An Introduction to Finance

1. An Introduction
To Finance

2. Section 1
The Role and Scope of
Finance
2

3. What is Finance?
A term that refers to two
main activities;
othe actual process of
attracting money;
oand the management of
these funds;
3

4. The Functions of Finance
Analysis;
Decision-making;
4

5. The Areas of Finance
 Business or Corporate Finance-the firm’s ability
to make good finance decisions;
 Personal Finance-retirement provision, saving
plans etc.,;
Public Finance-income distribution, stability plans
etc.,;
5

6. Finance v
Accounting
 Financial Accounting
concentrates on record keeping
and submitting of financial
statements;
 Finance focuses on making
decisions and carrying out
analysis based on information
presented by accounting;
6

7. Finance v
Accounting(cont.)
Financial Accounting tends to be more
concerned with the past;
 Finance tend to be more interested in
present and the future;
7

8. Finance v
Accounting(cont.)
 Financial Accounting tends to have an
income focus;
 Finance tends to have a cash flow focus;
8

9. Business Finance
Types of Financial Decisions
 Investment Decisions;
 Financing Decisions;
 Asset Management
Decisions;
9

10. Investment Decisions
 Should we built this component or buy it?
 What specific assets should be acquired?
 Should we introduce a new product?
 Which projects should be undertaken?
10

11. Financing Decisions
 What is the best structure of
financing(debt versus equity)?
 How much of our debt should be short-
term as opposite to long-term?
 What is the best dividend policy?
 How will the funds be physically acquired?
11

12. Asset-Management
Decision
 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; 12

13. The Goal of the Business
13
 The target of business is
the maximize
shareholder’s wealth;
 It’s measured as the
price of stocks;
 Wealth maximization
concept adjusts for
deficiencies of previous
concept;

14. Profit Maximization
 Short-Term Oriented;
 Can not account for risk;
 Can lead
mismanagement;
Wealth
Maximization
 Long-term Oriented;
 The risk factor is taken
account;
 Recognizes the timing of
returns;
14
Comparison of Two
Concepts

15. Section 2
An Overview of Business
Environment
15

16. Types of Businesses
Sole Proprietorships
 A business that owned
and operated by one
individual;
 The owner and the
business are legally
identical;
16

17. The Pros and Cons of
Sole Proprietorships
17

18. Partnerships
 A business that owned
and controlled by two or
more persons who are
equally liable for losses;
 Typically governed by
partnership agreement;
18

19. The Pros and Cons of
Partnerships
19

20. Company
• Business that owned by
shareholders;
• Shareholder liability is
limited to nominal value of
shares that they own;
• Business is legally
separate from it’s owners;
20

21. The Pros and Cons of
Company
21

22. Section 3
Corporate Structure
22

23. The Modern
Corporation
There exists a SEPARATION between
owners and managers.
Modern Corporation
Shareholders Management
23

24. Organizational Chart of
Corporate Structure
24

25. Role of Management
 An agenagentt is an individual authorized by
another person, called the principal, to act
in the latter’s behalf;
 Management acts as an agentagent for the
owners (shareholders) of the firm;
25

26. Agency Theory
Principals must provide
incentivesincentives so that
management acts in the
principals’ best interests and
then monitormonitor results;
Incentives include stockstock
options, perquisites,options, perquisites, and
bonusesbonuses;
26

27. Section 4
A Quick Tour to Financial
Environment
27

28. Financial Markets
 Businesses interact continually with the
financial markets;financial markets;
 Composed of all institutions and
procedures for bringing buyers and sellers
of financial instruments together;
28

29. The Purpose of Financial
Markets
 Mobilization of savings-uselessly lying fund is made to
flow the place where it is really needed;
 Facilitate price discovery-the price is determined by the
forces of demand and supply;
 Provide liquidity to financial assets-buyers or sellers of
securities are available all the times;
 Reduce the cost of transaction-making all necessary
information available without any cost;
29

30. Flow of Funds
in the Economy
INVESTMENT SECTOR
FINANCIAL
INTERMEDIARIES
SAVINGS SECTOR
FINANCIAL BROKERS
SECONDARY MARKET
30

31. Types of Financial
Markets
 Money Market-market for trading of short-term
securities(Repo, CDO, commercial paper, T-bills);
 Capital Market-where the transaction of long-term
securities takes place(corporate bonds, government
bonds);
 Primary Market-newly issued instruments are bid;
 Secondary Market-already issued stocks are sold and
bought;
31

32. Financial Intermediaries
 Come between
ultimate borrowers
and lenders by
transforming direct
claims to indirect
claims;
 Commercial banks,
insurance
funds,mutual funds;
32

33. Efficient Allocation of
Funds
 Funds will flow to economic units that are willing
to provide the greatest expected return;
 The highest expected returns will be offered only
by those economic units with the most promising
investment opportunities;
 Result:Result: Savings tend to be allocated to the most
efficient uses;
33

34. What Influences Security
Expected Returns?
 Default Risk-the failure to meet the terms of contract;Default Risk-the failure to meet the terms of contract;
 Marketability-Marketability- is the ability to sell a significant volume of
securities in a short period of time in the secondary
market without significant price concession;
34

35. What Influences
Expected Security
Returns?
 Maturity-Maturity- is concerned with the life of the security; the
amount of time before the principal amount of a
security becomes due;
 Embedded Options-Embedded Options- provide the opportunity to
change specific attributes of the security;
 InflationInflation -the greater inflation expectations, then the
greater the expected return;
35

36. Risk-Expected Return
Profile
RISK
EXPECTEDRETURN(%)
U.S. Treasury Bills (risk-free securities)U.S. Treasury Bills (risk-free securities)
Prime-grade Commercial PaperPrime-grade Commercial Paper
Long-term Government Bonds
Investment-grade Corporate Bonds
Medium-grade Corporate Bonds
Preferred Stocks
Conservative Common Stocks
Speculative Common Stocks
36

37. Term Structure of
Interest Rates
A yield curve is a graph of the relationship between yields
and term to maturity for particular securities.
Upward Sloping Yield CurveUpward Sloping Yield Curve
Downward Sloping Yield Curve
0246810
YIELD(%)
0 5 10 15 20 25 30
(Usual)
(Unusual)
YEARS TO MATURITY
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38. THANK YOU