TUTORIAL 1: INTRODUCTION TO FINANCIAL MANAGEMENT (WEEK 2)

Question 1
Explain the THREE (3) main activities/decisions in finance.
1. Financing decision to decide the level of funds required, which types of funds to raise
and the raising of funds

2. Investment decision to decide on the amount to be invested into which types of assets

3. Dividend decision to establish a dividend policy to retain earnings for reinvestment or

pay dividends to shareholders.

Question 2
Differentiate between profit maximisation and wealth maximisation.
Profits maximisation
• Short term in nature
• Major emphasis is on profit
• Mostly concerned about short term benefits
• A short-term horizon can fulfil objective of earning profit but may not help in creating
wealth
• Ignores cash flows, timing of cash flow, riskiness of cash flow

Shareholders wealth maximisation

• Long term in nature
• Concentrate on various other aspects like increasing sales, developing goodwill,
customer service, corporate responsibility for the purpose of capturing more market
share which will take care of profitability.
• Priority to value creation
• Leads to better and true evaluation of business e.g. under wealth maximisation, more
importance is given to cash flows rather than profitability.
• Considers cash flows, timing of cash flow, riskiness of cash flow

Question 3
Explain the THREE (3) motives for a business to hold cash.
i. Transaction motives- the principal motive for holding cash is to enable the firm to
conduct its ordinary business by making necessary payments to keep the business
going, such as wages, taxes and payments to supplires.

ii. Precautionary motives- the precautionary motive for holding cash relates primarily to
the predictability of cash inflow and outflow and also to the maintenance of balances
to be used to satisty possible but indefinite needs as some unforeseen expenses may
arise.
 iii. Speculative motives- cash is held for speculative purpose in order to take advantages
of pontential profit making situations or to exploit opportunities that although unknow
may arise at any future time.

Question 4
Discuss FIVE (5) roles performed by a financial manager.
1. Forecasting & planning
• Interact with people from other departments as they look ahead and lay the plans
that will shape the firm’s future.
2. Investment decision & Financing decision
• Decide on whether the firm should make a new investment in plan, equipment or
inventory.
• Decide on whether an investment should be financed by debt or equity, and if debt
is used, whether should it be long-term or short term.
3. Coordination & Control
• Interact with other personnel to ensure thet the firm is operated as efficiently as
possible.
• All business decisions have financial implications, and all managers need to take
this into account.
4. Dealing with financial markets
• Must develop good links with the firm’s bankers and other major financiers, and be
aware of the appropriate sources of fianace for corporate requirements.
5. Risk management
• Responsible for the firm’s overall risk management program, including identifying
the risk that should be managed and then managing them in the most efficient
manner.

Question 5
“In the short run, a loss-making business might survive while a profitable business might not
survive”.
Explain to what extend do you agree with the statement above.

In the short run, a loss-making business may survive, provided that it has enough cash or access
to new borrowings. While a profitable business might not survive if it has negative cash flows,
unless it has access to new borrowings or has investments/assets to sell and convert into cash.
TUTORIAL 2: FINANCIAL MARKETS (WEEK 3)

Question 1
Explain financial market and the THREE (3) parties to the financial market.

• Finance markets can be defined as the place where deficit units and surplus units meets.
• In this market, funds are transferred from the surplus units to the deficit units.
• A surplus unit is where the units generate more income than they spend, and have funds
left over.
• Other units generate less income than they spend and need to acquire additional funds
in order to sustain their operations. These are called deficit units.

i. Borrowers (deficit unit)- need money to finance investment or make purchases.

ii. Savers/ Inventors/ Lenders (surplus unit)- Those with extra money to invest and
have excess cash.
iii. Financial Institution (Intermediaries)- help bring together borrowers and savers.

Question 2
Explain THREE (3) purposes of a financial market.

1. Facilitation of savings
- Allows individuals to consume less today (increase savings) to be able to be in
position to consume more in the future.
2. Provision of a platform and channel
- To raise financing by the users (firms) of finance. Demand for and supply of funds
can interact and arrive at a suitable market price for funds.
3. Provision of financial services
- Allow participants to work out and balance their risk tolerance and expected returns
E.g. investors with higher tolerance of risk can invest in shares while investors with
lower risk tolerance can invest in bonds.

Question 3

Differentiate between:

a) Money Markets and Capital Markets

• Money markets- markets for short-term, highly liquid debt securities, which generally
have maturities of one year or less. Example: money market for certificate of deposits
 • Capital markets- markets for long-term debt and corporate stocks with maturities of
generally more than one year. Example: bond and share market.

b) Debt Markets and Equity Markets

• Debt markets- The holders are lenders and will receive a fixed amount of money
(interest). Debtholders have priority on any financial claims.
• Equity markets- Shareholders are the owners of the company and receive dividends.
The shareholders have financial claims or will be paid after the debtholders receive
their payments.

c) Primary Markets and Secondary Markets

• Primary markets- financial market in which corporation will raise capital by issuing
new securities for the first time, e.g. IPO (initial public offering, company selling shares
to public for the first time)
• Secondary markets- financial market on which existing securities are traded among
investors after the securities have been initially issued. E.g. Bursa Malaysia.

Question 4 ***
Describe any TWO (2) ways in which capital can be transferred from suppliers of capital to
those who are demanding capital.

i. Direct Transfer of funds

- Occurs when a business sells its stocks or bonds directly to savers without going
through any type of financial institutions.
ii. Indirect Transfer Through Financial Intermediary
- The financial intermediary collects the savings of individuals and issues its own
securities in exchange for these savings. The intermediary uses the funds collected
from the individual savers to offer new products packaged as their own e.g.
commercial banks use the savers deposits to offer credit cards under their brand.

Question 5

Explain any THREE (3) advantages of financial intermediaries and list any THREE
(3) examples of financial intermediary.

• Channelling of Funds
The main role of financial intermediation is in providing ways of linking lenders of
money with potential borrowers. A lender does not need to find an individual
borrower, but can deposit his money with a bank, investment trust or other financial
intermediary.

• Aggregate of Savings
This role in linking lenders and borrowers means that the intermediary is able to
“package” the amounts lent by savers into the amount which borrowers require. E.g.
banks gather small amount of savings from a large number of individuals and
repackaging them into larger bundles for lending to business.

• Maturity Transformation of Funds

Borrowers typically want to borrow for a longer period of time than lenders wish to
lend. A major feature of financial intermediaries is that they are able to
accommodate these different requirements. Whereby, financial intermediary
transformed short-term deposits into longer-term loans.

Example of financial intermediary: Commercial banks, investment banks, mutual

funds/ units trust companies.