2. Finance is the set of activities dealing with the management of
funds
Finance is also the science and art of determining if the funds of
an organization are being used properly
Finance studies and addresses the ways in which individuals,
businesses, and organizations raise, allocate and use monetary
resources over time, taking into account the risks entailed in their
projects
3. Public finance (Government Finance)
Public finance means collection of money through taxes
or other sources and management of revenue and
expenditure by the government
Corporate finance (Business Finance)
Personal finance
Involve paying for education, financing durable goods,
buying insurance, investing and saving for retirement
etc.
5. Corporate Finance refers to any decisions made by a
firm that will have an impact on its financial position.
These decisions may be from production, marketing or
any other department and are assumed to have a
strategic impact.
These decisions are:
◦ Investment Decisions
◦ Financing Decisions
◦ Dividend Decisions
6. Aditya Birla Group to invest $ 500 mn in Turkey
NTPC Ltd to invest Rs 18,346 crore in 2 projects
Groupe SEB buys 55% in Maharaja Whiteline
Srei Equipment Finance, a unit of SREI Infrastructure
Finance is planning to raise Rs 700 million rupees via
5-year 7-month bonds at 12.60 percent
7. Goodwill Hospital and Research Centre, a multi speciality
hospital in Noida under the name " Ojjus Medicare", is
entering the capital market to raise Rs 62 crore with its initial
public offer on December 30, 2011
Liquor maker United Spirits said late on Wednesday its board
approved raising up to $225 million via foreign currency
convertible bonds ( FCCBs) to cut high cost debt and help
improve earnings.
Nestlé India Ltd has declared second interim dividend of Rs.
27.00 per equity share for the year 2011
8. The financial management is generally concerned with
procurement, allocation and control of financial resources of a
concern. The objectives can be-
To ensure regular and adequate supply of funds to the concern.
To ensure adequate returns to the shareholders which will
depend upon the earning capacity, market price of the share,
expectations of the shareholders.
To ensure optimum funds utilization. Once the funds are
procured, they should be utilized in maximum possible way at
least cost.
To ensure safety on investment, i.e. funds should be invested in
safe ventures so that adequate rate of return can be achieved.
To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between
debt and equity capital.
9. The scope of financial management can be broken down into
three major decisions as functions of finance:
◦ What long-term investments should the firm take on?
◦ Where will we get the long-term financing to pay for the
investment?
◦ How will we manage the everyday financial activities of the
firm?
10. (1)Investment Decision
Capital budgeting
What long-term investments or projects should the
business take on?
Main elements:
◦ Long term assets and their composition
◦ Risk
◦ The concept and measurement of the cost of capital
Magnitude of cash flows, timing and riskiness of the
cash flows are crucial to consider
11. They influence the firm’s growth in the long run
They affect the risk of the firm
They involve the commitment of large amount of funds
They are irreversible, or reversible at substantial loss
They are among the most difficult decisions to make
12. Working capital management
◦ How do we manage the day-to-day finances of the
firm?
Trade-off between profitability and liquidity
Overall Working Capital management
Efficient management of the individual current assets
13. (2) Financing Decision
Capital structure
◦ How should we pay for our assets?
◦ Should we use debt or equity?
Capital Structure theory
Capital Structure decision
(3) Dividend Policy Decision
o How to deal with the profits of a firm?
o How much profits should be distributed to the
shareholders and how much to retain in the business?
14. What a firm should attempt to achieve with its investments,
financing and dividend policy decisions
Profit maximization (profit after tax)
Maximizing earnings per share
Wealth maximization
But WHOSE WEALTH?
The real reason behind failure in defining the proper objective is
the conflict between stakeholders of the firm.
15. Stockholders or Owners
Bondholders or Lenders
Employees
Financial Markets
Society
16. Maximizing the rupee income of firm
Resources are efficiently utilized
Appropriate measure of firm performance
Serves interest of society also
Objections to Profit Maximization
o It is Vague
o It Ignores the Timing of Returns
o It Ignores Risk
o In new business environment profit maximization is regarded as
o Unrealistic
o Difficult
o Inappropriate
o Immoral
17. Maximising PAT or EPS does not maximise the economic
welfare of the owners.
Ignores timing and risk of the expected benefit
Market value is not a function of EPS.
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.
18. 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.
19. CRITIQUE AND DEFENCE OF SHAREHOLDER WEALTH MAXIMISATION
GOAL
Critique Defence
• The capital market sceptics • Financial economists argue
argue that stock prices fail that stock prices are the
to reflect true values least biased estimates of
intrinsic values in developed
markets
• The balancers argue that a • Balancing the interests of
firm should seek to various stakeholders is not
‘balance’ the interests of a practical governing
various stakeholders objective
• Advocates of social • The only social
responsibility argue that a responsibility of business
business firm must assume is to create value and do so
wider social responsibilities legally and with integrity
20. In your own words, explain the role and importance of
financial management to a manufacturer whose
objective is to improve quality
21. to make sure there are sufficient funds for the organisation to
buy all the resources it needs to achieve its objectives i.e.
appropriate quality of raw materials, correctly trained staff,
well maintained machinery
to make sure there is enough money to recruit and train
appropriately skilled staff to satisfy the objective of improving
quality.
to make sure that all the costs/expenses are under control
to make sure that the organisation is performing profitably and
efficiently without compromising quality
to reduce costs of raw materials by ensuring the best value for
money from suppliers.
22. Estimation of capital requirements
Determination of capital composition
Choice of sources of funds
Investment of funds
Disposal of surplus
Management of cash
Financial controls
23. Stockholders
Hire/Fire & Maximize Stockholder’s
Control Managers Wealth
Lend Money Trace Economic Cost
& Returns
Bondholders Managers taking
Financial Decisions Society
Provide Debt Service & No Negative
Protect their Interests Social Impact
Real & True Market Price
Information = True Value
Financial Markets
24. The Agency Theory was first introduced by Jensen and
Meckling in 1976.
This theory explains how the conflict between various
stakeholders can result in sub-optimal allocation of resources.
Agency relationship exists when one party (the principal) hires
another party (the agency) to perform some services and in doing
so, delegates DM (Decision Making) authority to the agent.
Shareholders are principal and CEO is the agent; if CEO is
principal then managers are agents.
25. Divergent Objectives
Non-observability of Agent’s Actions
26. Stockholders
Have Little Control Maximize Managers Interest at
Stockholder’s Expense
Lend Money
Cannot Trace Cost
Bondholders Managers taking
Financial Decisions Society
Exploitation by Owners & Negative
Default in Payments Social Impact
Delayed & Market Price
Misleading Information ≠ True Value
Financial Markets
27. Agency costs include the less than optimum share value
for shareholders and costs incurred by them to monitor
the actions of managers and control their behaviour.
28. Managerial compensation
◦ Attractive monetary and non monetary incentives
◦ Incentives can be used to align management and stockholder
interests
◦ Close monitoring by stakeholders, board of directors and
outside analysis
◦ The threat of firing
◦ The threat of takeover
1.28
29. Stockholders
Control by Incentive Maximize Stockholder’s
& Other Systems Wealth
Lend Money
Laws & Regulations
Bondholders Managers taking
Financial Decisions Society
Put Stringent Covenants Negative Social
To Safeguard interests Impact Reduced
Information from
Various Sources Market Price
& Legal Remedies ≈ True Value
Financial Markets
30. The importance of the finance function depends on the size of the
firm. Financial management is an integral part of the overall
management of the firm. In small firms, the finance functions are
generally performed by the accounting departments. In large
firms, there is a separate department of finance headed by a
specialist known by different designations such as vice-president,
director of finance, chief finance officer and so on.
31. Board of Directors
Managing Director/Chairman
Vice-President/Director (Finance)/Chief Finance Officer (CFO)
Treasurer Controller
Financial Cash Credit Foreign Cost
Tax accounting
planning and Manager Manager exchange manager
fund-raising manager manager
manager
Capital Pension Corporate Financial
expenditur fund accounting accounting
e manager manager manager manager
Organization of Financial Management Function
34. Key macro-economic factors like the growth rate
of the economy, the domestic savings rate, the
role of the government in economic affairs, the tax
environment, the nature of external economic
relationships, the availability of funds to the
corporate sector, the rate of inflation, the real rate
of interests, and the terms on which the firm can
raise finances define the environment in which the
firm operates. No finance manager can afford to
ignore the key developments in the macro
economic sphere and the impact of the same on
the firm.
35. Growth
Control of inflation
Full employment
External balance (or Balance of payments)
Editor's Notes
Lawrence J. Gitman has defined finance as 'an art and science of managing money'. It implies that finance is Both art and science. Finance is a matured science since it provides knowledge as to how and at what time a firm should invest to outstrip other firms. On the other hand, finance is also an art. In modern time, finance has become more analytical. The new financial theories have been developed. Many data have been developed to prove these theories right or wrong. the financial mangers should examine the differentalternatives related to the raising and managing money. they should formulate the models to predict the results obtained from the use of any one alternative. In this way, the new theories, models and methods have made finance scientific. But the financial theories cannot be accurately compared with the 'Scientific Method' that applies to physics science. Physics predicts as to what happens from an action. for example, physics says that if a ball is thrown upward, that eventually falls down. This is not true in finance. For example, the financial analyst can predict from the historical trend that the rate of interest will change in a definite pattern. But, in reality, the rate of interest may change in different pattern. Despite this, financial guidelines and theories are useful in financial decision making. But any decision should be made by mixing those guidelines with self-skill. According to R.A. Stevenson, in modern time finance is a 'scientific art'. He opines 'finance is the science of knowing how to predict financial consequences and the art of knowing when to act'. It assists the financial managers of today to avoid the difficulties of tomorrow
Incentives – discuss how incentives must be carefully structured. For example, tying bonuses to profits might encourage management to pursue short-run profits and forego projects that require a large initial outlay. Stock options may work, but there may be an optimal level of insider ownership. Beyond that level, management may be in too much control and may not act in the best interest of all stockholders. The type of stock can also affect the effectiveness of the incentive. Corporate control – ask the students why the threat of a takeover might make managers work towards the goals of stockholders. Other groups also have a financial stake in the firm. They can provide a valuable monitoring tool, but they can also try to force the firm to do things that are not in the owners’ best interest.
