Download Financial institutions

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I.
OVERVIEW
II.
FORMS OF BUSINESS ORGANIZATION
III.
THE GOAL OF FINANCIAL MANAGEMENT
IV.
FINANCIAL INSTITUTIONS
V.
FINANCIAL SECURITIES
VI.
FINANCIAL MARKETS
VII.
THE AGENCY RELATIONSHIP (PROBLEM)
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What is finance?
What is financial management
(corporate/business finance)?
What is the goal of financial
management?
what is the role of the financial
manager in the corporation?
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“Finance is the art and
science of managing
money”.
Khan and Jain
‘management of money’.
Oxford dictionary
“It is the application of
economic principles and
concepts to business
decision-making and
problem solving.”
Jabossi & Peterson
“the Science on study of the
management of funds’ and the
management of fund as the system
that includes the circulation of
money, the granting of credit, the
making of investments, and the
provisionof banking facilities.
Webster’s Dictionary
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1.
Financial management (Business Finance)
Area of finance is concerned primarily with financial decision-making
within a business entity.
Guthumann and Dougall, “Business finance can broadly be defined as
the activity concerned with planning, raising, controlling, administering of
the funds used in the business”.
2.
Investments
Area of finance focuses on the behavior of financial markets and the
pricing of securities
3.
Financial institutions
Area of finance deals with banks and other firms that specialize in
bringing the suppliers of funds together with the users of funds
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Financial manager: analising and making
financial decision :

1. Investment decisions--the use of funds;
2. Financing decisions--, the acquisition of funds to
be used for investing and financing day-to-day
operations;
3. Decisions that involve both investing and
financing.
 expected return and risk
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
Financial Analysis
Financial analysis is a tool of financial
management. It consists of the evaluation of
the financial condition and operating
performance of a business firm, an industry,
or even the economy, and the forecasting of
its future condition and performance.
It is a means for examining risk and expected
return.
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1.
Capital Budgeting
The process of planning and managing a firm’s long-term
investments. In capital budgeting, the financial manager tries to
identify investment opportunities that are worth more to the firm
than they cost to acquire.
2. Capital Structure
A firm’s capital structure (or financial structure) is the specific mixture
of long-term debt and equity the firm uses to finance its operations.
3. Working Capital Management
The term working capital refers to a firm’s short-term assets, such as
inventory, and its short-term liabilities, such as money owed to
suppliers. Managing the firm’s working capital is a day-to-day activity
that ensures that the firm has sufficient resources to continue its
operations and avoid costly interruptions. This involves a number of
activities related to the firm’s receipt and disbursement of cash.
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SOLE PROPRIETORSHIP
A sole proprietorship is a business owned by one person. This is
the simplest type of business to start and is the least regulated
form of organization

PARTNERSHIP
A partnership is similar to a proprietorship except that there are
two or more owners (partners).
a.
A general partnership; all the partners share in gains or losses,
and all have unlimited liability for all partnership debts, not just
some particular share.
b.
A limited partnership; one or more general partners will run
the business and have unlimited liability, but there will be one
or more limited partners who will not actively participate in
the business.

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CORPORATION
A corporation is a legal “person” separate and
distinct from its owners, and it has many of
the rights, duties, and privileges of an actual
person. Corporations can borrow money and
own property, can sue and be sued, and can
enter into contracts. A corporation can even
be a general partner or a limited partner in a
partnership, and a corporation can own
stock in another corporation.

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
These three forms differ in a number of
factors, of which those most important to
financial decision-making are:
■ The way the firm is taxed.
■ The degree of control owners may exert on
decisions.
■ The liability of the owners.
■ The ease of transferring ownership interests.
■ The ability to raise additional funds.
■ The longevity of the business.
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
Sole Proprietorship
Advantages
1. The proprietor is the sole business decision-maker.
2. The proprietor receives all income from business.
3. Income from the business is taxed once, at the individual taxpayer level.

Disadvantages
1. The proprietor is liable for all debts of the business (unlimited liability).
2. The proprietorship has a limited life.
3. There is limited access to additional funds.


General Partnership
Advantages
1. Partners receive income according to terms in partnership agreement.
2. Income from business is taxed once as the partners’ personal income.
3. Decision-making rests with the general partners only.

Disadvantages
1. Each partner is liable for all the debts of the partnership.
2. The partnership’s life is determined by agreement or the life of the partners.
3. There is limited access to additional funds.

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
Corporation
Advantages
1. The firm has perpetual life.
2. Owners are not liable for the debts of the firm; the
most that owners can lose is their initial investment.
3. The firm can raise funds by selling additional
ownership interest.
4. Income is distributed in proportion to ownership
interest.
Disadvantages
1. Income paid to owners is subjected to double
taxation.
2. Ownership and management are separated in larger
organizations
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
1.
2.
3.
4.
5.
6.
7.
POSSIBLE GOALS
Survive.
Avoid financial distress and bankruptcy.
Beat the competition.
Maximize sales or market share.
Minimize costs.
Maximize profi ts.
Maintain steady earnings growth
The goal of financial management is to
maximize
stockholder wealth by means of maximizing the
current value per share of the existing stock.
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A. Investment Banks and Brokerage
Activities Investment banking houses help
companies raise capital.
(1) Advise corporations regarding the design
and pricing of new securities,
(2) Buy these securities from the issuing
corporation,
(3) Resell them to investors
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
Savings and Loan Associations (S&Ls)
Credit Unions
Credit unions are cooperative associations
whose members have a common bond, such
as being employees of the same firm or
living in the same geographic area.

Commercial Banks
Commercial banks raise funds from depositors
and by issuing stock and bonds to investors

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Mutual Funds
Mutual funds are corporations that accept money from
savers and then use these funds to buy financial
instruments. These organizations pool funds, which
allows them to reduce risks by diversification and achieve
economies of scale in analyzing securities, managing
portfolios, and buying/selling securities.

Hedge Funds
Hedge funds raise money from investors and engage in a
variety of investment activities. Unlike typical mutual
funds, which can have thousands of investors, hedge
funds are limited to institutional investors and a
relatively small number of high–net-worth individuals

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Private Equity Funds
Private equity funds are similar to hedge funds
in that they are limited to a relatively small
number of large investors, but they differ in
that they own stock (equity) in other
companies and often control those
companies, whereas hedge funds usually
own many different types of securities.

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
Life insurance companies take premiums,
invest these funds in stocks, bonds, real
estate, and mortgages, and then make
payments to beneficiaries. Life insurance
companies also offer a variety of taxdeferred savings plans designed to provide
retirement benefits.

Pension funds invest primarily in bonds,
stocks, mortgages,hedge funds, private
equity, and real estate.
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Financial securities are simply pieces of paper with
contractual provisions that entitle their owners to
specific rights and claims on specific cash flows or values
Debt
Equity
The value of an ownership interest in property, including
shareholders' equity in a business
Derivatives
Securities whose values depend on, or are derived from,
the values of some other traded assets.
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Financial markets bring together people and
organizations needing money with those having
surplus funds.
1.Physical asset & financial markets
2.Spot markets and futures markets: on- thespot
3.Money markets & capital market
4.Mortgage markets (loans on residents, agri.
Etc) & Consumer credit markets.
5.World, national, regional, and local markets
6.Private & Public Markets
7.Primary markets and Secondary markets
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Primary Markets
In a primary market transaction, the corporation is the
seller, and the transaction raises money for the
corporation.
Corporations engage in two types of primary market
transactions:
Public offerings (IPO) and private placements.
A public offering, as the name suggests, involves selling
securities to the general public, whereas a private
placement is a negotiated sale involving a specific
buyer.
 Secondary Markets
A secondary market transaction involves one owner or
creditor selling to another. Therefore, the secondary
markets provide the means for transferring
ownership of corporate securities

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Dealers Markets
Dealers buy and sell for themselves, at their own risk. A car
dealer, for example, buys and sells automobiles. In
contrast, brokers and agents match buyers and sellers,
but they do not actually own the commodity that is
bought or sold.
The Nasdaq Stock Market

Auction markets
Auction markets differ from dealer markets in two ways.
1. An auction market or exchange has a physical location (like
Wall Street).
2. In a dealer market, most of the buying and selling is done
by the dealer. The primary purpose of an auction market,
on the other hand, is to match those who wish to sell
with those who wish to buy. Dealers play a limited role.
 NYSE, BEI

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agency relationship
The relationship between stockholders and
management. Such a relationship exists
whenever someone (the principal) hires another
(the agent) to represent his or her interests.
agency costs
The costs of the conflict of interest between
stockholders and management
1. An indirect agency cost is a lost opportunity
2. A direct agency cost is an expense that arises
from the need to monitor management actions
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A. Managerial Compensation
1. Managerial compensation, particularly at the
top, is usually tied to financial performance in
general and often to share value in particular.
2. Incentive, Better performers within the firm will
tend to get promoted
B. Control of the Firm
Control of the firm ultimately rests with
stockholders. They elect the board of directors,
who in turn hire and fire managers
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