Financial Management

COFIA3-22

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Let’s Get Ready Review:
Questions/Notes for Discussion

Assessments (Self-assessments,, Pre-Assessment Quizzes, Online Tests, Proctored Exam)

Module Guide
Final mark calculation

Baseline Assessment 5 attempts

Lesson 1: Overview of financial Practice Quiz 1.2: 1 attempt

management Practice Activities: Any Questions?

Self-assessments must be completed to get access to the following week’s content/tile.

Self-assessment 1
No attempts

Pre- and Post assessment Questionnaires serve to inform, assess and diagnose your learning needs and gaps, and can
Learning outcomes Post assessment
be used to identify whether you are on tract or struggling with any specific topic/topics.
Week 0 :
Lesson 1 – Overview of financial management
Lesson 2 – Risk and Return

What you will be covering in this lesson?

• Overview of financial management.

Learning outcome
LO1: Describe financial management and determine the fundamental objective of the financial
manager.
Lesson 1 – Overview of financial management

Assessment criteria:
1. Discuss the context and environment of financial management.
2. Discuss the objective of financial management.
3. Define the role of the financial manager.
4. Describe various forms of business organisations.
5. Understand how agency issues that arise between managers and owners impact wealth
maximisation.
6. Understand the underlying concepts of financial management.
7. Understand the role of corporate strategy in financial management and define strategic
frameworks such as Porter’s five forces, SWOT and PEST analysis.
8. Explain behavioural finance and how biases can affect financial decision-making.
 What will be covered in
today’s lesson?
Week 1 Development of Financial
Lesson 1 Management and Forms of businesses

Overview of financial Financial Goals of a Firm & The

fundamental objective of financial
management management

Fundamental principles of financial

management

The role of the Financial Manager &

Agency Problem

Corporate Strategy & Behavioural

Finance
Development of Financial Management

Source: Correia, C., Flynn, D., Uliana, E. and Wormald, M., 2013.
Forms of Business Ownership

Source: Correia, C., Flynn, D., Uliana, E. and Wormald, M., 2013.
Financial Goals of a Firm
Long Term Goals
• Earning an acceptable return
• Keeping Cost of Capital low

Short Term Goals

• Profitability
• Liquidity
• Solvency
Fundamental objective of financial management

Objective
• Maximization of Shareholder Wealth, Not Profit!

Why?
• Manipulation of accounting profits
• Timing
• Cash flows
• Accounting profits and the cost of capital
• Risk
• Shareholders want management to maximise
value
• Focus on decision making
Fundamental Principles of Financial Management

• Cost benefit (Taking Decision on

most appropriate course of action)

• Risk and Return

• Time Value of Money (opportunity

cost)
Activity 1
Discuss the following:

• What are the advantages of a company as a form of business

organisation?
• From your understanding of financial accounting, what are your
thoughts about the accuracy and value of financial statements,
such as the Statement of Comprehensive Income and the
Statement of Financial Position, for use by financial managers?
• Indicate why maximizing accounting profits is not a useful
corporate finance objective?
Maximising the value of a firm and Economic Value
Added (EVA)
Maximise value
• Return > Cost of capital
• Minimise the cost of capital
• Maximise the return on investment

Economic Value Added (EVA)

• Used to measure company performance
• Operating profit (after tax) – cost of financing
Example

A company has operating profits of R50m after tax. Equity

investment amounts to R200m and after-tax cost of financing is
15%.

EVA = R50m – (R200m × 15%) = R12m

The role of the Financial Manager
& Major Financial Management
Decisions
• Explores investment opportunities
and make investment decisions.
• Consider Operating and
Financial assets

• Explores financing opportunities

and makes financing decisions
• Consider Capital and Money
markets
Flow of Funds in Capital Markets
• What is a capital market?
• How do funds flow in capital markets?
Activity 2
Discuss the following:

• What are the Objectives of a Financial Manager?

• Distinguish between capital markets and money markets.
• Under what circumstances do financial managers seek finance
from these two markets respectively?
AGENCY PROBLEM
Do managers act in the interest of
shareholders ?
• In an agency relationship the managers act as
agents for the shareholders but may put their
own interests first.
• Management are the agents of the
shareholders and should act to maximise the
value of shareholders’ wealth. Yet there is a
real possibility that the shareholders as
owners will experience losses because
managers take decisions that are in the best
interest of managers and are detrimental to
the interest of shareholders.

Solution: Regulations, Incentive Alignment,

Monitoring, Selection of Agents, Legal Recourse
Activity 3
Discuss the following:

• Indicate why agency problems exist between management and

shareholders.
• What factors will ensure an alignment between the objectives of
shareholders and management?
Corporate Strategy
• Porter’s Five Forces
• Bargaining power of customers
• Threat of new entrants and potential competitors
• Threat of substitutes
• Bargaining power of suppliers
• Rivalry among existing competitors
• Competitive strategies
• Cost leadership
• Differentiation
• SWOT Analysis
• Strengths and Weaknesses
• Opportunities and Threats
• PESTEL Analysis
• Political – taxation, government policies
• Economic – interest and exchange rates
• Social – demographics, black middle class
• Technological – research and development, obsolescence
• Environmental issues
• Legal factors
Behavioural Finance
• How does psychology affect financial decision making?
• What happens when markets are not always efficient?
• What happens when investors & financial managers are not
always rational?

Biases and heuristics (short-cuts/rules of thumb)

• Overconfidence
• Self-attribution bias
• Conservatism
• Anchoring
• Loss aversion
• Prospect theory
• Disposition effect
• Confirmation bias
• Availability bias
• Representative bias
• Inertia
• Herding behaviour
• Hindsight bias
• Ambiguity aversion
• Familiarity bias
Activity 4
Refer to Question 1.23 in the prescribed textbook.
What Happens Next?
To be completed before the next lecturer-led session (self-directed learning and assessments):
• Baseline assessment
• Lessons 1 and 2’s Practice Quizzes and Practice activities

What will be covered in the next lecturer-led session:

• Lesson 2: Risk and Return