Unit No.

1
zaheerswati@ciit.net.pk



































Lack of money is no obstacle. Lack of an idea is an obstacle Ken Hakuta


Finance
Real & Financial Assets
Agency Theory Decision Making
Financial Decision Making
Goals of the firm
Organizational Structure
Business Environment
Separation of Ownership & Control

Unit 1
Roadmap


Financial Management
Investments
Markets & Institutions
Investment

Asset Mgt
Financial
Internal

External
Finance


Work Book Foundation Level 2 Introduction to FDM

Unit 1
INTRODUCTION TO FINANCIAL DECISION MAKING (FDM)
Welcome to COMSATS Course Financial Decision Making, I amyour Resource Personnel Zaheer Ahmed Swati. The
main objective of this course is to explain the techniques, tools and strategies needed for taking financial decisions goals
in the light of risk and return tradeoff. Another important purpose of this course is to explain the linkage between modern
theories of finance and analytical techniques used by the investors for evaluating securities.

1.1 Finance
Finance is the study of how individuals, institutions, government and businesses acquire, spend and manage money
and other financial resources
Finance is the science of managing financial resources in an optimal pattern i.e. the best use of available resources
Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers.
Finance consists of three interrelated areas:








1.1.1 Financial Management
Financial Management involves the arrangement of unarranged financial resources of the firms
It studies how to best find and use investments and financing opportunities in an ever-changing and increasingly
complex environment of the business. Financial Management involves
Acquisition
Financing
Management of Assets (with some overall goals in mind)
Source and Use of fund both in Short Termand Long Term

1.1.2 Financial Markets and Financial Institutions
Financial market is a market for creation and exchange of financial assets
There are different ways of classifying financial market






o Equity market is a market for internal or floating claimlike common share and preference shares
o Debt market is a market for external or fixed claims like bonds and debenture

Nature of Claim
Equity Market Debt Market
Finance
Financial
Management
Market &
Institutions

Investment
Finance


Work Book Foundation Level 3 Introduction to FDM

Unit 1




o Money market is market for short termfinancial claims of debts (within one year)
o Capital market is market for long term financial claims of debts and equity (beyond one year)





o A market that involves the issue of new securities by the borrower in return for cash frominvestors
(Capital formation occurs) is called primary market
o Secondary Market deals of buying and selling of existing securities. Funds flow frombuyer to seller.
Seller becomes the new owner of the security (Capital formation is not occur)





o A Cash or Spot Market is one where delivery occurs immediately
o Forward and Future Market is one where delivery occurs at a pre-determined time in future

Financial Institution deals with Finance
Channeling Finance from Saving Surplus to Saving Deficit Unit of Economy
Concerned with Financial Instrument
Accept deposit and Advance loan, difference is Spread















Maturity of Claim
Money Market Capital Market
Issuance of Claim
Primary Market Secondary Market
Timing of Claim
Cash or Spot Market Forward or Future Market
P. Off.
N. Sav.
KSE 100
LSE 25
ISE 10
Public
Private
Foreign
Specialized
Microfinance
DFIs
Inv. B
Lea. C
Modaraba Co.
HBFC
Mutual Fund
Discount Houses
Non LifeInsurance
Life Insurance
Reinsurance
FINANCIAL INSTITUTIONS OF PAKISTAN
Banks NBFIs CDNS Insurance T. Moneylender Capital Market
Finance


Work Book Foundation Level 4 Introduction to FDM

Unit 1

1.1.3 Investment
Investment focuses on the decisions of both individual and institutional investors as they choose assets for their
Investment Portfolios.
Use money to make or gain more money
Commitment to fund assets
Purchase of Capital Goods

1.2 Decision Making
Decision Making is the study of identifying and choosing alternatives based on the values and preferences of the
decision maker
Making a decision implies that there are alternative choices to be considered, and in such a case we want not
only to identify as many of these alternatives as possible but to choose the one that best fits with our goals,
objectives, desires, values, and so on.














1.3 Financial Decision Making
Financial Decision Making is the study of planning, evaluating and drawing decisions in the course of business.
What type of investments do we need? In other words, what type of assets will be required to support the
business
Where the money will come from? Sources of investments to be determined in black and white
How we will finance our day to day monetary matters like purchase of raw materials and payment of salaries etc
There are three types of financial decisions available for business











Financial Decisions
Investment Decisions Financing Decisions
Assets management Decisions
Alternative
Evaluation
Decision Making Process
Recognize
Need
Decision
Making
Post-decision
Evaluation
Search
Alternatives
Finance


Work Book Foundation Level 5 Introduction to FDM

Unit 1
1.3.1 Investment Decisions
Determination of total assets
Composition of assets

1.3.2 Financial Decisions
Determine mix of Finance (Debt and Equity)
Dividend Policy

1.3.2 Assets Management Decisions
Efficiently and Effectively
Current Assets
Fixed or Long TermAssets

1.4 Goals of the firm
Maximize the wealth of shareholders
Represent by Market Price of Share
Reflect the Investing, Financing and Assets Management Decisions
Profit maximization is short termgoal of business

1.5 Organizational Structure

1.6 Business Environment
Business environment consists of internal and external environment

1.6.1 Internal Business Environment: Internal environment of business normally consists of the following
(a) Finance (b) Marketing
(c) Human Resources (d) Operations (Production, Manufacturing)

1.5.2 External Business Environment: The following business environment factors outside an organization have a
profound effect on the functions and operations of an organization.
(a) Customers (b) Suppliers
(c) Competitors (d) Government/Legal Agencies & Regulations
(e) Macro Economy/Markets

Finance


Work Book Foundation Level 6 Introduction to FDM

Unit 1

1.7 Separation of Ownership and Control

1.8 Real Assets and Financial Assets
Real assets are tangible things owned by persons and businesses
Residential structures and property
Major appliances and automobiles
Office towers, factories, mines
Machinery and equipment

Financial assets are what one individual has lent to another
Consumer credit / Insurance Policy
Loans / Mortgages
Shares / Bonds

1.9 Agency Theory
Agency theory, developed in the 1970s, a theory concerning the relationship between a principal (shareholder)
and an agent of the principal (company's managers)
Principal hires an agent to represent their interests (Shareholders vote for the board of directors, who in turn hire
the management team)
Issues such as remuneration, accounting techniques or risk-taking are among the major concerns of both parties
in this relationship
Conflict of interest between principal and agent because managerial goals may be different from shareholder
goals
Incentives can be used to align management and stockholder interests
The incentives need to be structured carefully to make sure that they achieve their goal
The threat of a takeover may result in better management
Finance


Work Book Foundation Level 7 Introduction to FDM

Unit 1

END-OF-UNIT ASSIGNMENT
(MULTIPLE CHOICE QUESTIONS)
1. Which of the following is an advantage of a corporation that is not an advantage as in a partnership?
(a) Limited liability (b) Capital shortage (c) Single taxation (d) All of the above
2. __________ is concerned with the acquisition, financing, and management of assets with some overall goal in mind?
(a) Profit maximization (b) Financial management (c) Agency theory (d) Social responsibility
3. Which one of the following can issue the corporate bond?
(a) Individuals (b) Government (c) Public limited companies (d) All of before
4. Which is the treasurers responsibility for managing the firms cash and marketable securities?
(a) Planning its capital structure (b) Overseeing the corporate pension fund
(c) Selling stocks and bonds to raise capital (d) All of the above
5. What should be the long termfocal point of financial management in a firm?
(a) The number and types of products or services provided by the firm
(b) The creation of value for shareholders
(c) The minimization of the amount of taxes paid by the firm (d) The profits earned by the firm
6. __________are analysts who use information concerning current and prospective profitability of firms to assess the
firm's fair market value?
(a) Credit analysts (b) Systems analysts (c) Fundamental analysts (d) Technical analysts
7. Financing decision determines?
(a) Current asset (b) Fix asset (c) Equity (d) Mix of finance
8. In finance, we refer to the market where new securities are bought and sold for the first time?
(a) Money market (b) Capital market (c) Primary market (d) Secondary market
9. Which of the following statements is most correct?
(a) One of the way in which firm can mitigate or reduce agency problems between bondholders and stockholders is by
increasing the amount of debt in thecapital structure
(b) Managerial compensation can be structured to reduce agency problems between stockholders & managers
(c) All of above statements are incorrect (d) All of the statements above are correct
10. The ____________ is responsible for accounting maintaining and auditing of the accounts?
(a) Controller (b) Treasurer (c) Shareholders (d) Board of Directors
11. What are the three interrelated areas of finance?
(a) Financial markets, option and forwards (b) Banking, financial institutions and swap currency
(c) Investment, Financial management and Financial market & Financial institution (d) All of above
12. Which of the following is the activity in which finance people are involved?
(a) Investing decisions (b) Marketing decisions (b) Promotion decisions (d) Non of Above
13. Profit maximization is a?
(a) Long termconcept (b) Short term concept (c) Both a & b (d) None
Finance


Work Book Foundation Level 8 Introduction to FDM

Unit 1

14. The goal of fundamental analysts is to find securities?
(a) Whose intrinsic value exceeds market price (b) With a positive present value of growth opportunities
(c) With high market capitalization rates (d) All of the above
15. Which of the following is not normally a responsibility of the controller of the modern corporation?
(a) Budgets and forecasts (b) Asset management (c) Financial reporting (d) Cost accounting
16. Which of the following is a major disadvantage of the corporate formof organization?
(a) Double taxation on dividend (b) Inability of the firm to raise large capital
(c) Limited liability of shareholders (d) Perpetual life of the company
17. What is potentially the biggest advantage of a small partnership over a sole proprietorship?
(a) Unlimited liability (b) Single tax filing (c) Difficult ownership resale (d) Raising capital
18. A company's ____________ are potentially the most effective instrument of good corporate governance?
(a) Common stock shareholders (b) Board of directors
(c) Top executive officers (d) All of the above option
19. ______________ is responsible for working capital management, inventory controlling and financial planning, etc?
(a) Shareholders (b) Controller (c) Treasurer (d) Board of Directors
20. _____________ refers to meeting the needs of the present without compromising the ability of future generations to
meet their own needs?
(a) Corporate Social Responsibility (CSR) (b) Sustainability
(c) Convergence (d) Green Economics
21. A partnership under which the participants have contractually agreed to contribute specified amounts of money and
exercise in exchange for stated proportions of ownership and profit?
(a) Limited partnership (b) Joint venture (c) Both a and b (d) Company
22. Combination of two or more firms, the resulting firmmaintains the identity of one of the firms usually the larger?
(a) Joint venture (b) Partnership (c) Merger (d) Consolidation
23. The Financial institutions makes it easier to trade because it?
(a) Facilitate Payments (b) Channels Funds fromSavers to Borrowers
(c) Enables Risk Sharing (d) All of the given options
24. The controllers responsibilities are primarily in nature, while the treasurer's responsibilities are primarily related to?
(a) Operational; Financial management (b) Financial management; Accounting
(c) Accounting; Financial management (d) Financial management; Operations
25. If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be
referred to as what type of transaction?
(a) It is primary market transaction (b) A secondary market transaction
(c) A money market transaction (d) A futures market transaction
26. The purpose of financial markets is to?
(a) Increase the price of common stocks (b) Lower the yield on bonds
(c) Allocate savings efficiently (d) Control inflation
Finance


Work Book Foundation Level 9 Introduction to FDM

Unit 1

27. Financial decisions are concerned with which of the following?
(a) Making investment decisions that optimize economic value
(b) Making asset management decisions that optimize economic wealth
(c) Raising capital that is needed for growth (d) All of the above
28. A (n) ________ would be an example of a principal, while a (n) _________ would be an example of a debt holder?
(a) Shareholder; manager (b) Shareholder; bondholder
(c) Accountant; bondholder (d) Manager; owner
29. Which of the following is regulator of financial institutions?
(a) Stock exchanges (b) SECP (c) Central Banks (d) PTA
30. The combination of two or more firms to forma completely new corporation?
(a) Merger (b) Joint venture (c) Consolidation (d) All of the above options
31. The ability to sell a significant volume of securities in a short period of time in the secondary market without
significant price Concession?
(a) Maturity (b) Marketability (c) Both a & b (d) None
32. A Financial institution that underwrites new securities for resale?
(a) Financial intermediaries (b) Mortgage Banker (c) Investment Banker (d) None
33. What is the most appropriate goal of the firm?
(a) Shareholders wealth maximization (b) Profit maximization
(c) Stockholders maximization (d) EPS maximization
34. Which of the following statements always apply to corporations?
(a) Limited life (b) Limited liability (c) Single taxation (d) None
35. Markets for newly issued financial instruments with maturities shorter than one year are?
I. Money markets
II. Capital markets
III. Primary markets
IV. Secondary markets
(a) Both I and III (b) Both I and IV (c) Both II and III (d) Both II and IV
36. Which of the following statements is most correct?
(a) One of the way in which firms can mitigate or reduce agency problems between bondholders and stockholders is by
increasing the amount of debt in thecapital structure
(b) The threat of takeover is one way in which the agency problembetween stockholders and managers can be reduced
(c) Managerial compensation can be structured to reduce agency problems between stockholders and managers
(d) Statements b and c are correct
37. Which of the following is a capital market instrument?
(a) A certificate of deposit (b) Bank loan (c) Commercial paper (d) Bonds
38. Which of the following is a money market instrument?
(a) Treasury bill (b) Stock (c) A corporate bond (d) Stock
Finance


Work Book Foundation Level 10 Introduction to FDM

Unit 1

39. Which of the following requires financial intermediaries?
(a) Direct finance (b) Indirect finance (c) Direct purchase of retail goods (d) None of the above
40. Which of the following is a depository financial institution?
(a) A savings bank (b) An investment bank (c) A finance company (d) A pension fund
41. Which of the following is not a depository financial institution?
(a) A savings and loan association (b) A credit union (c) A mutual fund company (d) Commercial bank
42. Until this year, Cheers Inc. was organized as a partnership. This year, the partners have decided to organize the
business as a corporation. As a result of this change in organizational form, which of the following statements is
most correct?
(a) Cheers shareholders (the ex-partners) will now have limited liability
(b) Cheers will now be subject to fewer regulations (c) Cheers will now pay less in taxes
(d) Cheers will now find it more difficult to raise additional capital
43. The primary goal of the financial manager of a profit-seeking organization is to?
(a) Maximize market share (b) Maximize the owners wealth
(c) Increase sales and profit (d) Have healthy cash flow
44. Finance has its origins in?
(a) Economics and statistics (b) Accounting and sociology
(c) Accounting and economics (d) Psychology and mathematics
45. Finance is?
(a) The study of how individuals, institutions, governments, and businesses acquire, spend, and
manage money and other financial assets
(b) The study of how businesses acquire, spend, and manage money and other financial assets
(c) The study of how governments and businesses acquire, spend, and manage money and other financial
assets (d) None of the above
46. Crucial elements of the financial environment and well-developed financial system include?
(a) Financial institutions (b) Financial markets
(c) Investment and financial management (d) All of the above
47. An area of finance that involves the sale or marketing of securities, the analysis of securities, and the management of
investment risk through portfolio diversification is referred to as?
(a) Financial management (b) Investments (c) Financial institutions (d) Financial market
48. The financial environment?
(a) Encompasses the financial markets and global interactions that contribute to an efficiently operating
economy.
(b) Encompasses the financial institutions and financial markets that contribute to an efficiently operating
economy.
(c) Encompasses the financial system, financial institutions, financial markets, business firms,
individuals, and global interactions that contribute to an efficiently operating economy
(d) None of the above
Finance


Work Book Foundation Level 11 Introduction to FDM

Unit 1

49. An effective financial systemmust have?
(a) Several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies
(b) An efficient monetary systemfor creating and transferring money
(c) Financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and
businesses (d) All of the above
50. ________________ is the study of how individuals, institutions, governments, and businesses acquire, spend, and
manage financial resources?
(a) Finance (b) Financial institutions (c) Financial markets (d) Financial management
51. Financial markets encourage investment by?
(a) Providing capital at lower rates than provided by banks
(b) Providing electronic execution of transactions which are faster and cheaper than other methods
(c) Providing the means for savers to easily and quickly convert financial assets into cash when
needed (d) None of the above
52. The possible conflict between managers and owners is sometimes called the?
(a) Principal-subordinate problem (b) Principal-agent problem
(c) Boss-subordinate problem (d) Boss-agent problem
53. An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among
investors, businesses, and governments is called?
(a) Financial management (b) Investments (c) Business Finance (d) None of before
54. An area of finance that involves financial planning, asset management and fund-raising decisions to enhance the
value of businesses is called?
(a) Financial management (b) Investments (c) Financial institutions (d) Financial markets
55. An area of finance that involves the study of organizations or intermediaries that help the financial systemoperate
efficiently and transfer funds fromsavers and investors to individuals, businesses, and governments that seek to
spend or invest the funds in physical assets (inventories, buildings, and equipment) is called?
(a) Financial management (b) Investments (c) Business Finance (d) Financial markets
56. ____________________ provide the record-keeping mechanism for showing ownership of the financial instruments
used in the flow of financial funds between savers and borrowers and record revenues, expenses, and profitability of
organizations that produce and exchange goods and services?
(a) Financial Managers (b) Accountants (c) Operations Managers (d) Statisticians
57. The ______________ is a termused to describe the financial system, institutions, markets, businesses, individuals,
and global interactions that help the economy operate efficiently?
(a) Financial environment (b) Regulatory environment
(c) International environment (d) Operating environment
58. ___________________ are intermediaries, such as banks, insurance companies, and investment companies that
engage in financial activities to aid the flow of funds fromsavers to borrowers or investors?
(a) Financial Institutions (b) Financial market organizations
(c) Federal agencies (d) International financial organizations
Finance


Work Book Foundation Level 12 Introduction to FDM

Unit 1

59. Banking Companies formed in Pakistan under law which is?
(a) Banking Companies Ordinance 1962 (b) Company Act 1932
(c) Company Ordinance 1984 (d) Banking Companies Act 1962
60. The issuing of new securities, mortgages, and other claims to wealth takes place in the?
(a) Secondary market (b) Money market (c) Primary market (d) Securities market
61. ____________________ in business involves making decisions relating to the efficient use of financial resources in
the production and sale of goods and services?
(a) Financial management (b) Financial economics
(c) Investment management (d) Asset allocation
62. ________________ involves making decisions relating to issuing and investing in stocks and bonds?
(a) Financial economics (b) Financial management
(c) Investment management (d) Asset allocation
63. Maximizing _____________________ is accomplished through effective financial planning and analysis, asset
management, and the acquisition of financial capital?
(a) The value of perquisites (b) the owners wealth
(c) The firm's profits (d) The firm's earnings
64. _____is the study of financial planning, asset management and fund raising by businesses and financial institutions?
(a) Accounting (b) Controller (c) Business Finance (d) All of before
65. Company formed in Pakistan under law which is?
(a) Company Ordinance 1932 (b) Company Act 1932
(c) Company Ordinance 1984 (d) Company Act 1984
66. Which of the following is regulator of companies?
(a) Stock exchanges (b) SECP (c) Central Banks (d) PTA
67. The theory of finance that "management objectives may differ fromowner objectives" implies that owner returns
may be enhanced as a result of manager objectives that differ fromtheir own is called?
(a) Principal-subordinate theory (b) Boss-agent theory
(c) Boss-subordinate theory (d) Principal-agent theory
68. ________theory implies that the prices of securities reflect all information available to the public and that when new
information becomes available, prices quickly change to reflect that information?
(a) Market theory (b) Financial system theory
(c) Efficient market theory (d) Principal-agent theory
69. _________ is the study of how individuals prepare for financial emergencies, protect against premature death and
property losses, and accumulate wealth?
(a) Financial management (b) Personal Finance (c) Business Finance (d) Public Finance
70. Among the pairs given below select a (n) example of a principal and a (n) example of an agent respectively?
(a) Shareholder; manager (b) Manager; owner
(c) Accountant; bondholder (d) Shareholder; bondholder