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