Introduction to Business Finance

An Overview
MG-213
 What is Finance
Finance is the art and science of managing money.

Financial services is concerned with the design and

delivery of advice and financial products to
individuals, businesses and governments.

Financial managers actively manage the financial

affairs of any type of business, namely, financial and
non-financial, private and public, large and small,
profit-seeking and not-for-profit
 Financial Manager
• Financial management/corporate finance/managerial finance is
concerned with the duties of the finance manager in a business
firm.
He performs such varied tasks as:
 budgeting,
 financial forecasting,
 cash management,
 credit administration,
 investment analysis.

The recent trends towards globalization of business activity has

created new demands and opportunities in managerial finance.
 Types of Analysis
• Marginal analysis suggests that financial decisions
should be made on the basis of comparison of
marginal revenues and marginal costs/added
benefits exceed added costs.
• Accrual method recognizes revenue at the point
of sale and expenses when they are incurred.
• Cash flow method recognizes revenues and
expenses only with respect to actual inflows and
outflows of cash.
 Investment Decisions
• Investment decision relates to the selection of
assets.
• Capital budgeting relates to the selection of an
asset whose benefits would be available over
the project's life.
• Working capital management is concerned
with the management of current assets.
 Financing Decisions
• Financing decision relates to the choice of the
proportion of debt and equity sources of
financing.
• Quality refers to the degree of certainty with
which benefits can be expected.
 Table 1.1 Recent Investment/
Financing Decisions
Company

Boeing (U.S.) Delivers first Dreamliner after investing a Reinvests $1.7 billion of profits.
reported $30 billion in development costs.
ExxonMobil Spends $7 billion to develop oil sands at Fort Spends $12 billion buying back shares.
(U.S.) McMurray in Alberta.
GlaxoSmith- Spends $4 billion on research and Pays $3.2 billion as dividends.
Kline (UK) development for new drugs.
LVMH (France) LVMH acquires the Italian Jeweler, Bulgari, Pays for the acquisition with a mixture of cash and
for $5 billion. shares.
Procter & Spends $8 billion on advertising. Raises 100 billion Japanese yen by an issue of 5-
Gamble (U.S.) year bonds.
Tata Motors Opens a plant in India to produce the world's Raises $400 million by the sale of new shares.
(India) cheapest car, the Nano. The facility costs
$400 million.
Union Pacific Invests $330 million in 100 new locomotives Repays $1.4 billion of debt.
(U.S.) and 10,000 freight cars and chassis.
Vale (Brazil) Opens a copper mine at Salobo in Brazil. The Maintains credit lines with its banks that allow the
project cost nearly $2 million. company to borrow at any time up to $1.6 billion.
Walmart (U.S.) Invests 12.7 billion, primarily to open 458 Issues $5 billion of long-term bonds in order to
new stores around the world. repay short-term commercial paper borrowings.
 Risk
• Risk is the chance that actual outcomes may
differ from those expected.
• Risk-averters want to avoid risk
• Risk and Return tradeoff.
• Economic value added is equal to after-tax
operating profits of a firm less the cost of
funds used to finance investments.
• Stakeholders include groups such as
employees, customers, suppliers, creditors,
owners and others who have a direct link to
the firm.
 Agency Conflict
• Agency problem is the likelihood that
managers may place personal goals ahead of
corporate goals.
• Hostile takeover is the acquisition of the firm
(target) by another firm (the acquirer) that is
not supported by management.
• Agency costs are costs borne by shareholders
to prevent/minimise agency problems as to
contribute to maximise owners wealth.
• Fidelity bond is a contract in which a bonding company
agrees to re-imburse a firm upto a stated amount for
financial losses caused by dishonest acts of managers.
• Incentive plans tie management compensation to
share price .
• Stock options allow management to purchase shares at
a special / concessional price.
• Performance plans compensate management on the
basis of proven performance.
• Performance shares are given to management for
meeting the stated performance goals.