Finance

 

what is Finance? 

• is a science of money management
• The objective of finance is to price assets based on their risk level and expected rate of return. Accounting is the language of finance.
  ‘Money’ but finance is not exactly money
• it is a source of providing funds for a particular activity
• Thus, finance does not mean the money with the Government but it refers to sources of raising revenue for the activities and functions of a Government.)

how many types of Assets in Finance?

• Real Asset- is a physical assets that have value due to their substance and properties. For example, real estate, car, metal, gold, oil, coin, commodity
• Financial Asset- is a non-physical asset whose value is derived from a contractual claim. Financial asset is usually more liquid than physical asset. For example, bank deposit, bond, stock, money, loan, check

how many form of financing?

• Equity financing- issuing stocks
• Debt financing- borrowing money; bank, issuing bonds, leasing
• Retaining earning- internal financing

Accounting	Finance
System of record keeping designed to portray a firm’s operations in a fair/ unbiased manner	Process of decision making related to raising money, analyzing results
Generate financial statements which are provided to the marketplace science of planning the distribution of a business’ assets coordination of capital investments and debt backed investments for the purpose of improving the value of the business plan the exit strategy for the investors of the business, which is the way in which those that invest in the business receive their financial reward goals and objectives of the business are designed by the business’ Chief Financial Officer, who is supported by people focused on Financial Analysis, Financial Management, Budgeting, Purchasing, and Accounting. Finance revolves around planning future financial transactions	Use the output generated by the accountants as input in finance the art of the recording and reporting financial transactions concerned with tracking and reporting the financial transactions of a business. managing the general ledger, cash flow management, collections, recognizing revenue, analyzing profitability, reporting earnings, managing debt, and—of course—paying taxes. research and report the financial transactions and health of the business using a standard set of rules and principles, known as the Generally Accepted Accounting Principles (GAAP) Jobs in the Accounting function include Financial Reporting Accountants, Auditors, Bookkeepers, Accounts Receivable Clerks, Accounts Payable Clerks, Controllers, Treasurers, and Tax Accountants. Typically, the entire Accounting organization will report into the Chief Financial Officer. Accounting revolves around reporting past financial transactions

4 types of financial market
Money market- is a wholesale debt market for low risk, highly liquid, short term instrument. Funds are available in this market for period ranging from single day up to a year. This market is dominated mostly by government, banks and financial institutions.



The money market is where financial instruments with high liquidity and very short maturities are traded.
It is used by participants as a means for borrowing and lending in the short term,
with maturities that usually range from overnight to just under a year.
Among the most common money market instruments are eurodollar deposits, negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).


Capital market- is designed to finance the long term investments, The transactions taking place in this market will be for periods over a year.

• Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
• Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof
• the capital markets may also be divided into primary markets and secondary markets.
• Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings.
• Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors

Forex market

• buying, selling and exchanging currencies at current or determined prices
• deals with the multicurrency requirements which are met by the exchange of currencies. Depend on exchange rate that is applicable, the transfer of funds take place in the market. This is one of the most developed and integrated market across the globe.
• the most liquid financial market in the world. 

Credit market- is a place where banks, Financial Institution (FI) and Non-Bank Financial Institution (NBFI) provide short, medium and long term loans to corporates and individuals.

•  refers to the market through which companies and governments issue debt to investors, such as investment-grade bonds, junk bonds and short-term commercial paper.
• When corporations, national governments and municipalities need to earn money, they issue bonds. 
• Investors who buy the bonds essentially loan the issuers money. 
• In turn, the issuers pay the investors interest on the bonds, and when the bonds mature, the investors sell them back to the issuers at face value. 
• However, investors may also sell their bonds to other investors for more or less than their face values.

Sources of Business Cash Flow

• Angel equity
• Bank Loan

Instruments of Money Market
a)Call/ Notice Money
b)Treasury Bills
c)Term money
d)Certificate of Deposit
e)Commercial Paper

Risk of Bond Holders
a)Changes in current market interest rates (if interest rates rise, the market value of bond will fall)

b)Default risk (no or partial payment on debt as in bankruptcy cases)

c)Call risk (if bonds are called before maturity). Bond are generally called when interest rate decrease. Investors will have to reinvest the money received from corporation at a lower rate.

d)Inflation risk- investors commit to receiving a rate of return either fixed or variable for certain agreeable duration. It is affected if the cost of living and inflation increase dramatically in terms of purchasing power and finally achieve negative rate of return.



9.    Bond Types
a)    Debentures-    Type of debt instrument that is not secured by physical assets or collateral.
-    Support by general creditworthiness and reputation of issuer
-    Issued by government and corporations to secure capital. For example Treasury bond (T-bond) or Treasury bill (T-bill). Normally these 2 bonds are safe because issued by government. At worst, government can print off more money or raise taxes to pay these type of debts.
-    More risky and higher yield compare to secured bonds.

b)    Subordinated Debentures-    A loan or security that ranks below other loans and securities with regard to claims on company’s assets or earnings.
-    Known as junior security or subordinated loan
-    In case of borrower default, the owner of subordinated debt won’t be paid out until senior debt holders are paid in full.

c)    Mortgage Bonds-    Bond secured by a mortgage or pool of mortgages
-    Backed by real estate holdings or real property such as equipment.
-    If default, mortgage bondholders have a claim to the underlying property and could sell it off to compensate for the default.
-    The value of the real property is greater than bonds issued.

d)    Eurobonds-    Denominated in a currency other than the home currency of the country or market in which it is issued
-    Always grouped together by the currency in which they are denominated, such as Eurodollar or Euroyen bonds.
-    Handled by an international syndicate of financial institutions on behalf of the borrower (For example, European investment Bank)
-    Very popular as a financing tool due to high degree of flexibility as they offer issuers the ability to choose the country of issuance based on the regulatory market, interest rates and depth of the market.
-    For example, a bond issued by an American corporation in Japan that pays interest and principle in dollars.

e)    Convertible bonds-    Debt securities that can be converted into a firm’s stock at a pre-specific price.
-    Flexible financing option for companies and useful for companies with high risk/ reward profiles.
-    A way for company to minimise negative investor interpretation of its corporate actions
-    For example, a public company chooses to issue stock, the market usually interprets this as a sign that the company’s share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds which bondholders are likely to convert to equity anyway should the company continue to do well.


what is balance sheet?

• assets = liabilities + shareholders' equity
• statement of financial position
• reveals a company's assets, liabilities and owners' equity (net worth)
• snapshot of the company's financial position at a single point in time.

what is current asset?
have a life span of one year or less, meaning they can be converted easily into cash
example : cash, marketable securities / short term investment, account receivable, prepaid expenses ( rent / insurance ), inventory

• Cash equivalents are very safe assets that can be are readily converted into cash such as US Treasuries. 
• Accounts receivable consists of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit, which then are held in this account until they are paid off by the clients.
• Inventory represents the raw materials, work-in-progress goods and the company's finished goods.
  Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm caries none.
  The makeup of a retailers inventory typically consists of goods purchased from manufacturers and wholesalers.

what is Non-current assets?

• Non-current assets, are those assets that are not turned into cash easily
• expected to be turned into cash within a year and/or have a life-span of over a year. 
• They can refer to tangible assets such as machinery, computers, buildings and land.
• Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated.
• Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

what is equity?

• initial amount of money invested into a business
• at the end of the fiscal year, a company decides to reinvest its net earnings into the company
• these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder's equity account
• retained earnings is profits kept in the business rather paid to owners
• Conclusion is equity is funds supplied to business by owners whether a direct investment ( price paid for stocks or entrepreneurs’ contribution) or  retained earning.

what is current liabilities?

• the company's liabilities which will come due, or must be paid, within one year
• This is comprised of both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan
• - require cash within one year. Includes payables, accruals, notes payable, short term loans, short term debt due within the year.
• Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.
• account payable, taxes payable, salary payable, interest payable, accrued expenses, unearned revenue

1. current ratio
= current asset / current liabilities
 interpretion : more than 1 is good




  (331,218 / 398,550 = 0.8311 not good coz it less than 1 )

2. quick ratio
= ( current assets - inventory ) / current liabilities
interpretion : more than 1 is good 

 ( 331,218 - 20,014 / 398,550 = 0.7808 not good coz it less than 1)

3. average collection period ( ACP )
= account receivable / sales x 360
interpretation : number of day the company able to collect their debtors

(235,771 / 1,227,303 x 360 = 69 days  )


4. inventory turnover
= sales / inventory ( closing stock )
interpretion : less or equal than 5 is not good

(1,227,303 / 20,014 = 61.322 not good coz it mor than 50% )

5. fixed asset turnover
= sale / fix asset

6. total asset turnover
= sale / total asset

7. debt ratio
= ( long term debt + current liabilities ) / total asset
interpretation : > 50% is risky investment

8. debt to equity ratio
 = long term debt : equity
eg 1:4
interpretation : the company are able to pay their long term debt by sell-off equity in event of bankruptcy.

9. time interest earned ( TIE )
= EBIT / interest

10. cash coverage
= ( EBIT + depreciation ) / interest

11. return on sales ( ROS )
= net income / sales

12. return on assets ( ROA )
= net income / total assets

13. return on equity ( ROE )
= net income / equity

14. price earnings ratio
= stock price / EPS

Find out the present value of RM 200 for 3 years if the interest rate is 9%
1. PV = FV / ( 1 + r ) ⁿ
           = RM 200 / ( 1 + 9% ) ³
           =  RM 200 / ( 1.09 ) ³
           = RM 200 / 1.295
           =  RM 154.44

Find out the future value at the end of 6 year of RM 1,000 invested today at an interest rate of 13%
 FV = PV x ( 1 + r )ⁿ
      = RM 1,000 x ( 1 + 13%) ⁶
      = RM 1,000 x ( 1 + 0.13 ) ⁶
      = RM 1,000 x ( 1.13 ) ⁶
      = RM 1,000 x2.08195
      = RM 2,081.95