BUSINESS FINANCE

SESSION 1
BY
Muhammad Furquan
Introduction to Financial Management

An Overview of Financial
Management
 An Overview of Financial Management
What is Finance

• Finance V/S Economics and Accounting

• Finance within Organization

• Sarbanes-Oxley Act
• “A law passed by Congress that requires the CEO and CFO to certify that their firm’s financial
statements are accurate”

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
What is Finance

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
What is Finance
• Finance as taught is generally divided into three areas:

• Corporate Finance

• Capital Markets

• Investments
• Security Analysis
• Portfolio Theory
• Market Analysis
Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-
 An Overview of Financial Management
What is Finance

Activity-1

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 Activity-1
1. What is the relationship between economics, finance, and accounting?

2. Who is the CFO, where does this individual fit into the corporate hierarchy,
and what are some of his or her responsibilities?

3. Does it make sense for not-for-profit organizations such as hospitals and

universities to have CFOs?

4. What three areas of finance does this book cover? Are these areas independent
of one another, or are they interrelated in the sense that someone working in
one area should know something about each of the other areas?
 An Overview of Financial Management
Jobs in Finance

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations
• Sole Proprietorship

• Partnership

• Corporations

• Limited Liability Companies (LLCs) and Limited Liability

Partnerships(LLPs)

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations
• Sole Proprietorship

“An unincorporated business owned by one individual”

• Benefits
• Limitations
Advantages Disadvantages
Retention of All profits. Incurs all losses
Ease of formation. Unlimited liability.
Complete control. Financing limitations.
Lower taxes
Limited skills

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations
• Partnership

“An unincorporated business owned by two or more persons.”

• Benefits
• Limitations
Advantages Disadvantages
More Sources of Funding Control is shared
Losses are shared. Unlimited liability.
Specialization
Shared Profits

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations
• Corporation
“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..”

• Benefits Advantages Disadvantages

Limited Liability Very costly to establish
• Limitations Maximum access to funds Double Taxation
Transfer of Ownership Financial Disclosure

• S Corporation
“A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship
or a partnership rather than a corporation...”

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations
• Limited Liability Company (LLCs)
“A relatively new type of organization that is a hybrid between a partnership and a corporation..”

• Benefits

• Limitations
• Limited Liability Partnerships (LLPs)
“Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It
has limited liability like corporations but is taxed like partnerships..”

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations

• Which form is better (Value of a business)

• Limited Liability

• Access to Capital

• Liquidity

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations

Activity-2

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 Activity-2

1. What are the key differences between proprietorships, partnerships, and corporations?
2. How are LLCs and LLPs related to the other forms of organization?
3. What is an S corporation, and what is its advantage over a C corporation? Why don’t firms
such as IBM, GE, and Microsoft choose S corporation status?
4. What are some reasons the value of a business other than a small one is generally
maximized when it is organized as a corporation?
5. Suppose you are relatively wealthy and are looking for a potential investment. You do not
plan to be active in the business. Would you be more interested in investing in a partnership
or in a corporation? Why or why not?
 An Overview of Financial Management
Stock Prices and Shareholder Value

• Shareholder Wealth Maximization

The primary goal for managers of publicly owned companies implies that decisions should be made to
maximize the long-run value of the firm’s common stock

Shareholder wealth is the number of shares outstanding times the market price per share.

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Stock Prices and Shareholders Value

Activity-3

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 Activity-3
1. What is management’s primary goal?
2. What do investors expect to receive when they buy a share of stock? Do investors know for sure how much
they will receive? Explain.
3. Based just on the name, which company would you expect to be riskier? General Foods or South Seas Oil
Exploration? Explain.
4. When Boeing decides to invest $5 billion in a new jet airliner, are its managers certain of the project’s effects
on Boeing’s future profits and stock price? Explain.
5. Who would be better able to judge the effect of a new airliner on Boeing’s profits—its managers or its
stockholders? Explain.
6. Would all Boeing stockholders expect the same outcome from a given new project, and how would those
 An Overview of Financial Management
Intrinsic Values, Stock Prices and Executive Compensation

• Intrinsic Value : (An estimate of a stock’s “true” value based on accurate risk and return data.)

• Market Price: (The stock value based on perceived but possibly incorrect
information as seen.)

• Marginal Investor: (An investor whose views determine the actual stock
• price.)

• Equilibrium: (Intrinsic Value = Market Price)

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-
 An Overview of Financial Management
Intrinsic Values, Stock Prices and Executive Compensation

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Intrinsic Values, Stock Prices and Executive Compensation

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Forms of Business Organizations

Activity-4

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 Activity-4

1. What’s the difference between a stock’s current market price and its intrinsic value?
2. Do stocks have known and “provable” intrinsic values, or might different people reach
different conclusions about intrinsic values? Explain.
3. Should managers estimate intrinsic values or leave that to outside security analysts?
Explain.
4. If a firm could maximize either its current market price or its intrinsic value, what would
stockholders (as a group) want managers to do? Explain.
5. Should a firm’s managers help investors improve their estimates of the firm’s intrinsic
value? Explain.
 An Overview of Financial Management
Important Business Trends

• Sarbanes – Oxley Bill

• Increased Globalization

• Improvements in IT

• Corporate Governance

Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-

 An Overview of Financial Management
Conflicts between Managers, Stockholder and Bondholders

• Managers V/S Stockholders V/S Bondholders

• Reasonable Compensation Packages

• Firing of Managers who don’t Perform
• The thereat of Hostile Takeovers

• Corporate Raider: An individual who targets a corporation for takeover because

it is undervalued.
• Hostile Takeover: The acquisition of a company over the opposition of its
management
Reference: Fundamentals of Financial Management, 12th edition, by Brigham and Hous-
THANK
YOU