Introduction Why Finance Matters F F M

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  • For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company
  • Introduction Why Finance Matters F F M

    1. 1. FINANCE FOR MANAGERS COURSE LECTURER Shumaila Paracha Assistant Professor Course Code: 0387 MBA Program Academic Year Fall 2010
    2. 2. Today Introduction - Why Finance Matters Role and responsibilities of Finance Manager Forms of businesses with their pros & cons Moral hazard & agency problem
    3. 3. Financial manager’s role & responsibilities Financial managers face two main questions: Q1:What real assets should the firm invest in? A1: Investment / capital budgeting decision Q2: How should the cash for investment be raised? A2: Financing decision Therefore a financial manager is assigned with following responsibilities: 1. Forecasting & planning 2. Major investment and financing decision 3. Coordination and control 4. Dealing with financial markets 5. Risk management
    4. 4. Forms of Business 1. Sole proprietorship 2. Partnership 3. Corporations In addition to this there are several hybrid forms of organizations such as limited liability partnership, professional associations
    5. 5. Forms of Business Sole proprietorship Advantages Easy to form. Low cost to form. Owner is typically the manager of the business. Income is taxed only once (at proprietor level). Disadvantages Unlimited liability for the owner. Limited access to additional capital. Life of proprietorship ends with proprietor.
    6. 6. Forms of Business Partnership Advantages Easier to form than a corporation. Low cost to form. Income and assets are shared according to the partnership agreement. Income is taxed only once (at partner level). Disadvantages Unlimited liability for the owners. Limited acces to additonal capital. Life of partnership ends with partners.
    7. 7. Forms of Business Corporations Advantages Limited liability for the owners. Ready access to capital. Disadvantages Double taxation. Must be granted corporate charter by a state. Agency problems arise as owners become separated from management.
    8. 8. Moral hazard & agency problem Moral Hazard Moral hazard arises because an individual does not take the full responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. Moral hazard also arises in a principal agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned Agency Problem Firms managers may have personal goals that compete with shareholders wealth maximization

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