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Jamil Ahmed Assistant Professor
Financial Services Industry in UK
In UK industry accounts for about a proportion of National Output as the whole of Manufacturing Industry (2008). The growth is still amazing after 2008 financial crises. It contributed $200 billions, accounting for 10% of total economic output.
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Scope of Financial Sector
Number of Firms in the U.S.
Corporation 1,011,973 1,292,081 622,908 Partnership 2,584,427 Sole Proprietorship $149,121,474 $2,808,013,079 S-Corporation $479,673,700 $1,068,232,095
Size of Payroll (000s)
Source: U.S. Census 2008 SUSB Annual Data
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What is Finance?
At the macro level, finance is the study of financial institutions and financial markets and how they operate within the financial system in both the Local and global economies. At the micro level, finance is the study of financial planning, asset management, and fund raising for businesses and financial institutions. Financial management can be described in brief using the following balance sheet.
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What is Finance?
Macro Finance
Assets: Current Assets Cash & M.S. Accounts receivable Inventory Liabilities & Equity: Current Liabilities Accounts payable Notes Payable Total Current Liabilities Long-Term Liabilities Total Liabilities Equity: Common Stock Paid-in-capital Retained Earnings Total Equity Total Liabilities & Equity
Working Capital
Total Current Assets Fixed Assets: Gross fixed assets Less: Accumulated dep. Goodw ill Other long-term assets Total Fixed Assets Total Assets
Working Capital
Investment Decisions
Financing Decisions
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Areas of Specialization in Finance
Financial Markets
Markets of users and savers of funds. Design and delivery of financial advice and products to individuals, businesses, government. Financial management of business firms.
Financial Services
Managerial Finance
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Basic Forms of Business Organization
Sole Proprietorship
Owned by one person, operated for personal profit. Owned by two or more people, operated for joint profit. Legal entity, owned by individuals, operated for joint profit.
Partnerships
Corporations
Sole Proprietorship
STRENGTHS: Low organizational cost Income taxed once as personal income Independence Secrecy Ease of dissolution WEAKNESSES: Unlimited liability Limited funding Proprietor must be all Difficult to develop staff career opportunities Lack of continuity on death of proprietor
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Partnerships
STRENGTHS: Improved funding sources Increased managerial talent Income split by partnership contract, taxed as personal income WEAKNESSES: Unlimited liability to all partners Partnership dissolved upon death of partner Difficult to liquidate or transfer ownership
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What is a Corporation?
Corporation-A business organized as a separate legal entity owned by stockholders. Types of Corporations:
Public Corporations Private Corporations
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Corporations
STRENGTHS: Owners liability limited Large capitalization possible, greater funding Ownership readily transferable Indefinite life Professional management
WEAKNESSES: Higher tax rates/Double Taxation Expensive organization Greater government regulation When publicly traded, lacks secrecy Improper corporate structures may lead to Agency Problems
Corporate Organization Chart
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Goals of The Corporation
Managers/Investors forced to make decisions and choices in the harsh environment. All must therefore be very clear about the purpose of the organization and its imperative for the management teams to be aware of, respect and contribute to the objectives. Achieving Target Market Share. Keeping Employees at peace. Survival. Creating an Industrial Empire. Maximization of profit. Maximization of Shareholders Wealth.
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Goals of The Corporation
Wealth maximization vs. profit maximization:
Prospects: Identical profits by two firms but one is valued more and other less by shareholders. As profits fails to reflect the relative potential of two firms.
Risk: Same profits and same future prospectus. But the returns of one firms have a greater variability.
Accounting Problems Communications
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The Ethics of Maximizing Value
Does value maximization justify unethical behavior?
Recent examples: Enron
WorldCom Bernard Madoff
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Agency Problem
Do managers really maximize value?
Agency Problems
Managers are agents for stockholders, but the managers may act in their own interests rather than maximizing value
Shareholders vs. Stakeholders
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Agency Problem
Different Information Stock prices vs. returns Dividend Policy Financing Decisions Different Objectives Managers vs. shareholders Top managers vs. lower managers Stockholders vs. banks and lenders
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Agency Problem Solutions
Compensation plans Board of Directors Blockholders
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Agency Problem Solutions
Takeovers Specialist Monitoring Legal and Regulatory Requirements
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Role of the Financial Manager
Firms Operations
(2) (1)
Investors
Financial Manager
(3)
(4a)
Real assets
(4b)
Financial Assets
1. Cash raised from investors (how?) 2. Cash invested in firm 3. Cash generated by operations 4A. Cash reinvested in the firm 4B. Cash returned to investors
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The Flow of Capital: Closely Held Corporations
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The Flow of Capital: Public Corporations
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Financial Markets
Financing Decision
Source of Funds (Capital) Capital Structure
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The Flow of Capital: Public Corporations
Financial Market:
Market where securities are issued and traded.
Primary Market:
Market for the sale of new securities by corporations.
Secondary Market:
Market in which previously issued securities are traded among investors.
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Financial Markets
Initial Public Offering (IPO):
First offering of stock to the general public.
Fixed-Income Market:
Market for debt securities
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Information Provided by Financial Markets:
Commodity Prices Interest Rates Company Value Cost of Capital
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Function of Financial Markets
Transport cash across time Risk transfer and diversification Liquidity Payment mechanism Provide information
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Financial Intermediaries
Mutual Fund
An investment company that pools the savings of many investors and invests in a portfolio of securities
Hedge Fund A private investment pool, open to wealthy or institutional investors, that is only lightly regulated and therefore can pursue more speculative policies than mutual funds Pension Fund Fund set up by an employer to provide for employees retirement
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