FINANCIAL CONTROLLERSHIP

Introduction to FINANCIAL CONTROLLERSHIP

WEEK 1
` Module 1
Introduction to FINANCIAL CONTROLLERSHIP

At the end of this module, you are expected t0:

1. Understand the meaning of Financial Management
2. Learn the flow of cash and it’s operation.
3. Distinguish the Different types of financial markets
A Synopsis of Financial Management
• What is finance: cash flows between capital markets and firm’s managements
• The target of a business
• Types of business organization
• Intrinsic value and market financial value of a stock
• Bureau issue
• Company morality
• Career opportunities in finance

What is finance: cash flows between capital markets and business managements.

(1)Cash produced by trading economic assets in financial markets

(2)Cash invested in business managements and accustomed buy real assets
(3)Cash produced from business management
(4a)Cash reinvested in business management
(4b) Cash returned to financier
The duty of a financial manager
Forecasting and planning of business’ financial desires
Creating funding and venture determination
Integrating with other departments/divisions
Negotiating with financial markets
Administering risks

Finance within an institution: the significance of finance

Finance contains three sectors

(1)Financial management: allied funding, which handles with determination associated with how many
and what sort of assets a company must acquire (investment decisions), in what way a company should
increase capital to buy assets (financing decisions), and in what way a company should do to inflate its
stakeholder's wealth (target of a firm) - the main focus of this category
(2) Capital markets: learning of economic markets and organizations, which handles interest rates, stocks,
bonds, state protections, and other marketable protections. It also comprises the Federal Reserve System
and its guidelines.
(3) Investments: learning of security scrutiny, portfolio hypothesis, market scrutiny, and behavioral
finance
• The target of a business To inflate stakeholder’s wealth (or business long-run value)

Why not profit or EPS maximization? Profit inflation commonly avoid timing and jeopardize cash flows
EPS now and then will be wielding or confusing Why not concentrating on the short-term? Elite
entrepreneurs receive a huge gratuity for employing in dangerous undertakings that might produce short-
term profits and those undertakings weaken, later on, subprime loan agreement, for instance.

Forms of business organization

Proprietorship: an unincorporated company possessed by one person
Advantages:
Simple and economical to build
Liable to fewer state governance
minimize income taxes

Disadvantages:
Boundless personal accountability
Restricted period of business
Arduous to increase capital

Partnership: an unincorporated company possessed by two or more individual

Advantages vs. disadvantages: related to those of ownership, in general Corporation: legal body made by
a government

Advantages:
Limited liability
Easy to transfer the ownership
An unlimited lifetime of business
Easy to raise capital

Disadvantages:
Double taxation (at both allied and individual levels)
Cost of reporting

Intrinsic value and market price of a stock

1.Intrinsic value is a projection of a stock’s “fair” value (how much a stock should be valued)
2.Market price is the real price of a share, which is driven by the demand and supply of the share in the
market
3.Stimulus of intrinsic value and share price
4.Intrinsic value is assumed to be predicted using the “true” or authentic jeopardize and return data.
Nonetheless, because sometimes the “true” or authentic data isn't straight apparent, the intrinsic value
can't be calculated precisely.
5.Market value is located on recognized risk and return data. After all the anticipated risk and return
might not be balanced to the “true” risk and return, the market price is often mispriced as well.
6.Stock in equilibrium: when a share’s market value is balance to its intrinsic value the shares are in
evenness.
7.Stock market in equilibrium: when all the shares in the market, the market value is a balance to its
intrinsic value) then the market is in evenness.

When the intrinsic value of a share is on top of the market value of the share, we are saying that the share
within the market is under-valued (under-priced) An an example, if the intrinsic value for a share is $26
and the market value is $25, then the share is under-priced.
When the intrinsic value of a share is not up to the market value of the share, we are saying that the share
in the market is over-valued (over-priced) As an example, if the intrinsic value for a share is $30 and also
the market value is $32, then the stock is over-priced.

When the intrinsic value of a share is a balance to the market value of the share, we are saying that the
share within the market is fairly priced (the stock is in evenness)

Bureau Problem
A potential conflict of interest between two class of individuals
Shareholders vs. Managers
Instead of stakeholders’ wealth upsurge, managers are also fascinated by their wealth upsurge
Beneficial inspirational medium
Accomplishment shares, executive share alternative (positive)
Menace of termination (negative)
Antagonist vigorous (negative)
Shareholders vs. bondholders
Shareholders favor high-risk programs for higher returns
Bondholders obtain steady fee and therefore obtain minimum risk programs

Company Morality (Business ethics) - Principles of conduct or moral behavior toward its workers,
clients, society, and shareholders - all its stakeholders
Measurements: Impulse of its workers, compliance to laws and guidelines, moral principles to
commodity security and condition, fair recruitment process, fair marketing and selling process, accurate
use of classified information, society engagement, and no unlawful remittance or process to acquire
business

Career opportunities in finance

Banking
Investments
Insurance
Corporations
Government

Financial Markets and Organizations

• Capital allocation process
• Financial markets
• Financial institutions
• The stock market and stock returns
• Stock market effectiveness

Capital allocation process The method of capital flows from those with balance capital to those who need
it

Three types of transfer

(1)Direct transfer: a company sells its bond straight to a financier
(2) Indirect transfer through an investment banker: a company sells its bond to an investment banker,
which successively sells the same bond to a person financier
(3)Indirect transfer through a financial intermediary: a financial intermediary contains funds from
financier by donating its bond and uses funds to buy another company bond

Capital formation process

Financial markets
Physical asset market vs. financial asset markets
Physical asset markets are markets for certain (or tangible) assets

Financial asset markets are markets for financial assets - a concentrate of this category
Money markets vs. capital markets
Money markets are markets for short-term and greatly liquid debt safety (less than one year)

Capital markets are markets for intermediate and long-term debts and shares (one year or longer)
Primary markets vs. secondary markets
Primary markets are markets for releasing new safety
Secondary markets are markets for commerce current bond

Spot markets vs. futures markets

Spot markets are markets for urgent transfer
Futures markets are markets for outlook transfer although the transaction is created today

Private markets vs. public markets

In private markets: dealing are settled straight between two groups
Public markets: regulated contracts are traded on systematized exchanges

Derivative markets: for derivative securities

A derivative security is a bond whose price is derived from the price of a latent asset. For instance,
outlook contracts and option contracts
Why can we need financial markets?
Bring debtors and bestower jointly to swap needs

Financial institutions
Investment banks (investment banking houses): specially designed in bankrolling and allocating new
bonds.

The duty of investment bankers: bankrolls

Design bond with the characters that are appealing to financiers

Purchase these bond from the issuing company auction these bond to individual financier
Public offering vs. private placement
Public offering: a bond donating to all financiers
Private placement: a bond donating to a limited number of potential financiers.
Commercial banks: supply main banking and checking services, like BOA

Financial service corporations: huge cartel that links various financial organizations into a sole
corporation, like Citigroup, S&Ls, credit unions, Life insurance companies.

Mutual funds: auction themselves to financiers and use funds to lend in bond Exchange-traded funds
(ETFs): mutual funds but traded like shares

Hedge funds: related to mutual funds with some limitations.

The stock market and stock returns

Organized markets vs. over-the-counter
(OTC) markets Organized markets (exchanges) have tangible areas like NYES OTC markets are affiliated
by a computer network with a lot of business owner and financial expert, like NASDAQ

Auction markets vs. dealer markets

Organized markets are auction markets
OTC markets are dealer markets
IPO markets: markets for first public donations

Stock market transactions (three types)

(1)Trading outstanding (existing) stocks takes place in a secondary market
(2)Auctioning additional stocks by a candidly purchased business takes place in a primary market
(experienced offerings)
(3)Auctioning stocks to the public for the first time by a privately purchased business takes place in a
primary market (IPOs)