Principles of Business Finance

Lecture 1 – BBA2K20
By Hassan Ali Solangi - Lecturer
Sindh University Campus at Thatta
 Chapter 1
Introduction to Business
Finance and Role of
Financial Management
Introduction to Business Finance
and Role of Financial Management
Learning Objectives
■ Definition of Finance and Business Finance
■ What is Financial Management and Its Role
■ Important Decisions of Financial Management
■ Goal of Financial Management and Financial Manager
■ Agency Problem, CSR and Corporate Governance
Introduction to Business Finance
and Role of Financial Management
What is Finance
■ At the Macro level, Finance is the study of
financial institutions and financial markets and how
they operate within the financial system in both the
Local and global economies.

■ At the Micro level, Finance is the study of

financial planning, asset management, and fund
raising for businesses and financial institutions.
Introduction to Business Finance
and Role of Financial Management
What is Finance

Business
Finance can be
described in
brief by following
balance sheet.
Introduction to Business Finance
and Role of Financial Management
What is Financial Management
■ Concerns the Acquisition, Financing, and Management of
assets with some overall goal in mind.
■ Financial Management is based on Three Important
Decisions

• Investment Decision
• Financing Decision
• Asset Management Decision
Introduction to Business Finance
and Role of Financial Management
Financial Management
(Three Important Decisions)
1. Investment Decision
• What is the optimal firm size?
• What specific assets should be
acquired?
• What assets should be reduced or
eliminated?
Introduction to Business Finance
and Role of Financial Management
Financial Management
(Three Important Decisions)
2. Financing Decision
• What is best type of financing?
• What is the best financing mix?
• What is the best dividend policy?
• How will the funds physically acquired?
Introduction to Business Finance
and Role of Financial Management
Financial Management
(Three Important Decisions)
3. Asset Management Decision
• How we manage asset efficiently?
• Financial Manager has operating
responsibility over asset.
• Greater emphasize on current asset than
fixed asset.
Introduction to Business Finance
and Role of Financial Management
What is the Goal of the Firm?
Maximization of Shareholder Wealth!

Value creation occurs when

we maximize the share price
for current shareholders.
Introduction to Business Finance
and Role of Financial Management
What is the Goal of the Firm?
The Ethics of Maximizing Value
Does value maximization justify unethical behavior?

Good Examples:
o Enron
o WorldCom
o Bernard Madoff
Introduction to Business Finance
and Role of Financial Management
Financial Management Function
Agency Theory
Modern Corporation

Shareholders Management
There exists a difference between
owners and managers.
Introduction to Business Finance
and Role of Financial Management
Financial Management Function
Agency Theory
Role of Management
■ Management acts as an agent for the owners
(shareholders) of the firm.
■ An agent is an individual authorized by another
person, called the principal, to act in the latter’s
behalf.
Introduction to Business Finance
and Role of Financial Management
Corporate Social Responsibility &
Corporate Governance:
■ Wealth maximization does not preclude the firm
from being Socially Responsible at the corporate
level.

■ Assume we view the firm as producing both private

and social goods, Then Shareholder Wealth
Maximization remains the appropriate goal in
governing the firm.
Introduction to Business Finance
and Role of Financial Management
Corporate Social Responsibility &
Corporate Governance:
■ Corporate Governance represents the
system by which corporations are managed
and controlled including shareholders, Board of
Directors, and Senior management, Then
Shareholder Wealth Maximization
remains the appropriate goal in governing the
firm.