1st Chapt PP.ppt

7/30/2019 1st Chapt PP.ppt

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1ST CHAPTERINTRODUCTIONTO PRINCIPLESOF

FINANCE

Definition and Basic

Concepts


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DEFINITIONOF FINANCE

Finance is the art and science of managingmoney which is concerned with theprocess, institutions, markets and

instruments involved in the transfer ofmoney among and between individuals,business and governments.

Finance is a body of facts, principles, and

theories dealing with the raising and usingof money by a firm.


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DEFINITIONOF FINANCE

Finance is the branch of economicsthat focuses on investment in real andfinancial assets and their management.

A real assetis a physical item such asa truck, land, or building.

A financial assetis a claim for a futurefinancial payment, such as a savingsaccount at a bank.


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BENEFITSOF KNOWLEDGEOF FINANCE

Careers in Finance-

As a Corporate Financial Manager

As a StockbrokerExecutive- Financial Analyst

Investment Consultant in an

Investment Bank or Financial Institution

Loan Analyst/ Loan Officer in a Bank


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MAJOR AREAS & OPPORTUNITIESIN

FINANCE

Financial Services- The part of finance

concerned with the design and delivery of

advice and financial products to individuals,

business and government.

Managerial Finance- Concerns the duties of

the financial manager in the business firm.


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FINANCIAL MANAGER

Financial managers actively manage thefinancial affairs of many types of business-

financial or non financial, private and public,

large and small, profit-seeking and not forprofit.

They perform such varied financial tasks as

planning, extending credit to customers,evaluating proposed large expenditures,

and raising money to the firms operations.


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FUNCTIONSOF FINANCIAL MANAGERS

1. Performing financial analysis and

planning-which includes:

Monitoring the firms financial condition,

Evaluating the need for increased (or

reduced ) productive capacity, and

Determining what financing is required.


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2. Investment Decision Making:

It is the most important decision of the firmwhen it comes to value creation. It begins witha determination of the total amount of assetsneeded to be held by the firm.


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FUNCTIONSOF FINANCIAL

MANAGERS

3. Making Financing Decision:

Here the financial manager is concernedwith the makeup of the right-hand side of

the balance sheet. It involves two majorareas. First, the most appropriate mix ofshort term and long-term financing must beestablished. A second important concern is

which individual short term or long termsources of financing are best at a givenpoint in time.


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4. Asset management Decision:

Assets must be managed efficiently andfinancial manager must be moreconcerned in this respect. Otherwise firmmay fall in difficulty in several cases.5. Accounting and Control:Maintaining financial records; controllingfinancial activities, identifying deviations

from planned and efficient performance,and managing payroll, tax matters,inventories, fixed assets and computeroperations.


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6. Forecasting:

Forecasting costs, technological changes,

capital market conditions, funds needed for

investments, demand for the firms products

and using forecasts and historical data toplan future operations.

Pricing, credit and collections, insurance

and incentive planning are some otherresponsible duties to the financial

managers.


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FORMSOF BUSINESS ORGANIZATION

Sole Proprietorships

Partnerships

Corporations


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EPS & SHARE

EPS are calculated by dividing the periods total

earnings available for the firms commonstockholders by the number of shares of common

stock outstanding.

Share: A share is a piece of paper/document which

represents the ownership of a particular company.

Or, a share is a chose in action, conferring on its legal

right to the part of the companys profits (usually by

payment of a dividend) and to any voting rightsattaching to that share.


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PROFIT MAXIMIZATIONORWEALTH MAXIMIZATION?

Goals of the Corporation:


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PROFIT MAXIMIZATIONOR WEALTH

MAXIMIZATION?

Profit maximization is not a reasonable goalbecause it fails to consider some important

facts. It ignores:

The timing of returns- the receipt of fundssooner rather than later is preferred.

Cash flows available to stockholders/ effect

of dividend policy.Risk- the chance that actual outcome may

differ from those expected.


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MAXIMIZE SHAREHOLDER WEALTH:

The goal of the corporation, and thereforeof all managers and employees, is tomaximize the wealth of the owners forwhom it is being operated.

Shareholders wealth is represented by themarket price per share of the corporationscommon stock. The market price serves asa barometer for business performance; it

indicates how well management is doing onbehalf of its shareholders.

S


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STAKEHOLDERSRATHERTHAN

STOCKHOLDERS

The stakeholders include creditors,employees, customers, suppliers,communities in which a company

operates and others. Only throughattention to the legitimate concerns of thefirms various stakeholders can attain its

ultimate goal- maximizing shareholderswealth.


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SOCIAL RESPONSIBILITYOFTHE FIRM:

Protecting the consumer rights-

Companies shouldnt charge abnormalprices for their product or services and act

as a monopoly type. Every firm should

ensure quality product and services forultimate consumers.

Paying fair wages to employees and

provide rewards as a motivational drive toincrease their productivity. Firms must

ensure welfare of their workers and

employees.


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(CONTINUE)

Maintaining fair hiring practice orselection process and safe workingcondition.

Giving support for proper education tograss-root level. In this case establishedfirms may provide various types of

scholarship for poor students.


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(CONTINUE)

Becoming involved in such environmental

issues as clean water and air. Firm may take

social awareness activities againstenvironment pollutions, AIDS, acid terrorism,

and other negative matter which creates social

distress and hampered normal life.


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AGENCY PROBLEMS

There is a potential conflict of interest

between the owners, who expect the

managers to act on their behalf, and

managers, who have their own interests aswell. This gives rise to what has been called

the agency problem, that is, the

divergence of interests that arisen betweena principal and his agent.


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AGENCY COSTFOR PREVENTIONOF

AGENCY PROBLEMS:

Several mechanisms are used to motivatemanagers to act in the shareholders bestinterests. These include-

The threat of takeover Structuring managerial incentives

Monitoring ExpendituresThis outlays pay for audits and controlprocedures that are used to asses and limitmanagerial behavior to those actions that tendto be in the best interest of the owners.

The threat of firing


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AGENCY COSTFOR PREVENTIONOF

AGENCY PROBLEMS:

Bonding expenditures

Protect against the potentialconsequences of dishonest acts by

managers. Typically, the owners pay athird- party bonding company to obtaina fidelity bond. This bond is a contractunder which the bonding companyagrees to reimburse the firm for up to astated amount if a bonded managersdishonest act results in financial loss to

the firm.


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Thank You

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1st Chapt PP.ppt

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