Lecture 1-Introduction Flashcards
In whose interests is the firm run?
- Creditors
- Customers
- Society
- Shareholders
- Managers
- Employees
What is the role of the financial manger?
- Cash used to purchase real assets for the firms operations/ cash generated by firm’s operations goes to financial manager
- Reinvestment (Retained earnings)
- Cash return to investors/capital markets which are financial claims held by investors
- Cash raised by selling financial assets to investors goes back to financial manager
Things a financial manager does
- Interaction with the financial markets
- Investment
- Treasury management
- Risk management
- Strategy and value based management
What is treasury management?
-includes management of an enterprise’s holdings, with the ultimate goal of managing the firm’s liquidity and mitigating its operational, financial and reputational risk.
What is value based management?
- management philosophy and approach that enables and supports maximum value creation in organizations, typically the maximization of shareholder value.
- VBM encompasses the processes for creating, managing, and measuring value.
What is the purpose of the business?
- Achieving a target market share
- Keeping employee agitation to a minimum
- Survival
- Maximisation pf profit
- Maximisation of long-term shareholder wealth
What is shareholder wealth?
Maximising wealth is maximising purchasing power
What is maximising shareholder wealth?
Maximising the flow of dividends to shareholders through time
Why is profit maximisation not the same as shareholder wealth maximisation?
- Prospects
- Risk
- Accounting problems
- Communication
- Additional capital
The introduction of financial intermediaries
-Brokers
-Asset transformers:
Risk transformation
-Maturity (Liquidity) transformation
-Volume transformation
- Intermediaries economies of scale:
- Efficiencies in gathering information
- Risk spreading
- Transaction costs
-Financial markets
What are economies of scale?
a proportionate saving in costs gained by an increased level of production.
What are asset transformers?
is the process of creating a new asset (loan) from liabilities (deposits) with different characteristics by converting small denomination, immediately available and relatively risk free bank deposits into loans
What is liquidity transformation?
Transformation of short-term debts like deposits to finance long-term investments like loans.
The financial system: the banking sector
- Retail banks
- Investment banks
- International banks: foreign banking
- Eurocurrency banking
- Building societies
- Finance Houses
Role of investment banks
- Raising external finance for companies
- Broking and dealing
- Fund management (asset management)
- Assistance in corporate restructuring
- Assisting risk management using derivatives
Long-term savings institutions
- Pension funds
- Insurance funds
General assurance
-Life assurance: term assurance and whole-of-life policies/endowment policies and annuities
The risk spreaders in the financial system
- Unit trusts
- Investment trusts
- Open-ended investment companies (OEICs)
- Exchange-traded funs (ETFs)
- Private equity funds
- Hedge funds
The markets in the financial system
The money markets
The bond markets
The foreign exchange markets (Forex or FX)
The share markets
The derivative markets
What is the impact of corporate ownership?
Ownership and control
Diffuse and fragmented set of shareholders
Control often lies in the hands of directors.
Separation, or a divorce, of ownership and control
The management team may pursue objectives attractive to them.
‘Managerialism’ or ‘managementism’
An example of the principal–agent problem
Agency costs as an impact of corporate ownership
Monitor managers’ behaviour
Create incentive schemes and controls for managers to encourage the pursuit of shareholders’ wealth maximisation
Agency cost of the loss of wealth caused by the extent to which prevention measures do not work
What is corporate governance?
- The system by which companies are managed and controlled
- main focus is on the responsibilities and obligations placed on the executive directors and the non-executive directors and on the relationships between the firm’s owners, the board of directors and the top tier of managers.
What is a corporate objective?
-the placing of constraints on managerial behaviour and the setting of targets and incentive payments based on achievement
Different corporate governance regulations
-The Companies Act 2006
London Stock Exchange (LSE)
Financial Conduct Authority (FCA)
Financial Reporting Council (FRC)
Solutions to maintain corporate governance
Linking rewards to shareholder wealth improvements
Sackings
Selling shares and the takeover threat
Information flow
