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An Overview of Managerial
Finance
1-1
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 family
1-3
Definition
Objective
Sources of fund
Issuing new notes and coins
Foreign borrowings
Confidentiality
Bankruptcy
Income & expenditure decision
1-4
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
Functions of Managerial
Finance
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. To
predict future profit is difficult as Profit=TR-TC. TR=P.Q.
TC=FC+TVC.
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.
1-7
Alternative Forms of
Business Organization
Sole proprietorship
Partnership
Corporation
1-8
Advantages
Ease of formation
Subject to few government regulations
No corporate income taxes
Disadvantages
Corporation
Advantages
Unlimited life
Easy transfer of ownership
Limited liability
Raising huge capital
Formal monitoring by government agencies
Disadvantages
Double taxation
Cost of set-up and report filing
1-10
A graphical approach to
wealth maximization
S2
S1
W2=P2
W1=P1
D2
D1
Q1
Quantity of stock
1-12
Goal of a firm:
Maximization
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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