Business Finance(MGT 232)

Lecture 1

IntroductionIntroduction

Introduction to the Course

• What we are going to study:“ the BASICs of FINANCE in BUSINESSES”

-How they outsource their money-How they manage their finances

-The best utilization of their money-The return earned through its efficient management

• BUSINESS FINANCE INTRODUCTION

• THE FINANCIAL ENVIRONMENT

• TIME VALUE OF MONEY

• VALUATION OF SECURITIES (Bonds and shares)

• RISK AND RATES OF RETURN

• FINANCIAL STATEMENT ANALYSIS

• COST OF CAPITAL

• CAPITAL BUDGETING TECHNIQUES

• WORKING CAPITAL CONCEPTS,

• DIVIDEND POLICY

• CAPITAL MARKETS

• LONG TERM SECUITIES

• FINANCE USING EXCEL SPREADSHEET

Course Outline

Suggested Readings

1. Fundamental of Financial Management, seventh Edition by Eugene F. Brigham

2. Fundamental of Financial Management by Van Horne3. Fundamental of Corporate Finance by Brealy and

Myers4. Corporate Finance By Ross Westerfield Jordan   

Course requirements

• 4 x Assignments

• 4 x Quizzes

• 4 x Discussion Topics

• 2 Sessional Exams

• 1 Final Exam

Business Finance Business Finance IntroductionIntroduction

Business Finance Business Finance IntroductionIntroduction

What is Finance?

• Managing the large amount of Money

(Dictionary Definition)

Finance is:

“attaining the amount of money, using it by investing and gaining return on your

investment”

Finance (Interrelated areas)

The Role of Financial Management

• What is Financial Management?

• The Goal of the Firm

• Organization of the Financial Management Function

What is Financial Management?

Concerns the acquisition, financing and management of assets with some overall goaloverall goal

in mind.

Investment Decisions

• What is the optimal firm size?

• What specific assets should be acquired?

• What assets (if any) should be reduced or eliminated?

Most important of the three decisions.Most important of the three decisions.

Financing Decisions

• What is the best type of financing?

• What is the best financing mix?

• What is the best dividend policy?

• How will the funds be physically acquired?

Determine how the assets (LHS of balance Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet) will be financed (RHS of balance

sheet).sheet).

Asset Management Decisions

• How do we manage existing assets efficiently?

• Financial Manager has varying degrees of operating responsibility over assets.

• Greater emphasis on current asset management than fixed asset management.

What is the Goal of the Firm?

Maximization of Maximization of Shareholder Wealth!Shareholder Wealth!

Value creation occurs when we maximize the share price for current

shareholders.

Shortcomings of Alternative Perspectives

• Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.).

• Ignores changes in the risk level of the firm.

Profit MaximizationProfit Maximization Maximizing a firm’s earnings after taxes.

ProblemsProblems

Shortcomings of Alternative Perspectives

• Does not specify timing or duration of expected returns.

• Ignores changes in the risk level of the firm.

• Calls for a zero payout dividend policy.

Earnings per Share MaximizationEarnings per Share Maximization Maximizing earnings after taxes divided by

shares outstanding.

ProblemsProblems

Strengths of Shareholder Wealth Maximization

• Takes account of: current and future profits and current and future profits and EPSEPS; the timing, duration, and risk of profits and the timing, duration, and risk of profits and EPSEPS; dividend policydividend policy; and all other relevant factors.

• Thus, share priceshare price serves as a barometer for business performance.

The Modern Corporation

There exists a SEPARATION between owners and managers.

Modern Corporation

Shareholders Management

Summary

• What is Finance? And interrelated areas

• Financial Management

• Three Important FM decisions

• Goal of a Firm (some alternatives)

• Structure of a Modern Corporation