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Lecture1.pptx
1. Topics to be covered in this Chapter
Financial Management Decisions
Forms of Business organizations
Goals of finanacial management
Ownership & control
Stakeholders
Financial markets
Faculty
of
Management
Sciences
2. KEY POINTS/ CONCEPTS
Introduction to corporate finance
Objectives of a company
Primary objective
Maximization of Shareholders Wealth
Secondary Objectives
Maximize Profits
Maximize Sales Revenue
Minimize Cost
Increase Market Share
Customer Satisfaction
Organization Growth
Faculty
of
Management
Sciences
3. Financial Objectives
High return on capital employed
Increase in profit margins
Maintaining adequate cash flows
Increase in earning per share
Increase in dividend payments
Maintaining gearing level
Faculty
of
Management
Sciences
4. Non-Financial Objectives
Welfare of employees
Welfare of management
Fulfillment of responsibilities towards
customers/ suppliers
The welfare of society
FINANCIAL STATEMENTS AT A GLANCE
Income Statement
Balance Sheet
Cash Flow Statement
Faculty
of
Management
Sciences
5. What comes first in your mind when you plan to
start your own business?
6. 1- Investment Decisions/ Capital Budgeting Decisions
What should we do? In which project
should we invest or not?
2- Financing Decisions
How would we finance the investments in
projects?
3- Working Capital Decisions
How would we manage running finances?
Faculty
of
Management
Sciences
7. Financial Manager
The person responsible to answer all
three above stated decisions in a
corporation
WHAT IS Corporate FINNACE?
Corporate Finance focuses on decisions
relating to how much and what type
of assets to acquire, how to raise the
capital needed to buy assets and how
to run the firm so as to maximize its
value
Faculty
of
Management
Sciences
8. Concerns of Financial Manager
Investment Decisions
Size, Timings and Risk Factor of future
cash flows
Financing Decisions/Capital Structuring
Decisions
Debt or Equity financing
Working Capital Decisions
Management of short term assets &
liabilities
Faculty
of
Management
Sciences
9. Forms of Business Organizations
1- Sole proprietorship
2- Partnership
General
Limited
3- Corporations
Faculty
of
Management
Sciences
10. Goals of Financial Management
Primary Goal
Maximize the Market Value of the
existing owners equity
Reason?
Faculty
of
Management
Sciences
12. Do you think Liquidity and Profitability goals will
conflict each other?
13. Agency Problem/ Ownership & Control
Principal – Agent Relationship
Financial Mangers should act in the best
interest of the stockholders
Agency Relationship
The relationship between the stockholders
and the management
Agency Problem
Conflict of interest between stockholders
and management
Example ??
Faculty
of
Management
Sciences
14. Agency Cost
Cost of the conflict of interest between
stockholders and management
Types of Agency Cost
Direct Agency Cost
Indirect Agency Cost
Faculty
of
Management
Sciences
15. Direct Agency Cost
1- Corporate expenditure that benefits
management but costs the
stockholders
i-e Purchase of luxurious and un-needed corporate
asset
2- Expense that arises from the need to
monitor management action
i-e Paying outside auditors to assess the accuracy of
financial statement information
Faculty
of
Management
Sciences
16. Indirect Agency Cost
Cost of lost opportunity
i-e Not taking a project (might be riskier one)
but in the interest of shareholders
Faculty
of
Management
Sciences
17. Do managers act in the stockholders
interest?
Managerial compensation
Control of the firm
Faculty
of
Management
Sciences
18. Do managers act in the stockholders interest?
Managerial compensation
Reasons:
1. Financial Performance (General Terms)
2. Increase in share value (Particular Terms)
Terms:
1. Option to buy stock
2. Promotions/High Salaries
Faculty
of
Management
Sciences
19. Do managers act in the stockholders interest?
Control of the firm
Control of the firm rests with the
stockholders
1. Election of board of directors
2. Hiring / Firing of managers
Faculty
of
Management
Sciences
20. Do managers act in the stockholders interest?
Control of the firm (contd.)
Proxy Fighting
A mechanism by which unhappy
stockholders can act to replace the
existing management
i-e Acquiring of a target company by persuading
current shareholders
Faculty
of
Management
Sciences
21. STOCKHOLDERS CONTROLS THE FIRM AND THE
STOCKHOLDERS WEALTH MAXIMIZATION IS THE
RELEVANT GOAL OF THE CORPORATION/
MANAGEMENT
22. STAKEHOLDERS OF A CORPORATION
Anyone that can affect or be affected by a
company’s actions, objectives and policies
OR
Anyone who has a claim on the cash flows of
the firm
Types of Stakeholders
Internal
External
Faculty
of
Management
Sciences
25. FINANCIAL MARKETS & THE
CORPORATIONS
Markets where financial instruments/
securities are traded
Types of Financial Markets
Primary Markets
Secondary Markets
Faculty
of
Management
Sciences
26. PRIMARY MARKETS
Primary markets refers to the markets where
the securities are issued first time or the
market of original sale of securities by
government and corporations
Types of Primary Markets
IPO’S (Selling securities to general public)
Private Placements ( Selling securities to
specific buyers)
i-e Financial Institutions, Insurance Companies,
Mutual Funds
IS SECP REGISTRATION MANDATORY FOR PRIMARY MARKETS?
Faculty
of
Management
Sciences
27. SECONDARY MARKETS
Market in which securities are bought
and sold after the original sale
TYPES OF SECONDARY MARKETS
Dealer Markets
Auction Markets
Faculty
of
Management
Sciences
28. SECONDARY MARKETS
Dealer Markets
Dealer markets in stocks/Debt are called OTC (Over
the Counter)
What will be the Model of OTC?
Physical LOCATION?
COMMUNICATION MODE?
Faculty
of
Management
Sciences
31. CAPITAL INVESTMENT
Capital investment is an expenditure
incurred on non-current assets (Fixed
Assets) in expectation of profits in the
future
What are capital and revenue
Expenditures?
Faculty
of
Management
Sciences
32. CAPITAL INVESTMENT DECISION
MAKING PROCESS
1. Identifying investment opportunities
2. Screening investment proposals
3. Analyzing and evaluating investment
proposals
4. Approving investment proposals
5. Implementing, monitoring and
reviewing investments
Faculty
of
Management
Sciences
33. ACCOUNTING PROFITS & CASH FLOWS
Why it is more appropriate to evaluate future
cash flows rather than accounting profits
for the purpose of capital investment?
Relation between cash flows and profits
Profits= Net Cash Flows – Depreciation
Net Cash Flows= Profits + Depreciation
Faculty
of
Management
Sciences