1. Ayesha Saimoon 1

2. 2 Email: Ayeshasaimoon@yahoo.co.uk Counseling: Before starting or after finishing every class. For your Emergency: 01726427878 (Please don’t make a call after 10:00 pm)

3. Required Text Book Besley and Brigham, Essentials of Managerial Finance Additional Readings 1.Brigham and Houston, “Fundamentals of Financial Management” 2.L J Gitman, “Principles of Managerial Finance”

4. Ayesha Saimoon 4 Required Computer Knowledge 1. MS-Excel Spread Sheet 2. MS-Word 3. PowerPoint Presentation Course Websites www.teachmefinance.com www.studyfinance.com www.investorwords.com www.islamicfinance.com

5. Ayesha Saimoon 5 Required Instrument A good Financial Calculator or a Good Scientific Calculator.

6. Ayesha Saimoon 6 Evaluation Process Mid-Term (Week 07)30 Final Exam (Week 14)40 Class Test a.Closed book b.Open book c.Surprised Test d.Take Home exam 10 Assignment and Presentation/case study10 Class Attendance and Performance10 Total100

7. Ayesha Saimoon 7 Points To Be Noted For Closed book class test, student will get one week prior notice. For open book class test, student will get 7 days prior notice. For Assignment/presentation/case study, student will get maximum 2 months to submit it. For take home exam, student will get 7 days to submit the (hand written) answer scripts.

8. Ayesha Saimoon 8 Contents Definitions of Finance, Basic Principles of Finance, Functions of Finance, Sectors of Finance, Responsibility of Financial Manager, Financial Management Issue of The New Millennium, Forms of Business Organizations, Financial Goals of The Corporations, Profit Maximization Vs. Wealth Maximization and The Agency Problems.

9. Ayesha Saimoon 9 What is Finance? Finance is the relationship between deficit sector and surplus sector of the society. Finance is the process of transferring fund from one sector to another sector. –Individual to individual –Individual to organization –Organization to individual –Organization to organization –One place to another place –One government to another government –One country to another country etc. The commercial activity of providing funds and capital for the business is called Finance. Finance is the branch of economics that studies the management of money and other assets The management of money and credit and banking and investments is known as finance.

10. Ayesha Saimoon 10 Types of Finance 1.Public Finance 2.Private Finance a.Personal Finance b.Business Finance i.Personal Business Finance ii.State-Owned Business Finance iii.Financing for Autonomous Organization c.Non-Business Finance

11. Ayesha Saimoon 11 Importance of Studying Finance: Every interested person should study finance to know the following principles related to any business: –To know the Risk and Return associated with the business –To know the application of Time Value of Money –To know the Cash Flow –To know the Profitability and Liquidity –To apply Hedging Principles in risk management –To Diversify the risk –To know the Business Cycle

12. Ayesha Saimoon 12 Functions of Finance (Responsibilities of Financial Manager) 1.Financial Planning: Future actions of Money related activities of an organization. 2.Identification of Sources of financing: From where the organization can collect its desired fund 3.Analyzing and Selecting of Sources 4.Raising of Funds 5.Investment of Funds/Utilization of Fund 6.Protection of Funds 7.Distributions of Profit Sources of financing 1.Individuals 2.Organizations 3.Government 4.Foreign Agencies

13. Ayesha Saimoon 13 Sectors of Finance (Career Fields in Finance) Financial Markets & Institutions –Money and capital markets: Investments –Investment in Existing Business –Expansion of Existing Business –Investment in New Project –Research and Development Financial management

14. Ayesha Saimoon 14 Role of Finance in a Typical Business Organization ( Career Opportunities in Finance )

15. Ayesha Saimoon 15 Common Functions of Treasurer & Controller Functions of TreasurerFunctions of Controller Financial PlanningCorporate Accounting Fund Raising (Financing)Cost Accounting Capital Expenditure DecisionsTax Management Cash ManagementFinancial Accounting Credit Management Pension Fund Management Foreign Exchange Management

16. Ayesha Saimoon 16 Finance in The 20 th Century Some issues are observed and discussed in the 20 th century’s ---- Inflation and its effects on business decisions Deregulation of financial institutions and the resulting trend toward large, broadly diversified financial services companies------------------- Mergers and Acquisitions The dramatic increase in both the use of computers for analysis and the electronic transfer of information The increased importance of global markets and business operations Innovations in the financial products offered to investors The effect of changing technology The globalization of business

17. Ayesha Saimoon 17 Forms of Business Organization Sole proprietorship Partnership Corporation

18. Ayesha Saimoon 18 01. Sole Proprietorship Advantages –Easiest to start –Least regulated –Single owner keeps all the profits –Taxed once as personal income Sole Proprietorships: A business owned by a single individual Disadvantages –Limited to life of owner –Equity capital limited to owner’s personal wealth –Unlimited liability –Difficult to sell ownership interest

19. Ayesha Saimoon 19 A partnership has roughly the same advantages and disadvantages as a sole proprietorship with two or more owners. 02. Partnership Advantages 1.Two or more owners 2.More capital available 3.Relatively easy to start 4.Income taxed once as personal income Disadvantages –Unlimited liability –Partnership dissolves when one partner dies or wishes to sell –Difficult to transfer ownership, but less difficult than sole proprietorship – add partners

20. Ayesha Saimoon 20 Advantages 1.Limited liability 2.Unlimited life 3.Separation of ownership and management 4.Transfer of ownership is easy 5.Easier to raise capital Generally, any business organization which shares are traded in the share market is called Corporation. A business entity that legally functions separate and apart from its owners. 03. Corporation Disadvantages –Agency Problem –Double taxation –Lacks of Secrecy

21. Ayesha Saimoon 21 Partnership vs. Corporation EasyUneasyRaising of Fund LargeMediumCapital Size LimitedUnlimitedLiability UnlimitedLimitedLife Duration SeparateSame Owners and Mangers DoubleSingleTaxation Easy DifficultTransferability of ownership HardEasyStarting Corporation PartnershipIssues

22. Ayesha Saimoon 22 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? –Is stock price maximization good or bad for society? –Should firms behave ethically? Two opinion 1. Profit Maximization 2.Wealth Maximization

23. Ayesha Saimoon 23 Profit Maximization Under this approach, action that increase profit should be undertaken and those that decrease profits are to be avoided. Profit maximization consists of the following important features. 1.Profit maximization is also called as cashing per share maximization. It leads to maximize the business operation for profit maximization. 2.Ultimate aim of the business concern is earning profit, hence, it considers all the possible ways to increase the profitability of the concern. 3.Profit is the parameter of measuring the efficiency of the business concern. So it shows the entire position of the business concern. 4.Profit maximization objectives help to reduce the risk of the business. Measurement of Profit: For corporations profits are commonly measured in terms of Earnings Per Share (EPS) Profitability also refers to a situation where output exceeds input.

24. Ayesha Saimoon 24 Favorable and Unfavorable argument for Profit Maximization Favorable Arguments for Profit Maximization (i) Main aim is earning profit. (ii) Profit is the parameter of the business operation. (iii) Profit reduces risk of the business concern. (iv) Profit is the main source of finance. (v) Profitability meets the social needs also. Unfavorable Arguments for Profit Maximization (i) Profit maximization leads to exploiting workers and consumers. (ii) Profit maximization creates immoral practices such as corrupt practice, unfair trade practice, etc. (iii) Profit maximization objectives leads to inequalities among the sake holders such as customers, suppliers, public shareholders, etc.

25. Ayesha Saimoon 25 Drawbacks of Profit Maximization Profit maximization objective consists of certain drawback also: 1.It is vague: In this objective, profit is not defined precisely or correctly. It creates some unnecessary opinion regarding earning habits of the business concern. 2.It ignores the time value of money: Profit maximization does not consider the time value of money or the net present value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash flow during a particular period. 3.(It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or external which will affect the overall operation of the business concern.

26. Ayesha Saimoon 26 Wealth Maximization The financial goal of wealth maximization is also known as value maximization. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is universally accepted concept in the field of business. The wealth of a corporate owner is measured by the share price of the stock which in term based on the –Timing of returns –Cash flows and –Risk Wealth = Price per share x No. of Shares

27. Ayesha Saimoon 27 Favorable Arguments for Wealth Maximization 1.Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. 2.Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides extract value of the business concern. 3.Wealth maximization considers both time and risk of the business concern. 4.Wealth maximization provides efficient allocation of resources. 5.It ensures the economic interest of the society.

28. Ayesha Saimoon 28 Unfavorable and Unfavorable argument for Wealth Maximization 1.Wealth maximization leads to prescriptive idea of the business concern but it may not be suitable to present day business activities. 2.Wealth maximization is nothing, it is also profit maximization, it is the indirect name of the profit maximization. 3.Wealth maximization creates ownership-management controversy. 4.Management alone enjoy certain benefits. 5.The ultimate aim of the wealth maximization objectives is to maximize the profit. 6.Wealth maximization can be activated only with the help of the profitable position of the business concern.

29. Ayesha Saimoon 29 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).

30. Ayesha Saimoon 30 Home Task

31. Ayesha Saimoon 31 The Agency Problems & Relationships Agency problem –Conflict of interest between principal and agent Agency relationship An agency relationship exists whenever a principal hires an agent to act on their behalf. –Stockholders (principals) hire managers (agents) to run the company Within a corporation, agency relationships exist between: –Shareholders and managers –Shareholders and creditors

32. Ayesha Saimoon 32 Examples of Agency Problem Common example of an agency relationship is a real estate broker – in particular if you break it down between a buyers agent and a sellers agent. A classic conflict of interest is when the agent is paid on commission, so they may be less willing to let the buyer know that a lower price might be accepted or they may elect to only show the buyer homes that are listed at the high end of the buyers price range. Direct agency costs – the purchase of something for management that can’t be justified from a risk-return standpoint, monitoring costs. Indirect agency costs – management’s tendency to forgo risky or expensive projects that could be justified from a risk-return standpoint.

33. Ayesha Saimoon 33 Managers are naturally intended to act in their own best interests. But the following factors affect managerial behavior: 1.Managerial compensation plans 2.Direct intervention by shareholders 3.The threat of firing 4.The threat of takeover Tools for Mitigating the Agency Problems

34. Ayesha Saimoon 34 Preparation!! Following are the sample questions to take preparation!! Explain the Term “Finance”. Discuss the different principles of Finance. Discuss the main functions of Finance (or the responsibilities of a Financial manager). Define and discuss the Characteristics of Sole proprietorship, partnership and Corporation. Differentiate between partnership and Corporation. What is agency problems and Agency Relationships? What are the ways to reduce/mitigate the agency problem. Discuss in details. Discuss the goals of a business Organization. Why the profit maximization is criticized?