financial management

1. 10-1
1
CHAPTER
An Introduction to Financial
Management

2. 10-2
What is Financial Management?
Acc. To Guthmann and Dougall;
“Business finance can be broadly defined as the
activity concerned with the planning, raising
controlling and administrating the funds used
in the business.”
Acc. To Joseph & Massie;
“Financial Management is the operational activity
of a business that is responsible for obtaining
and effectively utilizing the funds necessary for
efficient operations”.

3. 10-3
Functions of Financial Management
 Determining Financial needs.
 Financing Decision.
 Investment Decision.
 Working Capital Decision.
 Dividend Policy Decision
 Financial Control
 Routine Functions

4. 10-4
Objectives of Financial Management
Objectives provide a framework with in which various
decisions relationg to investment, Financing and dividend
are to be taken.

5. 10-5
Profit Maximization
 Barometer for measuring the efficiency and
economic prosperity of a business
 Efficient allocation and utilization of scarce
resources.
 Source of finance for the growth and development
of the business.
 Fulfilling goal of social welfare.
 Survival under unfavorable economic and business
condition

6. 10-6
 Term ‘Profit’ is Ambiguous and vague
Ignores the time value of money
Ignores risk Factor of the prospective earning
stream of projects
Do not consider effect of the dividend policy
on the market price of the shares

7. 10-7
Wealth Maximization
wealth maximization is the single substitute for a stakeholder’s
utility. When the firm maximizes the shareholder’s wealth, the
individual stakeholders can use this wealth to maximize his
individual utility.
Stockholder’s current wealth in the firm = (No. Of shares
owned) * (Current stock price per share)
Maximum
utility
Maximum
stake holder’s
wealth
Maximum
current price
per share

8. 10-8
 universally accepted, because it takes cares interest
of financial institution, owners, employees and
society at large
 guides the management in framing the consistent
strong dividend policy
 ensures the security to the lenders.

9. 10-9
 Only prescriptive not descriptive.
 Not necessarily socially desirable.
 Controversary as to whether to maximize the
stockholder’s wealth or stakeholder’s wealths.