Lecture one

Dr. Doaa El-Diftar

 FINANCE: A QUICK LOOK
What is Finance?
The Four Basic Areas
­ Corporate finance
­ Investments
­ Financial Institutions
­ International Finance

Why Study Finance?

­ Marketing and Finance
­ Accounting and Finance
­ Management and Finance
­ Personal Finance (you & finance)
 BUSINESS FINANCE AND THE FINANCIAL
MANAGER
Business Finance à same as corporate finance listed earlier. Addresses the
following important questions:

Ø What long-term investments should the firm take on? (Capital Budgeting)
­ The process of planning & managing a firm's long-term investments.

Ø Where will we get the long-term financing to pay for the investment? (Capital
Structure)
­ the mix of debt (borrowing) and equity (ownership interest) used by a firm in financing its
operations.
 BUSINESS FINANCE AND THE FINANCIAL
MANAGER
Ø How will we manage the everyday financial activities of the firm? (Working
Capital)
­ The management of short-term assets & liabilities.

Financial Manager
The top financial manger within a firm is usually the Chief Financial Officer (CFO)
and he coordinates the activities of the treasurer and the controller.
­ Treasurer – oversees cash management, credit management, capital expenditures and financial
planning.
­ Controller – oversees taxes, cost accounting, financial accounting, and data processing.
THE GOAL OF FINANCIAL MANAGEMENT
The Goal of Financial Management in a Corporation à
To Maximize the Current Value per Share of the Existing Stock

A More General Financial Management Goal à

To Maximize the Market Value of the Existing Owners' Equity (wealth

maximization)
THE AGENCY PROBLEM AND CONTROL OF THE
CORPORATION
Agency Relationships
­ is the relationship between stockholders and management. This relationship occurs
when one party (principal) hires another (agent) to act on his/her behalf.

Agency Problem
­ The possibility of conflicts of interest between the principal and agent or between
owner and management
­ Agency problems exist whenever there is a separation of ownership and
management.

Examples…
 THE AGENCY PROBLEM AND CONTROL OF
THE CORPORATION
Do Managers Act in the Stockholders' Interests?
This depends on two factors:
1) How closely management goals aligned with stockholder goals?
­ This question is related to the way managers are compensated.
­ Management will have a great incentive to increase the share's value for two main reasons.
o If managerial compensation is tied to financial performance.
o Job prospects… Better performers within the firm will tend to get promoted.

2) Can management be replaced if they do not pursue stockholder goals?

­ This question is related to corporate control.
­ Proxy fight
­ Takeover
 FINANCIAL MARKETS AND THE
CORPORATION
Financial Markets:
v where debt and equity securities are bought and sold.
vPrimary vs. Secondary Markets:
­ Primary Market à Refers to the original sale of securities by the company or the
government.
­ Secondary Market à The market where securities that have already been issued
are traded between investors
 FINANCIAL MARKETS AND THE
CORPORATION
A summary of how cash flows to and from the firm:
Revision
The Balance Sheet