1. BBA, MBA (Finance & Banking), DU
Topic # 01
An Overview of
Finance
Ayesha Saimoon
BBA, MBA (Finance & Banking), DU
Ayesha Saimoon

2. Principles of Finance/L1MBA
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.
Kazi Zulfiqar Hasan, Senior Lecturer in Finance

3. Principles of Finance/L1MBA
What is 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
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

4. Finance is the management of money.
Finance is the process of raising fund and utilizing the fund to earn highest profit.
Ayesha Saimoon

5. Principles of Finance:
Principles of Finance/L1MBA
Principles of Finance:
Principles of Risk and Return
Principles of the Time Value of Money
Principles of Cash Flow
Principles of Profitability and Liquidity
Hedging Principles
Principles of Diversity
Principles of Business Cycle
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

6. Functions of Finance (Responsibilities of Financial Manager)
Principles of Finance/L1MBA
Functions of Finance (Responsibilities of Financial Manager)
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
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

7. Agency conflict/ agency problem:
Agent: When somebody represent any individual or firm is called agent.
Agency problem: Agency problem is a conflict of interest between the shareholders and the managers or stockholders and creditors.
Overcoming the agency problem:
Several mechanism are used to motivate managers to act in the shareholders best interests. These includes-
Ayesha Saimoon

8. Managerial compensation incentives) The threat of firing
Shareholders intervention
The threat of takeover.
Ayesha Saimoon

9. Sectors of Finance (Career Fields in Finance)
Principles of Finance/L1MBA
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
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

10. Principles of Finance/L1MBA
Role of Finance in a Typical Business Organization (Career Opportunities in Finance)
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

11. Finance in The 20th Century
Principles of Finance/L1MBA
Finance in The 20th Century
Some issues are observed and discussed in the 20th 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
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

12. Principles of Finance/L1MBA
Forms of
Business
Organizatios
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

13. Alternative Forms of Business Organization
Principles of Finance/L1MBA
Alternative Forms of Business Organization
Sole proprietorship
Partnership
Corporation
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

14. Principles of Finance/L1MBA
Sole Proprietorship
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
Advantages
Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

15. Principles of Finance/L1MBA
Partnership
A partnership has roughly the same advantages and disadvantages as a sole proprietorship with two or more owners.
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
Advantages
Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

16. Principles of Finance/L1MBA
Corporation
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.
Advantages
Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

17. Corporation: Disadvantages
Principles of Finance/L1MBA
Corporation: Disadvantages
Separation of ownership and management (Agency Problem)
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate) – proposal to have dividends deductible as interest is now or to not tax dividend distributions
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

18. Principles of Finance/L1MBA
Quick Quiz
What are the Differences
between
a Partnership
and
a Corporation?
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

19. Partnership vs. Corporation
Issues
Partnership
Corporation
Starting
…………
………
Transferability of ownership
…………
………
Taxation
…………
………
Owners and Mangers
…………
………
Life Duration
…………
………
Liability
…………
………
Capital Size
…………
………
Raising of Fund
…………
………
Ayesha Saimoon

20. Principles of Finance/L1MBA
Goals of
The Corporation
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

21. Financial Goals of the Corporation
Principles of Finance/L1MBA
Financial Goals of the Corporation
Two opinion
Profit Maximization
Wealth Maximization
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?
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

22. Is stock price maximization the same as profit maximization?
Principles of Finance/L1MBA
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).
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

23. Principles of Finance/L1MBA
Quick Quiz!
What are the
Limitations/Criticisms
of the Profit maximization?
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

24. The Agency Problems & Relationships
Principles of Finance/L1MBA
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
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

25. Examples of Agency Problem
Principles of Finance/L1MBA
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.
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

26. Principles of Finance/L1MBA
Tools for Mitigating the Agency Problems
Managers are naturally intended to act in their own best interests.
But the following factors affect managerial behavior:
Managerial compensation plans
Direct intervention by shareholders
The threat of firing
The threat of takeover
Kazi Zulfiqar Hasan, Senior Lecturer in Finance
Ayesha Saimoon

27. 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.
Ayesha Saimoon