This document provides an overview of financial management concepts for an MBA program. It discusses the role of the financial manager in ensuring availability of funds and determining sources of funds. It also compares equity versus debt capital, using examples to show how different leverage levels impact shareholder returns. The key financial management decisions are outlined as investment, financing, and asset management decisions. Finally, the objectives of financial management are discussed as either profit maximization or wealth/value maximization.

1. FINANCIAL MANAGEMENT
FOR MBA
PREPARED
BY
YAHYE HASSAN WARSAME
2015

2. Financial management MBA
Intorduction
Financial management is concerned with the
acquisition, financing, and management of assets
with some overall goal in mind
The role of financial manager
There are three managerial roles that managers
must know well and they are:
Ensure availability of funds
Where to raise the funds from?
How much you raise and from where?

3. Equity vs Debt Capital
Equity capital:
represents the
personal investment
of the owner (s) of a
company
Debt capital: the
financing that a small
business owner has
borrowed and must
repay with interest

4. Example
Assume 3 firms
A B C
CAPITAL- 1bn 1bn 1bn
Equity 800m 100m 480m
Debt – 200m 900m 520m
Then we assess all the firms leverage which is high and low and middle
I.e. firm A - low leverage
B - High leverage
C - Moderate leverage
Where leverage was low, returns are high and where leverage was high
the financing risk which in turn will influence the earnings of the share
holder.

5. Example
Assume the cost of borrowing is 20% interest; business pays 50% tax
bracket corporate tax. These business made earnings of 700m
before interest and tax assess the impact of the shareholders
returns.
Solution
A B C
EBIT 700M 700M 700M
Intrest 40M 180M 104M
TAX’S 50%) 330M 260M 298M
EAT 330M 260M 298M
Where leverage was low, returns are high and where leverage was
high the financing risk which in turn will influence the earnings of the
share holder.

6. The Decision Functions of Financial Management t

It can be categories into THREE:-
1) Investment Decision - The most important decision. It begins with the firm
determining the total amount of assets needed to be held by the firm. There are 2
types of investment decision:
a) Capital Investment Decision - Involves large sums of money. The impact is
critical. examples acquire a new machine or to set up a new plant.
b) Working Capital Investment Decision - a more routine or schedule form of
decision . Examples are determination of the amount of inventories, cash and account
receivables to hold within a certain period.
2) Financing Decision - The second major decision. After deciding on what assets to
buy or what securities to invest in, the financial manager would have to decide on
how to finance these assets.
Sources of Finance - 2 sources ; Borrowings and/ or Capital
3) Assets Management Decision - The third and last decision. Once the assets have
been acquired and appropriate financing provided, these assets must be managed
efficiently. By managing currents assets effectively and efficiently, the company can
increase its returns and minimizes its risk of illiquidity.

7. OBJECTIVES OF FINANCIAL
MANAGEMENT
The objective provide a framework for
optimum financial decision making. They
are concerned with designing a method of
operating the internal investment and
financing of a firm.there are two widely
discussed approaches under this, these
are:
Profit Maximisation
Wealth Maximisation

8. Profit Maximisation
Profit /EPS maximization should be undertaken and
those that decrease profits or EPS are to be avoided.
Profit is the test of economic efficiency. It leads to
efficient allocation of resources, as resources tend to be
directed to uses which in terms of profitability are the
most desirable. Financial management is mainly
concerned with the efficient economic resources namely
capital. The main technical flaws of this criteria are :
uncertainty
Timing of benefits
Quality of benefits.

9. Wealth Maximisation
Wealth maximization is also known as Value or Net present
worth maximization. Its operational features satisfy all the
three requirements of the operational of the financial course of
action namely, exactness, quality of benefits, and the time
value of money. Two important issues related to the value/share
price maximization are:
Focus on stakeholders ,stakeholders include groups such
as employees, customers, suppliers, creditors, owners and
others who have a direct link to the firm.
 EVA (Economic Value Added) –EVA is equal to the
after-tax operating profits of a firm less the cost of the
firm to finance investments.