Chapter 1

Finance is all about managing money.

Goal of the firm

• The ultimate goal of the firm should be “firm value maximization.”

• If we only maximise shareholders wealth then only shareholders are benefited and debt
holders are neglected. However, if we focus on firm value maximization then both equity
holder and debt holder can be benefited. Hence, maximize firm value.

Different forms of business organisations

• Sole-proprietorship: Easiest form of business. Operating for own profit. Only one owner.
• Partnership: When two or more people work together for profit.
• Corporation: It is an artificial entity that has same legal powers as a person and this
corporation can live forever (going concern).

Corporate governance

• Shareholders are the owners of the company

• Board of Directors (BoD) are voted by shareholders who represents shareholders interests in
the company.
• CEO or managers are responsible for running the company.
• Government regulations generally shapes the corporate governance of all firms.
• Board of Directors sole purpose is to question every step taken by mangers and CEO and
protect shareholders’ interest.
• Although shareholders are the owner of the company, they cannot make decisions for the
company but board of directors can.

Principal agent relationship

• The principal-agent relationship is an arrangement in which an agent (management) act on

behalf of a principal (company) and there should be no conflict interest.
• When the management puts their personal goal ahead of the shareholders goals, agency
problem arises.

Financial statement shows the financial position of a company at a certain period of time.
 Chapter 2

Financial products are intangible.

Financial asset categories (Securities types): These assets are tradeable which is why these are called
securities.

• Debt securities (bond): liability or form of loan.

• Equity securities (shares): partial ownership of a company.
• Derivatives (forward, future, options, swaps)

Liquidity: When an asset can be converted into cash at any given time without losing its fair value.

Financial markets

Money market: It involves trading of short term debt securities. Maturity is one year or less. Treasury
bills (T-bills): Issued by the treasury to borrow money. This is a money market debt instrument as the
maturity is one year or less.

Capital market: It refers to trading of long term equity and debt securities. Maturity is more than a
year. Treasury bonds (T-bond): Also issued by treasury to raise money. However, the maturity is more
than a year. Hence the trading takes place on capital market. Stocks, T-notes, corporate bonds are
also traded in the capital market.

Primary Merket: It facilitates the issuance of new securities. In the primary market, new stocks and
bonds are sold to the public for the first time, which is called IPO. Initial public offering (IPO) takes
place in primary market and it refers to the process of offering shares of a private corporation to the
public for the very first time in order to raise capital. In a primary market, investors are able to
purchase securities directly from the issuer. This market has no physical location.

Secondary market: The secondary market is where investors buy and sell securities they already own.
Typically has a physical location and those are called “Organised Exchange” and some secondary
market doesn’t have any physical location which are called “Over the Counter market.”

• Exchange traded: Dhaka Stock Exchange (DSE), New York Stock Exchange (NYSE).
• Over the Counter (OTC): National Association of Securities Dealers Automated Quotations
(NASDAQ). These securities are traded without being listed on an exchange.
Commercial paper

• An unsecured short term debt instrument which can be issued by renowned corporations.
• Maturity – can be as short as 1 day and up to 272 days.

Financial institutions: They resolve the limitations caused by market imperfections. These are two
types -

1. Depository institutions: A financial organisation that is legally allowed to accept monetary deposits.

• Commercial banks
• Credit unions (non-profit organisations)
• Savings and loan institutions
2. Non depository institutions: Do not accept any form of deposit from any individual and also they
do not provide banking services.
• Investment bank (An institution that underwrites securities/facilitates IPO). They make money
from the fees.
• Insurance company
• Mutual fund – They pool money from investors and use that money to buy securities, usually
stocks and bonds. Average risk and average return.
• Private equity – Only Institutional investors can invest and they only invest in private
companies. Less risky than hedge fund.
• Hedge fund – Only wealthy investors can invest. High risk and High return.
• Venture capital or angel investor – Invests in startup companies.

Exchange Traded Fund (ETF) - An exchange-traded fund (ETF) is a type of pooled investment security
that operates much like a mutual fund. ETFs can be purchased or sold on a stock exchange, while
mutual funds only can be purchased at the end of each trading day based on a calculated price. Mutual
funds are actively managed by a fund manager, ETFs are passively managed by following specific index.

Leveraged buyout (LBO) - A leveraged buyout (LBO) is the acquisition of another company using
almost entirely or a significant amount of borrowed money.
Equity types

• Common stock – Owner of the company. Shareholders have voting rights.

• Preferred stock – They are silent owners because they have no voting rights. It is also called
hybrid security because it has both the feature of a bond and stock.

Preferred Stock types

• Cumulative preferred stock – Cumulative stock entitles investors to missed dividends. If any
year net income is negative then the investor gets that year’s dividend in the subsequent year.
• Non-cumulative preferred stock – A type of preferred stock that does not entitle investor of
any type of unpaid dividends. If the company doesn’t generate income then the investor never
gets paid for that dividend.