Financial Management ppt

[seminar class]

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Nature of Financial Management
Business Activities
 Production
 Marketing
 Finance
Finance Functions
 Investment or Long Term Asset Mix Decision
 Financing or Capital Mix Decision
 Dividend or Profit Allocation Decision
 Liquidity or Short Term Asset Mix Decision
 Finance Manager’s Role
 Raising of Funds
 Allocation of Funds
 Profit Planning
 Understanding Capital Markets
Financial Goals
 Profit maximization (profit after tax)
 Maximizing Earnings per Share
 Shareholder’s Wealth Maximization
Profit Maximization
 Maximizing the Rupee Income of Firm
 Resources are efficiently utilized
 Appropriate measure of firm performance
 Serves interest of society also
 Objections to Profit Maximization
 It is Vague
 It Ignores the Timing of Returns
 It Ignores Risk
Assumes Perfect Competition
 In new business environment profit maximization is regarded as
 Unrealistic
 Difficult
 Inappropriate
 Immoral.
Maximizing EPS
 Ignores timing and risk of the expected benefit
 Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares
 Maximizing EPS implies that the firm should make no dividend payment so long as funds can be invested at positive rate of return—such a policy may not always work
Shareholders’ Wealth Maximization
 Maximizes the net present value of a course of action to shareholders.
 Accounts for the timing and risk of the expected benefits.
 Benefits are measured in terms of cash flows.
 Fundamental objective—maximize the market value of the firm’s shares.
Risk-return Trade-off
 Risk and expected return move in tandem; the greater the risk, the greater the expected return.
 Financial decisions of the firm are guided by the risk-return trade-off.
 The return and risk relationship: Return = Risk-free rate + Risk premium
 Risk-free rate is a compensation for time and risk premium for risk.
Managers Versus Shareholders’ Goals
 A company has stakeholders such as employees, debt-holders, consumers, suppliers, government and society.
 Managers may perceive their role as reconciling conflicting objectives of stakeholders. This stakeholders’ view of managers’ role may compromise with the objective of SWM.
 Managers may pursue their own personal goals at the cost of shareholders, or may play safe and create satisfactory wealth for shareholders than the maximum.
 Managers may avoid taking high investment and financing risks that may otherwise be needed to maximize shareholders’ wealth. Such “satisfying” behaviour of managers will frustrate the objective of SWM as a normative guide.
Financial Goals and Firm’s Mission and Objectives
 Firms’ primary objective is maximizing the welfare of owners, but, in operational terms, they focus on the satisfaction of its customers through the production of goods and services needed by them
 Firms state their vision, mission and values in broad terms
 Wealth maximization is more appropriately a decision criterion, rather than an objective or a goal.
 Goals or objectives are missions or basic purposes of a firm’s existence
 The shareholders’ wealth maximization is the second-level criterion ensuring that the decision meets the minimum standard of the economic performance.
 In the final decision-making, the judgement of management plays the crucial role. The wealth maximization criterion would simply indicate whether an action is economically viable or not.
Organisation of the Finance Functions
 Reason for placing the finance functions in the hands of top management
 Financial decisions are crucial for the survival of the firm.
 The financial actions determine solvency of the firm
 Centralisation of the finance functions can result in a number of economies to the firm.
Status and Duties of Finance Executives
 The exact organisation structure for financial management will differ across firms.
 The financial officer may be known as the financial manager in some organisations, while in others as the vice-president of finance or the director of finance or the financial controller.
Role of Treasurer and Controller
 Two more officers—the treasurer and the controller—may be appointed under the direct supervision of CFO to assist him or her.
 The treasurer’s function is to raise and manage company funds while the controller oversees whether funds are correctly applied.