The Role of Financial Management | Dr. H. Mustika Lukman Arief, SE., MBA., MM.

1. THE ROLE OF FINANCIALMANAGEMENTDr. H. MustikaLukmanArief, SE., MBA., MM.

2. Apaitumanajemenkeuangan….? ManajemenKeuanganmeliputisemuaaktivitas yang berhubungandenganusahamendapatkandana yang dibutuhkanperusahaansertamengggunakandan/mengalokasikandanatersebutsecaraefesiendanefektifgunamencapaitujuanperusahaan.

3. Manajemenkeuangandigunakanuntukmenjawabpertanyaan: • What long-term investments should the firma engage in? • How can the firm raise the money for the required investments? • How much short-term cash flow does a company need to pay its bills?

4. Prosesmanajemenkeuanganfor-profit organization LababersihDividen Labaditahan Inv. Jangkapanjang Inv. Jangkapendek Jangkapendek (HutangLanca) Jangkapanjang Modal sendiri:  Labaditahan  Saham  Hutangjk. pjg Keputusan Investasi Keputusan Investasi KebijakanDividen • Alternatifinvestasi? • Penilaianinvestasi? • pemilihaninvestasi? Keputusan Pendanaan • Jumlahkebutuhandana? • Sumberdana? • Struktur modal? • Biaya modal?

5. The Role of The Financial Manager • Capital Budgeting decision • decision to in tangible or intangible assets also called the investment decision • Financing decision • raising money that the firm needs for its investments and operations • Capital structure • the mix of long term debt and equity financing

6. Untukkebijakanfungsitersebut, ada 3 keputusan yang perludiambil • Keputusaninvestasi • KeputusanPendanaan • KebijkanDividen Masing-masingkeputusanharusberorientasipadapencapaiantujuanperusahaan

7. Tujuan Perusahaan Dalampengertianmikroekonomidisebutbahwatujuanperusahaanadalahmemaksimalkankeuntungan. Namunditinjaudarisudutkeuangantujuaninimengabaikanberbagaikerumitan yang adadalampraktekpengambilankeputusansehari-hari KelemahanMaksimalisasiKeuntungan: • Tidakmengaitkanbesarnyakeuntungan yang dihasilkandengawaktuperolehannya • Tidakmemperhatikanmasalahwaktudanketidakpastian • Mengabikanlamanyawaktupengembalian • Mengabaikanbeban modal yang harusdipikulpemegangsaham

8. Tujuan Perusahaan Tujuanperusahaanadalahmemaksimalkankekayaanpemegangsahamdengancaramemaksimalkannilaiperusahaan ‘Basic goal: Maximize stockholder value’ indikatornya - Firm’s value yang maksimal - Stock price yang maksimal • Nilaiperusahaandicerminkanolehhargapasarsaham • Mengapahargapasarsahammencerminkannilai perusahaanataukekayaanpemegangsaham?

9. TujuanmanajemenKeuangan • mempelajaridanmemahamibagaimanaupayaperusahaandalammemaksimalkannilaiperusahaannya (Value of the firm) memalui 3 macamkeputusanyaitu: keputusaninvestasi, keputusanpendaaan, kebijakandividen. Vf= f (I, F, D) Vf = value of the firm (nilaiperusahaan) I = Investment Decision F = Financial Decision D = Dividen Policy Decision

10. The Objektive Function • Maximime the Value of the firm • Basic corporation financial decision • 1. How do you allocate resources across competing uses? • 2. How do you raise founds to finance the projects? • 3. How much do you reinvest back into the business and how much do you return to you stockholders? • The corporate financial toolbox • Accounting stetement and ratio • Present value • Risk and return meodels • Option pricing models

11. Aksioma-aksioma yang diperlukanuntukmemahamiManajemenKeuangan

12. Lanjutan…

13. What is a Corporation? • Types of Corporations • Public Companies • Private Corporations • Limited Liability Corporations (LLC)

14. Organizing a Business • Types of Business Organizations • Sole Proprietorships • Partnerships • Corporations • Limited Liability Partnerships

15. Organizing a Business

16. Question • Why should a company concetrate primarily on wealth maximization instead of profit maximization? • What are the three types of financial management decisions? For each type of decision, give an example of the business transaction that would be relevant. • Firms often involve themselves in projects that do not result directly in profits: for example, IBM and Mobil Oil frequently support public television broadcast. Do these projects contradict the goal of maximization of shareholder wealth? Why or why not.

17. Case In early 2001, Doc and Lyn McGee formed the McGee Company. The company produced a full line of cakes, and its specialties included chess cake, le,on pound cake, and double-iced, double-chocolate cake. The couple formed the company as an outside interest, and both continued to marketing and distribution. With good product qualty and sound marketing plan, the company grew rapidly. In early 2006, the company was featured in a widely distributed entrepreneurial magazine. Later that year, the company was featured in Gourmet Desserts, sales exploded, and the company began receiving orders from all over the world. Because of the increased sales. Doc left his order job, followed shortly by lyn. The company hired additional workers to meet demand. Unfortunately, the fast growth experienced by the company led to cash flow and capacity problems. The company is currently producing as many cakes a possible with the assets it owns, but demand for its cakes is still growing. Further, the company has been approached by national supermarket chain with an proposal to put four of its cakes in all of the chain’s stores, and a national restaurant chain has contracted the company obout selling McGee cakes in its restaurants. The restaurant would sell the cakes without a brand name.

18. Doc and Lyn have operated as a sole proprietorship. They have approached you to help manage direct the company’s growth. Specifically, they have asked you to answer the following questions: • What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an Limited Liabilities Company (LLC)? • What are the advantages and disdvantages of changing the company organization from a sole proprietorship to a corporation? • Ulimately, what action would you recommend the company undertake? Why ?

19. Financial Statement Analysis

20. Financial Statement Analysis Financial analysis can be defined as the process of assessing the financial condition of a firm Basic Fianancial Statements • Balanced Sheet • The Income Statement

21. The Balance Sheet Definition financial statements that show the value of the firms’s assets and liabilities at a particular point in time (from an accounting perspective)

22. US Corporation Balance SheetU.S. CORPORATION 2004 and 2005 Balance Sheets (S in Millions) Assets Liabilities and Owners’ Equity 2004 2005 2004 2005 Current assets current liabilities Cash $ 104 $ 160 ccounts payable $ 232 $ 266 Accoumts receivable 455 988 notes payable 196 123 Inventory 553 555 total $ 428 $ 389 Total $1.112 $1.403 Fixed assets Net plant and Long-term debt $ 408 $ 454 Equipment $1,644 $1,709 Owners’ equity Common stock and Paid-in surplus 600 640 Retained earnigs 1,320 1,629 Total $1,920 $2,269 Total liabilities and Total assets $2,756 $3,112 owners’ equty$2,756 $3,112

23. The Income Statement Definition Financial statement that shows the revenues, expenses, and net income of a firm over a period of time (from an accounting perspektive)

24. US Corporation Income StatementU.S. CORPORATION 2005 Income Statement (S in Millions) Net sales $1,509 Cost of goods sold 750 Depreciation 65 Earnings before interest and taxes $ 694 Interest paid 70 Taxable income $ 624 Taxes 212 Net income $ 412 Diviends $ 103 Addition to retained earnings 309

25. Why Evaluate Financial Statements? • Internal uses - Performance evaluation-compensation and comparison between divisions - Planning for the future-guide in estimating future cash flows • External uses - Creditors - Suppliers - Custolers - Stockholders

26. Financial Ratio • The principal analytical tool of the financial analyst is the financial ratio • Financial ratios help us identify some of the financial strengths and weaknesses of a company • The ratios give us a way of making meaningful comparisons of a firm’s financial data at different points in time and with other firms

27. Categori of Financial Ratios • Short-term solvency or liquidity ratios • Long-term solvency or financial leverage ratios • Asset management or turnever ratios • Profitability ratios • Market value ratios

28. Liquidity Ratios Quick ratio = current assets - inventorie s Current liabilitie s Current ratio = current assets current liabilities Cash ratio = cash + marketable securities Current liabilities

29. Long-term solvency or financial leverage ratios Total debt ratio = total liabilities total assets Debt/equity ratio = Total debt equity Equity multiplier = Total Assets equity Long term debt ratio = long term debt long term debt+equty Times interest earned = EBIT Interest payments

30. Asset management or turnover ratios Receivable turnover ratio = Sales Receivable Day’s sales in receivable = 365 Receivables turnover Inventory turnover ratio = cost of goods sold Inventory Day’s sales in inventory = inventory Cost of goods sold/365

31. Asset management or turnover ratios Fixed asset turnover ratio = Sales Net fixed assets Total asset turn over= Sales Total assets NWC Turnover = Sales/NCW Net working capital (NCW) = CA - CL

32. Profitability ratios Net profit margin = net income Sales Return on asset (ROA) = net Income Total Return on equity = net income Total equity

33. Market value ratios • PE Ratio = Price per share/Earnings per share • Market-to-book ratio = market value per sgare/book value per share

34. Sample Balance Sheet Numbers in millions

35. Sample Income Statement Numbers in millions, except EPS & DPS

36. Liquidity Ratios • Current Ratio = CA/CL - 2256/1995= 1.13 times 2. Quick Ratio = (CA-Inventory)/CL - (2256-604)/1995 = 83 times 3. Cash Ratio = Cash/CL -696/1995 = 35 times

37. Long-term Solvency ratios • Total Debt Ratio = (TA – TE)/ TA - (5394 – 2556)/5394=52.61% • Debt/Equity = TD/TE - (5394-2556)/2556= 1.11 times • Equity Multiplier = TA/TE = 1+D/E - 1=1.11= 2.11 • Long-term debt ratio = LTD/(LTD=TE) - 843/(843=2556)= 24.80% • Times Interest Earned= EBIT/Interest - 1138/7= 162.57 times

38. Asset management or turnover ratios Computing Receivables ratios • Receivables Turnover= Sales/Accounts= Receivable - 5000/956= 5. 23 times • Days’ Sales in receivables = 365/ Receivales Turnover - 365/5.23= 70 days

39. Asset management or turnover ratios Computing Inventory ratios • Inventory Turnover = Cost of Goods Sold/Inventory - 2006/301= 6.66 times • Days’ Sales in Inventory = 365/Inventory Turnover - 365/6.66 = 55 days

40. Asset management or turnover ratios Computing Inventory ratios • Total Asset Turnover= sales/Total Assets - 5000/5394= 93 - it is not unusual for TAT <1, especially if a firm has a large amount of fixed assets • NWC Turnover = Sales/NWC - 5000/(2256-1995)= 19.16 times • Fixed Asset Turnover= Sales/NFA - 5000/3138= 1.59 times

41. Profitability Measures • Profit Margin= Net Income/Sales - 689/5000= 13.78% • Return on Assets (ROA) = Net Income/Total Assets - 689/5394 = 12.77% • Return on Equity (REO) = Net Income/Total Equty - 689/2556= 26.96%

42. Computing Market Value Measures • Market Price = $ 87.65 per share • Shares outstanding = 190.9 million • PER ratio = Price per share/Earnings per share - 87.65/3.61 = 24.28 times • Market-to-book ratio = market value per share/book value per share - 87.65/ (2556/190.9) = 6.56 times

43. Harley-Davidson, Inc. Ratio Analysis

44. Using the DuPont Identity ROE = PM * TAT * EM ROE = Net Income/sales x sales/assets x assets/Equity - Profit margin is a measure of the firm’s operating efficiensy - how well does it control costs - total asset turnover is a measure of the firm’s asset use efficiency-how well does it manage its assets - Equity multiplier nis a meausre of the firm’s financial leverage

45. Expanded Dupont Analysis-Aeropostale data • Balance Sheet Data • income Statement Data - cash= 138,356 - Sales= 734,868 - inventory= 61,807 - COGS+ 505,152 - other CA = 12,284 - SG&A = 141,520 - fixed assets = 94, 601 - interest = (760) - equity = 185, 640 - taxes = 34, 702 • Computations • Computations - TA = 307,048 - NI= 54,254 - TAT = 2. 393 - PM= 7,383% - EM = 1.654 - ROA= 17.668% - ROE= 29.223%

46. Aeropostale Expanded DuPont Chart • ROE = 29.22% • 11,654 17,668 • PM= 7,383% • TAT=2,393 • Sales=734,868 • TA=307,048 • Sales=734,868 • NI=54,254 • Sales= 680,614 • TC=734,868 • Fixed Assets=94601 • Current Assets= 212,447 • Inventory= 61,807 • COGS= 505, 152 • Cash= 138,356 • SG&A= 141,520 • Interest= (760) • Other CA=12,284 • Taxes= 34,702

47. ROE = net income x sales x assets sales assets equty = 54,254 x 734, 868 x 307, 048 734,868 307,048 185, 640 = 07383 x 2.3933 x 1.6540 = 29.2%

48. As we study the figure, we quickly see that improvement in the ROE can common in one or more of four ways: • Increase sales without a disproportionate increase in cost and expenses • Reduce COSGS or operating expences • Increase the sales relative to the asset base, either by increasing sales or by reducing the amounts invesred in company assets. From our earlier exammination of Harley-Davidson, we learned that the firm had excessive account receivables and fixed assets. Thus management need to reduce these assets to the lowest in the return on which would in turn result in an increase in the return on assets and then the return on equity • Increase the use of debt relative to equity, but only to the extent tha it does not unduly jeopardize the firm’s financial position.

49. Limitations of ratio analysis • It is sometimes diffcult to identify the industry category to which a firm belongs when the firm enganges in multiple line of business • Published industry averages are only approximations and provide the user with general guidelines rather than scientifically determoned averages of the ratios of all or even a representative sample of the firms within an industry • Accounting practice differ widely among firms and can lead to differences in computed ratio • An industry average may not provide a desirable target ratio or norm • Many firm experience seasonality in their operation

50. Case Chris was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance departement of a fortune 500 company since then. S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and light airplanes this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models; the birdie, which sells for $53,000, and the Eagle, which sells for $78,000.0