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Finance

Art and Science of managing money is Finance. Applying the concepts and theories of economics into practice is Finance. For example marginal cost Finance is concerned with Processes, Institutions, Instruments and Mar ets that are used for the transformation of funds from one place to another place among Surplus and !eficit "nits. Personal Finance, Pu#lic Finance, $orporate Finance

The Function of Financial Markets

What are some financial intermediaries?

!e%elopmental Financial Institutions &!FI's( )an ing, *on )an ing and Speciali+ed !FI's. In%estment )an s $ommercial #an s ,easing $ompanies Sa%ings #an s Insurance companies Mutual funds Pension funds International lending institutions &-orld #an , IMF(

Markets (Real assets Vs Financial markets)


.eal assets mar ets/ where trading of real assets will #e done Financial mar ets/ where trading of financial assets will #e done. It includes primary &IP0's 1 Pri%ate Placements(, secondary, money, capital, auction and dealer &02$/ 0%er the $ounter( mar ets. 2hese are the financial assets. A financial asset is a contract that entitles the owner to some type of payoff. $ommon Stoc s Preferred Stoc s )onds !eri%ati%es Sole proprietorship Partnership $orporation

FINANCIAL INSTR M!NTS


What are some forms of "#siness or$ani%ation?


Sole &ro'rietorshi'((0ne man )usiness Ad)anta$es* 3ase of formation Su#4ect to few regulations *o corporate income taxes +isad)anta$es* ,imited life "nlimited lia#ility !ifficult to raise capital

&artnershi'( )usiness of two or more than two indi%iduals. Partnership deed or agreement. A partnership has roughly the same ad%antages and disad%antages as a sole proprietorship. Cor'oration ,egal separate entity from the owner formulated in the light of $ompanies 0rdinance, 5678. Its re$istration 'rocess(((((((((((((((???? Ad)anta$es* "nlimited life 3asy transfer of ownership ,imited lia#ility 3ase of raising capital +isad)anta$es* !ou#le taxation $ost of set/up and report filing

What sho#ld mana$ement,s 'rimar- o".ecti)e "e? 2he primary o#4ecti%e should #e shareholder wealth maximi+ation, which translates to maximi+ing stoc price. Should firms #eha%e ethically9 :3S; !o firms ha%e any responsi#ilities to society at large9 :3S; Shareholders are also mem#ers of society.

Maximi+ation of stoc prices along with Social .esponsi#ility is desira#le in today<s competiti%e en%ironment. Agency pro#lems &Shareholders =s Management( may arise. A$enc- theorexplains the duties and responsi#ilities of #oth the parties.
What three factors affect stock 'rices?

Amount of cash flows expected #y shareholders 2iming of the cash flow stream .is of the cash flows

What factors determine of cash flo/s? Sales re%enues $urrent le%el Short/term growth rate in sales ,ong/term sustaina#le growth rate in sales 0perating expenses &e.g., raw materials, la#or, etc.( *ecessary in%estments in operating capital &e.g., #uildings, machines, in%entory, etc.( What factors affect the le)el and risk of cash flo/s? !ecisions made #y financial managers> In%estment decisions &product lines, production processes, geographic mar et, use of technology, mar eting strategy, etc.( Financing decisions &choice of de#t policy and di%idend policy( 2he external en%ironment &taxes, regulation, etc.(

Financial Mana$ement

$oncerns the ac?uisition, financing, and management of assets with some o%erall goal in mind.

Im'ortant Financial Mana$ement +ecisions In)estment +ecisions


-hat is the optimal firm si+e9 -hat specific assets should #e ac?uired9 -hat assets &if any( should #e reduced or eliminated9 -hat is the #est type of financing9 -hat is the #est financing mix9 -hat is the #est di%idend policy9 @ow will the funds #e physically ac?uired9 Asset Mana$ement +ecisions @ow do we manage existing assets efficiently9 Financial Manager has %arying degrees of operating responsi#ility o%er assets. Areater emphasis on current asset management than fixed asset management.

Financin$ +ecisions

Cor'orate Finance The follo/in$ 0#estions sho#ld "e ans/ered /hile st#d-in$ Cor'orate Finance 5. -hat long/term in%estment strategy should a company ta e on9 B. @ow can cash &Funds( #e raised for the re?uired in%estments9 C. @ow much short/term cash flow does a company need to pay its #ills9 Wh- is cor'orate finance im'ortant to all mana$ers? Corporate finance provides the skills managers need to: Identify and select the corporate strategies and indi%idual pro4ects that add %alue to their firm. Forecast the funding re?uirements of their company, and de%ise strategies for ac?uiring those funds.

1alance Sheet model of Firm is as follo/s