Professional Documents
Culture Documents
Introduction to
Business Finance
Read Only 4
Basic forms of business
organization
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
6
Partnership
7
Corporation
Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
8
Basic Forms of Business
Organization
Read Only 9
Percentage share of
business organizations
Corp.
15%
S Prop.
P'ship 75%
10%
10
Corporate Organization
S T O C K H O L D E R S
VP of Finance
Treasurer Controller
Capital Budgeting Cost Accounting
Cash Management Cost Management
Credit Management Data Processing
Dividend Disbursement General Ledger
Fin Analysis/Planning Government
Pension Management Reporting
Insurance/Risk Mngmt Internal Control
Tax Analysis/Planning Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts
12
Corporate Organization
Another
Example
13
The Financial Environment
Financial Institutions
Financial institutions are intermediaries that channel
the savings of individuals, businesses, and
governments into loans or investments.These
institutions accepts money from savers and use those
funds to make loans and other financial investments
in their own name. They include commercial banks,
saving institutions, mutual funds etc
14
The Financial Environment
Financial Markets
Financial markets provide a forum in which suppliers
of funds and demanders of funds can transact business
directly.
The two key financial markets are the money market
and the capital market. Transactions in short term
marketable securities take place in the money market
while transactions in long-term securities take place in
the capital market.
Within the money and capital markets are the primary
& secondary market.(Refer to the next slide)
15
Primary & Secondary Markets
Primary Market
The primary market is the one in which a corporation or
government is directly involved in and receives the proceeds
from the transaction.When a corporation issues securities,
cash flows from investors to the firm.
(Usually an underwriter is involved)
Secondary Markets
The secondary markets involve the sale of used securities
from one investor to another. Once issued, securities then
trade on the secondary markets such as the Karachi Stock
Exchange or NASDAQ.Securities may be exchange traded or
trade over-the-counter in a dealer market.
16
Financial Markets
Stocks and
Investors
Bonds
Firms securities
Money Ali Sami
money
Primary Market
Secondary
Market
17
Types of Financial Decisions
Investment Decisions
Financing Decisions
18
Investment Decisions
19
Financing Decisions
20
Key Activities of the
Financial Manager
21
Asset Management Decisions
Profit Maximization
23
Shortcomings of
Alternative Perspectives
Profit Maximization
Maximizing a firms earnings after taxes.
Problems
Could increase current profits while harming firm (e.g., defer
maintenance, issue common stock to buy T-bills, etc.).
It fails to account for the level, timing and the risk of the cash
flows. (Consider the figure below)
Product Year 1 Year 2 Year 3 Total earnings
A $10,000 $10,000 $10,000 $30,000
B $11,000 $11,000 $11,000 $33,000
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Shortcomings of
Alternative Perspectives
Earnings per Share Maximization
Maximizing earnings after taxes divided by
shares outstanding.
Problems
Similarly to profit maximization, it does
not specify timing or duration of expected
returns and ignores changes in the risk
level of the firm.
Calls for a zero payout dividend policy.
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What is the Goal of the Firm?
Maximization of
Shareholder Wealth!
Value creation occurs when we
maximize the share price for
current shareholders.
26
Strengths of Shareholder
Wealth Maximization
Takes account of: current and future profits and EPS; the
timing, duration, and risk of profits and EPS; dividend policy;
and all other relevant factors.
28
The Internal Environment
Availability or lack of human
resources.
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The External Environment
Political and legal framework.
include law makers, law and law enforcers.
Economic/Climatic conditions.
e.g. companies importing raw material depend highly on
fluctuation of Pak rupees against dollar. (Edible oil
companies)
30
Contd external environments
Technological trends.
If comp. utilizes most modern equipment available to
start a production line, a year later competitors are under
pricing and making it non productive.
Investors Attitude.
A company cannot one perception. It takes time to
influence the attitude of the investors.
The firm can provide timely information to help its
investors be as objective as possible.
31
Framework for Financial Management
External
Environment
Business
Asset Structure
risk
Financial Risk Price Returns
considerations and
decisions
Financial Financial
Structure risk
Internal
Environment
32
The Modern Corporation
Modern Corporation
Shareholders Management
35
Agency Theory
36
What About Other
Stakeholders
Stakeholders include all groups of individuals who have a direct
economic link to the firm including:
Employees
Customers
Suppliers
Creditors
Owners
37
Goals of the Corporation
38