Briefly introduces the finance topic .

1. Principles of Finance
Mrs Kiran Odit Dookhan
Senior Lecturer
Department of Accounting, Finance
and Economics
University of Technology, Mauritius
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An Introduction to the Principles of Finance © 2014 by Mrs Kiran Odit Dookhan is licensed under Creative Commons
Attribution 4.0 International

2. An Introduction to the Principles of
Finance
Chapter 1

3. 1. The Goal of the Firm

4. 4
The Goal of the Firm
 The goal of the firm is to maximize
shareholder wealth.
 Shareholder wealth is measured by share
prices. Thus shareholder wealth maximization
would imply maximizing the price of common
stock.

5. 5
Benefits of Maximizing
Shareholder Wealth
 Good corporate decisions are those that
create wealth for the shareholder.
 Society benefits as scarce resources are
directed to the most profitable use by
businesses competing to create wealth.

6. 6
Why is Profit Maximization not
the appropriate goal?
 Profit maximization goal is unclear about the
time frame over which profits are to be
measured.
 It is easy to manipulate the profits through
various accounting policies.
 Profit maximization goal ignores risk and timing
of cash flows.

7. 7
Primary Versus Secondary Market
 Primary Market (initial issue)
 Market in which new issues of a security are sold to initial
buyers. This is the only time the issuing firm ever gets any
money for the securities.
 Example: Google raised $1.76 billion through sale of shares
to public in August 2022.
 Secondary Market (subsequent trading)
 Market in which previously issued securities are traded. The
issuing corporation does not get any money for stocks traded
on the secondary market.
 Example: Trading among investors today of Google stocks.

8. 8
Money versus Capital Market
 Money Market
 Market for short-term debt instruments (maturity periods of
one year or less). Money market is typically a telephone and
computer market (rather than a physical building)
 Examples: Treasury bills (issued by Bank of Mauritius) and
commercial paper.
 Capital Market
 Market for long-term securities (maturity greater than one
year).
 Examples: Corporate Bonds, Common stocks, Treasury
Bonds, and financial leases

9. Five Foundational
Principles of Finance
 Cash flow is what matters
 Money has a time value
 Risk requires a reward
 Market prices are generally right
 Conflicts of interest cause agency
problems
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