ACST101 – Week 1Introduction

Welcome to ACST101

• Associate Professor Kathy Walsh

• Course related questions: iLearn (peer to peer)

• Confidential questions: acst101@mq.edu.au

• Consultation: See iLearn• Teaching assistant: Veronica Chen

ACST101 Description

This unit provides an introduction to the pricing of financial instruments and the functions of the Australian financial system. Students apply mathematical concepts in valuing a range of financial assets including loans, bonds, shares and investments. They also increase their financial literacy by learning about financial institutions, financial markets, risks and regulation. Spreadsheet skills are introduced throughout the unit. A background of HSC Mathematics or equivalent numerical competency is assumed. Students who have not studied the necessary mathematics are advised to complete Mathematics 123 (MATH123) before enrolling in ACST101. The concepts developed in this unit are required in subsequent actuarial studies and finance units. The unit also provides a practical introduction to finance for students not planning to continue with study in the area.

ACST101

• Kickstart – getting ready for the semester• Ilearn - Course outline and Assessment• Redesigned course: Significantly different from

2014• Tutorials• PAL

In class polling

• Go to b.socrative.com (or download the student app)

• You will see a welcome screen• Enter the room number: ACST101• Join room – room sized is limited• Enter your name (anonymous)• You will have an opportunity to answer questions

in real time

iLearn: Maths preparation test

ACST101 Learning Outcomes

• Identify and explain fundamental concepts of finance• Apply fundamental concepts of finance to current affairs

and real life situations • Calculate time value of money problems• Evaluate financial information using a spreadsheet• Explain the relationship between risk and return • Identify the risks and major functions and regulation of

financial markets

Assessment

Name Weighting Due

Multiple choice quizzes

20% 11:59pm Monday Weeks 4 to 12

Class Tests30% During lectures in Weeks 5 and 10

Final Examination50% University Examination Period

Lecture 1: Learning Objectives

1. Identify the key financial decisions facing the financial manager of any company

2. Identify the basic forms of business organisation used in Australia, and review their respective strengths and weaknesses

3. Describe the typical organisation of the financial function in a large company

4. Explain why maximising the current value of the company’s shares is the appropriate goal for management

5. Discuss how agency conflicts affect the goal of maximising shareholder value

6. Explain why ethics is an appropriate topic in the study of corporate finance.

7. Identify and use basic excel functions

The objective of managers

• Should be to maximise the wealth of the shareholders

• A company also has other stakeholders that rely on it, for example:– Managers: salaries, bonuses– Employees: wages– Creditors: interest & principle– Suppliers: pay for goods/services– Government: tax

The role of the financial manager

• A firm generates cash flows by selling the goods and services produced by its productive assets and human capital

• When the cash flows generated from the productive asset exceed the cash outflows (such as operating cash flows) the remaining cash is called residual cash flows

• The company can choose to pay any profit to the owners as a cash dividend, or reinvest the cash in the business

Cash flow diagram

Basic Sources of Funds

• Make a profit by selling a product for more than it costs to produce.

• Borrow money – bank loans, bonds (debt funding)

• Sell part of the company in the form of shares to investors (equity funding)

The role of the financial manager

It is all about cash flows:• A company is unprofitable when it fails to

generate sufficient cash inflows to pay operating expenses, creditors and tax.

• Firms that are unprofitable over time will be forced into bankruptcy by their creditors

• In bankruptcy, the company will either be reorganised, or the company’s assets will be liquidated

The role of the financial manager

Three fundamental decisions in financial management:

1. The capital budgeting decision:– Which productive assets should the firm buy?

2. The financing decision:– How should the firm finance or pay for assets?

3. Working capital management decisions:– How should day-to-day financial matters be

managed?

Legal forms of business organisation

Sole Trader:• Is the simplest type of business to start and the least

regulated• Keeps all the profits from the business• Doesn’t share decision making• All company income is taxed as personal income• Has unlimited liability for all business debts and other

obligations of the company

Legal forms of business organisation

Partnership:• Has the same basic advantages and

disadvantages as a sole trader• Has access to more capital, knowledge, experience

and skills• When a transfer of ownership takes place the

partnership is terminated, and a new partnership is formed

• The problem of unlimited liability can be avoided in a limited partnership

Legal forms of business organisation

Company:• Is a legal entity. In a legal sense, it is a “person”

distinct from its owners• The owners of a company are its shareholders• A major advantage of the company form of

business is that shareholders have limited liability

• Heavily regulated by the Australian Securities and Investments Commission (ASIC) and corporate regulations (Corporations Act 2001)

The goal of the company

What should management maximise? • Minimising risk or maximising profits

without regard to the other is not a successful strategy

The goal of the company

Why not maximise profits? • Under creative accounting, a decision that increases

profits under one set of accounting rules can reduce it under another.

• Accounting profits are not necessarily the same as cash flows

• Profit maximisation does not tell us the timing cash flows are to be received

• Profit maximisation ignores the uncertainty or risk associated with cash flows

The goal of the company

Maximise the value of the company’s share price• When analysts and investors determine the

value of a company’s share price, they consider– The size of the expected cash flows– The timing of the cash flows– The riskiness of the cash flows.

Major factors affecting share prices

The goal of the company

Can management decisions affect share prices?

YES!!!• There are many factors that can affect this:

– Short term• Advertising campaign

– Long term• Investing in new product lines

Agency conflicts:

Ownership and control• For large companies, the ownership of the firm

is spread over a number of shareholders and the company’s owners may effectively have little control over management

• Management may make decisions that benefit their self-interest rather than those of the shareholders

Agency conflicts:

Agency relationships• An agency relationships arises whenever one

party, called the principal, hires another party, called the agent

• Agents have a fiduciary duty to shareholders to put shareholders interests above their own

Agency conflicts:

Do managers really want to maximize the share price?• Shareholders own the company, but managers

control the money and have the opportunity to use it for their own benefit

Agency Costs• The costs of the conflict of interest between the

company’s owners and its management

Agency conflicts:

Aligning the interests of management and shareholders• Board of directors• Management Compensation• Managerial labour market• The takeover market• An Independent Board of Directors

The importance of ethicsin business

The law is not enough• Ethicists argue that laws and

market forces are not enough• Serious Consequences

– Legal cost of ethical mistakes can be extremely high

Excel skills

• Gantt Chart– plan out a project or a series of tasks

• Excel Skills– cell formatting – insert - columns and rows– relative references – printing - scaling, portrait, landscape– Freeze panes

Summary

• Identify the key financial decisions facing the financial manager of any company

• Strengths, weaknesses of the basic forms of business organisation

• Corporate goal should be about maximising the current value of the company's share

• Presence of agency conflicts affect the goal of maximising shareholder value

• Ethics are important in the study of corporate finance• Excel skills

Coming up

• Lecture: Time Value of Money– If maths is not your first language please do

some revision before next week.

• Weekly compulsory online quizzes (quiz one can be used as a diagnostic)

• In class test in week 5