COURSE NAME: FIN101
TOPIC : 1
AN OVERVIEW OF MANAGERIAL FINANCE
PART ONE: CHAPTER ONE
AN OVERVIEW OF MANAGERIAL FINANCE
◼ Define finance, describe the general areas of finance; identify the
alternative forms of Business Organization.
◼ Explain the goals of firm, managerial actions to Maximize
Shareholder Wealth, managers’ roles as agents of stockholders
◼ Discuss business ethics, corporate governance, and Stakeholders;
identify who are the stakeholders
WHAT IS FINANCE?
◼ In Simple terms, Finance deals with money.
◼ More appropriate terms, Finance deals with cashflows.
◼ Finance is a process to determine the required fund, to identify the
sources of funds, to calculate the cost of each sources, to collect the
fund from least cost source ,and finally to disburse the fund so that
we can maximize our target.
◼ Finance decisions deal with how money is raised and used by
individuals/governments/businesses
WHAT IS FINANCE?
3 general concepts of Finance:
1. More is preferred to less Vice-versa
2. The sooner the better Vice-versa
3. Less risky assets are more valuable Vice-versa
GENERAL AREAS OF FINANCE
1. Financial markets and institutions: Financial institutions like banks and insurance
companies are key part of financial marketplace.
2. Investments: Businesses and individuals make financial decisions when they
choose securities in their investment portfolio. Such as determining values, risks,
returns and optimal mix of securities.
3. Financial services: Financial services are functions those are provided by financial
organizations.
4. Managerial (Business) Finance: Managerial finance deals with decisions that all
firms make concerning their cash flows. Such as plant expansion, credit terms,
inventory & cash-in-hand management, merger analysis, reinvestment & dividend
policy.
IDENTIFY THE ALTERNATIVE FORMS OF BUSINESS ORGANIZATION.
3 main form of business organizations
1. Proprietorship is business owned by one person and operated for his or her
own profit.
2. Partnership is business owned by two or more people and operated for
their profit.
3. Corporation is a legal entity created by state, separate and distinct from its
owners and managers, having unlimited life, easy transferability of
ownership and limited liabilities.
WHAT GOAL(S) SHOULD BUSINESS PURSUE?
Question: What is the goal/objective/target of a business?
Profit maximization
Or
Shareholders wealth maximization
WHAT GOAL(S) SHOULD BUSINESS PURSUE?
Why “Profit maximization ” is not business’s goal?
The traditional goal of business was profit maximization from inception of
business but this goal is outdated for several problems such as:
1. Profit maximization is a vague idea
2. Profit maximization does not consider cashflow
3. Profit maximization does not consider timing of return
4. Profit maximization does not consider risk
WHAT GOAL(S) SHOULD BUSINESS PURSUE?
“Shareholders wealth maximization”
What is “Shareholders wealth maximization”?
Shareholders wealth maximization is the management’s primary goal, it
considers the risk and timing associated with expected cashflows to
maximize the price of firms common shares
Financial Managers
3 Key decision Area
1. Capital Structure
Decisions
2. Capital Budgeting
Decision
3. Dividend Policy
Decision
MANAGERIAL ACTIONS TO MAXIMIZE SHAREHOLDER WEALTH
Financial Manager makes decision in order to maximize shareholders
wealth resulting increase share price. Key action/decision areas:
1. Capital Structure Decisions: Decision about how much and what types
of debt and equity should be used to finance the firm
2. Capital Budgeting Decision: What types of assets should be purchased
3. Dividend Policy Decision: How much reinvest in the firm and how
much to pay dividend.
MANAGERIAL ACTIONS TO MAXIMIZE SHAREHOLDER WEALTH
Decision Rule For Manager: Only to decisions that are subject to increase
the share price
MANAGERS ROLES AS AGENTS OF STOCKHOLDERS
Agency Relationships
◼ Shareholders (owners) are not involved in day-to-day operations and
decisions making in large institutions.
◼ Shareholders hire managers as agents on how the firm runs and achieve the
goal of shareholders wealth maximization.
◼ Agency Relationships exists between shareholders (Principals) and
manager (Agents)
MANAGERS ROLES AS AGENTS OF STOCKHOLDERS
Agency Problem/Conflict:
◼ Because of the separation of ownership from its management, a manager
may act to maximize his/her personal wealth rather than shareholder’s
wealth.
◼ A potential conflict of interests between shareholder (owners) and managers
is called agency problem.
◼ Biggest problem in the company world
Mechanisms to solve
agency problem
1. Managerial
compensation
2. Shareholders
Intervention
3. Threat of Hostile
Takeover
BUSINESS ETHICS
◼ Business ethics is a company’s attitude and conduct toward its
stakeholder - employees, customers, stockholders; ethical behavior
requires fair and honest treatment of all parties
◼ Ethical business behavior includes fair employment practice, fair product
safety and quality assurance, fair marketing & selling practice,
community involvement &CSRs, information confidentiality and privacy
policy.
◼ Unethical business behavior includes bribery, illegal payments etc.
BUSINESS ETHICS
Business ethics is essential for long-run profitability because-
◼ Ethical behavior prevents fines and legal expenses
◼ Helps to build public trust
◼ Attracts customers
◼ Attracts and keeps employee
◼ Support the economic viability of community
CORPORATE GOVERNANCE
◼ Corporate governance is a “set of rules” that a firm follows while
conducting business.
◼ It provides road-map that managers follow to pursue various goals
◼ These rules identify who is accountable for major financial decisions
◼ It is importance to clearly specify corporate governance structure to
stakeholders (managers, employees, suppliers, stockholders, creditors)
◼ Good corporate governance includes a board of directors are independent
from company’s management.
◼ Good corporate governance ensures financial and accounting accuracy and
avoids potential unethical & fraudulent practices
