Chapter-1
1. What is Finance?
Finance is the art and science of managing money. It involves how individuals, businesses, and
governments raise, invest, and manage funds efficiently, while considering risk and return.
2. Main Areas of Finance:
1. Corporate Finance – Managing finances within a business
2. Investments – Buying/selling financial assets
3. Financial Institutions & Markets – Systems that facilitate financial transaction
4. What are the Types of Business Organizations?
Sole Proprietorship
●
Owned by one person
●
Easy to form
●
Owner gets all profits but bears unlimited liability
Partnership
●
Owned by two or more people
●
Shared profits and responsibilities
●
Partners have unlimited liability
Corporation
●
Separate legal entity
●
Owners (shareholders) have limited liability
●
Can raise large capital, but more regulated
Limited Liability Company (LLC)
●
Hybrid of partnership and corporation
●
Limited liability + flexible management
5. Main Role of a Business Firm?
To maximize shareholder wealth by making efficient financial and operational decisions.
Key Functions/Roles:
1. Production of Goods/Services – Convert inputs into valuable outputs
2. Profit Generation – Earn returns by managing costs and revenues
3. Efficient Resource Allocation – Use capital and labor effectively
4. Risk Management – Identify and control business and financial risks
5. Value Creation – Increase the market value of the firm for its owners
Gitman’s Focus:
A business firm acts as an economic unit that raises capital, invests in assets, and manages
operations to achieve long-term value creation.
6. Government of Agency?
Agency Relationship:
Occurs when owners (shareholders) hire managers to run the company on their behalf.
Agency Problem:
Managers may act in their own interest instead of maximizing shareholder wealth.
Solutions to Agency Problem:
1. Incentives (e.g., bonuses, stock options)
2. Monitoring (e.g., audits, board oversight)
3. Corporate Governance (rules and practices to ensure accountability)
Goal:
Align manager’s actions with shareholder interests.
Definition:
● Time Value of Money (TVM): Time Value of Money means that a dollar today is
worth more than a dollar in the future because of its earning potential.
●
Risk is the chance that actual returns may differ from expected returns.
●
Return is the gain or loss from an investment.
●
Cash Flow:- Cash flow is the actual movement of money into and out of a business
over a period of time.
Types of Cash Flow:
1. Operating Cash Flow – From core business activities
2. Investing Cash Flow – From buying/selling assets
3. Financing Cash Flow – From loans, shares, or dividend payments
●
Timing refers to when cash flows occur — it's crucial because money now is more
valuable than money later (due to the time value of money).
●
Capital refers to the money or financial resources that a business uses to fund its
operations and growth.
●
Managerial finance involves the tasks of a financial manager in planning, analyzing, and
controlling a firm’s financial activities to maximize shareholder wealth.
● Legal Forms of Business Organization_ Legal forms of business refer to the different
ways a business can be structured legally, affecting ownership, liability, and taxation.
● Agency cost refers to the costs that arise due to conflicts of interest between owners
(shareholders) and managers (agents) of a firm.
● Corporate governance is the system of rules, practices, and processes by which a
company is directed and controlled to protect the interests of shareholders and
stakeholders.
Corporate Main Objectives:
Ensure accountability of management
Protect shareholders' rights
Promote transparency in financial reporting
Reduce agency problems
Chapter-2.
1. Financial Institutions?
Definition:
Financial institutions are organizations that provide financial services like lending, investing,
saving, and money transfer to individuals, businesses, and governments.
Types of Financial Institutions:
1. Commercial Banks – Accept deposits, give loans
2. Investment Banks – Help companies raise capital
3. Insurance Companies – Provide risk coverage
4. Pension Funds – Manage retirement savings
5. Credit Unions – Member-owned, offer basic banking services
2.Financial Markets?
Financial markets are platforms where buyers and sellers trade financial securities like
stocks, bonds, and other instruments.
Types of Financial Markets:
1. Money Market – Short-term funds (less than 1 year), e.g., Treasury bills
2. Capital Market – Long-term securities, e.g., stocks and bonds
3. Primary Market – New securities are issued (e.g., IPOs)
4. Secondary Market – Existing securities are traded (e.g., stock exchange)
3. The Efficient Markets Hypothesis (EMH)?
Definition:
The Efficient Markets Hypothesis (EMH) states that financial markets are "informationally
efficient", meaning all available information is already reflected in stock prices.
Three Forms of EMH:
1. Weak Form – Prices reflect past market data
2. Semi-Strong Form – Prices reflect all public information
3. Strong Form – Prices reflect all information, both public and private
4.The Securities Issuing Process?
Definition:
The securities issuing process refers to how companies raise funds by selling financial
securities (like stocks or bonds) to investors.
Steps in the Issuing Process:
1. Decision to Issue Securities
o
Company decides how much capital is needed and what type of security (equity
or debt).
2. Hire Investment Bank
o
Investment banks help plan, price, and sell the securities.
3. Regulatory Approval
o
File a prospectus with the regulatory body (e.g., SEC in the U.S., BSEC in
Bangladesh).
4. Pricing & Marketing (Roadshow)
o
Investment bank promotes the issue to investors and determines final price.
5. Issue in the Primary Market
o
Securities are sold to investors for the first time (e.g., IPO for stocks).
Definition:
Common stock represents ownership in a company. Shareholders have voting rights and may receive
dividends.
A bond is a debt instrument where the issuer (e.g., government or company) borrows money from
investors and promises to repay with interest after a fixed time.
0
