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Summary FIN2601 NOTES
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Summary of 32 pages for the course FIN2601 NOTES at University of South Africa (FIN2601 NOTES)
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Content
Introduction to managerial Finance
• Role of Financial management
• Financial Statement and Analysis
Importance of Financial Concepts
• Time Value of money
• Risk and Return
• Interest Rates and Bond valuation
• Stock Valuation
Past papers Used
Compliance and Use
• All question in this pack, comply with the curriculum of the FIN-2601.
• Our solutions are made and produced by our team of Assessors and well edited a
they do reflect the expectations of the exam setting body of FIN-2601 from the st
seating for this module
• Any queries, feel free to contact the pack author , and editor
• We also do recommend the student to use our notes, as quick reference to the
questions.
www.btscenter.co.za
Prepared by Marsh -0712468412
1
, FIN-2601 NOTES
TOPIC 1: INTRODUCTION TO MANAGERIAL FINANCE
THE Role and Environment oF Mangerial Finance
Financial Management
• Concerns the acquisition, financing, and management of assets with some overall goal in
mind.
Role(functions) of Financial Manager
• Planning and Forecasting
• Financing Decision
• Investment Decision
• Dividend Decision
• Financial negotiation
• Cash Management
• Evaluating financial performance
• Dealing with relevant parties in the Financial Markets
Goal of the Firm or of Financial Management
• Maximization of Shareholder Wealth!
- Value creation occurs when we maximize the share price for current shareholders.
Profit Maximization
• Maximizing a firm’s earnings after taxes.
Problems
• Could increase current profits while harming firm (e.g., defer maintenance, issue com
stock to buy T-bills, etc.).
• Ignores changes in the risk level of the firm.
Earnings per Share Maximization
• Maximizing earnings after taxes divided by shares outstanding.
Problems
• Does not specify timing or duration of expected returns.
• Ignores changes in the risk level of the firm.
• Calls for a zero payout dividend policy.
www.btscenter.co.za
Prepared by Marsh -0712468412
2
, FIN-2601 NOTES
Strengths of Shareholder Wealth Maximization
• Takes account of: current and future profits and EPS; the timing, duration, and risk o
profits and EPS; dividend policy; and all other relevant factors.
• Thus, share price serves as a barometer for business performance.
Role of Management
• agent
Management acts as an for the owners (shareholders) of the firm.
• Anagent is an individual authorized by another person, called the principal, to act in th
latter’s behalf.
Agency Theory
• Agency Theory is a branch of economics relating to the behavior of principals and their
agents.
• incentives so that management acts in the principals’ best interests
Principals must provide
and thenmonitor results.
• Incentives include, stock options, perquisites, and bonuses
Agency Problem
• A conflict of interest arising between shareholders and management because of
differing goals.
Agency Costs
• A type of internal cost that arises from, or must be paid to, an agent acting on behalf
of a principal. Agency costs arise because of core problems such as conflicts of
interest between shareholders and management. Shareholders wish for management
to run the company in a way that increases shareholder value.
• Costs of monitorig the budgets, internal audits etc
Corporate Governance
• represents the system by which corporations are managed and controlled.
• Includes shareholders, board of directors, and senior management.
• Then shareholder wealth maximization remains the appropriate goal in governing the
firm.
Legal Forms of Business
Sole Proprietorships
www.btscenter.co.za
Prepared by Marsh -0712468412
3
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