* Share price at start of year: RM2.50 per share * Number of shares held: 1000 * Market value at end of year: RM2.82 per share * Dividend paid: RM0.28 per share * Dividend received = 1000 shares x RM0.28 dividend per share = RM280 * Capital gain = 1000 shares x (RM2.82 - RM2.50) per share = RM320 * Total return = Dividend + Capital gain = RM280 + RM320 = RM600 * TSR = (Total return / Value of investment at start) x 100% = (RM600 / RM2500) x 100% = 24%

1. Strategic Financial
Management
Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall
Finance Function
Dayana Mastura Baharudin

2. Financial Management
The acquisition and deployment of financial resources to achieve key objectives

3. Acquisition of
Financial
Resources
A financing decision
The need to obtain suitable sources of finance
Risk will be a consideration
Some sources of finance create risk for a
business (interest rate risk of increasing during
economic downturn or global pandemic Covid-
19)

4. Deployment
of Financial
Resources
Business financial resources
being used effectively
Whether or not to invest in
projects? (investment
decision)
Whether or not to return
surplus cash to shareholders?
(dividend decision)

5. Key financial objectives - Profits
PROFIT MAXIMIZATION IS ASSUMED TO BE THE
MAIN FINANCIAL OBJECTIVE OF A BUSINESS
IN CONTRAST, SHAREHOLDERS OFTEN EXPRESS
DISAPPOINTMENT IN A COMPANY’S
PERFORMANCE EVEN WHEN PROFITS ARE
RISING
WHY?

6. Drawbacks –
Profit as a
financial
objective
It is historic and not future
oriented. It does not measure the
future potential of a company
It does not measure liquidity or
risk, despite both are important
commercial issues
It can be manipulated by the use
or abuse of accounting policies

7. Earnings per
share (EPS)
Profits distributable to
shareholders/Number of
ordinary shares
Distributable profits =
Profit after interest, tax
and preference dividends

8. Key financial
objective –
Shareholder
wealth
maximisation
For-profit company – maximization of
shareholder wealth is assumed to be the
main financial objective
The wealth of the shareholders in a
company comes from:
Dividends received
Market value of the shares

9. Market value of shares
Depends on the forecast
future cash flows of the
company,and
The perceived risk of these
cash flows
These forecast was a result
from a financial analysis of
the impact of a firm’s long-
term business plan, i.e
corporate strategy

10. Total shareholder return (TSR)
(Dividend + change in share price) /
Share price at the start of the year
The ability of a firm to create wealth for
its shareholders is measured by the TSR

11. A Framework for Maximizing Shareholder
Wealth
Maximisation of
shareholder's
wealth
Investment
Decision
Dividend
Decision
Financing
Decision
Risk
Management

12. Investment Decision
ANALYSES PROPOSED INVESTMENTS TO ENSURE THEY
ARE BENEFICIAL TO THE INVESTOR AND MAXIMISE
SHAREHOLDER WEALTH.
INVESTMENTS ARE CRUCIAL IN HELPING A FIRM TO
ACHIEVE KEY CORPORATE OBJECTIVES SUCH AS MARKET
SHARE AND QUALITY, AND IN ACHIEVING FINANCIAL
OBJECTIVES SUCH AS IMPROVING EARNINGS PER SHARE
(EPS).

13. Financing
Decision
Mainly focus on how much
debt should a firm use, and
the key aim is to minimize
the cost of debt
Sometimes there are
benefits in employing debt
as part of the firm’s capital

14. Dividend Decision
Considers on how much to pay out to shareholders
It is determined by how much a firm has decided to spend
on investments (the investment decision);
And how much of the finance needed for this – it has
decided to raise xternally (the finance decision);
And how good is the interrelationship between these key
decisions (investment and finance decision)

15. Risk Management
RISK NEEDS TO BE CONSIDERED
IN DETERMINING WHAT TYPE OF
FINANCE TO RAISE;
HOW TO INVEST IT; AND WHETHER TO PAY A
DIVIDEND
RISK MATTERS TO
SHAREHOLDERS AND
THEREFORE NEEDS TO BE
CAREFULLY MANAGED

16. Agency
Theory
It involves the problem of directors
controlling a company whilst
shareholders own the company.
In the past, a problem was identified
whereby the directors might not act
in the shareholders (or other
stakeholders) best interests.
Agency theory considers this problem
and what could be done to prevent
it.

17. Key Concepts of Agency Theory
An agent is employed by
a principal to carry out a task
on their behalf.
Agency refers to the
relationship between a principal
and their agent.
Agency costs are incurred by
principals in monitoring agency
behaviour because of a lack of
trust in the good faith of
agents.
By accepting to undertake a task
on their behalf, an agent
becomes accountable to the
principal by whom they are
employed. The agent
is accountable to that principal.

18. Separation of Ownership and Control
• Companies that are quoted on a stock market such as the London Stock
Exchange are often extremely complex and require a substantial
investment in equity to fund them, i.e. they often have large numbers
of shareholders.
• Shareholders delegate control to professional managers (the board of
directors) to run the company on their behalf.
• The Directors (agents) have a fiduciary responsibility to the
shareholders (principal) of their organisation (usually described
through company law as 'operating in the best interests of the
shareholders').
• Shareholders normally play a passive role in the day-to-day
management of the company.
• Directors own less than 1% of the shares of most of the UK's 100 largest
quoted companies and only four out of ten directors of listed
companies own any shares in their business.
• Separation of ownership and control leads to a potential conflict of
interests between directors and shareholders.
• The agents' objectives (such as a desire for high salary, large bonus
and status for a director) will differ from the principal's objectives
(wealth maximisation for shareholders).

19. Agency Theory and Corporate Governance
• Examination of theories behind corporate governance provides a foundation for
understanding the issue in greater depth and a link between an historical perspective
and its application in modern governance standards.
• Historically, companies were owned and managed by the same people. For economies to
grow it was necessary to find a larger number of investors to provide finance to assist in
corporate expansion.
• This led to the concept of limited liability and the development of stock markets to buy
and sell shares.
• Limited liability: limited risk and so less interest in the firm.
• Stock market: wide and limited individual ownership and the ability to simply sell
without the need to take any interest in the firm.
• Delegation of running the firm to the agent or managers.
• Separation of goals between wealth maximisation of shareholders and the personal
objectives of managers. This separation is a key assumption of agency theory.
• Possible short-term perspective of managers rather than protecting long-term
shareholder wealth.
• Divorce between ownership and control linked with differing objectives creates agency
problems.

20. Principal-Agent Relationship: Shareholders
and Directors
The separation of ownership and
control in a business leads to a
potential conflict of interests
between directors and
shareholders.
The conflict of interests between
principal (shareholder) and agent
(director) gives rise to the
'principal-agent problem' which is
the key area of corporate
governance focus.
The principals need to find ways of
ensuring that their agents act in
their (the principals') interests.
As a result of several high profile
corporate collapses, caused by
over-dominant or 'fat cat' directors,
there has been a very active
debate about the power of boards
of directors, and how stakeholders
(not just shareholders) can seek to
ensure that directors do not abuse
their powers.
Various reports have been
published, and legislation has been
enacted, in the UK and the US,
which seek to improve the control
that stakeholders can exercise over
the board of directors of the
company.

21. Principal- Agent Relationship: Shareholders
and Auditors
The other principal-agent relationship dealt with by corporate governance guidelines is that of the company with its auditors.
The audit is seen as a key component of corporate governance, providing an independent review of the financial position of the organisation.
Auditors act as agents to principals (shareholders) when performing an audit and this relationship brings similar concerns with regard to trust and
confidence as the director-shareholder relationship.
Like directors, auditors will have their own interests and motives to consider.
Auditor independence from the board of directors is of great importance to shareholders and is seen as a key factor in helping to deliver audit quality.
However, an audit necessitates a close working relationship with the board of directors of a company.
This close relationship has led (and continues to lead) shareholders to question the perceived and actual independence of auditors so tougher controls and
standards have been introduced to protect them.
Who audits the auditors?

22. The Cost of Agency Relationships
Agency costs arise largely from
principals monitoring activities of
agents, and may be viewed in
monetary terms, resources consumed
or time taken in monitoring. Costs are
borne by the principal, but may be
indirectly incurred as the agent spends
time and resources on certain
activities. Examples of costs include:
incentive schemes and remuneration
packages for directors
costs of management providing annual
report data such as committee activity
and risk management analysis, and
cost of principal reviewing this data
cost of meetings with financial
analysts and principal shareholders
the cost of accepting higher risks than
shareholders would like in the way in
which the company operates
cost of monitoring behaviour, such as
by establishing management audit
procedures.

23. Residual Loss
THIS IS AN ADDITIONAL TYPE OF AGENCY
COST AND RELATES TO DIRECTORS
FURNISHING THEMSELVES WITH EXPENSIVE
CARS AND PLANES ETC.
THESE COSTS ARE ABOVE AND BEYOND
THE REMUNERATION PACKAGE FOR THE
DIRECTOR,
AND ARE A DIRECT LOSS TO
SHAREHOLDERS.

24. Agency
Problem
Resolution
Measures
Meetings between
the directors and
key institutional
investors.
Voting rights at the
AGM in support of,
or against,
resolutions.
Proposing
resolutions for vote
by shareholders at
AGMs.
Accepting
takeovers.
Divestment of
shares is the
ultimate threat.

25. The need for Corporate Governance
If the market mechanism and shareholder
activities are not enough to monitor the
company then some form of regulation is
needed.
There are a number of codes of conduct
and recommendations issued by
governments and stock exchanges.
Although compliance is voluntary (in the
sense it is not governed by law), the fear
of damage to reputation arising from
governance weaknesses and the threat of
delisting from stock exchanges renders it
difficult not to comply.
The UK Corporate Governance Code
(2010) for Corporate Governance adopted
by the Financial Services Authority (FSA)
in the UK.
OECD code on ethics.
ACCA codes.
Specific regulation regarding director
remuneration and city code on takeovers.
Malaysian Code of Corporate Governance
2012 (MCCG 2012)
Malaysian Code of Corporate Governance
2017 (MCCG 2017) – to date

26. Stakeholder Theory
• The basis for stakeholder theory is that
companies are so large and their impact
on society so pervasive that they should
discharge accountability to many more
sectors of society than solely their
shareholders.

27. Non-Financial
Performance
measures
To ensure that the interest of other stakeholder
groups are not neglected, non-financial
measures can be used in addition to financial
measures. Some examples as follows;
Staff – staff turnover (percentage of staff
leaving during a year)
Customers – complaints and market share
Suppliers – non-defect products, fast delivery,
after-sales service

28. Financial
Performance
Measures
Profitability
ratios –
managerial
performance
Debt ratios –
leverage
level,
important for
banks to
evaluate
Liquidity
ratios –
important to
suppliers and
customers
Shareholder
investor ratios
– important to
shareholders

29. Profitability Ratios
Return on capital
employed (ROCE) = (Profit
from operations/Capital
employed) x 100
Profit from operations =
Profit before interest and
tax
Capital employed = (equity
+ long-term debt) OR (total
assets – current liabilities)
Return on Equity (ROE) =
Profits after interest and
tax / Shareholders funds

30. Debt Ratios
Gearing = Book value of debt
/ Book value of equity
Alternatively, this could be
calculated as
debt/(debt+equity)
Debt ratios are concerned
with how much the company
owes in relation to its size
and whether it is getting
into heavier debt or
improving its situation
Interest cover = Profit from
operations / Interest
The Interest cover or or
coverage ratio is a measure
of the affordability of
interest payments

31. Liquidity
Ratios
Current ratio = Current assets / Current liabilities
Acid test ratio = (Current assets – Inventory) /
Current liabilities
A firm should have enough current assets to meet
its commitments to pay its current liabilities. A
ratio of more than 1 indicates minimum liquidity
coverage.
Most inventories are not very liquid asset and some
businesses have slow inventory turnover especially
during the financial crisis

32. Shareholder Investor Ratios
Dividend yield = (Dividend per share / Market price per share ) x 100
Earnings per share (EPS) = Profits distributable to ordinary shareholders / Number of
ordinary shares issued
Price/earnings (P/E) ratio = Market price per share / EPS
The value of the P/E ratio reflects the market’s appraisal of the share’s future prospects –
the more highly regarded a company, the higher will be its share price and its P/E ratio

33. Not-for-profit
organisations:
Value for
Money
Value for money – Defined as getting the best
possible combination of services from the least
resources, which means maximizing the benefits
for the lowest possible cost.
Value for money involves 3Es
Economy – purchase of inputs of appropriate
quality at minimum cost
Efficiency – use of these inputs to maximise
output
Effectiveness – use of these inputs to achieve its
goals (quality, speed of response)

34. Activity 1: Financial Objectives
• B Berhad has just released its financial results for the year and its profits before tax
increased by 38% over the previous year. This was due largely to a doubling of sales in
South-East Asia. However, the share price in B Berhad fell by almost 20% immediately
after the profit announcement.
• Required: Which of the following is the least likely explanation for the fall in share
price?
• A. Sales in South-East Asia had been expected to increase by more than 100%
• B. The depreciation charge was higher due to a change in accounting policy
• C. The level of B Berhad’s business risk has incrased over the year
• D. Delays in the launch of new products are expected in the coming year

35. Activity 2: Total Shareholder Return
• A shareholder purchased 1000 shares in S Berhad on 1 January
20X1 at a market price of RM 2.50 per share. On 31 December
20X1 the shares had a market value of RM 2.82 per share. The
dividend paid during 20X1 was RM 0.28 per share.
• Required:
• Calculate Total Shareholder Return (TSR)