This document provides an overview of a finance for managers course being taught in the fall of 2010. It introduces the key responsibilities of a finance manager, which include forecasting and planning, making major investment and financing decisions, coordinating and controlling finances, dealing with financial markets, and managing risk. It also outlines different forms of businesses including sole proprietorships, partnerships, and corporations, noting their advantages and disadvantages. Finally, it defines and discusses the concepts of moral hazard and agency problems that can occur between principals and agents in a business context.

1. FINANCE FOR MANAGERS
COURSE LECTURER
Shumaila Paracha
Assistant Professor
Course Code: 0387
MBA Program
Academic Year
Fall 2010

2. Today
Introduction - Why Finance Matters
Role and responsibilities of Finance Manager
Forms of businesses with their pros & cons
Moral hazard & agency problem

3. Financial manager’s role &
responsibilities
Financial managers face two main questions:
Q1:What real assets should the firm invest in?
A1: Investment / capital budgeting decision
Q2: How should the cash for investment be raised?
A2: Financing decision
Therefore a financial manager is assigned with following responsibilities:
1. Forecasting & planning
2. Major investment and financing decision
3. Coordination and control
4. Dealing with financial markets
5. Risk management

4. Forms of Business
1. Sole proprietorship
2. Partnership
3. Corporations
In addition to this there are several hybrid forms of
organizations such as limited liability partnership,
professional associations

5. Forms of Business
Sole proprietorship
Advantages
Easy to form.
Low cost to form.
Owner is typically the manager of the business.
Income is taxed only once (at proprietor level).
Disadvantages
Unlimited liability for the owner.
Limited access to additional capital.
Life of proprietorship ends with proprietor.

6. Forms of Business
Partnership
Advantages
Easier to form than a corporation.
Low cost to form.
Income and assets are shared according to the
partnership agreement.
Income is taxed only once (at partner level).
Disadvantages
Unlimited liability for the owners.
Limited acces to additonal capital.
Life of partnership ends with partners.

7. Forms of Business
Corporations
Advantages
Limited liability for the owners.
Ready access to capital.
Disadvantages
Double taxation.
Must be granted corporate charter by a state.
Agency problems arise as owners become separated from
management.

8. Moral hazard & agency problem
Moral Hazard
Moral hazard arises because an individual does not take the full
responsibilities of its actions, and therefore has a tendency to act less
carefully than it otherwise would, leaving another party to hold some
responsibility for the consequences of those actions.
Moral hazard also arises in a principal agent problem, where one party,
called an agent, acts on behalf of another party, called the principal.
The agent usually has more information about his or her actions or
intentions than the principal does, because the principal usually cannot
completely monitor the agent. The agent may have an incentive to act
inappropriately (from the viewpoint of the principal) if the interests of
the agent and the principal are not aligned
Agency Problem
Firms managers may have personal goals that compete with
shareholders wealth maximization