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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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FUNCTIONSOF FINANCIAL MANAGERS
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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FUNCTIONSOF FINANCIAL MANAGERS
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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FUNCTIONSOF FINANCIAL MANAGERS
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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SOCIAL RESPONSIBILITYOFTHE FIRM:
(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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SOCIAL RESPONSIBILITYOFTHE FIRM:
(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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