Week 1 Intro to Financial Management Finance determining value making decisions based on that value assessment The finance function allocates resources including acquiring investing and managing of resources Types of finance Government eg public infrastructure Corporate business eg bringing in investors shareholders Personal eg financial goals mortgage loan term evaluation Main areas of finance Investments Intermediaries Corporate Business Finance Financial Markets Forms of business increasing in complexity and costs Sole Proprietorship owned and managed by an individual International Finance Fintech Easiest to start Least regulated One owner keeps all profits Equity capital limited to owner s personal wealth Unlimited liability Limited to life of owner Taxed as personal income Difficult to sell ownership interest Partnership owned and managed by a group of individuals 2 more owners General unlimited liability Limited general partner s limited partners Taxed as personal income More capital available Relatively easy to start Partnership dissolves when one partner dies wishes to sell Difficult to transfer ownership interest Corporation created via articles of incorporation Limited liability Unlimited life Separation of ownership management potential for agency costs Easier to raise capital Easy transfer of ownership Double taxation not in SG on income corporate income tax rate and dividends personal income tax rate Issues equity shares shareholders are owners of the firm Types of corporations companies Private shares ownership closely held by a small number of shareholders companies original founders financial backers etc Shares are not traded on any exchange Public shares listed on a stock exchange shares are widely dispersed and traded in the secondary markets Sources of external financing Debt Lenders debt holders are creditors and lenders Relationship Determined by debt Contract A legally binding agreement specifying principal interest maturity date etc In case of bankruptcy debt holders collect before equity holders Shareholders Ownership Rights shareholders become owners of the firm are residual claimants Shareholders Payoffs shareholders receive monetary returns through Dividend per share paid from the corporation s after tax dollars or Capital gain from sale of shares at a higher price than paid Equity Non traditional sources of financing Venture Capital investing in startups w high growth potential Private Equity buy mature established companies that may be deteriorating streamlining operations to increase revenues Crowdfunding raising capital from many people online Initial coin offerings practice of raising capital through the sale of tokens which occur on digital currency platforms Financial Managers Maximize market value of owners equity current stock price for public company Agency Problem Agency relationship Shareholders principals hire managers agents via the BODirectors to run the company Agency problem Conflicts of interest between principal and agent Managers are naturally inclined to act in their own best interests causing agency costs due to these conflicts Agency costs direct expenditures that benefit management eg high pay big offices direct monitoring costs eg auditors corporate governance indirect lost opportunities Address through compensation plans tie fortunes of managers to the the firm monitoring stock market analysts investors threat of firing Corporate Governance Rules processes laws by which businesses are operated regulated and controlled Can refer to internal factors or external forces Good CG requires responsibly managing various stakeholders interests Financial Markets and Institutions Primary Market Corporation is the seller receives money from transaction Where newly issued original securities are traded Public offering underwriting more regulations costly Private offering securities are offered to large financial institutions wealthy individuals etc less costly Secondary market Where existing financial claims are traded Where getting market value of securities is easier Dealer market where buyers and sellers are not buying from and selling to one another directly Instead transactions are occurring through dealers Auction market e g SGX NYSE highest bidding price is matched with the lowest asking price Money Market Banks are major players Where debt securities of less than one year are traded treasury securities commercial paper bills inter bank loans Loosely connected dealer markets Capital market Where equity and long term debt claims are traded Equity is usually traded in auction markets e g SGX Financial Institutions Depository institutions banks or commercial banks accept deposits from individuals and institutions make loans perform banking services e g payments funds transfers Scope of permitted deposits loans and or other activities Full banks whole range of banking business Local banks DBS OCBC UOB Bank of Singapore Foreign banks some Qualifying Full Bank privileges Non depository institutions Insurance companies Merchant banks Investment companies Pension funds Mutual funds Week 2 Financial Statement Analysis Annual report financial statements Balance sheet financial position at a point in time Hedge funds Sovereign wealth funds Private equity funds Operating Cash Flow OCF Net Capital Spending NCS Net Operating Working Capital NOWC Cash Flow to Creditors Cash Flow to Stockholders Interest Tax Shield Cash Flow to Creditors Interest paid Net new borrowing Long term debt notes payable Cash Flow to Stockholders dividends paid net new equity raised common stock Interest Tax Shield Interest paid Tax rate Financial ratios Liquidity ratios assets to cash quickly w o significant loss in value ability to meet maturing short term obligations Current ratio Current Assets Current liabilities Quick Ratio CA Inventory CL Cash Ratio Cash CL Long term Solvency financial leverage ratios extent that a firm relies on debt financing rather than equity Total Debt Ratio T Assets T Equity T Assets Debt Equity Ratio T Assets T Equity T Equity Equity Multiplier EM T Assets T Equity 1 T Debt T Equity Long Term Debt Ratio LT debt LT debt T Equity Times Interest Earned Ratio EBIT interest Cash Coverage Ratio EBIT depreciation interest Asset Management Activity ratios How quickly inventory is produced and sold Inventory Turnover COGS Inventory Days Sales in Inventory 365 Inventory Turnover Success in managing its collection from credit customers Receivables