

Financial markets

Primary marketsSecondary markets

Money marketCapital market

Organizedexchanges

Over-the-counter


9/13

08/02/20

Money and capital markets

Money markets – short-term assets (maturity less than 1year) are traded:

Certificates of deposits (CDs)

Commercial papers (CPs)

Treasury bills

Capital markets – long-term assets (maturity longer than 1year) are traded:

Stocks

Corporate bonds

Long-term government bonds

Organized exchanges and over-the-counter

Organized exchange – most of stocks, bonds and

derivatives are traded. Has a trading floor where floor

traders execute transactions in the secondary market for

their clients.

toc s not iste on t e organize exc anges are tra e

in the over-the-counter (OTC) market. Facilitates

secondary market transactions. Unlike the organized

exchanges, the OTC market doesn’t have a trading floor.

The buy and sell orders are completed through a

telecommunications network.

Prices of financial instruments are determined in

equilibrium by demand and supply forces

They reflect market expectations regarding the

future as inferred from currentl available

information

Financial instruments issued by government:

goals

To finance any shortfall between expenditures and

taxes (deficit)

To refinance maturing debt

, .


10/13

08/02/20

Financial instruments issued by government

Treasury coupon issues:

- Treasury notes (T-notes): maturity of 1-10 years

- Treasury bonds (T-bonds): maturity of 10-30 years

Considered free of default risk

Subject to interest rate risk

Interest is subject to federal tax (but exempted from state andlocal taxes)

Bank rates

Prime rate – base rate on corporate loans postedby at least 75% of American 30 largest banks

Federal funds – reserve traded among commercialbanks in amounts of $1 mln or more

Discount rate – the charge on loans to depositoryinstitutions by the Federal Reserve banks

Prime rate

The Prime Interest Rate is the interest rate charged

by

banks

to

their

most

creditworthy

customers

(usually

the

most

prominent

and

stable

business

customers).

The

rate

is

almost

always

the

same

among

major

banks.

Adjustments

to

the

prime

lending

rate

are

made

by

banks

at

the

same

time;

although,

the

prime

rate

does

not

adjust

on

any

regular

basis.

Financial instruments issued by corporations:

goals

To finance operations

To invest in new projects

To repay debt or repurchase shares


11/13

08/02/20

Commercial paper – short-term debt with maturity

of not more than 270 days

Issued by larger, known corporations (GE – $80 bln)

Financial instruments issued bycorporations: CPs

Higher rates than comparable Treasury bills

because of smaller default risk and less liquidity

than government securities

Corporate bond – long-term debt security, promising abondholder interest payments on a regular basis andpayback of a par (face) value at maturity.

Maturities

Financial instruments issued bycorporations: bonds

- -

Intermediate-term: 5-10 years

Long-term: 10-20 years

Exceptions: Ford and Disney – 100 years

Interest is quoted as a percentage from face value


bonds ratings

Moody’s S&P Meaning Expected

return

Investment grade

Aa AA High quality Lower

A A Favorable Middle

Baa BBB Medium-grad

Middle/Upper


bonds ratings

Moody’s S&P Meaning Expected

return

Speculative grade

element

B B Not

desirable.Smal

l long-term

assurance of

payments

Higher


12/13

08/02/20


bonds ratings

Moody’s S&P Meaning Expectedreturn

Speculative grade

Caa CCC Poor standing, Very high

Default or danger of

default

Ca CC Highly speculative

standing

C C Very speculative.

Very poor prospects

of ever attaining

investment standing

D In default

Junk bonds – bonds with below investment grade

rating

High yield (high risk) bonds

Financial instruments issued bycorporations: bonds ratings

Corporate bonds

Debentures-unsecured debt. Backed only by the general

assets of the issuing corporation

Secured debt (mortgage debt) – secured by specific

assets

Subordinated debt – in default, holders get payments

only after other debtholders get their full payment

Senior debt – in default holders get payment before

other debtholders get.

Corporate bonds

Bonds that pay face value at maturity and no

payment until then

Sell today at a discount from face value

Taxed based on accrued interest

No reinvestment risk or reinvestment cost


13/13

08/02/20


common stocks

The common stockholders are the owners of the

corporation’s equity

Do not have a specified maturity date and the firm

is not o ige to pay ivi en s to s are o ers

Returns come from dividends and capital gains

Common stockholders are called the residual

claimants of the firm

Stockholders have only limited liabilities

Financial instruments issued bycorporations: common stocks

Derivative securities

Securities whose value is derived from the value of

some underlying asset

Most important derivatives are options and futures

. ,

method of compensation

The basic borrowing interest rate for Eurodollar loanshas long been tied to the

London Interbank Offered Rate (LIBOR) – theaverage of Interbank offered rates for

International Financial Markets

urocurrency eposits in on on mar et

Sesi 1 Pengantar Manajemen Keuangan(1)

Documents

Transcript of Sesi 1 Pengantar Manajemen Keuangan(1)