Outline Notes

PROGRAM BBA, BIM, BHRM, BAC, BEC, BMKT, BTRM, BHM

MODULE BBPW3103

FINANCIAL MANAGEMENT I

TUTORIAL

SESSION

T1

TOPIC 1

TOPIC 2

TOPIC 3

Introduction

Subtopics:

1. Finance

2. Roles of a Financial Manager

3. Objectives of Financial Management

4. Agency Problems

Analysis of Financial Statements

Subtopics:

1. Annual Report and Users of Financial Statements

2. Financial Ratio Analysis

3. Conducting a Complete Ratio Analysis

4. Weaknesses of Financial Ratios

Time Value of Money

Subtopics:

1. Concept of Compounding and Future Value

2. Concept of Discounting and Present Value

3. Future and Present Values of a Series Cash Flows

4. Compounding and Discounting More than Once a Year

LEARNING

OUTCOMES

Topic 1:

• Identify the areas of finance and its importance to businesses

• Explain the four main roles of financial manager in a company

• Discuss the main objective of financial management

• Examine the relationship in agency problem

Topic 2:

• Explain the importance of financial statements to different groups of users

• Calculate the ratios for liquidity, asset management, leverage, profitability

and market value

• Evaluate a company’s performance based on financial ratios and the DuPont

analysis

• Explain the weaknesses of financial ratio analysis

Topic 3:

• Apply the concept of compounding and discounting in determining future

value and present value of money

• Differentiate between ordinary annuity and annuity due

• Calculate the future and present value of money for non-annual

compounding periods

INSTRUCTIONAL

ACTIVITIES

Topic 1:

• Identify the areas of finance and its importance to businesses.

• Discuss the four main roles of a financial manager.

• Compare and contrast the goals of profit maximisation and shareholder

wealth maximisation.

• Explain the agency problem faced by owners of a business.

Topic 2:

• Explain the purpose of financial statement analysis.

• Distinguish among liquidity, asset management, leverage, profitability, and

market value ratios.

• Demonstrate by using relevant examples (companies) on how to calculate the

financial ratios.

• Explain the relationships among the several categories of ratios in

determining the health of a business.

• Discuss the weaknesses/limitations of ratios analysis.

Topic 3:

• Explain what is meant by time value of money.

• Explain the mechanics of compounding and discounting.

• Demonstrate by using relevant examples on how to calculate the future value

of a lump sum and present value of a future lump sum (both methods,

manual solution using formula and using financial tables).

• Demonstrate by using financial tables on how to solve compounding and

discounting of more than once a year questions

• Explain what is meant by annuity.

DIAGNOSTIC

EXERCISE

(5-10 minutes to

ensure basic

understanding

of topic)

Topic 1:

1. Why is knowledge of finance important even to learners in other business

disciplines?

2. What is meant by agency problem? How can this problem be either prevented

or minimised?

3. Why is the maximisation of wealth viewed as superior to that of profit

maximisation as a business objective?

Topic 2:

1. What is the purpose of financial statement analysis?

2. Provide an example of how financial statements can be used internally by the

managers of a company?

3. Identify information that may be useful to investors and shareholders.

4. Based on the five categories of financial ratios, perform ratio analysis of a

company listed on Bursa Malaysia. Explain the significance of the ratios

calculated. Are there any limitations when performing the ratio analysis?

Or other

exercises

prepared

by face to

face

tutors

Topic 3:

1. What is the relationship between the time value of money and inflation?

2. Compare simple interest to compound interest.

3. What is an annuity? Give examples of annuities.

4. Suppose you were considering depositing RM50,000 in one of three banks, all

of which pay 4% interest; BA Bank compounds annually, AP Bank compounds

semi annually and TR Bank compounds daily. Which bank would you choose?

Why?

WORKED EXAMPLES FOR TOPIC 1

Questions & Answers Extra Notes

1 What are the main roles of a financial manager?

Solution:

i. Make decisions for short-term and long-term

investment and financing

ii. Financial planning and forecast

iii. Control and coordination

iv. Dealings in financial market

2 Suggest ways for business owners to solve principal-agent

problem.

Solution:

To minimise agency problem, company’s owners i.e. the

shareholders will have to bear the costs of agency and control

the actions of the managers. Among steps that can be taken

includes providing compensation or incentives based on the

company’s achievement. The shareholders may introduce

incentive plans for managers that link their remuneration to

the performance of the business. A common form of

incentive plan is to give managers share options. In this way,

the interests of managers and shareholders will become

more closely aligned.

WORKED EXAMPLES FOR TOPIC 2

Questions & Answers

1 RCR Balance Sheet

31 December 2011

(Ringgits in Thousands)

Cash RM 200 Accounts payable RM 205

Receivables 245 Notes payable 425

Inventory 625 Other current liabilities 115

Total current assets RM1,070 Total current liabilities RM 745

Net fixed assets 1,200 Long-term debt 420

Ordinary share 1,105

Total assets RM2,270 Total liabilities and equity RM2,270

RCR Income Statement

for Year Ended 31 December 2011

(Ringgits in Thousands)

Sales RM2,400

Cost of sales 1,834

Gross profit RM 566

Selling expenses 175

General and administrative expenses 216

Earnings before interest and taxes (EBIT) RM 175

Interest expense 35

Earnings before taxes (EBT) RM 140

Taxes (40%) 56

Net income (NI) RM 84

Required:

i. Calculate the current ratio

ii. Calculate the debt ratio

iii. Calculate the return on total assets and return on equity

Method/Solution:

.1.44 = 745

1,070 =

sliabilitieCurrent

assetsCurrent = ratioCurrent ×

Debt ratio = Total liabilities = 1,165 = 0.51 = 51%.

Total assets 2,270

3.70%. = 0.0370 = 2,270

84 =

assets Total

incomeNet =ROA

%.60.70760.0105,1

84

equity rs'Shareholde

incomeNet ====ROE

WORKED EXAMPLES FOR TOPIC 3

Questions & Answers Extra Notes

1 Assuming you deposit RM22,500 into a savings account that

offers an interest rate of 12% per annum, how much will it be

worth in 2 years if interest is compounded:

i. annually

ii. semiannually

Method/ Solution:

i. annually

Manual solution using formula: FVn = PV(1 + i)n

FVn = PV(1 + i)n

F2 = 22,500 (1 + 0.12)2

= 28,224

Using financial table:

FVn = PV(FVIFi,n)

FVn = PV((FVIF12%,2)

FV2 = 22,500 (1.245)

= 28,012.50

ii. semiannually

Manual solution using formula: FVn = PV(1 + i/2)nx2

FVn = PV(1 + i/2)nx2

F2 = 22,500 (1 + 0.12/2)2x2

= 28,395

Using financial table:

FV = PV(FVIFi,n)

FV = PV((FVIF12%/2,2x2)

FV = 22,500 (1.262)

= 28,395

Refer to Attachment A of BBPW3103

Module: Financial Schedule for Future Value

Interest Factor

Refer to Attachment A of BBPW3103

Module: Financial Schedule for Future Value

Interest

Exercises for Topic 1

1 Identify the primary activities of a financial manager.

2 Explain why maximising value of a firm is an appropriate goal

for a business?

3 Describe the nature of the principle-agent relationship

between the owners and managers of a corporation.

Exercises for Topic 2

1 Teguh Sdn. Bhd. has sales of RM10,000,000, net income of

RM450,000, total assets of RM4,000,000 and shareholders’

equity of RM2,000,000.

You are required to calculate the followings:

i. Profit Margin

ii. Return on assets

iii. Return on equity

Answer: i. 4.5%

ii. 11.3%

iii. 22.5%

2 Last year 2011, Saphire Sdn. Bhd. had sales of RM300,000 and a net income of RM20,000, and its year-end assets were RM200,000. The company’s total debt to total assets ratio was 40%. Based on the Du Pont equation, calculate the company's return on equity (ROE).

Answer: 28.13%

Exercises for Topic 3

1 RM1,000 is invested at 10% compounded semi-annually for

three years. Calculate its future value.

Answer: RM1,340

2 Amran has RM10,000 in a savings account that offers 10%

interest rate compounded annually. He plans to withdraw the

money within 5 years. Determine the amount he can withdraw

every year from the account if he makes the withdrawal:

i. at the beginning of every year

ii. at the end of every year.

Answer: i. RM2,398.02

ii. RM RM2,637.83

3 David deposits RM3,000 at the end of every six months into a

savings account for 5 years. The bank pays 14% interest

compounded semi-annually. How much money will David have

at the end of year 5?

Answer: RM41,448