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UU-MBA710 : FINANCE & STRATEGIC MANAGEMENT
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Student
Weekly Handout 1
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UU-MBA710 : FINANCE & STRATEGIC MANAGEMENT
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Contents
1.1 Financial Management OverView ……………………………………………………………………………………………. 3
Financial management goals…………………………………………………………………………………………………….. 3
Corporate Structure ……………………………………………………………………………………………………………………. 4
Chief Financial Officer ………………………………………………………………………………………………………………… 5
CFO support …………………………………………………………………………………………………………………………. 5
Concerns of Financial Management ………………………………………………………………………………………… 6
Important Aspects in Financial Management ……………………………………………………………………….. 7
 Cash Flow Management ………………………………………………………………………………………………. 7
 Working Capital Management …………………………………………………………………………………… 7
 Equity & Debt Capital Management ………………………………………………………………………….. 8
 Business Strategic Plan ……………………………………………………………………………………………….. 8
1.2 Corporate Governance & Agency issue …………………………………………………………………………………… 9
Regulatory framework over corporate governance………………………………………………………….. 10
Board of Directors ……………………………………………………………………………………………………………. 11
Stakeholders ……………………………………………………………………………………………………………………… 11
BoD contractual agreement: what creates “agency” issue ………………………………………. 12
How “Agency” issue affects the business? …………………………………………………………………… 12
How to achieve best relationship and minimize “Agency” issue? ………………………….. 13
1.3 Capital Market …………………………………………………………………………………………………………………………… 14
Capital Market, an OverView …………………………………………………………………………………………………. 15
Market Efficiency ……………………………………………………………………………………………………………………… 15
Efficient Market Hypothesis ………………………………………………………………………………………….. 16
Semi-Strong Form Efficiency …………………………………………………………………………………………. 17
Strong Form Efficiency ……………………………………………………………………………………………………. 18
References ……………………………………………………………………………………………………………………………………………………….. 19
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1.1 Financial Management OverView
Financial management goals
Normally aims to
o Establish business sustainability
 Avoid financial distress
 Avoid bankruptcy
o Maximize market share
 Create marketable products
 Beat competitors
o Maximize wealth
 Maximize and maintain revenue
 Minimize costs
 Maximize and maintain profits
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Corporate Structure
A simplified form of corporate structure is illustrated below.
Corporate Structure is affected by each country’s variability over
Legislation
Business purpose
Business legal form
Limited Liability
Partnership
Sole Proprietorship
Shareholders rights given
Equity shares volume to issue
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Chief Financial Officer
As pronounced, the CFO.
Responsible to control Finance function of the business with the intention to
organize, direct and manage
Liquidity Risk
Operational Risk
Credit Risk
Interest Rate Risk
Currency Risk
Any policies, procedures chosen and plans prepared by CFO should incorporate
business strategic plan set by the Board of Directors.
CFO support
• Treasurer (Financial Manager)
Responsible for timely preparation of
Cash flow management
Financial planning and Capital Budgeting
Capital structure
• Controller (Chief Accountant)
Responsible for timely preparation of
Operational budgets
Financial reporting based on accurate historical data
Payroll
Accounting function
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Concerns of Financial Management
• Capital Structure
Determines business financial condition considering the capital structure
defined through liquidity and risk plan
Capital structure is defined by proportional contribution in terms of
Short-term debt
Long-term debt
Equity
• Capital Budgeting
Prepares economic strategy and forecasts capital expenditure regarding profit
generating assets as defined by strategic plan set
• Financial information accuracy and timeliness
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Important Aspects in Financial Management
 Cash Flow Management
The need that arise from operating activities timing mismatch
Cash inflows +
Cash outflows (-)
If variance is
+ Positive then surplus exists > working capital financing exists
(-) Negative then deficit exists > equity or debt financing needed
 Working Capital Management
Defines business financial efficiency
Current Assets +
Trade Receivables and Prepayments made
Cash held in hand and at Bank
Inventory held for sale
Investments held for sale
Current Liabilities (-)
Trade Payables and accrued expenses
Bank and other short-term debt
Variance defines business working capital; if negative urgent financing is needed
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 Equity & Debt Capital Management
Equity
Financing obtained by shareholders
Equity shareholders affect business decision making
Equity shareholders return:
Given as dividend from business profits
Debt
Financing obtain from lenders; mostly banks
Debt interest is tax deductible; offers a tax advantage
Financing carries an obligation until full repayment
Defined as Principal & interest
 Business Strategic Plan
The fundamental basis to decide upon the financing needed.
Issues to address:
 What are the business long-term goals?
 Issuing further capital dilutes existing autonomy or control?
 Do managers want to retain full control or combine debt to equity
financing at an acceptable ratio, for instance in-between 1:1 – 1:2?
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1.2 Corporate Governance & Agency issue
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Regulatory framework over corporate governance
Corporate governance has to meet
• Various legal & obligatory instruments
• Standards placed under company law or determined by company’s articles and
bylaws
• Listed entities; standards placed under securities law or binding requirements to
protect shareholders
8 4 % N a t i o n a l
j u r i s d i c t i o n s h a v e
n a t i o n a l c o d e s a n d
p r i n c i p l e s
Source: The main elements of the regulatory framework:
National codes and principles, OECD 2017
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Board of Directors
Rellatiionshiip::
Members of the Board are appointed by equity shareholders at Annual General Meeting
Their role:
ACT as “agent” on behalf of equity shareholders and other stakeholders
• Set strategic policies and goals
• Build and manage business diverse perspectives
• Monitor finances and increase business wealth
Stakeholders
Shareholders
Management
Customers
Suppliers
Banks and other financial institutions
Government
Society
Contractuall
Agreement
Sharehollders
Members of the Board
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BoD contractual agreement: what creates “agency” issue
“Agency” issue is actually a conflict of interests between principal and agent
Elemen t s t h at b oost “agen c y” re lat ion sh i p b etween t h e two p art ies
Shareholders BoD
Principal Agent.
Differences exist over
Incentives Increase wealth Remuneration benefits
Perspectives Safeguard interests Compromise all stakeholders’ interests
Authority Appoint BoD Manage business efficiently & effectively
How “Agency” issue affects the business?
• Lost business opportunities since BoD has no decision making power
Certain jurisdictions prohibit BoD decision making power upon fundamental issues such as
dividend distributions, appointment or dismissal of auditors and strategic direction by
amending corporate memorandum
• Indirect costs, for instance any lost opportunities caused by agency issue
• Direct costs,
 that benefit management but on shareholders’ cost
 relate to management’s actions monitoring, for instance
o auditors appointment to assess financial information accuracy or
o internal audit committee
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How to achieve best relationship and minimize “Agency” issue?
BoD needs to ensure that
• Clear contractual authority has been given
• Formal authority empowers directors’ decisions;
no consent needed from shareholders
• Shareholders’ interests are safeguarded
• Balance business returns against risks taken
• All stakeholders’ interests are compromised
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1.3 Capital Market
Financial Market
The broaden market where any entity can trade, either by investing or raising money.
The Investment type determines market classification.
At the market defined below an entity can
 Capital market
Invest or raise money upon long-term financial instruments
 Money market
Invest or raise money upon short-term financial instruments
 Commodity market
Buy or sell upon primary products, hard or soft
 Foreign exchange market
Buy, sell, speculate or exchange currencies
 Insurance market
Buy or sell insurance products
 Derivatives market
Trade derivative instruments, either in OTC or Exchange
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Capital Market, an OverView
Securities, such as shares or bonds, are regulated by SEC (Securities & Exchange Commission)
Purpose is to avoid market manipulation by imposing
 Transparent pricing
 Rules and regulations upon process
 Regulated fees
Market Efficiency
Classified into
 Weak form efficiency
 Semi-strong form efficiency
 Efficient market
 Strong form efficiency
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Efficient Market Hypothesis
All available information regarding value is reflected upon market prices
Includes all inside and public information and when information is
reflected upon market prices implies that current market price is
never too low or too high. In case market prices are not reflecting
all the available information it can be said that arbitrage
opportunity exists, an ability to have positive payoff with zero cost.
It is assumed that capital markets such as NYSE are well organized and are assumed
to be efficient despite that may be argued that “Inefficiencies can exist but are
considered as relatively small and not common”.
Inefficiencies can be found thoroughly examining the alphas (α) but any results
cannot be conclusive. Possible reasons for these abnormalities can be the size
effect of the involved security, the value effect, the momentum effect, the liquidity
effect and so on. The efficient market hypothesis is based upon certain
parameters; for instance trusting market prices or that market have no memory, or
no financial illusions exist and prices produce the needed information since the
information is reflected upon them.
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Weak Form Efficiency
Also called as “random walk theory”
Theory that was further developed by Burton G. Malkiel in 1973
The random walk hypothesis assumes
that future prices cannot be predicted
based upon historic prices. The
history of price movement just offers
useful information so as to enable
investor to outperform in buy and
hold portfolio management strategy.
Any attempt by researchers to enter into technical analysis is worthless since any
trends arise purely by chance and cannot be used to predict future market prices.
Semi-Strong Form Efficiency
Unlike weak form market it is assumed that all public information, either past or
present or future, affects the securities price at various levels. Therefore, an
attempt to analyze whether securities have been mispriced is waste of time since
such information, as the financial statement, has already been reflected in the
current price; this has a controversial form. It must be said that any newly released
public information directly affects securities market price normally within the same
day and closing price reflects that information.
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Strong Form Efficiency
The extreme case scenario where all available information is reflected upon
securities prices. Prior knowledge can be valuable as well as inside information;
how ethical or lawful is the use of an inside information is an issue.
Securities market prices cannot be predicted even based upon public and private
information.
Researchers have tested the strong hypothesis and found that mutual or pension
funds that were predicted to outperform were actually underperformed. These
professionally managed funds had failed actually to recover their management cost.
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References
Malkiel, B. G. (1999). A Random Walk Down Wall Street. USA: W.W. Norton &
Company Inc.
OECD (2017), Corporate Governance FactBook 2017
Richard A.Brealey, S. C. (2011). Principles of corporate finance (10th ed.). McGraw-
Hill/Irwin.
Richard Pike, B. N. (2009). Corporate and Investment Decisions and Strategies (6th
ed.). Pearson Education.
Stephen A. Ross, R. W. (2010). Corporate Finance. (10th, Ed.) NY: McGraw-
Hill/Irwin.
Stephen A.Ross, R. W. (2010). Fundamentals of Corporate Finance. NY: McGraw-
Hill/Irwin.
Thomas l.Wheelen, J. H. (2012). Strategic Management and Business Policy
toward global sustainability (13th ed.). New Jersey: Pearson Education Inc.

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