Introduction To Business Finance

Course Instructor
Muhammad Raghib Zafar
E.mail: raghibzafar@hotmail.com
raghib@kasbit.edu.pk
 Lecture Contents
• Definition
• Financial Activities
• Objectives of the firm
• Financial Decision Making
• Types of Business Organizations
• Financial Securities, Markets, Risk and
Rewards
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 Business
• An organization or enterprising entity engaged in
commercial, industrial or professional activities. A
business can be a for-profit entity, such as a
publicly-traded corporation, or a non-profit
organization engaged in business activities, such
as an agricultural cooperative.
• Any commercial, industrial or professional activity
undertaken by an individual or a group.
• Businesses include everything from a small
owner-operated company such as a family
restaurant, to a multinational conglomerate such
as General Electric.
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 FINANCE
Finance is an art and science of
handling money. A branch of economics
concerned with resource allocation as
well as resource management,
acquisition and investment. Simply,
finance deals with matters related to
money and the markets.
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 Business Finance
• The act of providing funds for business activities,
making purchases or investing.
• Financial institutions and banks are in the
business of financing as they provide capital to
businesses, consumers and investors to help
them achieve their goals.
• There is a large variety of financing techniques
that businesses and consumers can use to receive
financing; these techniques range from IPOs to
bank loans.
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 Financial Activities
The activity of finance is the
application of a set of techniques
that individuals and organizations
(entities) use to manage their
money, particularly the differences
between income and expenditure
and the risks of their investments.
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 THE OBJECTIVE OF THE FIRM

The goal of the firm’s

management is to maximize
the welfare of the
stockholders.

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 FINANCIAL DECISION MAKING

• The investment decision

• The financial Decision

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 The investment decision
• In which long-term assets a firm should
invests?
Or
• What long-term investments should the
firm engage in?
• What mix of fixed assets? (Plant,
Equipment, and Land)
and
• What mix of current assets (Cash,
Accounts Receivable and Inventories) will
best facilitate the firm’s production of
goods and services?
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 The investment decision

•Revenue Expenditure
•Capital Expenditure
•Capital Budgeting

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 The financing decision
The company needs to finance its
assets by acquiring cash from the
financial markets.
• What securities to issue?
• What mix of short term credit, long
term debt, and equity best facilitate
the effort to meet the firm’s
objectives?
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The financing decision

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TYPES OF BUSINESS ORGANIZATIONS

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 TYPES OF BUSINESS ORGANIZATIONS

• Sole Proprietorship

• Partnership

• Company / Corporation
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 SOLE PROPRIETROSHIP
• It is formed by a single owner

• Liabilities are unlimited

• Profit / loss is for the single owner

• Decisions are made by single person

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 PARTNERSHIP
• It is formed by a 2 or more persons.
• For Banking sector, partners limit is 2-10.
• For other sectors, partners limit is 2-20.
• Follows Partnership Act 1932.
• Liabilities are unlimited.
• According to Banking Ordinance, banks
cannot be formed with partnership in Pakistan.

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 COMPANY / CORPORATION
• Before 1913, companies followed
‘Company’s Act 1856’.
• 1913 - 1984, companies followed
‘Company’s Act 1913’.
• 1984 till now, companies followed
‘Company’s Ordinance 1984.
• Liability is limited. For example, if shares
are purchased on installment & company
face closed due to loss then the remaining
amount of share’s cost that is not yet paid
is payable.
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FINANCIAL SECURITIES
MARKETS
RISK AND REWARDS

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 FINANCIAL SECURITIES
People with less need to consume now
will provide capital by lending to the
borrowers. Some will choose to invest
in a business and share in the potential
rewards or losses of the firm. Others
may want to provide capital to a
business but may not be willing to take
on the risks of the firm.

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Thus, depending on their
personal considerations,
individuals provide capital to
a business primarily in two
distinct forms: as equity
capital or as debt.

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 Equity Capital

• Equity is ownership; suppliers

of equity capital (stockholders)
are the owners of the firm.

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 Debt Capital

• Debt is borrowing;
suppliers of debt capital
(bondholders) are creditors
of the firm.

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 Other forms of capital
In addition to common stocks and
bonds, companies issue other types of
securities to investors.
Some of the more popular securities
are:
 Preferred stock
 Convertible securities

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Financial Markets

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 PRIMARY & SECONDARY MARKET
• If a company issue new shares, they are sold
in market and increases Company’s capital.
This is called ‘Primary Market’.

• Trade / transfer of already issued shares are

referred to as ‘Secondary Market’. It does not
increase company’s capital. These activities
are normally taken place in Stock Exchange.
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 The Rewards to Stockholders
• Dividends

• Capital gains

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 Dividends
Corporations may choose periodically to
return a portion of their earnings to
stockholders in the form of a cash
distribution. This distribution is called a cash
dividend. However, instead of paying a cash
reward to its shareholders, it may choose to
issue new share of stock for existing stock-
holder as stock dividend.

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 Capital Gains
In addition to cash or stock dividends,
stockholders may expect to sell their stock
in the stock market for more than what
they paid for it. For example, if you
bought a share of Indus Motors stock for
Rs.55 on January 1 and sold it at a later
date for Rs.69; you would have a capital
gain of Rs.14.
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 The Risks to Stockholders
• Although stockholders can expect dividends,
there is no assurance that a firm will in fact
pay them.

• Capital loss

• Common stockholders also face a risk when a

company goes bankrupt.
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 The Rewards to Bondholders

• Interest Payments

• Capital Gains

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 Interest Payments

• Bondholders know exactly the

amount of interest they can
expect periodically for loaning
capital to the company; this rate
is stated on the bond.

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 Capital Gains
• If you paid Rs.1,000 for a
bond issued by WAPDA on
February 6 and sold it for
Rs.1,100 2 years later, you
would have a capital gain of
Rs.100.
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 The Risks to Bondholders
• Risk of default

• Capital loss

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