BUSINESS

BUSINESS FINANCE
FINANCE
 BUSINESS FINANCE WEEK 1
INTRODUCTION
• Is that managerial activity which is concern with the
planning and controlling of the firm financial resources.
• It is an immense interest to both academics and
practicing managers.
• Great interest for academicians because the subject is
still developing, and there are still certain areas where
controversies exist for which no solutions have been
reached as yet.
• Practicing managers are interested in this subject
because among the most crucial decisions of the firm are
those which relate to finance, and an understanding of
the theory of financial management provides them with
conceptual and analytical insights to make those decision
skillfully.
 Field of Finance
• It is important to business people
• Financial decisions about how to raise,
spend and allocate money can affect every
aspect of a business from personnel to
products.
• Finance also offers career opportunities in
three main areas, financial Management,
Financial Markets and institutions, and
investments.
• Financial Management focuses on managing
the finance of a business
 Financial Management

• Manage the finance of a business firm.

• Analyze, forecast and plan a firm’s
finances, assess risk, evaluate and select
investment, decide where and when to find
money sources.
• And how much money to raise, and
determine how much money to return to
investors in the business
 Scope of Finance
• What is finance
• What are a firm’s financial activities
• How are they related to the firm’s other
activities
• Manufacturing companies produce goods,
and some provides services to customers.
They sell their goods or services to earn
profit.
• They raise funds to acquire manufacturing
and other facilities.
 Important activities of business
firm
• Production
• Marketing
• Finance
• A firm secures whatever capital it
needs and employs it (finance
Activity) in activities which
generates return on invested capital
(Production and Marketing Activities)
 Objectives of Financial Management
• Is to maximize the wealth of the firm’s
owners by adding value.
• It is not to maximize profits.
• The value of a firm is measured by the price
investors are willing to pay to own the firm.
• For businesses that sell stock to the general
public, stock price indicates the firm’s value
because shares of stock are units of
ownership.
• So the basic financial goal of such firm is to
maximize the price of the firm’s stock.
 Financial Markets

• Financial system allows surplus

economics units to trade with deficit
economic units.
• The trades are carried out in the
financial markets.
• Surplus economics units
• Deficit economics units
 Surplus economic units

• Economics units generate more

income than they spend, and have
funds left over.
Deficit Economic Units
• Economics units generate less income than
they spend, and need to acquire additional
funds in order to sustain their operations.
 Primary Market
• When a security is created and sold for the
first time in the financial marketplace, this
transaction takes place in the primary market.

Secondary Market
• Once a security has been issued, it may be traded
from one investor to another.
• The secondary market is where previously issued
securities or “used” securities are traded among
investors.
 Money Market
• Short term securities (a maturity of one
year or less) are traded in the money
market. Networks of dealers operate in
this market.
• They use phone computer to make trades
rapidly among themselves and with the
issuing organizations.
• Securities traded in money market include
T-bill, Negotiable Certificates of Deposit,
Commercial Papers, and Short Term Debt
instruments.
 Capital Market
• Long term securities (maturities over one year)
trade in capital market.
• Federal, state, and local governments, as well
as large corporations, raise long term funds in
the capital market.
• Firm invest from capital market securities in
long term assets like buildings, production
equipment, and so on.
• Initial offerings of securities in the capital
market are usually large deals put together by
investment bankers, although after the original
issue, the securities may be traded quickly and
easily among investors
 Organized Markets
• Which have physical location e.g. Stock Exchange

Over the Counter (OTC) Market

• OTC Market has no fixed location or, it is
everywhere, OTC is a network of dealers around
the world who maintain inventories of securities
for sale.
• E.g. A person wanted to buy a security that is
traded OTC.
• Some Dealers in the OTC Market are connected
through a computer network call NASDAQ (The
National Association of Securities Dealers
Automated Quote System).