CHAPTER 1

An Overview of Financial Management

 Finance Explained
 Areas of Finance
 Scope of Finance
 Forms of Businesses
 Goals of the Corporation
 Agency Relationships
 Career Opportunities
 Issues of the New Millennium
Finance - Explained

• The science of the management of money and

other financial assets.
• Finance is an art of managing various available
resources like money, assets, investments,
securities, etc.
• "Finance is the management of money and other
valuables, which can be easily converted into cash."
Areas of Finance
• Personal finance - Personal financial decisions may
involve paying for education, financing durable goods
such as real estate and cars, buying insurance, e.g.
health and property insurance, investing and saving
for retirement
• Corporate finance - Managerial or corporate finance
is the task of providing the funds for a corporation's
activities
• Public finance - Public finance describes finance as
related to states and sub-national entities
(states/provinces etc.) and related public entities.
Alternative Forms of Business Organization

•Sole proprietorship
•Partnership
•Corporation
Sole proprietorships & Partnerships

•Advantages
•Ease of formation
•Subject to few regulations
•No corporate income taxes
•Disadvantages
•Difficult to raise capital
•Unlimited liability
•Limited life (mostly in partnership)
Corporation

• Advantages
• Unlimited life
• Easy transfer of ownership
• Limited liability
• Ease of raising capital
• Disadvantages
• Double taxation
• Cost of set-up and report filing
Financial Goals of the Corporation

•The primary financial goal is shareholder

wealth maximization, which translates to
maximizing stock price.
•Do firms have any responsibilities to
society at large?
•Should firms behave ethically?
Do firms have any responsibilities to
society at large?
Is stock price maximization the same
as profit maximization?
• No, despite a generally high correlation amongst stock price, EPS, and
cash flow.
• Current stock price relies upon current earnings, as well as future
earnings and cash flow.
• Some actions may cause an increase in earnings, yet cause the stock
price to decrease (and vice versa).
Financial Markets

• Physical Asset Markets vs Financial Asset Markets

• Spot Markets vs Futures Markets

• Money Markets vs Capital Markets

• Primary Markets vs Secondary Markets

• Local, Regional, National and world Markets

Financial Markets

Investors
Stocks and
Bonds
Firms securities
Money A A
money

Primary Market

Secondary Market
Financial Institutions

• Investment banks

• Financial Intermediaries
• Commercial banks

• Insurance companies

• Mutual funds

• Financial Service Companies