21-Jan-14

Session 2

The Business, Tax, and Financial Environments

00677 FINANCE AN IN!EST"ENT #"TE$% #A%

Mr. Bishwajit Banik Pathik

Assistant &ro'essor American International (niversit)*Ban+ladesh

,hat is Financial "ana+ement- .&revious/

Concerns the acquisition, financing, and management of assets with some overall goal in mind. The three major decisions of financial management are
Investment ecision !inancing ecision "sset #anagement ecision

21-Jan-14

The 0oal o' a Firm .&revious/

$rofit #a%imi&ation '$#( #a%imi&ing a firm)s earnings after the ta%
$# Increasing no. of *hare 'invest in +an,( -ut .$*

Increasing .arnings $er *hare '.$*( .$* / '.arnings after the ta%(0'1um+er of share( 2alue Creation 'considering +oth conditions(

The Financial "ana+er1s 2ole .&revious/

Investment to value enhancing 5roject

!und 4aising

Firm

4einvestment

Financial "ana+er

Ca3ital "ar4et
4eturn funds to Investors as dividends

#anage funds generated +6 o5erations

21-Jan-14

,h) do )ou need to stud) 'inancial mana+ement- .&revious/

-usinesses are reducing management jo+s and squee&ing together the various la6ers The successful manager will need the a+ilit6 to move not just verticall6 +ut hori&ontall6 as well To start a new com5an6, entre5reneurshi5, ta,ing investment decision etc.

To3ics
-asic forms of +usiness organi&ation
*ole $ro5rietorshi5s, $artnershi5s, Cor5orations, 8imited 8ia+ilities Com5an6 '88C(

e5reciation
*traight 8ine e5reciation, ou+le eclining -alance e5reciation

!inancial #ar,ets
#one6 vs. Ca5ital #ar,et, $rimar6 vs. *econdar6 #ar,et

!inancial intermediaries

21-Jan-14

The Business 5r+ani6ations

4 +asic forms of +usiness organi&ation are *ole $ro5rietorshi5s $artnershi5s
:eneral $artnershi5 8imited $artnershi5

Cor5orations 8imited 8ia+ilities Com5an6 '88C(

Sole &ro3rietorshi3
*ingle <wner The owner has unlimited lia+ilit6 for all de+ts of the firm 1o se5arate income ta%, sim5l6 add 5rofit or su+tract losses *hortcoming
8ia+le for ever6thing ifficult to raise ca5ital for investment

21-Jan-14

&artnershi3
" +usiness form in which two or more individuals act as owners 1o se5arate income ta% :reater amount of ca5ital can +e raised #a6 attract more investors

>

&artnershi3 .cont7/
:eneral $artnershi5?
@nlimited 8ia+ilit6 ' eath of a $artnerA(

8imited $artnershi5?
:eneral $artner '@nlimited 8ia+ilities(

8
8imited $artner 'investor(

1B

21-Jan-14

Cor3orations
" +usiness form legall6 se5arated from its owners "dvantages?
.as6 transfer of ownershi5 @nlimited life "n a+ilit6 to raise large sums of ca5ital <wners are not e%5osed to unlimited lia+ilit6

isadvantage ou+le Ta%ation

The com5an6 5a6s ta% on income it earns The stoc,holders are also ta%ed when s0he receives income in the form of cash dividend
11

$$C .$imited $ia9ilities Com3anies/

" +usiness form that 5rovides its owners with cor5orate st6le limited 5ersonal lia+ilit6 and ta% treatment of a 5artnershi5 Characteristics
8imited 8ia+ilit6 Centrali&ed #anagement @nlimited life The a+ilit6 to transfer
12

21-Jan-14

Tax Environment: e3reciation

*6stematic allocation of the cost of a ca5ital asset over a 5eriod of a time for financial re5orting 5ur5oses, ta% 5ur5oses or +oth. e5reciation is
The 5ortion of asset which is used "n e%5ense *how higher de5reciation to save more ta%

13

e3reciation .cont7/
*traight 8ine e5reciation
" method of de5reciation that allocates e%5enses evenl6 over the de5recia+le life of the asset

"ccelerated e5reciation
#ethod of de5reciation that write off the cost of a ca5ital asset faster than under straight-line de5reciation

14

21-Jan-14

B
ou9le eclinin+ Balance e3reciation

- / m C '10n( C 1-2
m/2 n / life s5an of the asset 1-2 / asset)s net +oo, value !or a T,. 1B,BBB asset, with a five-6ear life, the de5reciation for the first 6ear is 2C'107(C1B,BBB / T,. 4BBB The de5reciation charge in the 2nd 6ear is +ased on the net +oo, value of t,. 9BBB is 2C'107(C9BBB / T,. 24BB B "ethod is also 4no;n as 200 < declinin+ 9alance

17

Financial "ar4ets
"ll institutions and 5rocedures for +ringing +u6ers and sellers of financial instruments together. #one6 #ar,et
It is concerned with +u6ing and selling of short term 'less than 1 6ear( government and cor5orate de+t.

Ca5ital #ar,et
It deals with relativel6 long term 'more than 1 6ear( de+t 'e.g. stoc,s(

19

21-Jan-14

Financial "ar4ets .cont7/

$rimar6 #ar,et
" mar,et where new securities are +ought and sold for the first time !unds are raised through the sale of new securities 'first time(

*econdar6 #ar,et
" mar,et for +u6ing and selling of e%isting securities rather than new issues These transactions do not 5rovide additional funds to finance ca5ital investment
1;

Financial Intermediaries
!inancial institutions those acce5t mone6 from savers and use those funds to ma,e loans and to ma,e other financial investments in their own name. .%am5le
Commercial -an,s *avings institutions Insurance com5anies !inance com5anies

1=

>

21-Jan-14

Theoretical =uestions
Dhat is the 5rinci5le advantage of the cor5orate form of +usiness organi&ationE iscuss the im5ortance of this advantage to the owner of a small firm. Dhat are the disadvantages of 'a( a sole 5ro5rietorshi5E '+( a 5artnershi5E 'c( a limited lia+ilit6 com5an6 '88C(E iscuss the financial intermediaries. Dhat is de5reciationE Fow does it affect the ta%E

1>

2e'erences
James C. 2an Forne and John #. Dachowic&, Jr., GFundamentals of Financial ManagementH, $earson .ducation 8imited, .sse%, .ngland, 13th .d., 2BB=. I*-1 >;=-B-2;3-;1393-B .ugene !. -righam and Joel !. Fouston, GFundamentals of Financial ManagementH, *outh-Destern Cengage 8earning, #ason, <F47B4B, @*", 13th .d., 2B1B. I*-1? >;=-B-73=-4=243-1 I # $ande6, GFinancial ManagementH, 2i,as $u+lishing Fouse $vt. 8td., 1ew elhi, India, >th .d., 2BB7. I*-1? =1-27>-197=-I

2B

1B