Finance consists of providing and

utilizing of money, capital rights, credit

& funds of any kind, which are
employed in the operation of an
enterprise.
Finance may be classified as:
(A)Public Finance
(B)

Private Finance

(i) Finance for Non profitable

Organization
(ii) Finance for Profitable Organization
(a) Sole Trader ship
(c) Corporation

(b)Partnership

Financial Managers
Responsibilities
1.Forecasting and Planning
2.Major Investment and Financing
Decisions
3.Coordination and Control
4.Dealing with the Financial

Goals of the Corporation

1. Profit Maximization
- Current Profit Maximization
- Does Not Consider Longevity
of project
- Ignore Time Value of Money
- Does not consider social
Responsibility

2. Wealth Maximization
- Consider Longevity
- Consider Time Value Of
Money
- Maximize Wealth of The
corporation
- Maximize Share Price

Stakeholders : Group such as

employees, customers, suppliers,
creditors, owners, and others who
have a direct economic link to the firm.
Stakeholders expect to be
compensated by :
-Wealth maximization
-Maximum long term benefit
-Positive stakeholders
relationship may

THE AGENCY ISSUE

The control of the corporation is
frequently placed in the hands of the
professional non-owner managers.
Thus management can be viewed as
agents of the owners who have hired
them and given them the decisionmaking authority to manage the firm
for the owners' benefit.
Managers may consider personal

Agency Problem
The likelihood that managers may
place personal goals ahead of
corporate goals.
Resolving the Agency Problem
(1)Market Forces
- Electing Board Of Directors
- Empowered to hire or fire

(2)Agency Costs:
Costs borne by stockholders to prevent or
minimize agency problem. Agency cost is
of four types:
(i)Monitoring Expenses
These outlays pay for audits & control
procedures that are used to asses and limit
the managerial behavior to those actions
tends to be in the best interest of the

(iii)Opportunity costs: Result from the

difficulties that large organizations
typically have in responding to new
opportunities. The firms necessary
organizational structure, decision
hierarchy, and control mechanisms
may cause profitable opportunities to
be forgone because of managements
inability to seize up on them quickly.

Incentive plans tend to tie management

compensation to share price. The most
popular incentive plan is the granting
stock of options to management.
(a)Granting of Stock options to
management. These options allow
managers to purchase stock at the market
price set at the time of the grant. If the
market price rises, they will be rewarded
by being able to resell the shares
subsequently at the higher market price.

They are some times criticized because

positive management performance can
be masked in a poor stock market in
which share prices general have
declined due to economic and
behavioral market forces outside of
managements control.

(b)Performance plans:
- The use of performance plan has