FINA 252
Basics of Financial
Management
AUGUST 2015
Week 1
INTRODUCTORY
CLASS
1-1
Dr. Mazharul Islam
Lesson Plan
 Introduction
 Subject
– (Me and You)-15 minutes
Overview – 25 minutes
 Important
Instructions- 10 Minutes
 Discussion
on Topic 1: The role of Financial
Management.
1-2
Dr. Mazharul Islam
Introduction
 Me
– Personal
– Education
– Professional
 Now
You
– Background (Name, Home location)
– Life goals
– What do you want from this subject
1-3
Dr. Mazharul Islam
My Background- Work
1-4

Associate Professor, KAU – (2012-current)

Senior Lecturer, Swinburne University of Technology,
Australia (2010-2012, currently on leave)

Research Officer: RMIT University, Australia (20082010)

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)
Dr. Mazharul Islam
Introduction
Now
Your turn
– Background (Name, Home location)
– Life goals
– What do you want from this subject?
1-5
Dr. Mazharul Islam
Subject Overview - Objectives

To familiarize the student with the concept of finance and
the role financial managers.

Recognize the ten different principles of financial
management. Explain why the role of the financial manager
today is so important .

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.
1-6
Dr. Mazharul Islam
Subject Overview-Learning Methods
Lectures
(interactive)
Tutorials
– Problem solving Group (in
class and at home)
1-7
Dr. Mazharul Islam
Subject Overview - Assessment


Individual assignments
– Class Participation Activities (10%)
– 2 Quizzes (15%)
(This exam will cover chapter 1 and 2)
– Mid-term Exam (25%)
(This exam will cover chapter 3 and 4)
– Final exam (40%)
(This exam will cover chapter 5, 6, 7, 8, and 16)
Group assignments
– Homework (10%)
Total = 100%
1-8
Dr. Mazharul Islam
Subject Overview – Course Materials
 Recommended
textbook
Ross/ Westerfield/ Jordan (2010), Fundamentals
of Corporate Finance, 9th Edition, McGraw-Hill/
Irwin, NY, USA.
 Other
References; (Journals,
Websites, E. Library…etc.)
Reports,
I may ask students to get information and/or data
from the internet, in some suitable subjects. This
will be part of evaluating the student performance.

1-9
Lecture slides
Dr. Mazharul Islam
Chapter 1
The Role of Financial
Management
1-10
Dr. Mazharul Islam
Chapter Objectives
1-11

What is 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
What is Financial
Management?
Financial Management means
planning, organizing, directing
and controlling the financial
activities of the organization.
It refers the efficient and effective management of
money (funds) in such a manner as to accomplish
the objectives of the organization.
1-12
Dr. Mazharul Islam
Investment Decisions
Most important of the three
decisions.
1-13

What is the optimal firm size?

What specific assets should be
acquired?

What assets (if any) should be
reduced or eliminated?
Dr. Mazharul Islam
Financing Decisions
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
 What is the best type of financing?
 What
is the best financing mix?
 What
is the best dividend policy?
 How
1-14
will the funds be physically
acquired?
Dr. Mazharul Islam
Asset Management
Decisions
 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.
1-15
Dr. Mazharul Islam
Interrelationship of the decisions
made by a Financial Manager
1-16
1-16
What is the Goal of the
Firm? (General Goals)
 Survival
 Avoid
 Beat
financial distress and bankruptcy
the competition
 Maximize
 Minimize
costs
 Maximize
 Maintain
1-17
sales or market share
profits
steady earnings growth.
Dr. Mazharul Islam
Shortcomings of these
General Goals
Problems
 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 T-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.
So it is necessary to find a goal that can encompass
both profitability and risk.
1-18
Dr. Mazharul Islam
The Real Goal of
the Firm
Maximization of
Shareholder Wealth!
Shareholders’ wealth can be
measured as the current
value per share of existing
shares.
1-19
Dr. Mazharul Islam
Strengths of Shareholder
Wealth Maximization
Takes
account of: current and future
profits and EPS; the timing,
duration, and risk of profits and EPS;
dividend policy; and all other
relevant factors.
Thus,
share price serves as a
barometer for business performance.
1-20
Dr. Mazharul Islam
The Modern Organization
Modern Organization
Shareholders
Management
There exists a SEPARATION
between owners and managers.
1-21
Dr. Mazharul Islam
Role of Management
Management acts as an agent
for the owners (shareholders)
of the firm.

1-22
An agent is an individual
authorized by another person,
called the principal, to act in
the latter’s behalf.
Dr. Mazharul Islam
Agency Theory
Jensen
and Meckling developed
a theory of the firm based on
agency theory.
Agency
Theory is a branch of
economics relating to the
behavior of principals and their
agents.
1-23
Dr. Mazharul Islam
Agency Theory
Principals
must provide incentives
so that management acts in the
principals’ best interests and then
monitor results.
Incentives
include stock options,
perquisites, and bonuses.
1-24
Dr. Mazharul Islam
Social Responsibility
 Wealth
maximization does not
preclude the firm from being socially
responsible.
 Assume
we view the firm as producing
both private and social goods.
 Then
shareholder wealth maximization
remains the appropriate goal in
governing the firm.
1-25
Dr. Mazharul Islam
Organization of the Financial
Management Function
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations
1-26
Vice President
Finance
Vice President
Marketing
Dr. Mazharul Islam
Organization of the Financial
Management Function
Vice President of Finance
1-27
Treasurer
Controller
Capital Budgeting
Cash Management
Credit Management
Dividend Disbursement
Fin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning
Cost Accounting
Cost Management
Data Processing
General Ledger
Government Reporting
Internal Control
Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts
Dr. Mazharul Islam