CHAPTER 1 & 2

1. 3 KEY DECISIONS/ACTIVITIES
- Financing decision: to decide which types of funds to raise and the raising of funds.
- Investment decision: to decide the amount to be invest into which types of assets.
- Dividend decision: to establish a dividend policy to retain earnings for reinvestment or pay
dividends to shareholders. (制定股息政策以保留收益用于再投资或向股东支付股息。)

Financial management : manage financial activities to maximize shareholders’ wealth. A good

financial planning and management will increase the value of a firm and shareholders' wealth. The
most important goal of most corporations is to maximise shareholder’s wealth. Maximize profit and
maximize shareholders’ wealth are different.

Profit Maximisation refers to how much profit the company makes. If company focus on maximising
shareholder’s wealth, it means company focus on the value of a company.

Factors Affecting Stock/Share Price of A Company

1. Cash flow : expectation of firm will generate cash in future. higher the expected cash inflows
and the lower the expected cash outflows, the higher the firm’s stock price will be.

2. Timing of cash flow: Refers to when the firms expect to receive cash and when they expect
to pay out cash. A dollar received today is worth more than a dollar received a year from
now, this is because we can earn interest on money received today. The sooner the cash
inflows and the later the cash outflows, the higher the firm’s stock price will be. (现金流入
越早，现金越晚 资金流出，公司的股价就会越高。)

3. Riskiness of expected cash flow: For an asset with uncertain cash flows (risky), a rational
investor will demand for a higher return than a risk-less asset. Concept in finance is “higher
risk, higher return”.

Why cash flow is important?

Why is cash flow important? Cash flow is defined as the amount of money entering and leaving your
business over a given period of time. Cash flow is important because it enables you to meet your
existing financial obligations as well as plan for the future.
Chapter 2

responsibilities of a financial manager

- Forecasting and planning: interact with other executives as they look ahead and plans which
will shape the firms’ future position.

- Major investment and financing decision: The financial manager needs to help figure out the
best way to grow sales and which assets to buy, as well as the best way to pay for these
investments.

- Coordinate and control: financial manager must interact with other executives to ensure the
firm is operated as smooth as possible.

- Dealing with financial market: deal with the money and capital markets. All firms are
affected by the general financial markets where funds are raised, where the firm’s securities
are traded, and where its investors are either rewarded or penalised.

- Risk management. Responsible for the firm’s overall risk management program, including
identifying the risk that should be managed and then managing them in the most efficient
manner.

3 parties to financial markets. (types of market participants who engage in financial market
transactions.)

Borrower , savers, and financial institutions (help bring together borrowers and savers.)

Financial management is strategic planning, organising, directing, and controlling of financial

undertakings in an organisation or an institute. It also includes applying management principles to
the financial assets of an organisation, while also playing an important part in fiscal management.

Chapter 4 time value of money

Annuity: set aside,, years/ months

No annuity : set aside now

At the beginning : must add : x(1+i)

At the end no need to add

Compounded quarterly for FV

How to know it’s asking PV or FV?

PV :

- deposit TODAY (got information of Today)

- set aside now

FV:

- cost RMXXX today… will cost = FV

- after xx years
Chapter 5 inflation

Inflation happens when the prices of goods and services go up, this means that you can buy less with
$1 today than you could yesterday. Inflation makes money worth less over time.

What causes inflation?

Economists have found a number of things that could cause inflation. Cost-push inflation is the
decrease in the aggregate supply of goods and services stemming from an increase in the cost of
production. Demand-pull inflation can be caused by a rise in the cost of raw materials or labour.
Built-in inflation is the idea that higher wages cause prices to go up because people expect prices to
go up. Prices can also go up because of changes in supply or demand, as well as because of loose
fiscal and monetary policy.

WHO IS BENEFITS FROM INFLATION?

inflation benefits borrowers who have lower fixed interest rates and owners of assets that rise along
with inflation. The relative costs of servicing these debts becomes less expensive with inflation.

Inflation tends to harm savers and lenders the most. Savers see their cash deposits eroded of
purchasing power, while those who loaned money at lower fixed interest rates are stuck with less
valuable loans until they mature. Consumers are also harmed by inflation as goods become more
expensive.

Chapter 8,9,10 source of financing

( a ) Overdraft

overdraft lets you borrow money through your current account by taking out more money than you
have in the account

- usually used to financing working capital. As long as the overdraft limit is not reached, there
is no need to pay in instalments.

advantages:
1. When the account is overdrawn, the customer only has to pay interest. If a customer doesn't
use his overdraft, he doesn't have to pay interest.

2. An overdraft can do the same job as a medium term loan: a facility can simply be renewed
every time it comes up for review.
 3. The bank has the right to review the customers’ overdraft facility periodically and perhaps
agrees to additional facilities.

Disadvantages:

1. Overdraft is subject to annual reviewed by the bank. The bank has the right to withdraw the
facility or charge higher interest.
2. Overdraft is repayable on demand. Customer must repay in full if the bank decides to
withdraw the facility granted.
3. Generally the overdraft interest rate is higher than a loan.

( b ) short term loan

which a borrower agrees to make a series of interest and principal payments on specific dates to the
lender. It is a loan from a bank to a business with an initial payment due date of less than one year.

Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a
company's balance sheet. An accounts payable department's main responsibility is to process and
review transactions between the company and its suppliers and to make sure that all outstanding
invoices from their suppliers are approved, processed, and paid. When processing an invoice,
important information from the invoice needs to be written down and put into the company's
accounting system. After this is done, the invoices must go through the business process of the
company before they can be paid. ( whatever you’re doing now wenqi!)

*amounts that are owed to vendors or suppliers for goods or services that have been received but
not yet paid for. On the company's balance sheet, the accounts payable balance shows the total
amount owed to vendors. *

Accounts payable are the main way that businesses get short-term, unsecured loans.

Doesn’t carry any interest charges. Trade credit need not be negotiated regularly. Any increase in
trade credit is automatic as long as it doesn't go over the limit. The amount of trade credit will
increase as business expands.

( c ) Factoring ( selling account receivables to 3 rd party for cash)

>exporter and lender agreed to a debt purchase facility

> financier becomes loss payee of credit insurance or provides debt protection.

> Notice of assignment of debt(invoice) to financer provided to importer

> goods shipped and importer invoiced by exporter

> financier purchases invoice and pay 80% proceed to importer

> importer pays the invoice to financier and exporter receives balance.

Factoring example : lets say payment terms are 30 days and your Account receivable is 500,000.
Instead of waiting 30 days for customers to pay , company sell the invoices to 3 rd party for up to 80%
and get the cash right now. Then the customer will pay to the 3 rd party.

Advantages of factoring:

1. Smoother cash flow and financing plan.

2. Factors can your business trade with better quality customers and improved debtor spread.
3. Enjoy security against bad debt losses.
4. Adjust your financing needs to your sales.

Disadvantages of factoring:

1. Factors will restrict funding against poor quality debtors

2. Some customers may prefer to deal directly with firm
3. Factor deals with the firm’s customers will affect what the customers think of the firm

Advantages of Short Term Financing

The biggest advantage of a short term loan is that, upon approval, you will often receive funds within
a week. For example, you need to make a quick payment to outstanding bills, or you need to
purchase new stock quickly – a short term loan will help you meet your cash requirements
immediately.

Flexibility. A company might not want to take on long-term debt if it only needs money for short-
term or seasonal needs.

Disadvantages of Short Term Financing

Risk. If a company borrows money for a long time, its interest costs will be fairly stable over time,
but if it borrows money for a short time, its interest costs will vary a lot and sometimes be quite
high.

If a firm borrows heavily on a short-term basis, a temporary recession may make it impossible to
repay the debt on schedule. If the borrower is in a weak financial position, the lender may not
extend the loan, which could force the firm into bankruptcy.

Long term finance: maturity exceeding 1 year , such as bank loan , bonds , leasing…
Chapter 10a long term finance

Equity financing

the owners would have to give up more ownership, reducing their share of future profits and
decision-making power.

Debt financing

their monthly expenses would be higher, leaving less cash on hand to use for other purposes, as well
as a larger debt burden that it would have to pay back with interest.

Therefore, businesses MUST determine which option or combination is the best for them.

Common stock = ordinary shares

: is an equity investment represents ownership in corporate form of business.

Example: purchase of Bugatti shares means ownership of the company.

/ shareholders allow to vote an important matters.

/ no maturity, if shareholders pass away, the share will owed by the next kin ( close relatives )

/ shareholders may appoint directors as representatives.

/ ordinary share are easy to buy and sell.

/ price and market information are widely spreaded in news or financial medias.

Advantages for investors: - no limit to stocks capital gains. Higher return due to higher risk.
Transaction cost low. Have voting rights.

Disadvantages for investors: - incase of bankruptcy, bondholders and preferred shareholders have to
be paid first.

-may not receive income.

Preferred shares

- Known as hybrid security. Because it has debt + equity characteristic.

- Pay fixed dividend before common stock dividends.
- Normally not given right to vote in company administration decision.

Advantages

- Investors receive first dividends.

- Some PS provides cumulative shares.
- Give investor higher claim.
 - Might have option to trade in PS to CS.

Equity financing

- Most new issues of share capital are in the form of ordinary share capital and shareholders
are the owners or members of the company.
- Firms that issue ordinary share capital are inviting investors to take an equity stake in the
business.
- the owners would have to give up more ownership, reducing their share of future profits
and decision-making power.

Debt financing

- Long term debt capital might be raised in the form of a bonds or bank loans.
- their monthly expenses would be higher, leaving less cash on hand to use for other
purposes, as well as a larger debt burden that it would have to pay back with interest.

Chapter 13,14 part one

Investing surplus fund ( extra money )

How Surplus Funds Are Generated?

- Unexpectedly large amounts of cash generated from operations, may be due to higher
income from increased sales revenue.
- Lower expenses may be because of improved productivity or a cost-cutting exercise
- Seasonal factors – surpluses generated in good months of sales
- Improvements in working capital management

Categories of surplus fund

Long term surpluses: very rare. When they arise, the business is likely to repay liabilities or pay out
the money to its shareholders in the form of dividends.

Short term surpluses: These surpluses need to be invested temporarily. Perhaps in short term
securities or deposit accounts as they have higher liquidity.

How to use it?

- Purchase fixed assets or buy another company

- Used as a buffer by keeping in company
- Re-invested to expand or grow the business
- Reduce debts or borrowings
- Returned to shareholders as dividends
- Re-purchase company’s own shares (buy back share)

Factors to be considered in investment of surplus funds

- Profitability/ return : How much to invest or invest in what type of investment vehicles will
depend on the return on investment or its profitability. The higher the return, the more
attractive the investment is.

- Liquidity: When deciding on investment, company should consider how fast the investment
can be converted into cash in the event it needs the cash. For example, investment in land
and property will not able to provide liquidity because it needs time to look for buyers and
negotiation.

- Safety and risk: Cash surpluses can be stolen or lost if no proper safety measures are in
place. They are the assets of the company and do need to be looked after. Any surplus of
cash must be kept secured.
- Legal restrictions: Different organisations have certain restrictions by law on investment.

- Maturity: is the length or duration of the investments. (它是投资的长度或持续时间)A

company’s investments should mature and that the surplus cash should be made available
when the business needs it. (公司的投资应该成熟，并且应该在业务需要时提供盈余现
金。)