Overview of Financial Management

1. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Dr.Jayashree R. KotnalDr.Jayashree R. Kotnal
Asst. Professor & Head, M.Com ProgrammeAsst. Professor & Head, M.Com Programme
SBS Arts & Commerce College for WomenSBS Arts & Commerce College for Women
Vijayapur.Vijayapur.
Chapter 1
Financial
Management : An
Overview

2. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Pearson Prentice HallFoundations of Finance1 - 2
The Goal of the FirmThe Goal of the Firm
• The goal of the firm is maximizationThe goal of the firm is maximization
of shareholder wealthof shareholder wealth
oror
• Maximization of the price of theMaximization of the price of the
existing common stockexisting common stock

3. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
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Profit MaximizationProfit Maximization
• Stresses the efficient use of capitalStresses the efficient use of capital
resourcesresources
• Not specific to time frame for profits toNot specific to time frame for profits to
be measuredbe measured
• Goals are not precise, allow forGoals are not precise, allow for
misinterpretationmisinterpretation
• Ignores uncertainty and timingIgnores uncertainty and timing

4. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
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Benefits of MaximizingBenefits of Maximizing
Shareholder WealthShareholder Wealth
• Good decisions are those that createGood decisions are those that create
wealth for the shareholderwealth for the shareholder
• Societal benefits as businessesSocietal benefits as businesses
compete to create wealthcompete to create wealth
• Includes effects of all financialIncludes effects of all financial
decisionsdecisions

5. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Definition of Financial Mgt.Definition of Financial Mgt.
• Financial Management- is the
process of transforming existing
assets into new, contractual
forms, as well as the analytical
techniques needed to support
this process, for the purpose of
wealth creation in modern,
capitalistic economies..
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6. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Another Definition:Another Definition:
Financial Management entailsFinancial Management entails
planning for the future for aplanning for the future for a
person or a business enterpriseperson or a business enterprise
to ensure a positive cash flow. Itto ensure a positive cash flow. It
includes the administration andincludes the administration and
maintenance of financial assets.maintenance of financial assets.
Besides, financial managementBesides, financial management
covers the process of identifyingcovers the process of identifying
and managing risk. and managing risk.
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7. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Scope of FinancialScope of Financial
ManagementManagement
• Money and Capital MarketsMoney and Capital Markets
-which deals with securities-which deals with securities
markets and financialmarkets and financial
institutions;institutions;
• Investments -which focuses onInvestments -which focuses on
the decisions. the decisions.
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8. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Cont.,Cont.,
• made by both individual andmade by both individual and
institutional investors as theyinstitutional investors as they
choose securities for theirchoose securities for their
investment portfolios.investment portfolios.
• Financial Management-orFinancial Management-or
‘business finance’, which‘business finance’, which
involves decisions within firms. involves decisions within firms.
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9. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Financial Mgt. DecisionsFinancial Mgt. Decisions
• Capital Budgeting: The processCapital Budgeting: The process
of planning and managing aof planning and managing a
firm’s long term investment. firm’s long term investment.
• Capital StructureCapital Structure : The: The
mixture of debt and equitymixture of debt and equity
maintained by the firm. maintained by the firm.
• Working CapitalWorking Capital
ManagementManagement short termsshort terms
asset and liabilities. asset and liabilities. Pearson Prentice HallFoundations of Finance1 - 9

10. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Capital BudgetingCapital Budgeting
• Capital Budgeting(or investmentCapital Budgeting(or investment
appraisal)-appraisal)- is the planning process usedis the planning process used
to determine whether a firm's long termto determine whether a firm's long term
investments such as new machinery,investments such as new machinery,
replacement machinery, new plants, newreplacement machinery, new plants, new
products, and research developmentproducts, and research development
projects are worth pursuing. It is budgetprojects are worth pursuing. It is budget
for major capital, or investment,for major capital, or investment,
expenditures. expenditures.
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11. Chapter 1 AN INTRODUCTION TO FINANCIAL MANAGEMENT – THE TIES THAT BIND
Capital Budgeting TechniquesCapital Budgeting Techniques
• Net Present Value (NPV)Net Present Value (NPV) -each-each
potential project's value ispotential project's value is
estimated using a estimated using a
discounted cash flow (DCF)discounted cash flow (DCF)
valuation, to find its NPV. valuation, to find its NPV.
• Profitability Index (PI)Profitability Index (PI) -identifies-identifies
the the
relationship of investment to payoffrelationship of investment to payoff
of a proposed project. of a proposed project.
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