Chapter 1

An Overview of
Managerial
Finance
What is Finance?

 Finance can be defined as the science and art of

managing money.
 In simple terms, finance is concerned with decisions
about money, or more appropriately, cash flows.
• Finance decisions deal with how money is raised and
used by businesses, governments, and individuals. To
make rational financial decisions, you must understand
three general, yet reasonable, concepts: Everything else
equal, (1) more value is preferred to less; (2) the
sooner cash is received, the more valuable it is; and (3)
less risky assets are more valuable than (preferred to)
riskier assets.
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What is Finance? (Cont’d)

• The process of:

– determining the required fund for an activity
or a purpose,
– identifying the available sources for raising
the fund,
– calculating the cost of each source,
– collecting the fund from the minimum cost
source and
– allocating the collected fund in such a way
that maximizes the target is called finance.
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What is Finance? (Cont’d)

• Personal level: finance is concerned with individuals’

decisions about how much of their earnings they
spend, how much they save, and how they invest
their savings.

• Business context: finance involves how firms raise

money from investors, how firms invest money in an
attempt to earn a profit, and how they decide
whether to reinvest profits in the business or
distribute them back to investors.
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Types of Finance
1. Business finance: The process of determining the required
fund for an activity or a purpose by a business enterprise,
identifying the available sources for raising the fund, calculating
the cost of each source, collecting the fund from the minimum
cost source and utilizing the collected fund in such a way that
maximizes the profit is called business finance.
2. Public/Government finance: The process of……………by the
government of a particular country, ……...………….that
maximizes the welfare of the common people of the country is
called public finance.
3.Personal/Private finance: The process of……………………………by
an individual,………………and using the fund for maximizing
personal and family benefit is called personal finance.

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Name the currency

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Bangladeshi Taka

•The Bangladeshi taka (Bengali: টাকা, Sign: ৳ or Tk,

Code: BDT) is the currency of the People's
Republic of Bangladesh.
– Bangladesh Bank has the sole authority to issue
banknotes in Bangladesh. Bangladesh Bank, like other
central banks the world over, changes the design of
banknotes from time to time.

Source: Bangladesh Bank 1-7

Name the currency (Cont’d)

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Name the currency (Cont’d)

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Name the currency (Cont’d)

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General Areas of Finance

• The study of finance consists of four interrelated

areas:
(1) Financial Markets and Institutions:
 Financial institutions, which include banks,
insurance companies, savings and loans, and
credit unions.
 Various types of financial instruments, such as
mortgages, auto loans, and certificates of
deposit.
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General Areas of Finance (Cont’d)

(2) Investments: This area of finance focuses on the

decisions made by businesses and individuals as they
choose securities for their investment portfolios. The major
functions in the investments area are:
i. determining the values, risks, and returns
associated with such financial assets as stocks
and bonds.
ii. determining the optimal mix of securities that
should be held in a portfolio of investments.
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General Areas of Finance (Cont’d)

(3) Financial Services:

 Financial services refers to functions provided by organizations
that operate in the finance industry.
 In general, financial services organizations deal with the
management of money.
 Example: home purchase, retirement, financial stability and
sustainability, budgeting.

(4) Managerial Finance:

 Managerial finance deals with decisions that all firms make
concerning their cash flows.
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Alternative Forms of Business
Organization
• A sole proprietorship is a business owned by one
person and operated for his or her own profit.
• A partnership is a business owned by two or
more people and operated for profit.
• A corporation is an entity created by law. A legal
entity created by a state, separate and distinct
from its owners and managers, having unlimited
life, easy transferability of ownership, and limited
liability.
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Table 1.1 Strengths and Weaknesses of the
Common Legal Forms of Business Organization

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Tax rate in Bangladesh

Source: The Daily Star 1-16

Matter of Fact

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Goal of the Firm

• The conventional goal of a firm is profit-maximization

(maximization of the firm’s net income). The modern goal
of firm is shareholders’ wealth maximization, which
refers to maximizing stock prices at the market.
 Stockholder wealth maximization:
The appropriate goal for management decisions; considers
the risk and timing associated with expected cash flows to
maximize the price of the firm’s common stock.
• Stock price maximization is the most important goal of
most corporations.
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Goal of the Firm:
Maximize Shareholder Wealth
 Decision rule for managers: only take actions that
are expected to increase the share price.

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Managerial Actions to Maximize
Shareholder Wealth
• Capital structure decisions: Decisions about how much
and what types of debt and equity should be used to
finance the firm.
• Capital budgeting decisions: Decisions as to what types
of assets should be purchased to help generate future
cash flows.
• Dividend policy decisions: Decisions concerning how
much of current earnings to pay out as dividends rather
than retain for reinvestment in the firm.

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Managerial Actions to Maximize
Shareholder Wealth (Cont’d)
 First, the value of any investment, such as a stock, is
based on the amount of cash flows the asset is
expected to generate during its life.
 Second, investors prefer to receive a particular cash
flow sooner rather than later.
 And, third, investors generally are risk averse, which
means that they are willing to pay more for
investments with more certain future cash flows than
investments with less certain, or riskier, cash flows,
everything else equal.
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Managerial Actions to Maximize
Shareholder Wealth (Cont’d)
• Managers can increase the value of a firm by making
decisions that increase the firm’s expected future cash flows,
generate the expected cash flows sooner, increase the
certainty of the expected cash flows, or produce any
combination of these actions.
• Value: The present, or current, value of the cash flows an
asset is expected to generate in the future.
• Earnings per share (EPS): Net income
divided by the number of shares of
common stock outstanding.

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Managers’ Roles As Agents of
Stockholders
 Agency Problem: A potential conflict of interest between
outside shareholders (owners) and managers who make
decisions about how to operate the firm.
Several mechanisms are used to motivate managers to act in the
shareholders’ best interests. These include the following:
– Managerial compensation (incentives)
– Shareholder intervention
– Threat of takeover
• Hostile Takeover: The acquisition of a company over the
opposition of its management.

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Business Ethics
 A company’s attitude and conduct toward its stakeholders —
employees, customers, stockholders, and so forth; ethical behavior
requires fair and honest treatment of all parties.
 Business ethics are the standards of conduct or moral judgment
that apply to persons engaged in commerce.
 Ethics programs seek to:
– Reduce potential litigation costs
– Maintain a positive corporate image
– Build shareholder confidence
– Gain the loyalty and respect of all stakeholders
 The expected result of such programs is to positively affect the firm’s share price.

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Corporate Governance

•Corporate Governance: The ‘‘set of rules’’ that a

firm follows when conducting business; these
rules identify who is accountable for major
financial decisions.
– It defines the rights and responsibilities of the
corporate participants such as the shareholders, board
of directors, officers and managers, and other
stakeholders, as well as the rules and procedures for
making corporate decisions.

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Corporate Governance (Cont’d)

•Stakeholders: Those who are associated with a

business; stakeholders include mangers,
employees, customers, suppliers, creditors,
stockholders, and other parties with an interest in
the firm.
•Firms that follow good corporate governance
generate higher returns to stockholders.

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Corporate Organization

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Focus on Practice

• Professional Certifications in Finance:

– Chartered Financial Analyst (CFA) – Offered by the CFA
Institute, the CFA program is a graduate-level course of study
focused primarily on the investments side of finance.
– Certified Treasury Professional (CTP) – The CTP program
requires students to pass a single exam that is focused on
the knowledge and skills needed for those working in a
corporate treasury department.
– Certified Financial Planner (CFP) – To obtain CFP status,
students must pass a ten-hour exam covering a wide range
of topics related to personal financial planning.

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Table 1.2 Career Opportunities
in Managerial Finance

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Personal Finance Example

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Business Finance Example

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