Chapter - 1 Nature of Financial Management
Business Activities <ul><li>Production  </li></ul><ul><li>Marketing </li></ul><ul><li>Finance </li></ul>Rakesh Kumar Singh
Finance Functions <ul><li>Investment or Long Term Asset Mix Decision </li></ul><ul><li>Financing or Capital Mix Decision <...
Finance Manager’s Role <ul><li>Raising of Funds </li></ul><ul><li>Allocation of Funds </li></ul><ul><li>Profit Planning </...
Financial Goals <ul><li>Profit maximization (profit after tax) </li></ul><ul><li>Maximizing Earnings per Share </li></ul><...
Profit Maximization <ul><li>Maximizing the Rupee Income of Firm  </li></ul><ul><ul><li>Resources are efficiently utilized ...
Objections to Profit Maximization <ul><li>It is Vague </li></ul><ul><li>It Ignores the Timing of Returns </li></ul><ul><li...
Maximizing EPS <ul><li>Ignores timing and risk of the expected benefit </li></ul><ul><li>Market value is not a function of...
Shareholders’ Wealth Maximization <ul><li>Maximizes the net present value of a course of action to shareholders. </li></ul...
Risk-return Trade-off <ul><li>Risk and expected return move in tandem; the greater the risk, the greater the expected retu...
Managers Versus Shareholders’ Goals <ul><li>A company has stakeholders such as employees, debt-holders, consumers, supplie...
Financial Goals and Firm’s Mission and Objectives <ul><li>Firms’ primary objective is maximizing the welfare of owners, bu...
Financial Goals and Firm’s Mission and Objectives <ul><li>The shareholders’ wealth maximization is the second-level criter...
Organisation of the Finance Functions   <ul><li>Reason for placing the finance functions in the hands of top management  <...
Status and Duties of Finance Executives <ul><li>The exact organisation structure for financial management will differ acro...
Role of Treasurer and Controller <ul><li>Two more officers—the  treasurer  and the  controller —may be appointed under the...
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Financial Management chapter-1

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  1. 1. Chapter - 1 Nature of Financial Management
  2. 2. Business Activities <ul><li>Production </li></ul><ul><li>Marketing </li></ul><ul><li>Finance </li></ul>Rakesh Kumar Singh
  3. 3. Finance Functions <ul><li>Investment or Long Term Asset Mix Decision </li></ul><ul><li>Financing or Capital Mix Decision </li></ul><ul><li>Dividend or Profit Allocation Decision </li></ul><ul><li>Liquidity or Short Term Asset Mix Decision </li></ul>Rakesh Kumar Singh
  4. 4. Finance Manager’s Role <ul><li>Raising of Funds </li></ul><ul><li>Allocation of Funds </li></ul><ul><li>Profit Planning </li></ul><ul><li>Understanding Capital Markets </li></ul>Rakesh Kumar Singh
  5. 5. Financial Goals <ul><li>Profit maximization (profit after tax) </li></ul><ul><li>Maximizing Earnings per Share </li></ul><ul><li>Shareholder’s Wealth Maximization </li></ul>Rakesh Kumar Singh
  6. 6. Profit Maximization <ul><li>Maximizing the Rupee Income of Firm </li></ul><ul><ul><li>Resources are efficiently utilized </li></ul></ul><ul><ul><li>Appropriate measure of firm performance </li></ul></ul><ul><ul><li>Serves interest of society also </li></ul></ul>Rakesh Kumar Singh
  7. 7. Objections to Profit Maximization <ul><li>It is Vague </li></ul><ul><li>It Ignores the Timing of Returns </li></ul><ul><li>It Ignores Risk </li></ul><ul><li>Assumes Perfect Competition </li></ul><ul><li>In new business environment profit maximization is regarded as </li></ul><ul><ul><li>Unrealistic </li></ul></ul><ul><ul><li>Difficult </li></ul></ul><ul><ul><li>Inappropriate </li></ul></ul><ul><ul><li>Immoral. </li></ul></ul>Rakesh Kumar Singh
  8. 8. Maximizing EPS <ul><li>Ignores timing and risk of the expected benefit </li></ul><ul><li>Market value is not a function of EPS. Hence maximizing EPS will not result in highest price for company's shares </li></ul><ul><li>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 </li></ul>Rakesh Kumar Singh
  9. 9. Shareholders’ Wealth Maximization <ul><li>Maximizes the net present value of a course of action to shareholders. </li></ul><ul><li>Accounts for the timing and risk of the expected benefits. </li></ul><ul><li>Benefits are measured in terms of cash flows. </li></ul><ul><li>Fundamental objective—maximize the market value of the firm’s shares. </li></ul>Rakesh Kumar Singh
  10. 10. Risk-return Trade-off <ul><li>Risk and expected return move in tandem; the greater the risk, the greater the expected return. </li></ul><ul><li>Financial decisions of the firm are guided by the risk-return trade-off . </li></ul><ul><li>The return and risk relationship: Return = Risk-free rate + Risk premium </li></ul><ul><li>Risk-free rate is a compensation for time and risk premium for risk. </li></ul>Rakesh Kumar Singh
  11. 11. Managers Versus Shareholders’ Goals <ul><li>A company has stakeholders such as employees, debt-holders, consumers, suppliers, government and society. </li></ul><ul><li>Managers may perceive their role as reconciling conflicting objectives of stakeholders. This stakeholders’ view of managers’ role may compromise with the objective of SWM. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>Rakesh Kumar Singh
  12. 12. Financial Goals and Firm’s Mission and Objectives <ul><li>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 </li></ul><ul><li>Firms state their vision, mission and values in broad terms </li></ul><ul><li>Wealth maximization is more appropriately a decision criterion , rather than an objective or a goal . </li></ul><ul><li>Goals or objectives are missions or basic purposes of a firm’s existence </li></ul>Rakesh Kumar Singh
  13. 13. Financial Goals and Firm’s Mission and Objectives <ul><li>The shareholders’ wealth maximization is the second-level criterion ensuring that the decision meets the minimum standard of the economic performance. </li></ul><ul><li>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. </li></ul>Rakesh Kumar Singh
  14. 14. Organisation of the Finance Functions <ul><li>Reason for placing the finance functions in the hands of top management </li></ul><ul><ul><li>Financial decisions are crucial for the survival of the firm. </li></ul></ul><ul><ul><li>The financial actions determine solvency of the firm </li></ul></ul><ul><ul><li>Centralisation of the finance functions can result in a number of economies to the firm. </li></ul></ul>Rakesh Kumar Singh
  15. 15. Status and Duties of Finance Executives <ul><li>The exact organisation structure for financial management will differ across firms. </li></ul><ul><li>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. </li></ul>Rakesh Kumar Singh
  16. 16. Role of Treasurer and Controller <ul><li>Two more officers—the treasurer and the controller —may be appointed under the direct supervision of CFO to assist him or her. </li></ul><ul><li>The treasurer’s function is to raise and manage company funds while the controller oversees whether funds are correctly applied. </li></ul>Rakesh Kumar Singh

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