 Hey guys, it's MJ the student factory and we're going to be talking about maximizing shareholder value This is subject CT2 and I was thinking instead of me just doing the voice record I'll just fill myself chatting about it. So you can still listen to it I mean before you go to bed or while you drive But if you one of those people who'd likes to see you know something moving on the screen Then this works much better than just a black screen like I had in my previous videos So with that out of the way, let's jump straight into the material and I want to break this into two separate videos So this video is going to focus on the goals of the financial manager And then the next video will be on the opportunity costs of capital So financial managers First of all, they start off with what what is a financial manager? We we've learned from the previous videos that they're the person who stands between the firm's operations and the capital market But let's have a close look at this financial manager What we know is that they are well, you know, they form part of the management Committee which forms part of the the strategy side of a business That so they're a manager. They're an employee and they're a person and What they what can be done to them is that they can be hired they can be fired. They can be promoted their salaries can be increased all these things can happen to them and Some of the stuff that they do is they what I've got it written down over here, you know They they make decisions. They do calculations. They cost judgment on various projects And job they will project cash flows. They will reflect on a company's financial position. They they have quite a lot of responsibilities and When we talk about a financial manager, what are some of the the key dimensions that makes up a financial manager? Well, they're gonna be What we've got sure their age their experience their qualification their expertise their salary demands How much stress they can tolerate their productivity all these things make up the various dimensions of a financial manager and When we think financial manager, we're normally associate them with accountants profits bookkeeping and All that type of stuff So that's our financial manager You get different types of financial managers. I mean you can have a dedicated financial manager This is normally for big companies You have an interim financial manager while they're busy looking for a replacement Or you could be a part-time financial manager if you're a sort trade up, you know You're gonna be doing a little bit of each role So you might be a financial manager on Mondays and then you go back to being like an entrepreneur on Tuesdays so that is the financial manager and What is their goal? What is their their purpose in life and when we read the CT to course material? They're gonna say that their goal is to maximize shareholders value So before we delve into into all of that let's discuss what exactly is a shareholder Now I've got it some stuff written down here. Oops. Let me just turn the page Okay, we're back with me. Okay. So shareholders Um Shareholders, they're interesting characters. They make part of the the capital markets along with financial institutions and governments and The shareholders can either be a company like a business in itself or it could be some key individuals What I forgot written about shareholders so yeah shareholders there there are party to these transactions and Some of the stuff a shareholder can do they can invest in a company They can sell their shares and they can also vote but voting is a little bit of active management and we'll approach that later on in the course and You deal with it a lot in other actual subjects such as CA1 and financial specialist subjects more about shareholders They can be rewarded and that's where we this is going to be the link between the shareholders and the financial managers Financial managers advise the businesses on how what's the best way to reward the shareholders? You know, do we want to give them a dividend? What time do we give the dividend and All of this is very important because when we look at a shareholder, they have some key dimensions You know, which makes each shareholder unique and I've got them written down here So each shareholder will have their own risk tolerance And they'll have a whole bunch of you know am I if you're a youngster You might be a little bit more risky, you know invest in a nice start up with The desire that it might go big and you don't worry too much of it crashes and burn We're compared to say an old shareholder who might you know favor stability and would rather invest in a blue chip company Where growth prospects aren't that high, but there's less downside risk So risk tolerance is is one of the dimensions of a shareholder Another dimension are their preferences. How do they want? You know, what what are their time preferences? So the youngster here to have a much longer time preference than say an old investor to have a shorter time preference But that's not always the case and they might also have a preference on how they want their return Do they want their return in an income form such as dividends or do they want their return in? capital form and the share price increasing and then finally Well, not finally. Sorry. There's there's more dimensions But I think one of the most important ones is the tax position and the wealth of a shareholder So how much money does the shareholder have and that will also influence along with some few other factors the shareholders tax position Sometimes the tax Is structured in such a way that it's better to reward shareholders with form of dividends other times It might be better with You're just increasing the share value and that's something that the financial manager needs to consider But the thing is all these dimensions make the shareholders unique So what does a financial manager do if there are thousands and thousands of shareholders and this this can be the case With some of your more larger public companies, you know, private company might have maybe 10 20 shareholders But a private company. I mean sorry a public company could have thousands and What the course or the core reading says and I'm going to disagree with it but it says that in order for the financial manager to Accompany all these needs the best thing for him to do is to increase the share Value and by doing so he will make all the shareholders happy Now what I don't like about the notes is because it's very much focused on they must just increase the the shareholders value and And While this sounds great in theory There are some Problems when it's applied in practice. I mean a famous example is Enron. So Enron was a company Whose financial manager's main goal was to increase the stock price and by doing so they did a few things which Yeah, we're maybe considered to be illegal. Well, yeah, they were illegal. They were very wrong They were croaking the accounting books you know making some fake adjustments here and there and they they manipulated the Results in such a way so that they could just cause the stock price to increase, you know They were very short-term incentivized, you know, they needed the stock price to increase so they could keep their job Otherwise they got replaced and that type of corporate culture um Leaded or led to a lot of people losing a lot of money because not only did Enron Take all his employers Employees money and the pension fund invested back inside itself But a lot of other companies were invested in it. So when it blew up a lot of people lost a lot of money It was a big disaster for the accounting world financial markets in total So, yes financial managers should increase the shareholders Positioned by increasing the stock price, but they mustn't do it at all costs because it could have some devastating results and that's a key thing to remember as when you get asked an Exam question on the stuff mentioning that could get you an extra mark or two. So keep that in mind Is there anything else so when you want to chat about oh Yeah, just coming back to the share price. I mean the best way to increase the share price in the proper way The legal way is to just pursue projects that are profitable and just make sense for the business And you can see this is quite a difficult Well, yeah, it's a it's a task or role that requires a lot of judgment and expertise So financial managers are paid quite a lot of money. They are an important part of any business I don't think it's it's very much an actuarial role. So as an actuary, you might not be taking up that position But it's important to understand this role as you will definitely be dealing with the financial manager When you're working as a senior actuary or when you become the chief risk officer There'll be someone that whenever you've got an idea you'll need to convince them From a financial point of view because they do have quite a lot of say in a business But job that is the goal of a financial manager to increase the wealth of the shareholders And I hope I've explained well what a financial manager and what a shareholder is and Yeah, stay tuned because I will be making another video on the opportunity costs of capital But just let me know in the comment section below if you preferred, you know looking at my face while I do these Or if you prefer the black screen Or if I should maybe try go back to the old presentation mode But like I said, I don't like doing that for the subject just because it is a lot of theory And I think we can get away with just with just chatting about it But let me know and John I really value you guys opinions and yeah share this video We close to two thousand subscribers. That's that's a lot of act trees. So Yeah, keep sharing it with your friends and thank you guys so much for all the support. Cheers