This document provides an introduction to principles of finance. It defines finance as the art and science of managing money, which deals with transferring money among individuals, businesses, and governments. Finance focuses on investment in real assets like land and financial assets like savings accounts. The benefits of understanding finance include various career opportunities in fields like corporate financial management, stockbroking, and investment consulting. Major areas of finance include financial services and managerial finance. Financial managers perform tasks like financial planning, investment decision making, financing decisions, and maintaining accounting records and controls. Their goal is to maximize shareholder wealth by considering stakeholders and factors like risk, timing of returns, and cash flows. Agency problems can arise between owners and managers, so various mechanisms are

1. 1ST CHAPTER
INTRODUCTION TO
PRINCIPLES OF
FINANCE

2. DEFINITION OF FINANCE
Finance is the art and science of
managing money which is concerned with
the process, institutions, markets and
instruments involved in the transfer of
money among and between individuals,
business and governments.
Finance is a body of facts,
principles, and theories dealing
with the raising and using of
money by a firm.

3. DEFINITION OF FINANCE
Finance is the branch of economics
that focuses on investment in real
and financial assets and their
management.
A real asset is a physical item such
as a truck, land, or building.
A financial asset is a claim for a
future financial payment, such as a
savings account at a bank.

4. BENEFITS OF KNOWLEDGE
OF FINANCE
Careers in Finance-
As a Corporate Financial Manager
As a Stockbroker
Executive- Financial Analyst
Investment Consultant in an
Investment Bank or Financial
Institution
Loan Analyst/ Loan Officer in a Bank

5. MAJOR AREAS & OPPORTUNITIES
IN FINANCE
Financial Services- The part of
finance concerned with the design and
delivery of advice and financial
products to individuals, business and
government.
Managerial Finance- Concerns the
duties of the financial manager in the
business firm.

6. FINANCIAL MANAGER
Financial managers actively manage the
financial affairs of many types of business-
financial or non financial, private and
public, large and small, profit-seeking and
not for profit.
They perform such varied financial tasks as
planning, extending credit to customers,
evaluating proposed large expenditures,
and raising money to the firm’s
operations.

7. FUNCTIONS OF FINANCIAL
MANAGERS
1. Performing financial analysis
and planning- which includes:
Monitoring the firms financial
condition,
Evaluating the need for increased (or
reduced ) productive capacity, and
Determining what financing is
required.

8. FUNCTIONS OF FINANCIAL
MANAGERS
2. Investment Decision
Making:
It is the most important
decision of the firm when it
comes to value creation. It
begins with a determination of
the total amount of assets
needed to be held by the firm.

9. FUNCTIONS OF FINANCIAL
MANAGERS
3. Making Financing Decision:
Here the financial manager is concerned
with the makeup of the right-hand side of
the balance sheet. It involves two major
areas. First, the most appropriate mix of
short term and long-term financing must
be established. A second important
concern is which individual short term or
long term sources of financing are best at
a given point in time.

10. FUNCTIONS OF FINANCIAL
MANAGERS
4. Asset management Decision:
Assets must be managed efficiently and
financial manager must be more concerned
in this respect. Otherwise firm may fall in
difficulty in several cases.
5. Accounting and Control:
Maintaining financial records; controlling
financial activities, identifying deviations
from planned and efficient performance,
and managing payroll, tax matters,
inventories, fixed assets and computer
operations.

11. FUNCTIONS OF FINANCIAL
MANAGERS
6. Forecasting:
Forecasting costs, technological changes,
capital market conditions, funds needed
for investments, demand for the firm’s
products and using forecasts and
historical data to plan future operations.
Pricing, credit and collections, insurance
and incentive planning are some other
responsible duties to the financial
managers.

12. PROFIT
MAXIMIZATION OR
WEALTH
MAXIMIZATION?
Goals of the Corporation:

13. PROFIT MAXIMIZATION OR
WEALTH MAXIMIZATION?
Profit maximization is not a reasonable
goal because it fails to consider some
important facts. It ignores:
The timing of returns- the receipt of
funds sooner than later is preferred.
Cash flows available to stockholders/
effect of dividend policy.
Risk- the chance that actual outcome may
differ from those expected.

14. MAXIMIZE SHAREHOLDER
WEALTH:
The goal of the corporation, and therefore
of all managers and employees, is to
maximize the wealth of the owners for
whom it is being operated.
Shareholders wealth is represented by
the market price per share of the
corporation’s common stock. The market
price serves as a barometer for business
performance; it indicates how well
management is doing on behalf of its
shareholders.

15. STAKEHOLDERS RATHER
THAN STOCKHOLDERS
The stakeholders include creditors,
employees, customers, suppliers,
communities in which a company
operates and others.
Only through attention to the
legitimate concerns of the firm’s
various stakeholders can attain its
ultimate goal- maximizing
shareholders wealth.

16. EPS & SHARE
EPS are calculated by dividing the period’s
total earnings available for the firm’s common
stockholders by the number of shares of
common stock outstanding.
Share: A share is a piece of paper/document
which represents the ownership of a particular
company.
Or, a share is a chose in action, conferring on its
legal right to the part of the company’s profits
(usually by payment of a dividend) and to any
voting rights attaching to that share.

17. SOCIAL RESPONSIBILITY OF THE
FIRM:
Protecting the consumer rights-
Companies shouldn’t charge abnormal
prices for their product or services and act
as a monopoly type. Every firm should
ensure quality product and services for
ultimate consumers.
Paying fair wages to employees and
provide rewards as a motivational drive to
increase their productivity. Firms must
ensure welfare of their workers and
employees.

18. SOCIAL RESPONSIBILITY OF
THE FIRM: (CONTINUE)
Maintaining fair hiring practice or
selection process and safe working
condition.
Giving support for proper education
to grass-root level. In this case
established firms may provide
various types of scholarship for poor
students.

19. SOCIAL RESPONSIBILITY OF THE
FIRM: (CONTINUE)
Becoming involved in such environmental
issues as clean water and air. Firm may
take social awareness activities against
environment pollutions, AIDS, acid
terrorism, and other negative matter
which creates social distress and
hampered normal life.

20. AGENCY PROBLEMS
There is a potential conflict of interest
between the owners, who expect the
managers to act on their behalf, and
managers, who have their own interests
as well. This gives rise to what has been
called “the agency problem”, that is,
the divergence of interests that arisen
between a principal and his agent.

21. AGENCY COST FOR
PREVENTION OF AGENCY
PROBLEMS:
Several mechanisms are used to
motivate managers to act in the
shareholders’ best interests. These
include-
 The threat of takeover
 Structuring managerial
incentives
 Monitoring Expenditures
 The threat of firing

22. AGENCY COST FOR
PREVENTION OF AGENCY
PROBLEMS:
 Bonding expenditures
Protect against the potential consequences of
dishonest acts by managers. Typically, the
owners pay a third- party bonding company
to obtain a fidelity bond. This bond is a
contract under which the bonding company
agrees to reimburse the firm for up to a
stated amount if a bonded manager’s
dishonest act results in financial loss to the
firm.

23. Thank You