Lecture 1 Introduction to Financial Management

Financial Management (F.M.) What is FM? FM is the management of financial resources – how best to find and use investments and financing opportunities in an ever-changing and increasingly complex environment. Why should CS majors study FM? Core Life Skill – need to understand finance to manage your business & personal life. “Money Makes the World Go Round” – even healthy companies and good CEO’s “die” because of poor FM MIS and IT are just a part of the overall corporate strategy which runs on financing, the major resource. Financial Engineering is an upcoming field that requires people with CS, math/science, and finance background Copyright: M.S. Humayun

FM 1-2 Major Areas & Concepts of FM Analysis of Financial Statements Investment Decisions & Capital Budgeting Interest, Time Value, Cash Flows, NPV Risk & Return Uncertainty, Risk, Portfolio Theory, Capital Asset Pricing Model (CAPM). Corporate Financing & Capital Structure Cost of Capital, Leverage, Dividend Policy Valuation Share, Bond, Option, Corporate Working Capital & Inventory Management International Finance & Foreign Exchange Copyright: M.S. Humayun

Organizational Structure (FM 1-3) (Who does the FM work?) Copyright: M.S. Humayun

FM 1-5 Copyright: M.S. Humayun

Business Legal Entities (FM 1-4) Proprietorship (80% of total number of businesses worldwide) Single owner is the company. The legal entity is the person who is the owner. Disadvantages: Unlimited liability. In case of bankruptcy, owner can lose the business and his personal belongings. Difficult to get financing. Limited life. Proprietorships die with the owner. Advantage: Easy to set up, Individual (personal) income tax only Partnership Similar to Proprietorship except many owners Can be Registered or Unregistered Corporation (control 80% of global sales of products and services) Separate legal entity registered by the government. Can be Private Limited (Pvt. Ltd.) or Public Limited (which may be listed on Stock Exchange) Possibly thousands of owners / shareholders. Separation of shareholders and managers. Limited liability and unlimited life (perpetual, going-concern) Disadvantages: Double-taxation (Corporate Tax & Dividend Tax). Difficult to set up and costly to maintain. Hybrids (Mixed) S-Type Corporation: Corporation without double taxation LLP: Limited Liability Partnership without double taxation PC: Professional Corporation ie. doctors, limited liability Copyright: M.S. Humayun

FM 1-6 Copyright: M.S. Humayun

Financial Markets (FM 1-7) Capital Markets Stock Exchange (listed shares, unit trusts, TFC) Money Markets Bonds Government of Pakistan: FIB, T-Bill Private Sector: Corporate Bonds, Debentures Call Money, Inter-bank short-term and overnight lending Loans, Leases, Insurance policies, Certificate of Deposits (CD’s) Badlah (money lending against shares), Road-side money lenders Real Assets Markets Cotton Exchange, Gold Market, Kapra Market Property (land, house, apartment, warehouse) Computer hardware, Used Cars, Wheat, Sugar, Vegetables,etc. Copyright: M.S. Humayun

FM Course Details (FM 1-8) Text: Financial Management – Theory and Practice (8th Edition or latest edition) by Brigham and Gapenski. (Lecture-wise outline of chapters is available with VU) Grading: Semester activities (GDB, Quizzes and assignments) Mid-terms and Final terms Skills Required: Financial Accounting (financial statements, cash-flows, value…) Mathematics (algebra, equations, graphical analysis, statistics) – “Finance is a game of numbers!” Excel Spreadsheet Business common sense. Read newspapers & visit markets. Copyright: M.S. Humayun