1. Overview of Fundamentals of Finance
Chapter One
Overview of
Fundamentals of Finance
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

2. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
What is Finance?
At the macro level, finance is the study of financial institutions and financial markets and how they operate within the financial system in global economies.
At the micro level, finance is the study of financial planning, asset management, and fund raising for businesses and financial institutions.
What is Business Finance
What is Financial Management
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

3. Investment Financing Dividend Decision Decision Decision
Scope of finance
Managerial Function Routine Function
Investment Financing Dividend Decision Decision Decision
Capital Budgeting
Working capital Management
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

4. Major decisions taken by financial manager
Investment Decision
Working Capital Management
Capital budgeting
Financial Decision
Dividend Decision
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

5. Role of Financial Manager
Financial Planning
Source Identification
Raising of fund
Investment of fund
Protection of capital
Distribution of profit
Managing fund
Forecasting cash flow
Forecasting future profits
Managing Assets
Cost control
Pricing
Time Schedule
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

6. Principles of Finance/Financial Manager
Principles of Risk and Return.
Principles of Time value of Money.
Principles of Cash Flow.
Principles of Profitability and Liquidity.
Hedging Principles.
Principles of Diversity.
Principles of Business Cycle.
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

7. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
Goal of a firm/Goal of financial manager
Economic welfare of common shareholders (owners of the firm)
Profit Maximization
(example)
Wealth Maximization
(example)
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

8. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
Profit Maximization
Year year year year-2010 NP
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

9. Profit maximization in 3 ways
By reducing cost
If firm use the component perfectly, cost of production will be reduced and profit will be maximized.
By providing quality goods and services
Quality raw material, effective manpower, efficient management can reduce production cost.
By creating additional demand
It can be ensured by producing better products, advertisement, effective investment decision, efficient management etc.
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

10. Profit Maximization as the goal of a firm
Profit is the yardstick to measure efficiency
Proper utilization of resources
Social welfare
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

11. Criticism of Profit Maximization
a) Ambiguity or Vague
b) Timing of profit and time value of money are ignored
c) It ignores risk
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

12. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
Wealth Maximization
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

13. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
Wealth maximization
The net present value or wealth can be defined more explicitly in the following way:
   
V = W = NPV =
- C
Example:
Assume that project X costs Rs 2500 now and is expected to generate year-end cash inflows of Rs 900, Rs 800, Rs 700, Rs 600 and Rs 500 from year 1 to year 5. The opportunity cost of the capital is assumed to be 10 percent.
W= NPV= (Rs 900/(1+0.10)+ Rs 800/(1+0.10)2 +Rs 700/(1+0.10)3 +Rs 600/(1+0.10) Rs 500/(1+0.10)5] – Rs 2500
= [ ]-2500 =
= 225.
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

14. Wealth Maximization as the goal of a firm
Clear Concept
It considers timing of return, time value of money, and risk
Focus on market price of share
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

15. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
Clear Concept
It considers timing of return, time value of money, and risk
The net present value or wealth can be defined more explicitly in the following way:
   
V = W = NPV =
- C
W= NPV= (Rs 900/(1+0.10)+ Rs 800/(1+0.10)2 +Rs 700/(1+0.10)3 +Rs 600/(1+0.10) Rs 500/(1+0.10)5] – Rs 2500
= [ ]-2500 =
= 225.
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

16. Tanzina Hossain,Lcturer, Daffodil International University, Dhaka
Factors that influence Financial Decision
Internal Factors
External Factors
Size of Business
Nature of Business
The Form of Legal Organization
Situation of Business Cycle
Assets Structure
Regularity and Adequacy of Income
Economic Life of Business
Terms of Credit
Management Philosophy
Govt. regulations
Tax system
Economic condition of the country
Condition of money market and capital market
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

17. Agency Issues: The Principal-Agent Problem
Whenever ownership is independent of management there exists potential problem of conflicts.
The owner’s goals for the firm are best described as maximizing shareholder wealth.
Managers are also concerned with personal wealth, job security, lifestyle, and benefits. These concerns may conflict with shareholder interests.
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka

18. Types of Agency Problems
Shareholders & Board of Directors
Board of Directors & Managers
Managers & Staff
Owners & Other parties
Tanzina Hossain,Lcturer, Daffodil International University, Dhaka