FINA 2303

Financial
Management

Agenda

Getting to know the course instructor and

teaching assistant

Explaining the course structure and course

requirements

Beginning our first lecture on Ch. 1

Lynn Pi

Education:
PhD (Finance, Georgia State U)
Academic Experience:
CSU at Hayward, Georgia State U, OUHK, HKUST
Professional Experience:
Academic Director of MBA Program
Head of executive training and management consultancy
Executive Director of Certification for CFPCM
Board member of IFPHK and FPSB, and ISO technical
committee
Committee member of Private Wealth Management
Association in HK
Consultant for BOC, DBS, China Construction Bank

Why Study Finance?

The study of how people allocate scarce resources over

time
Aim: to make optimal financial decisions; i.e.
to maximize the value of the company
to maximize satisfaction of peoples consumption
preferences
Financial theory consists of:
the set of concepts that help to organize ones thinking
about how to allocate resources over time
the set of quantitative models used to help evaluate
alternatives, make decisions, and implement them
These concepts and models apply at all levels and scales
of decision making
3

How Corporations Make

Financial Decisions?

Valuation Principles

Identifying and comparing costs and benefits from the

decision

costs and benefits are distributed over time

the actual timing and size of future cash flows are

uncertain to some extent

Arbitrage and the Law of One Price

The Price of Risk

Course Structure
Foundation
and Tools

Valuation

Risk and Return

Time Value of Money

Interest rate
Investment decision rules
Financial Statement Analysis

Capital Budgeting
Bond valuation
Stock valuation

Risk and return in capital markets

Systematic risk and equity risk premium
Cost of capital
5

TAPPS (Thinking Aloud Paired Problem

Solving)
Explainer

Listener
Seeks
clarification
and shares
own ideas

Explains concept
or exercise. Talks
2/3 of time

1 minute

2 minutes

5 minutes

TAPPS
What do you have to deal with in your
own personal finances? Give an
example.

Write down your answer on a piece of paper.

Put down names of contributing members
clearly on the upper part of the paper.
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What is Finance?
Personal Finance
Saving for
Retirement

Buying a flat

Investing in
Stock

Assessment
Class Participation
In class exercises
9%
bonus cards
1%
MFL Homework (Best 9 out of 10)
Midterm Exam
Final Exam (comprehensive)
Total

10%

15%
30%
45%
100%

NOTE: There are 5 sessions of this course and they are

taught by two instructors. However, all assessments
including exams are common in order to ensure
consistency and fairness in grading.
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Class Participation

To promote active learning and achieve

interactive learning through TAPPS
Assigned group of 4 students
Confirmed list of group members available by
Sept 16 (Fri) on Canvas
Stay with same members throughout the
semester.
All groups must sit according to seating plan
posted on canvas.
Two rotations of seating plan in the semester
10

Homework

Same structure as end-of-chapter problems with different

numerical parameters
Unlimited practices with hints and solutions in STUDY
PLAN
Complete the assignments in HOMEWORK before each
specified deadline
6-7 questions in each homework assignment
Only ONE attempt to submit each question for grading
Questions can be submitted separately in whatever order
Best 9 out of 10 assignments
No late submission.
No assistance from other people in completing homework!
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Exams

All MC format

Closed book, closed notes

Mid-term exam
Date: Oct 15 (Sat) 10:30am-1:00pm

Final exam (comprehensive)

NO make up exam

12

Course Materials

Access Code

recommended

13

Guided Problem Solutions

Approach for numerical problems in

textbook
1. Plan
2. Execute
3. Evaluate

14

Access Code
Code

to register for individual account

Discount price bundled with the required textbook sold at
the HKUST bookstore
Self-guide available on website:
http://www.pearsonmylabandmastering.com/global/myfin
ancelab/
IMPORTANT: You must have a registered account
before 10 am on Sept 15 (Thur) in order to receive
proper credits for your homework assignments.
Late registration will NOT be accepted.

15

Course website: http://canvas.ust.hk

16

Lectures
Full co-operation needed!

Be punctual

Sit with your group members in assigned area

Abide by ONLY 1 person talk rule

Be considerate
NO mobile phone ringing
NO web surfing
NO chatting with other students
NO eating or drinking
18

Tutorials

Weekly meetings to supplement the large lecture

classes
What do you get
Practices on textbook exercises
Opportunities for more interaction among
yourselves and between you and the tutor
Consultation with the tutor on specific
questions

19

Means of Communication

Announcements on canvas
Quick chat after class
Email
Office hours
Discussion Board on canvas among students

20

What is Corporate Finance?

Corporate Finance
Capital Budgeting

Acquisition

Working Capital
Management
Financing:
Stock and Bonds

21

News on Bloomberg
PetroChina Plans to Maintain Oil Exploration Spending
(Update2) July 31 (Bloomberg)

PetroChina Co., the world's second- biggest company by market

value, will maintain spending on oil exploration to gain from rising
demand and record crude prices.
Next year's exploration budget will be similar to 2008's levels,
President Zhou Jiping said in Beijing today after a meeting with
shareholders to approve a bond sale of as much as 60 billion yuan
($8.8 billion).
Benchmark New York oil prices have gained 62 percent in the past
year, reaching a record $147.27 a barrel on July 11, spurring
investments in new fields. PetroChina aims to spend 132.3 billion
yuan on exploration and production, its 2007 annual report shows.
BP Plc said yesterday it plans capital spending of $22 billion this
year, excluding acquisitions.
22

News on Bloomberg (Contd)

Non-core business spending will be cut by 20.7 billion yuan this

year, Zhou said today, without elaborating. Parent China National
Petroleum Corp. plans to reduce 5 percent of its workforce over the
next three year to lower costs, the National Business Daily
newspaper said earlier this month, citing a company newsletter.
The domestic bonds approved today will have maturities of as long
as 15 years and may be sold in stages, PetroChina said in June.
The funds are for working capital, to improve its debt structure and
finance its second West-East natural-gas pipeline project, the
company said today.
PetroChina shares climbed 1.2 percent to HK$10.42 in Hong Kong
trading today. The stock has fallen 11 percent in the last year,
compared with a 2 percent decline in the benchmark Hang Seng
Index.

23

News on Bloomberg (Contd)

PetroChina will spend 12.8 billion yuan to boost production

capacity at its Changqing and Daqing fields, the company said in
its Shanghai-listing prospectus last year.
The Beijing-based explorer and refiner will use 1.5 billion yuan to
develop part of the Jidong Nanpu field, China's biggest oil
discovery in almost 50 years, and 6 billion yuan to expand an
ethylene plant at Daqing.
PetroChina's capital expenditure will increase 15 percent to 207.9
billion yuan this year, the company said in March. Spending plans
will include the acquisition of foreign assets from its parent,
Chairman Jiang Jiemin said then. The Hong Kong-listed company
intends to buy China National Petroleum Corp.'s share of an
overseas oil and gas exploration joint venture, CNPC Exploration &
Development Co.

24

TAPPS
In the article, what are the financial
decisions that Petro China has made?

Write down your answer on a piece of paper.

Put down names of contributing members
clearly on the upper part of the paper.

25

Chapter 1
Corporate Finance and
the Financial Manager

Outline
Corporate
finance

Corporation

Roles of Financial
managers

Stock
Market

Financial
Institutions

Agency
Problem

27

Learning Objectives
1. Describe the roles of the financial manager.
2. Discuss the division of corporate ownership from its
management and the implications.
3. Describe the importance of financial markets.
4. Recognize the role of financial institutions in the
economy.

28

Outline
Corporate
finance

Corporation

Roles of Financial
managers

Stock
Market

Financial
Institutions

Agency
Problem

29

Features of Corporations

separate legal entity (the right to sue and be sued

in its own name) unlimited life
investor ownership
limited liability of the shareholders
delegated management
transferable shares

30

Tax Implications of Corporations

Double Taxation

A corporations profits is subject to corporate income

tax (business profits tax).

The dividend received by the owner is subject to

personal income tax (not applicable in HK).

Note: Dividend income or capital gains is not subject to

personal income tax in HK.

31

Financial Functions in a Corporation

32

Roles of Financial Manager

Three main tasks:

1. Make investment decisions
Add value for its owners
2. Make financing decisions

sell stocks or bonds

3. Manage cash flow from operating activities
Maintain enough cash on hand
Goal of the Financial Manager
To maximize the wealth of the owners, the
stockholders

33

Ownership and Control

Agency relationship
Principal hires an agent to represent their interest
Stockholders (principals) hire managers (agents) to
run the company
Agency problem
Separation of Ownership and Management
Conflict of interest between principal and agent
Agency cost
Loss of firm value due to agency problem
Pursuit of management goals at the expense of
shareholders
34

Managing Managers

Managerial compensation
Compensation structure tied to performance to
create incentives bonus, stock options
Corporate control
Hostile takeover
Reputation in labor market
Capital structure
Cash constraints imposed by debt
Bankruptcy change in ownership

35

Outline
Corporate
finance

Corporation

Roles of Financial
managers

Stock
Market

Financial
Institutions

Agency
Problem

36

Liquidity

The ability to easily sell an asset for close to the price

you can currently buy it for
The stock market provides liquidity to shareholders.
Largest Stock Markets
New York Stock Exchange (NYSE)
Market Makers/Specialists
Each stock has only one market maker
NASDAQ
Does not meet in a physical location
May have many market makers for a single stock

37

Major Stock Exchanges

Source: www.world-exchanges.org
38

Stock Markets Terminology

Exchanges
e.g. NYSE
Auction market
Market makers
Individuals on the trading floor who post their bid
and ask prices for every stock they make a market
in (specialists on NYSE)
Over the counter
e.g. NASDAQ
Dealer Markets
System fills order based on best prices first
39

Transaction cost

Bid-ask spread
1. Bid-price

The price a market maker or dealer is willing to

buy

Investors sale price

2. Ask-price

The price a market maker or dealer is willing to

sell

Investors purchase price

Commission
40

Example: Forex Quotes

Bid price

Ask price

Currency

Code

Bank Buy

Bank Sell

US Dollar

USD

7.7420

7.7720

Renminbi

CNY

1.1505

1.1668

Renminbi

CNH

1.1505

1.1668

Australian Dollar

AUD

5.8130

5.9310

Canadian Dollar

CAD

5.9250

6.0140

Swiss Franc

CHF

7.8700

7.9930

Euro

EUR

8.6210

8.7550

Pound Sterling

GBP

10.1210

10.2720
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Exercise
If you want to exchange your Renminbi for HK
dollar, how much HKD will you get per CN1?
1.
2.
3.
4.

0.8570
0.8691
1.1505
1.1668

42

Classification of Stock Markets

primary market

When a corporation issues new shares of

stock and sells them to investors.

secondary market

Markets where shares of a corporation are

traded between investors without the
involvement of the corporation

43

Outline
Corporate
finance

Corporation

Roles of Financial
managers

Stock
Market

Financial
Institutions

Agency
Problem

44

The Financial Cycle

45

Financial Institutions and their Roles

Outline
Corporate
finance

Corporation

Roles of Financial
managers

Stock
Market

Financial
Institutions

Agency
Problem

47

Prep for Next Class

1.
2.
3.
4.

Purchase textbook
Register for MFL
Check out financial calculators
Attend financial calculator workshop:
Date: September 5th, 2016 (Monday)
Time: 7pm 8pm
Venue: LSK G012
5. Read Ch 1 and 3
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Next Lecture:
Ch. 3
Time Value of Money

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