MBA

Business Finance
Learning Roadmap
 Topic 3

Topic 3
Topic 3

Topic 1
Topic 3

Topic 2
 Learning
Objectives
 Learning Objectives

● the steps in financial decision making

● the various objectives that, it has been suggested, might be

followed by businesses
● some evidence on objectives that UK businesses actually
follow
● the problem that arises from businesses being run by
professional managers on behalf of the shareholders

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 Learning Objectives

● some theoretical rules for financial decision making; the

separation theorem

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Topic 1
 Financial decision making has six steps

1. Define objective(s).
2. Identify possible courses of action.
3. Assemble data relevant to the decision.
4. Assess the data and reach a decision.
5. Implement the decision.
6. Monitor the effects of the decision.

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 Business objectives

• Various possibilities suggested: for example, maximization of profit.

• Maximization of shareholders’ wealth is generally accepted as the key
objective because it takes account of returns and risk and provides a practical
measure.
• Maximization of shareholders’ wealth can be seen as an objective, which tends
to promote the interests of all stakeholders (customers, employees, suppliers
etc.).
• Maximization of shareholders’ wealth seems to be the objective followed by
most larger businesses.

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Topic 2
 Agency problems

• Conflicts of interest between shareholders and directors.

• Can lead to costs for shareholders, either the costs of prevention or the cost of
directors having acted counter to the best interests of shareholders.
• Arise in various contexts in business finance, for example, making investments
that are not in the best interests of shareholders, though they may be beneficial
for the directors.

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Topic 3
 Financing, investment and separation

• If there is the opportunity to borrow and lend money, investment and financing
decisions can be separated.
• Businesses should invest in all opportunities that have a rate of return higher
than the borrowing/lending rate in order to maximize shareholders’ wealth.
• Personal preferences of individual shareholders are irrelevant to directors
because shareholders can maximize these for themselves.
• The financing method does not affect shareholders’ wealth.
• These assertions are based on simplifying assumptions.

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Topic 3
 Theory and practice

• Business finance is based on a solid base of theory.

• There is also a wide body of evidence about what happens in practice.
• Reconciling theory and practice can provide useful insights.
• People do not always behave in the rational way that theory would suggest,
sometimes they react emotionally rather than totally logically; a phenomenon
known as ‘behavioral finance’.

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Thank
You!