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.

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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 family

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Differences among Business,

Public and Private Finance
1.
2.
3.
4.
5.
6.
7.
8.

Definition
Objective
Sources of fund
Issuing new notes and coins
Foreign borrowings
Confidentiality
Bankruptcy
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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Definition of Managerial
Finance
The assessment of finance techniques to
determine how they affect the business
internally and externally. Managerial
finance takes into consideration how to
improve financial techniques to better the
company and where changes can be made
to prevent loss. This approach is a mixture
between basic corporate financing and
managerial.
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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 profitmaximization. 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
P1

W 2= P 2Q1
W 1= P 1Q1
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 an long-term concept
It cannt 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:
compensation, threat of firing,
intervention and threat of takeover

managerial
shareholder

Stockholders vs Creditors:
investment
employees,
others.

long term
is risky projects, payment to
shareholders and financing from

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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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