Managerial Finance.ppt (705Kb)

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Program Magister Manajemen Universitas Gunadarma

Manajemen Keuangan

Budi Hermana

Refferences:

(2)

Chapter 1

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The Role of Finance and The Financial Manager

Finance?

The

art and Science of managing money

Concerned with the

process

,

institution

,

markets

, and

instrument

involved in the

transfer of money

among and

between

individuals

,

businesses

, and

governments

Areas&

Opportunities?

Financial Services

Managerial Finance

The area of finance concerned with the

design and

delivery of advice and financial product to individual,

business, and governments

concerned with the duties of the

financial manager

in the business firm.

Actively manage the

financial

affairs of many tipes of

business

- financial and

non-financial, private and public,

large and small, profit-seeking

and not-for-profit

Task? Budgeting

(4)

Basic Forms Of Business Organization

Sole Proprietorship

Partnerships

Corporations

A Business owned by one person and operated

for his or her own profit

Small firm, unlimited liability

A Business owned by two or more persons and

operated for profit

Written contract (article of partnership), unlimited liability,

Limited partership

An Intangible business entity created by law

(often called a “legal entity”)

(5)

Basic Forms Of Business Organization

Legal Form

Sole Propriatorship Partenrship Corporation

S

tre

n

g

th

•Owner receives all profits (as well as losses)

•Low organizationak costs •Income taxed as personnel income of proprietor

•Secrecy

•Ease of dissolution

•Can raise more more funds than sole proprietorships •Borrowing power enhanced by more owners

•More available brain power and managerial skill

•Can retain good employees •Income taxed as personnel income of partners

•Owners have limited liability which guarantees they cannot lose more than invested

•Can achieve large size due to marketability of stock (ownership)

•Ownership is readily transferable

•Long-life of firm- not dissolved by detah of owners

•Can hire professional managers

•Can expand more easily due to access to capital markets

•Receives certain tax advantages

W

•Owner has unlimited liability-total wealth can be taken to satisfy debts

•Limited fund-raising power tends to inhibit growth

•Propietor must be jack-of-all-trades

•Difficult to give employees long run career opportunity •Lacks continuity when propitor dies

•Owners have unlimited liability and may have to covers debts of other less financially sound partners •When a aparter dies, partership is dissolved •Difficul to liquidate or transfer partership

•Difficult to achieve large-scale operations

•Taxes generally higher since corporate income is taxed and dividends paid to owners ara again taxed

•More expensive to organize than other business forms

•Subject to greater government regualation •Employees often lack personnel interest in firm

(6)

The Managerial Finance Function

Managerial Finance is closely related to,

but quite different from, Economics and

Accounting

_?

Organizational View

Since most business decisions are measured in financial terms, the

financial manager plays a key role in the operation of the firm

The size and importance of the managerial finance

depend on the size of the firm

In small firm the

finance function

generally performed

by

the accounting department

In medium-to-large-size firm

Separate department, vice-president of finance (CFO),

Treasurer

,

Controller

The officer responsible for the firm’s financial activities: financial planning and fund raising, managing cash, making capital expenditure decision, managing credit activities and managing the investment portfolio

The officer responsible for the firm accounting activities: tax management, data processing, and cost and financial accounting

Financia l Manage

(7)

The Managerial Finance Function

Relationship to Economics

The

Financial Manager

must understand the

economic framework

, and be

alert to the consequences of varying

levels of economic activity

and changes in

economic policy

?

Must be able to use economic theories as guidelines for efficient busineness operation

Supply-demand analysis Profit-Maximazing strategies Price Theory

Marginal Analysis

Economic principle which states

that financial decisions should be

made and actions taken only

when the added benefit exceed

the added costs

Benefits with new computer $100.000 Less: Benefits with old computer 35.000

(1) Marginal (Added) benefits $65.000

Cost of new computer $80.000 Less: Proceeds from sale of old com 28.000

(2) Marginal (added) costs $52.000

(8)

The Managerial Finance Function

Relationship to Accounting

The finance and accounting function are

closely related and generally overlap;

indeed, managerial finance and accounting are

not often easily distinguishable

. In smal

firm the

controller often carries out of the finance function, and in large firms many

accountants are intimately involved in various finance activities

?

Two Basic Differences

Emphasis of cash flows Decision Making

Accrual Method vs Cash Method

Recognizes revenue at the point of sale and recognized expenses when incurred

Recognized revenues and expenses only with respect to actual inflow and outflows of cash

Accounting View Financial View

Income statement ABC Corporation For the year xxxx

Sales Revenue $100.000 Less: Costs 80.000 Net Profit $ 20.000

Income statement ABC Corporation For the year xxxx

Cash inflow $ 0 Less: Cash Outflow 80.000 Net Profit ($80.000)

The

accountant

devotes

the

majority

of

attention

to

the

collection and presentation of

financial data

The financial manager evaluates

the

accountant’s

statements,

develops additional data, and

makes

decisions

based

on

subsequent analyses

This

does

not

mean

that

(9)

The Managerial Finance Function

Key Activities of The Financial Manager

Primary Activities

Performing Financial Analysis and Planning

Making Investment Decisions

3. Determining what additional (or reduced) financing is required

Determine both the mix and the type of assets found on the firm’s balance sheet

The left-hand side of the balance sheet

Deals with The right-hand side of the balance sheet and involves two major area: 1. Most appropriate mix of short-term and

long-term financing must be established 2. Which individual short-term or long-term

(10)

The Managerial Finance Function

Goal of The Financial Manager

Maximize Profit?

Some pepople believe that the owner’s objective is always to maximize profits

The Financial Manager are expected to make a major contribution to the firm’s overall profit

For Corporation, profit are commonly measured in terms of

Earnings per Share (EPS)

EPS:

The amount earned during the period on each outstanding share of common stock

period’s total earnings avaliable for the firm’s common stock holders

The number of shares of common stock outstanding

Investment

year 1

year 2

year 3

total

X

$1.40

$1.00

$0.40

$2.80

Y

0.60 1.00 1.40

3.00 Earning per share (EPS)

Profit maximization fails for reason: 1. Timing of return

2. Cashflow avaliable to stockholder 3. Risk

The chance that actual outcomes may differs from those expected Basic primises in managerial finance is that trade-off exist between return (cash flow) and risk

Return and risk are in fact the key determinant of share price– which represents the wealth of the owners in the firm

Stockholder are risk-averse ?

(11)

The Managerial Finance Function

Maximizing Shareholder Wealth

The goal of the financial manager

is to maximize

the wealth of the

owners

for whom the firm is being

managed

Measured by the share

price of the stock

Timing of return (cash flow)

magnitude

Risk

Financial Manager

Financial Decision Alternative or action

Return? Risk?

Increase Share

Price ? Yes

Yes

Reject

Acept

(12)

The Managerial Finance Function

The Agency Issue

The goal of the financial manager

should be to maximize

the wealth

of the owners

of the firm

Management can be viewed as

agents of the owners

who have

hired them and given them

decision-making

authority

to

manage the firm

for the owners’

benefit

In theory In practise

Most financial managers would agree with the goal of owner wealth maximization

However, managers also concern with their personnel wealth, job security, lifestyle, and privilege

Agency problem

The likelihood that managers may place personnel goals ahead of corporate goals

Agency Cost

Monitoring expenditure Bonding expenditure Structuring expenditure Opportunity cost

To prevent or minimize problem

Audit&control

Fidelity bond Managerial compensation:

(13)

The Managerial Finance Function

The Role of Ethics

Ethics – Standard of conduct or

moral judgement

example

Corporate Ethics Guidelines

and Policies

Ethics and share price

Issues Update

http://www.cfainstitute.org

Good Corporate Governance

Corporate Social Responsibility

Certified Financial Analyst

http://www.kpk.go.id/modules/edito/content.php?id=27

http://www.bi.go.id/NR/rdonlyres/2246113B-DC63-4731-8558-3693A6254962/3449/pbi8406.pdf Responsibility

Fairness

Transparency

Accountability

www.fcgi.or.id

http://www.goodyear-indonesia.com/social_responsibility.html

(14)

Chapter 2

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Business Taxation

Ordinary Income

Income earned through the sale

of a firm’s goods and services

Corporate Tax Rate Schedule

Range of taxable income Base Tax + (rate x amount over base bracket)

$ 0 to $ 50.000 $ 0 + (15% x Amount over $ 0) 50.000 to 75.000 7.500 + (25 x Amount over 50.000) 75.000 to 100.000 13.750 + (34 x Amount over 75.000) 100.000 to 335.000 22.250 + (39 x Amount over 100.000) over $335.000 113.900 + (34 x Amount over 335.000)

Tax Calculation

Example

PT X has before-tax earnings of $250.000 Total Tax due = $22.250 + [0.39 x ($250.000-100.000)] = $22.250 + (0.39 x $150.000)

= $22.250 + $58.500 = $80.750

(16)

Business Taxation

Ordinary Income

Average Tax Rates

A Firm’s taxes divided by its

taxable income

the marginal tax rate on the additional $50.000 of income will be 39%. The company will therefore have to pay additional taxes of $19.500 (0.39 x $50.000)

Total Taxes on the $300.000 = $80.750+$19.500 = $100.250

Using Taxe rate schedule:

(17)

Business Taxation

Ordinary Income

Interest and Dividend Income

Interest

received by the corporation is included

as

ordinary income

Devidend received on common and preferred stock held in other corporation,

(18)

Business Taxation

Ordinary Income

Tax-Deductible Expenses

Corporation are allowed to deducti operating expenses. The tax-deductible expenses reduces their after-tax cost. interest and taxes of $200.000. Company X during the year will have to pay $30.000 in interest; Company Y has no debt and therefore will have no interest expenses. Calculate the earnings after taxes for these two firm, which pay 40% tax on ordinary

(19)

Business Taxation

Capital Gains

Amount by which the price at which an asset was sold exceeds the asset’s initial purchase price

For corporation, capital gain are added to ordinary corporate income and taxed at the regular corporate rates

Example

The Ross Company has operating

earnings of

$500.000

and hast just

sold for

$40.000

a capital asset

initially purchased two years ago for

$36.000

.

Since the asset was sold for more than its initial

purchased, there is capital gain of

$4000

($40.000

sale price

- $36.000

initial purchase price

)

The corporation’s taxable income will total

$504.000

($500.000

ordinary income plus

$4.000

capital gain

)

Since this total is above$335.000, the capital gain

will be taxed at the 34%, resulting in tax of

$1.360

(20)

Financial Institutions and Markets: An Overview

Financial institutions and markets are

important elements in a firm’s operating

environment

?

Firms that require

funds from external

sources

can obtain them in

three ways

Financial Institution

Financial Market

Private placement

That accept savings and transfers them to those

needing funds

(21)

Financial Institutions and Markets: An Overview

Financial Institution

An intermediary that channels the savings of individuals, businesses, and governments into loans or investment deposits. Makes loans directly to borrowers or through the financial market

Not hold demand (checking) deposits. Generally lends or invest funds through financial markets

Similar to a saving bank. Also raise capital through the sale of securities. Lends funds for real estate mortgage loans and some funds are channeled into financial market

Deals primarily in transfer of funds between consumers. Accept members’ deposit and lends to other members

Receive premium payments that are placed in invesments to accumulate funds to cover future benefit payment

Money is sometimes transferred directly to borrowers, but the majority is lent or invested via the financial markets

Pools funds of savers and makes them available to business and government demanders. Creates a portfolio of securities to achieve a specified investment objective

(22)

Financial Institutions and Markets: An Overview

Financial Markets

Provide a forum in which suppliers of funds

and demanders of loans and investments

can transact business directly

Money Market

Capital Market

Primary market

Secondary Market

Transactions in

short-term

debt instruments, or marketable securities, take place in the money market

Long-term

securities (bonds and stocks) are traded in the capital market

Financial market in which securities are

initially issued

; the only market in which

the issuer is directly involved

in the

transaction

(23)

Financial Institutions and Markets: An Overview

Financial Markets

Flow of funds for financial institutions and market

Financial Institutions

Financial Markets Suppliers of

Funds

Demanders of Funds

Funds

F

u

n

d

s

Deposits/Shares

Loans

Securities

S

ec

u

rit

ie

s

Funds

Securities Private

(24)

Financial Institutions and Markets: An Overview

The Money Market

A financial relationship created between

suppliers and demanders of short-term

funds, which have maturities of one year or

less

Most money market transactions are made in

marketable securities

Short-term debt instruments, such as US Treasury Bill, Commercial Papers, and Negotiables Certificate of Deposits issued by government, business, and financial institution

Indonesia? Certain individuals, businesses,

governments, and financial institution have temporary idle funds that they wish to place in some type of liquid asset or short-term, interest earning instrument

Other individuals, businesses, gevernments, and financial institution find themselves in need of seasonal or temporary financing

(25)

Financial Institutions and Markets: An Overview

The Capital Market

A

financial relationship created by

institutions and arrangements that allows

suppliers and demanders of long-term

funds-

funds with maturiry of more than

one year

- to make transactions.

The backbone of the capital market is

formed by the various securities exchange

that provide a forum

for debt and and

equity transaction

Key Securities

Bond

Long-term debt instrument used by business and governments to raise large sums of money

Common stock

Units of ownership interest, or equity. In a corporation

Common stockholders expect to earn a return by receiving

Dividend

Periodic distribution of earnings to the owners of stock in a firm

Preferred stock

(26)

Financial Institutions and Markets: An Overview

Major Securities Exchange

1. Organized Securities Exchanges Provide the marketplace in

which firms can raise funds through the sale of new securities and in which purchasers can resell securities

Tangible organozations on whose premises outstanding securities are resold

New York Stock Exchange (NYSE)

Jakarta Stock Exchange (JSX)

To make transaction on the “floor”, individual or firm must own a “seat” on the exchange

For “listing”, a firm must file an application and

meet a number requirements

Have at least 2000 stockholders with 100 ≤ shares

Min 1,1 million share of publicly held stock

Earning power of $2,5 million before taxes

Net tangible asset of $16 million

A total of $18 million in market value of publicly traded shares, etc

(27)

Financial Institutions and Markets: An Overview

Major Securities Exchange

2. The-Over-the-Counter Exchange (OTC)

Not an organization, but an intangible market for the purchase and sale of securities not listed by the organized exchange

The market price of OTC securities results from a matching of the forces of supply and demand for securities by traders known

as dealer

National Association of Securities Dealers Automated Quotation (NASDAQ)

Sophisticated telecommunications system that provide current

bid and ask prices

on thousands of actively traded

The bid price is the highest price offered by dealer to purchase a given security

The ask price is the lowest price at which the dealer is willing to sell the security

Automated

matched

(28)

Interest Rates and Required Return

The

level of funds flow

between suppliers and

demanders can significantly

affect economic

growth

Interest rates and required returns represent the

costs of obtaining various forms of financing

?

Growth results from the interaction of variety of

economic factors, such as the money supply,

trade balance, and economic policy, that affect

the

cost of money – the interest rate or

required return

?

The level of interest rate acts as

regulating

device that controls the flow of funds

?

The

lower the interest rate

, the

greater the

funds flow

and therefore the

greater the

economic growth

, and vice versa

(29)

Interest Rates and Required Return

Interest Rate Fundamentals

The compensation paid by the borrower of

funds to the lender; from the borrower’s

point of view, the cost of borrowing funds

Interest rate

Required Return

The level of return expected on equity

investment

Ignoring risk factors, the

nominal or actual

interest rate

(cost of funds) results from the

real rate of interest

adjusted for inflationary

expectation and

liquidity preferences

General preferences of investors for shorter-term securities

Rate that creates an equilibrium

between the supply of savings and the demand for investments funds in perfect world, without inflation, where funds suppliers and demanders have no liquidity preferences, and all outcomes are certain

The actual rate of interest chargeb by the supplier of funds and paid by demander

(30)

Interest Rates and Required Return

Term Structure of Interest Rates

The relationship between the interest rate or

rate

of return

and the time

to maturity

Annual rate of interest earned on a security purchased on a given day and held to the time to maturity (x-axis)

7 indicates generally cheaper long-term borrowing costs than short-term borrowing costs

Normal Yield Curve

An upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term- borrowing costs

(31)

Interest Rates and Required Return

Term Structure of Interest Rates Theory of Term Structure

1. Expectation Hypothesis

Theory suggesting that the yield curve reflects investor expectations about future interest rates; an increasing inflation expectation results in upward-sloping yield curve, and vice versa

2. Liquidity Preference Theory

Theory suggesting that for any given issuer, long-term interest rates tend to be higher than sort-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer term securities; causes the yield curve to be upward-sloping

3. Market Segmentation Theory

(32)

Interest Rates and Required Return

Term Structure of Interest Rates Risk and Return

(33)

Chapter 3

(34)

The Stockholders’ Report

A Stockholder’s report summarizes and documents a

publicly held corporation’s financial activities over the

year.

Who

receives theses reports?

What types

of

informastion do you think they typically include?

Why

are they important?

?

1. Regulator or Goverments 2. Creditor (lenders)

3. Owners 4. Management

1. The letter to stockholders

Events, management philosophy, strategy, and action

2. Financial statements

(a) the income statemnet, (b) the balance sheet, (c) the statement of retained earnings, and (d) the statements of cash flows

3. Other feature

Firm activities, new product, R&D, etc

An important vehicle for

influencing owners’

perceptions of the company and its future outlook.

The stockholders’ report may

effect expected risk, return, stock price, and the viability of the firm

(35)

Basic Financial Statements

Income Statement

Provide a financial summary of the

operating results

during a specified period

Sales revenue

Less: Cost of goods sold Gross profits Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes

Less: Prefered stock dividends

Earning available for common stockholders Earning per share (EPS)

$ 1.700

ABC Corporation Income Statement ($000) for the year Ended December 31, 2000

The number of

common stock=

(36)

Basic Financial Statements

Balance Sheet

Summary statement of the firm’s financial position at given point in time ABC Corporation Balance Sheets ($000)

Current assets Cash

Marketable securities Account receivable Inventories

Total current assets Gross fixed assets (at cost) Land and buildings

(37)

Basic Financial Statements

Balance Sheet

Summary statement of the firm’s financial position at given point in time

ABC Corporation Balance Sheets ($000)

(38)

Basic Financial Statements

Statement of Retained Earning

ABC Corporation Statement of Retained Earnings ($000) for the end year Ended December, 2001

Retained earnings balance (january 1, 2001) $500

Plus: Net Profit after taxes (for 2001) 180

Less: Cash dividend (paid during 2001)

Preferred stock ($10)

Common stock ( 70) 80

Retanined earnings balance (Dec 31, 2001) $600

(39)

Basic Financial Statements

Statement of Cash Flows

ABC Corporation Statement of Cash Flows ($000) for the end year Ended December, 2001

Cash Flow from Operating Activities

Net Profits after taxes $ 180

Depreciation 100

Decrease in account receivable 100

Decrease in inventories 300

Increase in account payable 200

Decrease in accruals (100)

Cash provided by operating $780

Cash Flow from investment activities

Increase in gross fixed asset ($300)

Changes in business interest 0

Cash used for investment activities (300)

Cash Flow from financing Activities

Decrease in notes payable ($100)

Increase in long-term debts 200

Changes in stockholders’ equity 0

Dividends paid (80)

Cash provided by financing activities 20

Net increase in cash and marketable securities $500