This document provides an overview of finance and key concepts. It discusses what finance is, the functions and areas of finance, and compares finance to accounting. It also outlines the goals of business as maximizing shareholder wealth. The document reviews types of businesses including sole proprietorships, partnerships, and companies. It then discusses the modern corporation's separation of owners and managers. Finally, it provides a brief tour of the financial environment, including financial markets, flows of funds, types of markets, and influences on expected security returns such as risk.

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
37

38. THANK YOU