CHAPTER 1

An Overview of Managerial
Finance
 Concept of Finance and Managerial Finance
 Types of Finance
 Functions of Managerial Finance
 Forms of Businesses
 Goals of the Corporation
 Principles of Finance
 Agency Relationship
 Business Ethics
 Multinational vs Domestic Managerial Finance
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Concept of Finance

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. 1-2
 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 finance.
2. Public/Government finance: The process of determining the required fund for
an activity or a purpose by the government of a particular country, searching the
available sources for collecting the required fund, estimating the cost of each
source, raising the fund from the minimum cost source and disbursing the
collected fund in such a way that maximizes the welfare of the common people of
the country is called public finance.
3. Personal/Private finance: The process of determining the required fund for an
activity or a purpose by an individual, identifying the available sources for raising
the fund, calculating the cost of each source separately, collecting the fund from
the minimum cost source and using the fund for maximizing personal and 1-3 family
benefit is called personal finance.
Differences among Business,
Public and Private Finance

1. Definition
2. Objective
3. Sources of fund
4. Issuing new notes and coins
5. Foreign borrowings
6. Confidentiality
7. Bankruptcy
8. Income & expenditure decision
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 Definition of Managerial Finance
The process of determining the required fund for
a business purpose, identifying the available
sources for raising the fund, calculating the cost of
fund, collecting the fund from the minimum cost
source and allocating the collected fund in such a
way that maximizes the profit and achieving
the target of the manager is called
managerial finance.

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 Functions of Managerial Finance
1. Procurement of funds: There are alternative
sources of fund like a company can take loan or it
can issue common stock, preferred stock,
debenture or bond to raise the fund required
based on cost minimization is the goal of
financing. Finance managers need to select the
best possible sources of funds among the different
alternatives called Capital structure Decision.

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 Functions of Managerial Finance
2. Utilization of funds: Capital Budgeting decision.
Long term investment decision is made on the basis
of risk and return. The goal is profit maximization.
This is the most important and challenging function
of finance.
3. Short term asset management: Working capital
management by considering liquidity and
profitability.
4. Distribution of funds: Dividend policy decision.
Dividend policy, repurchase of shares and
amortization of debt.
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Alternative Forms of Business
Organization
 Sole proprietorship
 Partnership
 Corporation

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 Goals of the Corporation
 The conventional goal of a firm is profit-
maximization. However, since profit is
reported by the management so it can
be manipulated. Moreover, accounting
profit is not estimated on cash basis. So,
the modern goal of firm is shareholders’
wealth maximization, which refers to
maximizing stock prices at the market.
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A graphical approach to
wealth maximization
Market Price of Shares
S1

P2 W2= P2Q1
P1 W1= P1Q1

D2
D1

Q1 Quantity of stock
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 Why is Wealth Maximization?

For the following favorable reasons wealth

maximization is considered as ultimate goal:
 Clearness in definition

 It is a long-term concept

 It cann’t be manipulated by the management

 Risk consideration

 Time value of money consideration

 This leads to better and true evaluation of business

 It emphasis more on cash flows rather than

profitability.
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 Agency Relationship
 Stockholders vs Managers: managerial
compensation, threat of firing, shareholder intervention
and threat of takeover
 Stockholders vs Creditors: long term investment
is risky projects, payment to employees, shareholders and
financing from others.

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MNCs and Multinational vs Domestic Managerial Finance

 Different currency denominations

 Economic and legal ramifications
 Language differences
 Cultural differences
 Role of governments
 Political risk

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Principles of Managerial Finance

 Return and risk

 Time value of money
 Cash flow
 Profitability vs liquidity
 Diversification
 Hedging

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