Lecture 01 - Principles of Finance

Principles of Finance
Debashis Saha
BBM (India), MBA (Germany)
Assistant Professor,
Department of Finance & Banking,
Jahangirnagar University
CAREER PROFILE
S.S.C. St. Gregory’s High School, Dhaka

H.S.C. Notre Dame College, Dhaka
Bachelor Bachelor of Business Management,
Bangalore University, India
Masters MBA in Financial Management,
Coburg University, Germany
Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-2

Course Organization
My contacts: debashissaha1986@gmail.com
Office hour: Monday &Thursday,
8:30 am to 12 pm
 Class Test ?
 Mid term ?
 Final ?
 Attendance ?
 Assignment/Presentation/
Class Performance/Quiz ?
Total 100

Reference
• Financial Management : Theory & Practice, 9th

edition, Prasanna Chandra
• Financial Management: Theory and Practice, 15th
edition Eugene F. Brigham & Michael C.
Ehrhardt
• Financial Management, 11th Edition, I M Pandey
• Principles of Managerial Finance,13th Edition, L.
J. Gitman

Content
Sl No. Title of the Topics
01 Nature of Financial Management
02 Concepts of Value & Return
03 Valuation of Bond & Stocks
04 Risk & Return
05 Capital Budgeting Decision
06 Cost of Capital
07 Financial & Operating Leverage
08 Capital Structure: Theory & Practice
09 Dividend Theory & Policy
10 Financial Statement Analysis
Lecture 01
Nature of FinancE

What is Finance?
• Finance can be defined as the science and art of managing

money.
R. A. Stevenson “ Finance is the science of knowing
how to predict financial consequences and the art of
knowing when to predict”.
• At the personal level, finance is concerned with individuals’
decisions about how much of their earnings they spend, how much
they save, and how they invest their savings.
• In a business context, finance involves the same types of decisions:
how firms raise money from investors, how firms invest money in
an attempt to earn a profit, and how they decide whether to reinvest
profits in the business or distribute them back to investors.
Lawrence J. Gitman has defined finance as 'an art and science of managing money'. It implies
that finance is Both art and science. Finance is a matured science since it provides
knowledge as to how and at what time a firm should invest to outstrip other firms.
On the other hand, finance is also an art. In modern time, finance has become more analytical.
The new financial theories have been developed. Many data have been developed to prove
these theories right or wrong. the financial mangers should examine the different
alternatives related to the raising and managing money. they should formulate the
models to predict the results obtained from the use of any one alternative.
In this way, the new theories, models and methods have made finance scientific. But the
financial theories cannot be accurately compared with the 'Scientific Method' that applies to
physics science. Physics predicts as to what happens from an action. for example, physics
says that if a ball is thrown upward, that eventually falls down. This is not true in finance. For
example, the financial analyst can predict from the historical trend that the rate of interest will
change in a definite pattern. But, in reality, the rate of interest may change in different pattern.
Despite this, financial guidelines and theories are useful in financial decision making. But
any decision should be made by mixing those guidelines with self-skill. According to R.A.
Stevenson, in modern time finance is a 'scientific art'. He opines 'finance is the science of
knowing how to predict financial consequences and the art of knowing when to act'. It assists
the financial managers of today to avoid the difficulties of tomorrow.
Finance, there are three basic components:
 First, there are financial instruments. These instruments—stocks
and bonds—are recorded evidence of obligations on which
exchanges of resources are founded. Effective investment
management of these financial instruments is a vital part of any
organization's financing activities.
 Second, there are financial markets, which are the mechanisms
used to trade the financial instruments.
 Finally, there are banking and financial institutions, which
facilitate the transfer of resources among those buying and selling
the financial instruments.

Finance is concerned with the process institutions, markets and
instruments involved in the transfer of money among individuals,
business and governments.‖
–Gitman
―Finance is concerned with a decision about money or more
appropriately cash flows.‖
–Scott and Brigham
Finance can be used to describe the activities of a firm attempting to
raise capital through the sale of stocks, bonds, or other promissory
notes.

Some prefer to divide finance into three distinct categories:
 PUBLIC FINANCE: deals with the allocation of resources to
meet the set budgets for government entities. "The investment into
the nature and principles of state expenditure and state revenue is
called public finance".
 CORPORATE FINANCE :dealing with the sources of funding
and the capital structure of corporations, the actions that managers
take to increase the value of the firm to the shareholders, and the
tools and analysis used to allocate financial resources.
 PERSONAL FINANCE: deals with the process of optimizing
finances by individuals such as people, families and single
consumers.

Why Study Finance?
Marketing
– Budgets, marketing research, marketing financial products
Accounting
– Dual accounting and finance function, preparation of
financial statements
Management
– Strategic thinking, job performance, profitability
Personal finance
– Budgeting, retirement planning, college planning, day-to-
day cash flow issues

What Is Financial Management?
Financial management is used to help make three

major decisions:
1. Which assets should we invest in?
2. How will we pay for these assets?
3. What should we do with the earnings generated
by the assets?
These are called the investment, financing, and
dividend decisions.

Financial Management
"Financial management is that activity of management which is

concerned with the planning, procuring and controlling of the firm's
financial resources. " By Deepika &Maya Rani
“Financial Management is the Operational Activity of a business that
is responsible for obtaining and effectively utilizing the funds
necessary for efficient operation.” By Joseph Massie
“Financial Management is an area of financial decision making,
harmonizing individual motives and enterprise goals." -By Weston
and Brigham
“Financial management is the area of business management devoted
to a judicious use of capital and a careful selection of sources of
capital in order to enable a business firm to move in the direction of
reaching its goals.” – by J.F.Bradlery
―Financial management is the application of the planning and control
function to the finance function.” – by K.D. Willson
“Financial management may be defined as that area or set of administrative
function in an organization which relate with arrangement of cash and
credit so that organization may have the means to carry out its objective as
satisfactorily as possible." - by Howard & Opton.
Financial management is a body of business concerned with the efficient and
effective use of either equity capital, borrowed cash or any other business
funds as well as taking the right decision for profit maximization and value
addition of an entity.- Kepher Petra; Kisii University.
"Financial management refers to the proper and efficient use of money
and it plays a significant role in analyzing to invest in profitable
business enterprise. Return on Investment must be greater than the
invested amount."
Evolution of Financial
Management
Financial management emerged as a distinct field of study at the turn of this 20th
century. Its evolution may be divided into three broad phases the traditional phase,
the transitional phase, and the modern phase.
The traditional phase lasted for about four decades. The following were its important
features:
1. The focus of financial management was mainly on certain episodic events like
formation, issuance of capital, major expansion, merger, reorganization, and
liquidation in the life cycle of the firm.
2. The approach was mainly descriptive and institutional. The instruments of
financing, the institutions and procedures used in capital markets, and the legal
aspects of financial events formed the core of financial management.
3. The outsiders point of view was dominant. Financial management was viewed
mainly from the point of the investment bankers, lenders, and other outside
interests
The transitional phase :early 1940 and continues through the early 1950s. Though the nature of
financial management during this phase was similar to that of the traditional phase, greater
emphasis was placed on the day to day problem faced by the finance managers in the area of
funds analysis, planning, and control. The focus shifted to working capital management.
The modern phase begin in mid 1950s and has witnessed an accelerated pace of development
with the infusion of ideas from economic theories and applications of quantitative methods of
analysis. The distinctive features of modern phase are:
• The central concern of financial management is considered to be a rational matching of funds
to their uses so as to maximize the wealth of current shareholders-in the light of
appropriate decision criteria*
• The approach of financial management has become more analytical and quantitative*
The point of view of the financial decision maker has become dominant Since the beginning of the
modern phase many significant and seminal developments have occurred in the fields of capital
budgeting, capital structure theory, efficient market theory, optional pricing theory, agency
theory, arbitrage pricing theory, valuation models, dividend policy, working capital
management, financial modeling, and behavioral finance.

Financial Manager
Financial managers are responsible for the financial health

of an organization. They produce financial reports, direct
investment activities, and develop strategies and plans for
the long-term financial goals of their organization.
Financial managers work in many places, including banks
and insurance companies.
Financial managers increasingly assist executives in making
decisions that affect the organization, a task for which they
need analytical ability and excellent communication skills.

What does a Financial Manager
do?
The role of the financial manager, particularly in business, is changing in response to
technological advances that have significantly reduced the amount of time it takes
to produce financial reports. Financial managers’ main responsibility used to be
monitoring a company’s finances, but they now do more data analysis and advise
senior managers on ideas to maximize profits. They often work on teams, acting as
business advisors to top executives. Financial managers typically do the following:
• Prepare financial statements, business activity reports, and forecasts
• Monitor financial details to ensure that legal requirements are met
• Supervise employees who do financial reporting and budgeting
• Review company financial reports and seek ways to reduce costs
• Analyze market trends to find opportunities for expansion or for acquiring other
companies
• Help management make financial decisions
Financial managers also do tasks that are
specific to their organization or industry. For
example, government financial managers must
be experts on government appropriations
and budgeting processes, and healthcare
financial managers must know about
issues in healthcare finance. Moreover,
financial managers must be aware of special
tax laws and regulations that affect their
industry.
Corporate Organization

Financial Manager
The top financial manager within a firm is usually the Chief

Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting, financial
accounting, and data processing

Types of financial managers:
 CFO A chief financial officer (CFO) is the senior executive responsible for managing the
financial actions of a company. The CFO's duties include tracking cash flow and financial
planning as well as analyzing the company's financial strengths and weaknesses and
proposing corrective actions. The CFO is similar to a treasurer or controller because he is
responsible for managing the finance and accounting divisions and for ensuring that the
company’s financial reports are accurate and completed in a timely manner.
 Controllers direct the preparation of financial reports that summarize and forecast the
organization's financial position, such as income statements, balance sheets, and analyses
of future earnings or expenses. Controllers also are in charge of preparing special reports
required by governmental agencies that regulate businesses. Often, controllers oversee the
accounting, audit, and budget departments.
 Treasurers and finance officers direct their organization's budgets to meet its financial
goals. They oversee the investment of funds. They carry out strategies to raise capital
(such as issuing stocks or bonds) to support the firm's expansion. They also develop
financial plans for mergers (two companies joining together) and acquisitions (one
company buying another).

Types of financial managers:

Objectives of Financial
Management
1. Profit maximization happens when marginal cost is equal to marginal revenue.
This is the primary objective of Financial Management.
2. Wealth maximization means maximization of shareholders' wealth. It is an
advanced goal compared to profit maximization.
3. Survival of company is an important consideration when the financial manager
makes any financial decisions. One incorrect decision may lead company to be
bankrupt.
4. Maintaining proper cash flow is a short run objective of financial management. It is
necessary for operations to pay the day-to-day expenses e.g. raw material,
electricity bills, wages, rent etc. A good cash flow ensures the survival of
company.
5. Minimization on capital cost in financial management can help operations gain
more profit.
6. It is vague :- There are several types of profits before interest, depreciation and
taxes,profit before taxes , profit after taxes , cash profit etc
Goal of the Firm:
Maximize Profit?
Nick Dukakis, the financial manager of Neptune Manufacturing, a
producer of marine engine components, is choosing between two
investments, Rotor and Valve. The following table shows the EPS
that each investment is expected to have over its 3-year life.
Which Investment is Preferred?

In terms of the profit maximization goal, Valve would be preferred
over Rotor, because it results in higher total earnings per share over
the 3-year period ($3.00 EPS compared with $2.80 EPS).
Profit maximization may not lead to the highest possible share price
for at least three reasons:
1. Timing is important—the receipt of funds sooner rather than later
is preferred
2. Profits do not necessarily result in cash flows available to
stockholders
3. Profit maximization fails to account for risk

Timing
Because the firm can earn a return on funds it receives, the receipt of funds sooner rather than
later is preferred. In our example, in spite of the fact that the total earnings from Rotor are
smaller than those from Valve, Rotor provides much greater earnings per share in the first
year. The larger returns in year 1 could be reinvested to provide greater future earnings.
Cash Flows
Profits do not necessarily result in cash flows available to the stockholders. Owners receive
cash flow in the form of either cash dividends paid them or the proceeds from selling their
shares for a higher price than initially paid. Greater EPS do not necessarily mean that a
firm’s board of directors will vote to increase dividend payments.
Higher EPS do not necessarily translate into a higher stock price. Firms sometimes
experience earnings increases without any correspondingly favorable change in stock price.
Only when earnings increases are accompanied by increased future cash flows would a
higher stock price be expected.

Risk:
Profit maximization also disregards risk—the chance that actual
outcomes may differ from those expected. A basic premise is that a
tradeoff exists between return (cash flow) and risk. Return and risk
are in fact the key determinants of share price, which represents the
wealth of the owners in the firm.
Cash flow and risk affect share price differently: Higher cash flow is
generally associated with a higher share price. Higher risk tends to
result in a lower share price because the stockholder must be
compensated for the greater risk.

Goals of the Corporate Firm
Broadly, there are two alternative

objectives that a business firm
can pursue
Profit Maximization
Wealth Maximization
Department of Finance & Banking, Jahangirnagar University

Profit Maximization
It is a term which denotes the maximum profit to

be earned by an organization in a given period
of time.
The profit maximization goal implies that the
Investment, Financing and Dividend decisions
of the enterprise should be oriented to profit
maximization.
Merits of Profit Maximization
• Best Criterion on decision making.

• Efficient allocation of resources.
• Optimum utilization
• Operational efficiency
Drawbacks of Profit
Maximization
• It ignores time value of money.

• It is vague conceptually.
• It ignores the risk factor.
• It may tempt to make such decisions which may in the
long run prove disastrous.
• Its emphasis is generally on Short run projects.
• In the new business environment Profit maximization
is regarded as unrealistic, difficult, inappropriate
and immoral.
Wealth Maximization
• Fundamental objective of wealth maximization is to

maximize the market value of the firm’s shares.
• Maximizes the net present value of a course of action
to the shareholders.
• Accounts for the timing and risk of expected benefits.
• Benefits are measured in terms of cash flows.
Merits of Wealth Maximization
The wealth maximization objective takes care of the:

 Shareholder’s interest
 lender’s or creditor’s interest
Worker’s or employees’ interest
It also ensures fair return to the shareholders,
building up reserves for growth and expansion,
ensuring financial discipline in the management.
Merits of Wealth Maximization
• It focuses on the long term.

• It takes into account the time value of money.
• It considers risk.
• It maintains market price of the shares of the
organization.
• It recognizes the value of regular dividend
payments.
Conflict
Profit Maximization Wealth Maximization

Its main objective is to earn large Its main objective is to achieve
amount of profits. highest market value of common
stock.
It emphasizes short term
It emphasizes long term
It ignores time value of money.
It considers time value of money.
It ignores risk and uncertainty.
It recognizes risk and uncertainty.
It ignores timimg of return
It recognizes the timings of return.
Goal of the Firm:
Maximize Shareholder Wealth
Decision rule for managers: only take actions that are
expected to increase the share price.

What companies say about
their corporate goal*
Cadbury Schweppes: “governing objective is growth
in shareowner value”
Credit Suisse Group: “achieve high customer
satisfaction, maximize shareholder value and be an
employer of choice”
Dow Chemical Company: “maximize long-term
shareholder value”
ExxonMobil: “long-term, sustainable shareholder
value”
*Refer to text for additional details

Goal of the Firm:
What About Stakeholders?
• Stakeholders are groups such as employees, customers, suppliers,
creditors, owners, and others who have a direct economic link to the
firm.
• A firm with a stakeholder focus consciously avoids actions that
would prove detrimental to stakeholders. The goal is not to
maximize stakeholder well-being but to preserve it.
• Such a view is considered to be "socially responsible.―
• It is expected to provide long-run benefit to shareholders by
maintaining positive stakeholder relationships. Such relationships
should minimize stakeholder turnover, conflicts, and litigation.

• Risk-Return Tradeoff – the more risk one is willing
to accept, the more return that should be expected.
• Time Value of Money – a dollar in hand today is

worth more than a dollar that is due at some point in
the future. The obvious reason is that a dollar today
could be invested in some interest bearing account.
• Leverage – refers to the degree of fixed costs

utilized by the firm. A firm with high fixed costs will
suffer a substantial loss in earnings with only a small
change in sales.
• Principles of Finance (cont)
• Liquidity versus profitability - liquidity illustrates the firm’s ability

to pay its bill as they come due. Too much liquidity will reduce
profitability.
• Matching Principle – concept that short-term assets should be

financed with short term liabilities and long-term assets should be
financed with long term funds.
• Portfolio Effect (Diversification) – the concept that as more

assets are added to the portfolio, the risk of the total portfolio
decreases.
• Valuation – the economic value of an asset is equal to the present

value of future (expected) cashflows.
The Role of Business Ethics
• Business ethics are the standards of conduct or moral

judgment that apply to persons engaged in commerce.
• Violations of these standards in finance involve a variety
of actions: “creative accounting,” earnings management,
misleading financial forecasts, insider trading, fraud,
excessive executive compensation, options backdating,
bribery, and kickbacks.
• Negative publicity often leads to negative impacts on a
firm
Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-44

The Role of Business Ethics:
Ethics and Share Price
Ethics programs seek to:
– reduce litigation and judgment costs
– maintain a positive corporate image
– build shareholder confidence
– gain the loyalty and respect of all stakeholders
The expected result of such programs is to positively affect
the firm’s share price.

Relationship to Economics
• The field of finance is closely related to economics.

• Financial managers must understand the economic
framework and be alert to the consequences of varying
levels of economic activity and changes in economic
policy.
• They must also be able to use economic theories as
guidelines for efficient business operation.

Relationship to Economics (cont.)
• Marginal cost–benefit analysis is the economic principle

that states that financial decisions should be made and
actions taken only when the added benefits exceed the
added costs
• Marginal cost-benefit analysis can be illustrated using the
following simple example.

Relationship to Economics (cont.)
Nord Department Stores is applying marginal-cost benefit

analysis to decide whether to replace a computer:

Relationship to Accounting
• The firm’s finance and accounting activities are closely-

related and generally overlap.
• In small firms accountants often carry out the finance
function, and in large firms financial analysts often help
compile accounting information.
• One major difference in perspective and emphasis
between finance and accounting is that accountants
generally use the accrual method while in finance, the
focus is on cash flows.

Relationship to Accounting (cont.)
• Whether a firm earns a profit or experiences a loss, it must

have a sufficient flow of cash to meet its obligations as
they come due.

Relationship to Accounting (cont.)
Finance and accounting also differ with respect to decision-

making:
– Accountants devote most of their attention to the collection and
presentation of financial data.
– Financial managers evaluate the accounting statements,
develop additional data, and make decisions on the basis of their
assessment of the associated returns and risks.

Governance and Agency:
Corporate Governance
• Corporate governance refers to the rules, processes, and
laws by which companies are operated, controlled, and
regulated.
• It defines the rights and responsibilities of the corporate
participants such as the shareholders, board of directors,
officers and managers, and other stakeholders, as well as
the rules and procedures for making corporate decisions.
• The structure of corporate governance was previously
described in Figure 1.1.

Individual versus Institutional Investors
• Individual investors are investors who own relatively small

quantities of shares so as to meet personal investment goals.
• Institutional investors are investment professionals, such as banks,
insurance companies, mutual funds, and pension funds, that are paid
to manage and hold large quantities of securities on behalf of others.
• Unlike individual investors, institutional investors often monitor and
directly influence a firm’s corporate governance by exerting pressure
on management to perform or communicating their concerns to the
firm’s board.

Government Regulation
• Government regulation generally shapes the corporate
governance of all firms.
• During the recent decade, corporate governance has
received increased attention due to several high-profile
corporate scandals involving abuse of corporate power
and, in some cases, alleged criminal activity by corporate
officers.

The Agency Issue
• A principal-agent relationship is an arrangement in
which an agent acts on the behalf of a principal. For
example, shareholders of a company (principals) elect
management (agents) to act on their behalf.
• Agency problems arise when managers place personal
goals ahead of the goals of shareholders.
• Agency costs arise from agency problems that are borne
by shareholders and represent a loss of shareholder
wealth.

The Agency Issue(prevention):
Market Forces
One market force is major shareholders, particularly large
institutional investors such as mutual funds, life insurance
companies, and pension funds. These holders of large blocks
of a firm’s stock exert pressure on management to perform.
When necessary, they exercise their voting rights as
stockholders to replace underperforming management.
Another market force is the threat of takeover by another
firm that believes it can enhance the target firm’s value to
restructuring its management, operations, and financing. The
constant threat of a takeover tends to motivate management
to act in the best interests of the firm’s owners.
The Agency Issue:
Agency Cost
• To minimize agency problems and contribute to the
maximization of owners’ wealth, stockholders incur
agency costs. These are the costs of maintaining a
corporate governance structure that monitors
management behavior, ensuring against dishonest acts of
management, and giving managers the financial incentive
to maximize share price.

The Agency Issue:
Agency Cost
• The most popular, powerful, and expensive approach is to
structure management compensation to correspond
with share price maximization. The objective is to give
managers incentives to act in the best interests of the
owners.
• In addition, the resulting compensation packages allow
firms to compete for and hire the best managers
available. The two key types of compensation plans are
incentive plans and performance plans.

The Agency Issue:
Management Compensation Plans
• Incentive plans are management compensation plans that
tie management compensation to share price; one example
involves the granting of stock options.
• Performance plans tie management compensation to
measures such as EPS or growth in EPS. Performance
shares and/or cash bonuses are used as compensation
under these plans.

Matter of Fact—Forbes.com
CEO Performance vs. Pay

The financial system of
Bangladesh
A financial system consists of institutional units and markets that interact, typically in a
complex manner, for the purpose of mobilizing funds for investment, and providing
facilities, including payment systems, for the financing of commercial activity.
The financial system of Bangladesh is comprised of three broad fragmented sectors:
The formal sector includes all regulated institutions like Banks, Non-Bank Financial
Institutions (FIs), Insurance Companies, Capital Market Intermediaries like Brokerage
Houses, Merchant Banks etc.; Micro Finance Institutions (MFIs).
The semi formal sector includes those institutions which are regulated otherwise but do
not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and
Exchange Commission or any other enacted financial regulator. This sector is mainly
represented by Specialized Financial Institutions like House Building Finance
Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank,
Grameen Bank etc., Non Governmental Organizations (NGOs and discrete government
programs.
The informal sector includes private intermediaries which are completely unregulated.
Financial System of Bangladesh
Formal Sectors Semi-formal Sectors Informal Sector
Financial Market Regulators & 1. House Building Financial Corporation (HBFC)

Institutions 2. Palli Karma Sahayak Foundation (PKSF)
3. Samabay Bank
Money Market (Banks, NBFIs, Bangladesh Bank (Central 4. Grameen Bank
Primary Dealers) Bank)
Capital Market (Investment Banks

Banks, Stocks Exchanges, 57 scheduled & 6 non-
Credit Ratings, Companies scheduled banks
etc.)
NBFIs (33 NBFIs)
Foreign Exchange Insurance Development &
Market(Authorized Dealers) Regulatory Authority
Insurance Companies
(45 general and 31 life)
Securities & Exchange
Commission
Stock Exchanges, Stock

Dealers & Brokers, Merchant
Banks, AMCs, Credit Rating
Agencies etc.
Microcredit Regulator Authority
Micro Finance Institutions

(703 MFIs)
Regulators & Institutions
Central Bank
Bangladesh Bank, the central bank and apex regulatory body for the country's monetary and financial system, was established in Dhaka
as a body corporate vide the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. At present
it has ten offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal, Rangpur and Mymensingh in
Bangladesh; total manpower stood at 5807 (officials 3981, subordinate staff 1826) as on March 31, 2015.
Functions:
Formulation and implementation of monetary and credit policies.
Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets.
Management of the country's international reserves.
Issuance of currency notes.
Regulation and supervision of the payment system.
Acting as banker to the government .
Money Laundering Prevention.
Collection and furnishing of credit information.
Implementation of the Foreign exchange regulation Act.
Managing a Deposit Insurance Scheme .

Insurance Development and
Regulatory Authority (IDRA)
Insurance Development and Regulatory Authority (IDRA) has been formed under the provision on
Insurance Development and Regulatory Authority Act 2010 on 26th January in 2011. Government
of Bangladesh has enacted the Insurance Act 2010 to develop and regulate the insurance
business. IDRA has established for the purpose of supervising the insurance business and
safeguarding the interest of policy holder. The authority is working for the systematic development
and regulation of insurance industry with a view to implement the 'The National Insurance Policy
2014.IDRA, consisting by one Chairman and four Members, some Executive Directors and
Directors carrying the different functions of the authority.
Functions:
The authority is assigned by the Insurance Development and Regulatory Authority Act 2010 to control
the institution relating to insurance and re-insurance industry to encourage the development of
insurance industry. Providing registration and certificate of insurer, re-insurer, mediator and
renewal, amendment, removal withheld or cancellation of such registration are the mandate of
IDRA. Inspection, inquiry and investigation of insurance institutions, developing new policies,
controlling the fund and investment, maintenance of solvency margin and determining the proposed
premium rate, giving advantage to insurer, settlement of dispute or claim and providing the
procedure for preparing actuarial reports are the major responsibility of IDRA.
Bangladesh Securities and
Exchange Commission (BSEC)
The Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June, 1993 as the regulator of the country’s
capital market through enactment of the Securities and Exchange Commission Act 1993. Through an amendment of the Securities
and Exchange Commission Act, 1993, on December 10, 2012, its name has been changed as Bangladesh Securities and
Exchange Commission from previous Securities and Exchange Commission.
Functions:
Regulating the business of the Stock Exchanges or any other securities market.
Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers and managers of
issues, trustee of trust deeds, registrar of an issue, underwriters, portfolio managers, investment advisers and other intermediaries
in the securities market.
Registering, monitoring and regulating of collective investment scheme including all forms of mutual funds.
Monitoring and regulating all authorized self-regulatory organizations in the securities market.
Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market.
Promoting investors’ education and providing training for intermediaries of the securities market.
Prohibiting insider trading in securities.
Regulating the substantial acquisition of shares and take-over of companies.
Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of securities, the Stock Exchanges and
intermediaries and any self-regulatory organization in the securities market.
Conducting research and publishing information

Microcredit Regulatory
Authority
The Microcredit Regulatory Authority (MRA) has been
established by the Government of the People’s Republic of
Bangladesh under the "Microcredit Regulatory Authority
Act 2006” to promote and foster sustainable development
of microfinance sector through creating an enabling
environment for NGO-MFIs in Bangladesh. MRA is the
central body to monitor and supervise microfinance
operations of NGO-MFIs. License from the Authority is
mandatory to operate microfinance operations in
Bangladesh as an NGO.
Financial Markets
A financial market is a market for creation and

exchange of financial assets
Function:
• Facilitate price discovery
• Provide liquidity to financial assets
• Reduce the cost of transacting (search & information
cost)
Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 2 - 68

Classification of Financial
Markets
Debt Market Fixed Claim (debt instrument)
Nature of
Claim Equity Market Residual Claim (equity instrument)
Money Market Short term financial claim

Maturity Claim
Capital Market long term financial claim
Primary Market New Claim

Seasoning of
Claim Secondary Market Outstanding Claim
Cash/Spot Market Delivery immediately

Timing of delivery
Forward/future Market Delivery at a predetermined time in the future
Exchange Traded Market Centralised with standardised procedure

Organisational
Structure Over the counter Market Decentralised with customised procedure
Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 2 - 41

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Lecture 01 - Principles of Finance

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Principles of Finance

S.S.C. St. Gregory’s High School, Dhaka

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-2

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-3

• Financial Management : Theory & Practice, 9th

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-4

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-6

• Finance can be defined as the science and art of managing

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-9

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-10

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-11

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-12

Financial management is used to help make three

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-13

"Financial management is that activity of management which is

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-18

Financial managers are responsible for the financial health

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-19

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-22

The top financial manager within a firm is usually the Chief

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-23

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-24

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-25

Which Investment is Preferred?

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-27

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-28

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-29

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-30

Broadly, there are two alternative

Department of Finance & Banking, Jahangirnagar University

It is a term which denotes the maximum profit to

• Best Criterion on decision making.

• It ignores time value of money.

• Fundamental objective of wealth maximization is to

The wealth maximization objective takes care of the:

• It focuses on the long term.

Profit Maximization Wealth Maximization

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-39

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-40

Debashis Saha, Assistant Professor, F & B, Jahangirnagar University 1-41

• Time Value of Money – a dollar in hand today is

• Leverage – refers to the degree of fixed costs

• Liquidity versus profitability - liquidity illustrates the firm’s ability

• Matching Principle – concept that short-term assets should be

• Portfolio Effect (Diversification) – the concept that as more

• Valuation – the economic value of an asset is equal to the present

• Business ethics are the standards of conduct or moral

Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-44

Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-45

• The field of finance is closely related to economics.

Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-46

• Marginal cost–benefit analysis is the economic principle

Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-47

Nord Department Stores is applying marginal-cost benefit

Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-48

• The firm’s finance and accounting activities are closely-

Debashis Saha, Lecturer, F & B, Jahangirnagar University 1-49