Week 1 Flashcards
(31 cards)
List different types of (a) financial markets, (
b) financial products, (c)
financial institutions
and (d) financial regulators that you know of
Financial markets Equity (stock) market Debt (credit) market Real estate (property) market Foreign exchange market Derivatives market
(b) Financial products/instruments
Equities: common shares, preference shares
Debt: bills, notes, bonds (debentures) issued by government, banks and/or
corporations
Derivatives: Futures, Forward, Options and Swaps (FFOS)
(c) Financial institutions
Commercial banks (JP Morgan, CBA, ANZ, and etc.)
Investment banks (Morgan Stanley, Goldman Sachs, Macquarie Group and etc.)
Managed funds, including superannuation funds
Insurance companies (health, property and life)
Hedge funds
Private equity funds
(d) Financial regulators
Australian Securities Exchange (ASX)
Australian Securities and Investment Commission (ASIC)
Australian Prudential Regulation Authority (APRA)
What sorts of careers do you think are open to you with knowledge of finance?
Investment banking including: Underwriting Merger and acquisitions Leveraged/Management buyout Consulting Project finance Treasury including: Risk management (foreign exchange, interest rate, commodity risk and etc.) Cash management Asset-liability Committee (ALCO) Proprietary trader in equity, debt, foreign exchange and derivatives markets Research department in accounting firms, banking and financial sector Corporate/Personal lending Wholesale/Retail finance Financial planning (investment advisors)
Jeff joined AMG Bank in 2017. As per the contract, Jeff’s salary increases by 5%
per annum (p.a.) for the first five years. Suppose Jeff’s salary as of 2019 is
$63,000.
1) How much was his salary in 2018?
Solution: 1) Let X = Jeff’s wage in 2018
X × (1 + 5%) = $63,000
X = $63,000 ÷ (1 + 0.05) = $60,000
Notes: 5% is based on 2018 wage, not 2019 wage. Therefore it is incorrect to
attempt as $63,000 × (1 - 5%) = $59,850
Jeff joined AMG Bank in 2017. As per the contract, Jeff’s salary increases by 5%
per annum (p.a.) for the first five years. Suppose Jeff’s salary as of 2019 is
$63,000.
2) How much will his salary be in 2021?
2) Following the given information, 2021 salary will be 5% more than 2020
salary, which is 5% on the top of 2019 salary.
2021 salary = 2020 salary × (1 + 0.05)
2020 salary = 2019 salary × (1 + 0.05)
So, 2021 salary = 2019 salary × (1 + 0.05) × (1 + 0.05)
= 2019 salary × (1 + 0.05)2
= 63,000 × (1 + 0.05)2
= 63,000 × 1.1025
= $69,457.50
Or we can directly skip to 63,000 × (1 + 0.05)2 because 2020 – 2018 = 2
The three key decisions faced by financial managers are:
The capital budgeting (investment) decision:
- What real assets will be purchased to help generate future cash flows?
2. The capital structure (financing) decision:
- How will the purchase of these real assets be financed? How much and what types of
debt and equity should be used to fund the firm?
3. The dividend policy decision:
- How will residual cash flows be distributed to shareholders, i.e. pay out as dividends
or buyback, or retain for future growth?
What is the main objective of a company? How is the maximisation of shareholder wealth
different to profit maximisation?
The main objective of corporation is to maximise the value of the company and hence the wealth
its owners i.e. the shareholders.
The maximisation of shareholder wealth is maximising the present value of future cash flows (what
expected future cash flows are equivalent to in today’s dollars).
This is different to profit
maximisation because profit maximisation doesn’t consider the timing of cash flows (the sooner
cash is received the more value it has), the risk of the cash flows, and it includes non-cash items
such as depreciation
what is a financial intermediary
An institution that raises capital by issuing
liabilities against itself and then lends that
capital to corporate and individual borrowers.
tradtional business legal classifications
Sole proprietorships
• Partnerships
• Corporations
all forms of business organisations
- Sole proprietorships
- Partnerships
- Corporations
- Limited partnership (emerging)
- Proprietary limited company (emerging)
what is a sole proprietorship
Sole proprietorship is unincorporated business owned by one individual.
No distinction between business and person
advantages of sole proprietorship
Advantages
Easy to set up and operate
Subject to few government regulations
Taxed like an individual
disadvantages of a sole proprietorship
Proprietor has unlimited personal liability for business debts
Life of proprietorship is limited to time the creator owns it
Transferring ownership can be difficult
Difficult for sole proprietorship to obtain large sums of capital (funds)
what is a pertnership
Partnership is unincorporated business owned by two or more persons.
advantages of partnership
Easy and inexpensive to form
Subject to few government regulations
Taxed like an individual
disadvantages of partnership
Partners have unlimited personal liability for business debts
Life of partnership is limited to time the same group of partners owns it
Transferring ownership can be difficult
Difficult for partnership to obtain large sums of capital (funds); but better than for a sole
proprietorship
what is a comany (corporation)
Legal entity with all the economic rights and responsibilities of a person created by a statute (Corporation Act 2001)
advantages of a corporation
Limited liability – shareholders’ loss will be limited at their capital contribution
Separate and distinct from its owners
Unlimited life – ‘going-concern’
Easy transferability of ownership if listed in the stock market
Able to raise capital by issuing debt and equity instruments in the financial markets
disadvantages of a corporation
Setting up and filing regulatory reports is complex
If Robert own 1,000 shares in ABC Co., ABC Co. has 1,800,000 shares on issue and their
market capitalisation is $225,000,000, what is the total wealth Robert has invested in ABC
Co.?
Market Capitalization = share price × # of outstanding shares
So share price = Market Capitalization ÷ # of outstanding shares
Share price = $225,000,000/1,800,000 = $125
Robert’s wealth = 1,000 x $125 = $125,000
calculate tax payable if:
Taxable income of $59,000
37,000 < 59,000 < 90,000, marginal tax rate (MTR) = 32.5% = 0.325
Tax Payable = $3,572 + 0.3
Calculate tax payable if Assessable income $182,500 and allowable deductions of $34,000
Taxable income = Assessable income – Allowable deduction
= 182,500 - 34,000 = 148,500
90,000 < 148,500 < 180,000, MTR = 37% = 0.37
Tax payable = $20,797 + 0.37 × ($148,500 - $90,000) = $42,442
what is finance
Finance is concerned with decisions about money. • It is integral to Economy and business Households Individuals Politics
• Finance is the ‘art and science to manage money’
A company’s share price reflects the
timing, magnitude and risk of the cash flows that investors expect a
company to generate over time.
Market capitalization = share price × # of outstanding shares
The capital budgeting process breaks down into three steps:
identifying potential investments
analysing the set of investment opportunities and selecting those improving shareholders’ value
Evaluating by estimating net present value (NPV) of these projects
implementing and monitoring the selected investments
