1. BBA (Finance), MBA (Banking), DU
Topic # 01
Fundamentals
of Financial
Management
Ayesha Saimoon
BBA (Finance), MBA (Banking), DU
Senior Lecturer
Ayesha Saimoon

2. L J Gitman, “Principles of Managerial Finance”, Latest Edition
Required Text Book
L J Gitman, “Principles of Managerial Finance”, Latest Edition
Additional Readings
James C. Van Horne, “Fundamentals of Financial Management”
Brigham and Houston, “Fundamentals of Financial Management”
Besley and Brigham, “Principles of Managerial Finance”

3. Required Computer Knowledge
1. MS-Excel Spread Sheet
2. MS-Word
3. PowerPoint Presentation
Course Websites
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4. Xy or yx or Λ Required Instrument
A good Financial Calculator or a Good Scientific Calculator.
Your Calculate must have any of the following keys:
Xy or yx or Λ
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5. Evaluation Process One Mid-Term 30 Final Exam 40 Class Test
Closed book
Open book
Surprised Test
Take Home exam 10
Assignment and Presentation/case study
Class Attendance and Performance
Total
100
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6. 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.
Ayesha Saimoon

7. CONTENTS
Fundamentals of Financial Management: Definition of Financial Management, Financial management decisions, The balance sheet model of the firm, Pie model of Capital structure, Modern World Perspective: Globalization of Business, Information Technology, and Regulatory Attitude of Management. Importance of Financial Management, Goals of the Corporation: Agency costs and agency problems-the set of contracts perspective, Separation Theorem, Financial Environment: External Environment, Business Ethics, MNCs.
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8. Meanings of Finance
Finance is the relationship between deficit sector and surplus sector of the society.
The commercial activity of providing funds and capital
The branch of economics that studies the management of money and other assets
The management of money and credit and banking and investments
Finance represents the processes that transfer money among businesses, individuals, and governments
Actually “ the art and science of Managing Money” is called Finance.
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9. Common Functions of Finance
Sources of Financing
Individual
Organization
Domestic Government
Foreign Agencies
Financial Planning
Identification of Sources
Analyzing and Selecting of Sources
Raising of Funds
Investment of Funds/Utilization of Fund
Protection of Funds
Distributions of Profit
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10. Sectors of Finance Financial Markets and Institutions Investments
Money and capital markets
Investments
Investment in Existing Business
Investment in Expansion of Existing Business
Investment in New Project
Investment in R&D
Financial management
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11. Financial Management Definition
Financial Management is concerned with the acquisition, financing, and management of assets with some overall goal in mind.
Financial management can be defined as the process of acquiring and using funds to accomplish a financial objectives.
The another name of Financial Management is Managerial Finance.
Anticipating Financial Needs
Acquiring financial resources
Allocating Funds in business
Administrating the allocation of funds
Analyzing the performance of funds
Reporting to the management
Financial
Management
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12. Financial Management Decisions
Capital Budgeting (Investment)
Asset Management Decisions
Capital Structure (Financing)
Working Capital Management (Short-term financing)
Dividend Decisions
Provide some examples of capital budgeting decisions, such as what product or service will the firm sell, should we replace old equipment with newer, more advanced equipment, etc.
Be sure and define debt and equity.
Provide some examples of working capital management, such as who should we sell to on credit, how much inventory should we carry, when should we pay our suppliers, etc.
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13. Factors Influencing Financial Management Decisions
Internal Factors
Size of the firm
Nature of Business
The legal forms of business organizations
Situation of business cycle
Assets structure
Regulatory and adequacy of income
Economic life of business
Terms of credit
Management Philosophy
External Factors
Government Regulations
Tax System
Economic Condition of the country
Political Condition of the country
Condition of money market
Condition of capital market
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14. Who is a Financial Manager?
Financial Manger is a person who actively manages the financial affairs of any type of business, whether financial or nonfinancial, private or public, large or small, profit-seeking or not-for profit.
To create value, the financial manager should:
Try to make smart investment decisions.
Try to make smart financing decisions.
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15. 03 Forms of Business Organization
Sole proprietorship: A business owned by one person and operated for his or her own profit.
Partnership: A partnership has roughly the same advantages and disadvantages as a sole proprietorship. Business formed by two or more owners is called Partnership.
Corporation: A business entity that legally functions separate and apart from its owners. A business firm which sells its shares in the financial market or already got the permission to sell its shares is called Corporation.
Discuss the characteristics, advantages and disadvantages of each of the above business organization.
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16. Sole Proprietorship Advantages:
Definition: A business owned by one person and operated for his or her own profit.
Advantages:
Business owned by one person.
Least regulated form of organization.
Owner keeps all the profits but assumes unlimited liability for the business’s debts.
Life of the business is limited to the owner’s life span.
Amount of equity raised is limited to owner’s personal wealth.
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17. Sole Proprietorship: Disadvantages
Limited to life of owner and difficult to continue when proprietor dies.
Equity capital limited to owner’s personal wealth
Owner has Unlimited liability
Difficult to sell ownership interest
Difficult to give employees long-run career opportunities
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18. Partnership
A partnership has roughly the same advantages and disadvantages as a sole proprietorship. Business formed by two or more owners is called Partnership.
All partners share in profits and losses of the business and have unlimited liability for debts.
Easy and inexpensive form of organization.
Business ceases if one partner sells out or dies.
Amount of equity raised is limited to the combined personal wealth of the partners.
Income is taxed as personal income to partners.
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19. Corporation: Advantages
A business entity that legally functions separate and apart from its owners.
A business firm which sells its shares in the financial market or already got the permission to sell its shares is called Corporation.
Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
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20. Corporation: Disadvantages
Subject to greater government regulation
More expensive to organize than other business forms
Facing Agency problems
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)
Lacks secrecy, because stock holders must receive financial reports.
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21. Practice 01: Liability Comparison
Merideth Harper has invested $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the nature of payments, if any, by Ms. Harper in each of the following situations.
Southwest Development Company is a sole proprietorship owned by Ms. Harper.
Southwest Development Company is a 50–50 partnership of Ms. Harper and Christopher Black.
Southwest Development Company is a corporation.
Ms. Harper has unlimited liability.
Ms. Harper has limited liability, which guarantees that she cannot lose more than she invested.
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22. Discuss how separation of ownership and management can be both an advantage and a disadvantage:
Advantages
You can benefit from ownership in several different businesses (diversification)
You can take advantage of the expertise of others (comparative advantage)
Easier to transfer ownership
Disadvantage
Agency problems if management goals and owner goals are not aligned
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23. Financial Goals of the Firm
Survival
Avoid financial distress and bankruptcy
Beat the competition
Maximize sales or market share
Minimize costs
Maintain steady earnings growth
Maximize profits
To Maximize the Wealth
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24. Profit Maximization is not the right answer
Firms commonly measure profits in terms of EPS.
Profit maximizing is not a reasonable goal because it fails for a number of reasons:
It Ignores the timing of returns
It ignores the cash flows available to stockholders
It ignores the risk
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25. Benefits of Maximizing Shareholder Wealth
The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price.
Direct benefit to shareholders as stock price increases
Societal benefits as businesses compete to create wealth
Includes effects of all financial decisions
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26. 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).
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27. Agency Problems
The agency problem suggest a possibility of conflict of interests between these two parties. Agency problem is the likelihood that managers may place personal goals ahead of corporate goals. The agency theory was Developed by Jensen and Meckling, Types of agency problems are:
Managers vs Owners
Senior management vs Owners
Creditors vs Owners
Owners vs Other Parties
The agency relationship is the relationship between shareholders (owners) and management of a firm.
Agency costs refer to the direct and indirect costs arising from this conflict of interest.
Monitoring costs (audit fees, higher employee compensation)
The cost of Implementing control devices.
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28. Factors/Tools used to Limit the Conflicts
Monitoring of management;
Managerial compensation plans
Incentives plans
Stock Options
Performance Plans
Performance Shares
Cash Bonuses
Direct intervention by shareholders
The threat of firing
The threat of takeover
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29. Practice 02: Identifying agency problems, costs, and resolutions
Explain why each of the following situations is an agency problem and what costs to the firm might result from it. Suggest how the problem might be dealt with short of firing the individual(s) involved.
a. The front desk receptionist routinely takes an extra 20 minutes of lunch to run personal errands.
b. Division managers are padding cost estimates in order to show short-term efficiency gains when the costs come in lower than the estimates.
c. The firm’s chief executive officer has secret talks with a competitor about the possibility of a merger in which (s)he would become the CEO of the combined firms.
d. A branch manager lays off experienced full-time employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year’s branch profit. The manager’s bonus is based on profitability.
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30. Practice 02: Answers
In this case the employee is being compensated for unproductive time. The company has to pay someone to take her place during her absence. Installation of a time clock that must be punched by the receptionist every time she leaves work and returns would result in either: (1) her returning on time or (2) reducing the cost to the firm by reducing her pay for the lost work.
The costs to the firm are in the form of opportunity costs. Money budgeted to cover the inflated costs of this project proposal is not available to fund other projects which may help to increase shareholder wealth. Make the management reward system based on how close the manager's estimates come to the actual cost rather than having them come in below cost.
The manager may negotiate a deal with the merging competitor which is extremely beneficial to the executive and then sell the firm for less than its fair market value. A good way to reduce the loss of shareholder wealth would be to open the firm up for purchase bids from other firms once the manager makes it known that the firm is willing to merge. If the price offered by the competitor is too low, other firms will up the price closer to its fair market value.
Generally part time or temporary workers are not as productive as full-time employees. These workers have not been on the job as long to increase their work efficiency. Also, the better employees generally need to be highly compensated for their skills. This manager is getting rid of the highest cost employees to increase profits. One approach to reducing the problem would be to give the manager performance shares if they meet certain stated goals. Implementing a stock incentive plan tying management compensation to share price would also encourage the manager to retain quality employees.
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31. What is Financial Market
A financial market is a market in which financial assets such as stocks and bonds can be purchased or sold. ( Jeff Madura)
Financial markets are mechanisms by which borrowers and lenders get together.
It is a system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers, no matter the location. (Besely & Brigham)
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32. Financial Market
It is a forum in which suppliers of funds and demanders of funds can transact business directly.
Financial Market is a market where financial goods and services are bought and sold.
Financial markets are institutions and procedures that facilitate transactions in all types of financial claims—facilitate the transfer of savings from economic units with a surplus to economic units with a deficit.
Exist to facilitate the efficient flow of savings from the surplus sectors to deficit sectors
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33. Why study Financial Markets and Institutions?
Functions of Financial Markets
They are the cornerstones of the overall financial system in which financial managers operate
Individuals use both for investing
Corporations and governments use both for financing
Provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units)
Provide payments system
Provide means to manage risk
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34. Broad Classifications of Financial Markets
Money Market
Capital Markets
Primary Market
Secondary Markets
Organized Market
Over-the-Counter Market
Foreign Exchange Market
Spot Market
Forward
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35. Money Market vs. Capital Markets
Money Market: Markets that trade debt securities with maturities of one year or less.
Examples: CD’s, Bangladesh Bank Treasury bills, Commercial Papers, Repurchase agreements etc.
Short-term, < 1 year
High quality issuers
Debt only
Primary market focus
Liquid market--low returns
Capital Market: Markets that trade debt and equity instruments with maturities of more than one year
Debt Instruments: Bonds, Mortgages etc.
Equity Instruments: Stocks
Long-term, >1Yr
Range of issuer quality
Debt and equity
Secondary market focus
Financing investment--higher returns
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36. Primary Market vs. Secondary Markets
Primary Market: markets in which users of funds raise funds by issuing financial instruments
Users of funds : corporations, governments
Financial instruments: stocks and bonds
New issue of securities
Exchange of funds for financial claim
Funds for borrower; an IOU for lender
Secondary Market: markets where financial instruments are traded among investors:
Secondary Markets Examples: NYSE, NASDAQ, DSE, CSE)
Trading previously issued securities
No new funds for issuer
Provides liquidity for seller
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37. Organized vs. OTC Markets
Visible marketplace
Members trade
Securities listed
Example: New York Stock Exchange, DSE, CSE.
OTC Market
Wired network of dealers
No central, physical location
Examples: NASDAQ
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38. Foreign Exchange Markets
Definition: Markets deal in trading one currency for another is called “FX” market. (e.g. dollar for yen)
Spot Market:
The “spot” FX transaction involves the immediate exchange of currencies at the current exchange rate
Forward Market:
The “forward” FX transaction involves the exchange of currencies at a specified date in the future and at a specified exchange rate
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39. Securities Traded in Financial Markets
Money market securities
Money market securities are debt securities that have a maturity of one year or less.
Capital market securities
Securities with a maturity of more than one year are called Capital market Securities.
Derivative securities
Financial contracts whose value is derived from the values of underlying assets
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40. You Purchase a 9-month Bangladesh Bank T-Bill at Taka 100,000.
Concept Check!: Classify the following financial Transaction as to whether they fit in (a) the money market or the Capital Market, (b) the primary market or the Secondary market and (c) the spot market or the forward/futures market.
You visit Eastern Bank Ltd and borrow a three-year loan to purchase a Flat at Dhanmondi Area.
You Purchase a 9-month Bangladesh Bank T-Bill at Taka 100,000.
Hearing the upward trend of Beximco Pharma’s Share price, you have just purchased 100 shares of this company from Dhaka Stock Exchange.
You purchase $1000 from HSBC Bank at 10:00 am today.
Concerned about recent trends in the price of $, from Sonali Bank you purchase 1000 Dollars at today’s $/Tk exchange rate for delivery in six months, when you plan to fly United States of America.
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41. Preparation The followings are given as sample questions only!!!!
Define Financial management. Discuss the three financial management decision relating them to the Balance Sheet Model.
What are the common types of business organizations? Differentiate between a Partnership and a Corporation.
Discuss the goals of the a business firm. Why profit maximization should not be the goal of a Corporation?
What is agency problem? Discuss the ways to reduce the agency problems in any firm.
Define Financial market. Discuss the characteristics of different financial markets in details.
Ayesha Saimoon