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Introduction To Finance

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					   Finance is concerned with resource allocation
    as well as resource management, acquisition
    and investment. Simply, finance deals with
    matters related to money and the markets.
   Finance can be defined as the art and science
    of managing money. All the individuals and
    organization earn or raise money and spend
    or invest money
   Finance is concerned with the process,
    institutions, markets and instruments
    involved in the transfer of money among and
    between individuals, businesses and
    government
   Financing Decision
   Investment Decision
   Dividend Decision
   Financial Analysis and Planning
   The primary goal is shareholder wealth
    maximization, which translates to
    maximizing stock price.
   Other Goals include
    ◦ Profit Maximizing
    ◦ Preserving Stakeholders wealth
   The Primary responsibility of financial
    managers is the acquisition of funds (cash)
    needed by the firm and directing those funds
    into projects that will maximize the value of
    the firm to its owners.
   Raise funds from investors
   Invest funds in value-enhancing projects
   Manage funds generated by operations
   Return funds to investors - dividends
   Reinvest funds in new projects
   Financial Service
   Managerial Finance
   Shareholders are the Principals
   Managers are their Agents
   An agency conflict arises when the goals of
    these two parties are not congruent.
   An agency conflict is generally costly to the
    firm, I.e., it results in reduced value of the
    total firm
   There are ways of mitigating this conflict
    but it cannot totally eliminated or reduced
    to zero
   Shareholders can attempt to control
    managers in a variety of ways
   Market-value based compensation such as
    stock options and bonus plans
   Threat of firing
   Threat of takeover
   Consider the evolution of a firm from a Sole
    Proprietorship, I.e., a firm owned by a single
    owner
   The owner is the manager of the firm’s
    operation manager, marketing manager,
    finance manager, and everything else for the
    firm
   A sole proprietorship has little conflict, low
    taxation, but limited financing available, and
    unlimited liability
   The firm may eventually add more partners
    (Partnership)and start to borrow from banks
    to fuel its growth.
   At some stage the firm may choose to
    incorporate and go public, I.e. becomes a
    Corporation
   An intangible business entity created by
    law often called a legal entity
   Individuals or firms who buy shares of
    such a firm become equity participants and
    may be quite active
   Other individuals lending money on very
    specific terms such as bondholders may
    choose to be passive
   At the Corporation stage, new investment and
    challenges face a firm, financing is abundant,
    stockholders have limited liability, but
    accountability is high as well
   On or about this stage, the firm is likely to
    hire finance professionals
   Strength
    Sole Proprietorship      Partnership                Corporation

    Owners receive all the   Can raise more funds       Owners have limited
    profits and losses       than sole proprietorship   liability Which
                                                        guarantees that they
                                                        cannot lose more than
                                                        they invested
    Low organizational       Borrowing power            Ownership is readily
    costs                    enhanced by more           transferred
                             owners
    Income taxed as          Income taxed as            Long life of firm
    personal income of       personal income of
    proprietor               partners
    Ease of dissolution      More available brain       Can expand more easily
                             power and managerial       due to access capital
                             skills                     market
     Weaknesses
Sole Proprietorship        Partnership                 Corporation
Owner has unlimited        Owners have unlimited       Taxes generally higher,
liability                  liability                   since corporate income is
                                                       taxed & dividends paid to
                                                       owners are again taxed
Limited fund raising       When partner dies,          More expensive to
power                      partnership is dissolved    organize than other
                                                       business forms
Difficult to give         Difficult to achieve large   Subject to greater
employees long run career scale operations             government regulation
opportunities

				
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posted:11/27/2010
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