1. introduction to FA

Applied Data and Communication Degree Overview

  • Intake: 40 - Semester 4

  • Department: Computing and Mathematics

  • Senior Lecturer: ID Wattuhewa

  • Department of Management and Finance

  • Faculty: Management, Social Sciences, and Humanities

  • Institution: General Sir John Kotelawala Defence University

  • Course: MF 2233 Financial Analysis

Outline of Financial Analysis Course

  1. Finance: A Quick Look

  2. Business Finance and The Financial Manager

  3. Forms of Business Organization

  4. The Goal of Financial Management

  5. The Agency Problem and Control of the Corporation

  6. Financial Markets and the Corporation

Key Concepts and Skills

  • Understand the basic types of financial management decisions and the role of the financial manager.

  • Recognize the goal of financial management.

  • Analyze the financial implications of various business organization forms.

  • Identify conflicts of interest between owners and managers.

Basic Areas of Finance

  • Corporate Finance: Also known as Business Finance.

  • Investments: Focuses on the valuation of financial assets.

  • Financial Institutions: Includes banks, credit unions, etc.

  • International Finance: Specialization in finance across borders.

Investments

  • Encompasses financial assets such as stocks and bonds.

  • Key components include the value of financial assets, risk versus return, and asset allocation.

  • Job Opportunities:

    • Stockbroker or financial advisor

    • Portfolio manager

    • Security analyst

Financial Institutions

  • Institutions that handle financial matters:

    • Commercial and investment banks

    • Credit unions

    • Insurance companies

    • Brokerage firms

  • Job Opportunities available in these fields.

International Finance

  • A specialization that may involve working abroad or frequent travel.

  • Requires knowledge of exchange rates and political risks.

  • Understanding cultural customs and fluency in foreign languages is beneficial.

Why Study Finance?

  • Marketing: Budgeting and marketing strategies.

  • Accounting: Functions overlapping with finance, including financial statements.

  • Management: Skills in strategic thinking and profitability assessment.

  • Personal Finance: Planning for retirement, budgeting, and managing cash flow.

Business Finance Decisions

  • Critical questions that finance addresses include:

    • Long-term investment choices

    • Sources of long-term financing

    • Management of daily financial activities

Forms of Business Organization

  • Major Forms:

    1. Sole Proprietorship

    2. Partnerships (General and Limited)

    3. Corporations (Private Limited and Public Limited Liability Companies)

Sole Proprietorship

  • Advantages:

    • Easiest to start and least regulated

    • Owner retains all profits

    • Taxed as personal income

  • Disadvantages:

    • Limited to the owner’s life

    • Limited capital and unlimited liability

    • Difficulty in selling ownership interests.

Partnership

  • Advantages:

    • Increased capital through multiple owners

    • Easier to start compared to corporations

    • Income is taxed as personal income

  • Disadvantages:

    • Unlimited liability for owners

    • Difficult to transfer ownership

    • Partnership dissolves upon certain events like a partner's death.

Corporation

  • Advantages:

    • Limited liability for shareholders

    • Unlimited life span of the corporation

    • Easier transfer of ownership

    • Better capital raising potential

  • Disadvantages:

    • Potential agency problems due to separation of ownership and management

    • Double taxation on corporate income and dividends.

Financial Management

  • Involves acquisition, financing, and management of assets aimed at achieving specific goals.

Investment Decisions

  • Key considerations:

    • Optimal firm size

    • Specific assets to acquire

    • Asset reduction or elimination

  • Ranked as the most crucial decision area.

Financing Decisions

  • Focus on:

    • Types of financing and financing mix

    • Dividend policies and acquisition of funds

  • Important for balancing the balance sheet.

Asset Management Decisions

  • Efficient management of existing assets

  • Financial managers focus more on current asset management.

Goal of the Firm

  • Maximization of Shareholder Wealth:

    • Involves enhancing share price to benefit current shareholders.

Agency Theory

  • Describes the relationship between principals (owners) and agents (managers).

  • Incentives must align management interests with those of shareholders.

    • Common incentives include stock options and performance bonuses.

Agency Problem

  • This occurs when there is a conflict of interest between management and the owners.

  • Effective incentives and corporate control can mitigate the agency problem.

Social Responsibility and Governance

  • Wealth maximization does not exclude being socially responsible.

  • Corporate governance involves managing and controlling the firm, including shareholders and board members.

Sarbanes-Oxley Act of 2002

  • Establishes standards for corporate governance and accountability.

  • Enhances disclosure requirements and penalties for securities law violations.