This document provides an introduction to business finance. It discusses key topics such as the goal of a firm being to maximize shareholder wealth, the five foundational principles of finance, and the role of finance in business decisions. It also outlines different legal forms of business organization such as sole proprietorships, partnerships, and corporations. The overall purpose is to introduce learners to basic concepts in finance and financial management.

1. Business Finance
Muhammad Rehan Ameen
ADPcs(II)
University of Central Punjab (PGC),….
Business Finance
Muhammad Rehan Ameen
ADPcs(II)
University of Central Punjab (PGC),….

2. Copyright © 2011 Pearson Prentice Hall.
All rights reserved.
Chapter 1
An Introduction
to the
Foundations
of Financial
Management

3. 1-3© 2011 Pearson Prentice Hall. All rights reserved.
Learning Objectives
 Identify the goal of the firm.
 Understand the five basic principles of finance and
business, the consequences of forgetting those
basic principles of finance, and the importance of
ethics and trust in business.
 Describe the role of finance in business.
 Distinguish between the different legal forms of
business.
 Explain what has led to the era of the multinational
corporation.

4. 1-4
Slide Contents
1. What is Finance?
2. The Goal of the Firm
3. Legal Forms of Business Organization
4. Role of Financial Manager in a
Corporation
5. Income Taxation
6. Five Principles of Finance
7. Finance and Multinational Firm

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What is Finance?
Finance describes the management,
creation and study of money, banking,
credit, investments, assets
and liabilities that make up financial
systems, as well as the study of
those financial instruments.

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Concerns the acquisition,
financing, and management of
assets with some overall goaloverall goal
in mind.
What is Financial
Management?

7. What is the Goal
of the Firm?
Maximization ofMaximization of
Shareholder Wealth!Shareholder Wealth!
Value creation occurs when we
maximize the share price for
current shareholders.

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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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Ethics and business
 Ethical behavior is doing the right thing! …
but what is the right thing?
 Ethical dilemma - Each person has his or her
own set of values, which forms the basis for
personal judgments about what is the right
thing.
 Sound ethical standards are important for
business and personal success. Unethical
decisions can destroy shareholder wealth
(ex. Enron Scandal)

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3. The Role of Finance
in Business
Three broad issues addressed by the study of
finance:
 Where to Invest? (Capital budgeting
decision)
 How to raise money to fund the investment?
(Capital structure decision)
 How to manage cash flows from daily
operations? (Working capital decision)

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The Role of Business in
Finance (cont.)
 Knowledge of financial tools is relevant for
decision making in all areas of business
(be it marketing, production etc.).
 Decisions involve an element of time and
uncertainty … financial tools help adjust for
time and risk.
 Decisions taken in business should be
financially feasible … financial tools help
determine the financial viability of decisions.

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The Legal Forms of
Business Organization

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Sole Proprietorship
 Business owned by an individual
 Owner maintains title to assets and
profits
 Unlimited liability
 Termination occurs on owner’s death or
by owner’s choice

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Partnerships
 Two or more persons come together as co-owners
 General Partnership: All partners are fully responsible
for liabilities incurred by the partnership.
 Limited Partnerships: One or more partners can have
limited liability, restricted to the amount of capital
invested in the partnership. There must be at least one
general partner with unlimited liability. Limited partners
cannot participate in the management of the business
and their names cannot appear in the name of the firm.

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Corporation
 Legally functions separate and apart from its owners
 Corporation can sue, be sued, purchase, sell, and own property
 Owners (shareholders) dictate direction and policies of
the corporation, oftentimes through elected board of
directors.
 Shareholder’s liability is restricted to amount of
investment in company
 Life of corporation does not depend on the owners …
corporation continues to exist through easy transfer of
ownership
 Taxed separately