Finance

1. MANGERIAL FINANCE
Lecture 1

2. BUSINESS FIRM
A firm procures assets to create
value to the firm.
Production Sales Generation
of Cash
Add Value to the
Firm

3. Balance Sheet Model of Firm
Current
Assets
Fixed Assets Equity
Long Term Debt
Current
Liabilities
Net
Working
Capital

4. Three Legal Forms of Firms
(a) Sole Proprietorship
(b) Partnership
(c) Corporation

5. FINANCE
Finance can be defined as the art and
science of managing money.
In a broader sense, finance is the management
of cash flows in an organization.
Every business decision is ultimately a
finance decision.

6. FINANCE FUNCTIONS
Finance function is concerned with the
financial aspects of management
decisions that ultimately contribute to
the attainment of corporate goals.

7. Cash – the Lifeblood of Business
The generation and management of cash is
central to the whole of finance.
Customers
Government
Employees
Shareholders
Lenders
Suppliers
Cash

8. FINANCE
Major areas of finance:
(a) Financial markets and institutions
(b) Investments
- Determining the values, risks and returns
- Optimal mix of securities
(c) Financial services
- FIs provide services for investment, financial
stability, sustainability, budgeting etc.
(d) Managerial finance

9. MANAGERIAL FINANCE
Managerial finance is concerned with the
duties of a finance manager in the
business firm.

10. Three Major Issues for
Finance Manager
1. In what long-term assets the firm
should invest?
2. How can the firm raise cash for
required capital expenditure?
3. How should the short-term operating
cash flows be managed?

11. How do Finance Managers
Create Value?
1. Buy assets that generate more cash than
they cost.
2. Sell bonds, stocks and other financial
instruments that raise more cash than they
cost.
Should consider
 Identification of cash flows.
 Timing of cash flows.
 Risk of cash flows.

12. Finance Manager’s Responsibilities
Create Value for the firm
1. Forecasting and Planning
2. Investment Decisions
3. Financing Decisions
4. Liquidity Management
5. Dividend Decision
6. Coordination and Control
7. Risk Management

13. Profit Maximization vs.
Wealth Maximization
Market economies achieve their goals when
businesses maximize their economic profits.
Economic Profit=
Revenue–Costs–Other Opportunity Costs
We expect firms to expand the production of
goods and services that provide positive
economic profits.

14. But some opine that profit maximization is vague.
– Short-run profitability or long-run profitability?
– Ignores the risk.
– Overlooks quality aspects of future activities (like
sales growth, quality improvement, new market)
– Sometimes it is unethical (e.g., exploiting labor or
customers, charging higher prices).
Profit Maximization vs.
Wealth Maximization

15. Wealth Maximization
Aims at maximizing the net worth of the
firm. It means the maximization of market
value of owners’ investment.
– maximizes the shareholders’ interest.
– socially responsible, helps society use scare
resources efficiently.
– ethical, does not hurt others’ interest.
Wealth maximization is translated into
maximization of stock price.

16. A Taka received tomorrow is not the
same as a Taka today.
Opportunity cost is the sacrifice of return
that could be attained from the best possible
alternative.
TIME VALUE OF MONEY
0 2
1 4
3 5

17. Discount Rate
The discount rate includes:
(a) Pure time value of money
(b) Premium for inflation
(c) Premium for risk

18. Pure Time Value of Money
- Compensation for the sacrifice of current
consumption.
- price charged for the exchange between
current goods and future goods.
Discount Rate

19. Discount Rate
Premium for Inflation
Compensation for the purchasing
power loss.
Premium for Risk
Compensation for the risk (chance
that the return may vary).

20. Use of Discount Rate:
Future Value = Present Value (1+k)t
k=Discount Rate, t=time
Say, Present value = Taka 100
Discount Rate = 10 %
Time = 2 years
Future value = 100 (1+0.10)2 = 121
Discount Rate

21. Discount Rate
Say, Future Value = Taka 400 after 5 years.
Discount Rate = 10 %
 
248.37
10
.
0
1
400
Value
Present 5



 t
k


1
FV
Value
Present

22. Annuity
An annuity is a series of payments made at
fixed intervals for a specified number of
periods.

23. Future Value of an Annuity
0 100 100 100 100.0
0
0 1 2 3 4
110.00
121.00
133.10
464.10
Future
Value

24. Future Value of an Annuity





 














i
i
PMT
i
PMT
i
PMT
i
PMT
i
PMT
FVA
n
n
t
t
n
n
1
)
1
(
)
1
(
)
1
(
.......
)
1
(
)
1
(
1
0
2
1
PMT = Annual Payment
i = Discount Rate

25. 10
.
464
10
.
0
1
)
10
.
0
1
(
100
1
)
1
(
4






 







 


i
i
PMT
FVA
n
n
Future Value of an Annuity
Example:
You deposit Taka 100 per year for four years at
an annual interest rate of 10%. How much will
you receive after 4 years?

26. Present Value of an Annuity
0 100 100 100 100
0 1 2 3 4
90.91
82.64
75.13
68.30
316.99 Present Value

27. Present Value of an Annuity
     







 



















i
PMT
PMT
PMT
PMT
PMT
PVA
n
n
i
i
n
t
i
i
i
n
)
1
(
1
)
1
(
1
1
)
1
(
1
)
1
(
1
)
1
(
1
1
...
1
2
1

28. Present Value of an Annuity
316.99
10
.
0
1
100
1
4
)
10
.
0
1
(
1
)
1
(
1








 








 



i
PMT
PVA
n
i
n
Example: Annuity of Taka 100 per year for
four years; Discount Rate is 10%.

29. Future Value of Annuity (Due)
Payments are made at the beginning of
the period.
100 100 100 100
146.41
0 1 2 3 4
110.00
121.00
133.10
510.51
Future Value

30. Future Value of Annuity (Due)
51
.
510
)
10
.
0
1
(
10
.
0
1
)
10
.
0
1
(
100
)
1
(
1
)
1
(
4







 








 

 i
i
i
PMT
FVA
n
n

31. Present Value of an Annuity (Due)
100 100 100 100
0 1 2 3 4
90.91
82.64
75.13
348.69

32. Present Value of an Annuity (Due)
Example: Annuity of Taka 100 per year (at the
beginning of each year) for four years;
Discount Rate is 10%.
348.69
)
10
.
0
1
(
10
.
0
1
100
)
1
(
1
4
)
10
.
0
1
(
1
)
1
(
1









 









 



i
i
PMT
PVA
n
i
n