Role and Environment of Managerial Finance Chapter 1 Role and Environment of Managerial Finance
What is Finance? Finance can be defined as the art and science of managing money. It is concerned with the process, institutions, markets and instruments involved in the transfer of money among individuals, businesses and government.
Major areas/opportunities in Finance Financial services-area of finance concerned with the design and delivery of advice and financial products to individuals, business and government. Managerial Finance-concerned with the duties of financial manager in the business firm.
Legal forms of business Sole proprietorship Partnership Corporation
Sole proprietorship A business owned by one person and operated for owner’s profit. Liability is unlimited.
Partnership Business owned by two or more people and operated for profit. Partnership deed – The written contract used to formally establish a business partnership.
Corporation An artificial being created by law often called as legal entity) Stockholders (Shareholders)-owners of a corporation. Equity-Shareholders’ evidence of ownership. Equity-two types(1) Common stock (2) Preferred stock. Dividend-periodic distribution of earnings to stockholders.
Organization of Finance Function In small firms, finance function is generally performed by the accounting department. As firm grows there will be separate finance department linked directly to the company president through Chief Financial Officer (CFO)
Finance and Economics-Relationship? Fundamental Economic Principle: Marginal Cost-Benefit Analysis Financial managers use this principle which says that financial decisions should be implemented only when added benefits exceed added costs.
Finance and Accounting-Relationship? The firm’s finance and accounting functions are closely-related and overlapping. While accounting is primarily concerned with the presentation of financial data, the financial manager is primarily concerned with analyzing and interpreting this information for decision-making purposes.
Primary activities of the Financial Manager 1.Making investment decisions 2.Making financing decisions Investment decisions - decide both the mix and the type of assets held by the firm. Financing decisions -decide both the mix and the type of financing used by the firm.
Goal of the firm Is it maximize profit or maximize shareholders’ wealth?? Corporations measure profits in terms of earnings per share (EPS) EPS=total earnings available to shareholders during a period/number of shares of common stock Maximize profit (profit maximization) is not a reasonable goal because it ignores timing of returns, cash flows available to stockholders and risk
The goal of the firm is to maximize the wealth of shareholders (owners). Wealth is measured by the share price of the corporation’s stock/share.