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Bme 5 Prelims
Bme 5 Prelims
Financial System
The financial system links the savers and users of
funds.
SAVERS
Households
Areas of Finance Individuals
Finance is generally divided into three areas: Corporations/ Companies
Government Agencies
Financial Management
Financial management, also called corporate FINANCIAL INTERMEDIARIES
finance, focuses on decisions relating to how Banks
much and what types of assets to acquire, how to Insurance Companies
raise the capital needed to purchase assets, and Stock Exchange
how to run the firm so as to maximize its value. Stock Brokerage Firms
Mutual Funds
Capital Markets Other financial institutions
Capital markets relate to the markets where
interest rates, along with stock and bond prices, USERS OF FUNDS
are determined. Also studied here are the (Borrowers/ Investors)
financial institutions that supply capital to Households
businesses. Banks, investment banks, Individuals
stockbrokers, mutual funds, insurance Corporations/Companies
companies, and the like bring together “savers” Government Agencies
who have money to invest and businesses,
individuals, and other entities that need capital Finance versus Economics and Accounting
for various purposes Finance, as we know it today, grew out of
economics and accounting.
Financing Decisions
Economists developed the notion that an asset’s One of the responsibilities of a financial manager
value is based on the future cash flows the asset is to find ways to provide money for the activities
will provide, and accountants provided of the firm. The manager needs to consider the
information regarding the likely size of those cash short-term or long-term debt or equity financing.
flows. People who work in finance need The manager assesses the best possible financing
knowledge of both economics and accounting. mix or capital structure for the company in order
to meet he expected return on investment.
Wealth Maximization – Creating Value for The main idea in financing decisions is to look for
Investors resources that will give the company the lowest
weighted average cost of capital.
Maximizing shareholders’ wealth through
maximization of stock price should be the Dividend Policy Decisions
overriding objective of management as it covers Dividend payouts is a sign that company is
the different facets of operating a company and profitable.
considers the different stakeholders in the
organization. A sound dividend policy is a good financial sign to
the market that continually assess a company.
Wealth Maximization as Compared to Companies with earnings retention have more
Profitability funds for investment; hence, it indicates the
growth potential of a business. This also equally
important to investors. Decisions to pay or not to
pay dividends are usually based on advice by the
finance manager to the board of directors.
Agency Theory