Financial mangement unit 1

Financial Mangement Unit -1
Represented By The Following Students of Sem 2
12MBA1016 - Amir Khan
15MBA1537 - Sabha
15MBA1572 - Chandni Rani
15MBA1459 - Sumit dadwal
15MBA1485 - Akashdeep Rangra
15MBA1042 - Furqan –Ul-Qureshi
15MBA1040 - Mufti Mohd. Murtaza
15MBA1472 - Gurpreet Kaur
15MBA1056 - Kriti

Finance
 Money is an arm or a leg. You can either use
it or lose it._ Henry Ford
 The Sanskrit saying “arthahsachivah” means
finance reigns supreme.
 Ready money is ‘Alladin lamp’._Byron

Meaning of finance
• Finance is the management of the monetary affairs
of a company. ____ Paul G Hastings
• Financing is the process of organizing the flow of
funds so that a business firm can carry out its
objectives in the most efficient manner and meet its
obligations as they fall due. __Ronald
• Finance is the common denominator for a vast range
of corporate objectives, and the major part of any
corporate plan must be expressed in financial terms.
____________ALKignshott

Finance
 Finance means to arrange payment for it.
__George Christy and Peter Rodan
 The act of providing the means of payment.
__Encyclopedia Britannica
In nutshell finance is closely linked with the flow of
money, the availability of funds at a time, advance
knowledge of, or information about financial
commitments etc. The focus of finance is on the flow of
funds which is justifiable, because the financial manager
must take financial decisions based on mainly flow of
funds.

FINANCE FUNCTION
• There exists an inseparable relationship between finance on one
hand and other functional areas on the other. All business activities,
directly or indirectly, involve the acquisition and use of funds. This
finance function though has a significant effect on other functions
yet it need not necessarily limit or constraint the normal
functioning of the enterprise.
• The functions of raising funds, investing them in assets, distributing
returns earned from assets to stakeholders and attempting to
balance cash flows are respectively called:
• 1) Financing decision;
• 2) Investment decision;
• 3) Dividend decision;
• 4) Liquidity decision.

FINANCE FUNCTION
1) Financing Decision: This decision is concerned with, where
from and how to acquire funds. The central issue is the
determination of appropriate proportion of debt and equity.
An attempt has to be made to have optimal capital structure
which means maximizing the value of shares.
The use of debt may increase the return and risk for
shareholders and hence, a proper balance has to be struck
between return and risk.
The issue of capital structure will be discussed in detail later
on.

FINANCE FUNCTION
2) INVESTMENT DECISION: A firm’s investment decision involves
capital expenditure, which is generally referred to as capital
budgeting. There are two important aspects of investment
decisions:
a) The evaluation of the prospective profitability of new investments;
b) The measurement of a cut-off rate against which the prospective
return of the new investments could be compared. Risk in
investment arises because of uncertain returns. Investment
proposals should be evaluated in terms of expected return and risk.
There is a broad agreement that the correct cut-off rate is the
opportunity cost of capital.
Capital budgeting will be discussed in detail at a later stage.

FINANCE FUNCTION
• 3) Dividend Decision: A finance manager is confronted with a
problem that whether a firm should distribute whole of the
profits earned or retain them or distribute a part and retain
the balance. Called, dividend policy, it should be designed in
terms of its impact on the shareholders wealth. A desirable
dividend policy is one which maximizes the market value of
the firm’s shares. As far as possible a firm should try to have a
stable dividend policy.
• Dividend is generally paid in cash.
• Dividend policy will be discussed at an appropriate place.

FINANCE FUNCTION
• 4) Liquidity Decision: Investment in current assets affects the
firm’s profitability and liquidity. Current assets should be
managed efficiently for safeguarding the firm against ill-
effects of illiquidity. A conflict generally exists between
profitability and liquidity while managing current assets and
an all out effort has to be made to have a trade-off between
the two.
• For ensuring such a trade-off the finance manager has to
develop sound techniques of managing current assets. In this
context precise estimates regarding current assets have to be
worked out and it has to be made certain that funds are made
available when required.

Financial management
• Financial management is an applied branch of general management that looks
after the finance function of a business. Management in general deals with
effective procurement and utilization of basic inputs like men, machines, methods,
materials and markets, and money or finance is a common thread that passes
through the wide-spectrum of all business activities; and management of finance
is a key variable that determines the success or failure of any business activity.
• Financial management is a dynamic subject and is responsible for operating a
business efficiently and effectively. Traditionally the subject of financial
management was considered only in narrow sense but the modern concept of
financial management has very wide coverage. It has to bring compatibility
between conflicting goals of liquidity and profitability.

Financial Management
• Financial management, however, should not be taken to be a profit-
extracting device. No doubt finances have to be so planned as to
contribute to profit-making activities within an organization, as
finance cannot be generated without profits. But there is much
more. Financial management implies a more comprehensive
concept than the simple objective of profit making or efficiency.
• Its broader mission is to maximize the value of the firm so that
interests of different sections of society remain undisturbed and
protected.
• Financial management is an integrated and composite subject. It
welds together substantial material that is found in accounting,
economics, mathematics, systems analysis and behavioral sciences
and uses other disciplines as its tool.

 Financial management deals with how the corporation obtains the
funds and how it uses them”.--- Hoagland
 “The term financial management refers to the application of skills in
the manipulation, use and control of funds”.--- Mock, Schultz and
Shuckett
 “Financial management is the custodian of corporate funds. It has
to plan, organise and control the finances of the enterprise”. ---S A
Sherlekar
 It can be concluded by saying that financial management is not only
concerned with procurement of funds but it also deals with three
decision-making areas called investment decisions, financing
decisions and dividend decisions.

• Strategic Financial Management: It is a part of financial
management. Over a period of time, a number of techniques
have evolved in the context of financial management. Some
techniques are aimed at the management of short term
funds, like funds flow analysis, cash flow analysis and
operating ratio etc. Some techniques on the other hand aim
at managing long-term funds, study of portfolios and study of
asset deployment etc. Strategic financial management
combines the knowledge of financial management,
economics and business environment to forecast and manage
the future of the enterprise.

• Financial management emerged as a
distinct field of study at the turn of 20th
century. Its evolution can be divided
into three broad phases (though the
demarcating lines between these
phases are somewhat arbitrary)__the
traditional phase, the transitional
phase, and the modern phase.

Traditional Phase
The traditional phase lasted for about four decades. Following were its
important features:
1) The focus of financial management was mainly on certain episodic
events like formation, issuance of capital, major expansion, merger,
reorganization and liquidation in the lifecycle of the firm.
2) The approach was mainly descriptive and institutional.
3) The approach placed great emphasis on long term problems.
4) The outsiders like investment bankers, lenders and other outside
interest point of view was dominant.
5) Financial management was not considered to be a managerial
function.
A typical work of the traditional phase is The Financial Policy Of
Corporations by Arthur S Dewing.

Transitional Phase
The Transitional Phase began around the early
1940s and continued through the early 1950s. Though
the nature of financial management during this
period was similar to that of the traditional phase,
greater emphasis was placed on the day-to-day
problems faced by financial managers in the areas of
funds analysis, planning and control. The focus shifted
to Working Capital Management.
A representative work of this phase is Essays On
Business Finance by Wilford J. Eitman et al.

Modern Phase
The Modern Phase began in mid 1950s and has witnessed
an accelerated pace of development with the infusion of
ideas from economic theory and application of
quantitative methods of analysis. The distinctive features
of the modern phase are:
1) The central concern of financial management is
considered to be a rational matching of funds to their uses
so as to maximize the wealth of the shareholders.
2) The approach of financial management has become more
analytical.
3) It covers security markets and studies security analysis and
portfolio management.

Modern----
4) It covers fund management of government, profitable and
non-profitable social oriented institutions like educational
institutions, hospitals clubs and NGOs.
5) It provides coverage to international fund flow management,
foreign exchange and risk management.
6) Finance has assumed the position of a managerial function and
is no longer an outsider looking approach. It deals with three
decision-making areas called investment decisions, financing
decisions and dividend decisions.
7) Modern financial management covers various tools and
techniques of evaluation, important being, funds flow analysis,
cash flow analysis, capital budgeting, cost of capital, leverages,
working capital management, eva, mva and capm etc.

Scope Of Financial Management
 As already discussed the scope of financial management has
increased manifold i.e. from simply raising of funds to investment
decisions, financing decisions and dividend decisions.
 The scope of financial management may broadly be classified into
five A’s viz.
1)Anticipation of the financial needs of the organization;
2)Acquisition of the necessary capital and determining the
sources of finance;
3)Allocation of funds which with the deployment of total funds
between the different components of fixed and current assets;

Scope----
4) Appropriation which basically considers the
division of total earnings between the dividend
distribution and retention of profits in the
business and
5)Assessment which deals with the control over
financial activities.

Objectives of Financial Management
Basic Objectives
Other Objectives
Basic Objectives:
1) Profit Maximisation
2) Wealth Maximisation

Profit Maximization
 Profit maximisation implies that a firm either produces maximum
output for a given amount of input, or uses minimum input for
producing a given output. Profit earning is the main aim of every
business activity.
 A business being an economic institution must earn profit to cover
its costs and provide funds for growth. Profit is the measure of
efficiency. Profits provide protection against risks. Accumulated
profits help an organization to face market oscillations. Thus profit
maximisation is considered to be the main objective of a business
enterprise .Profit is considered as the most appropriate measure of
a firm’s performance.

Points in favour of Profit maximisation.
 Profit is a barometer through which the performance of a
business unit can be gauged.
 Profit ensures maximum welfare of all the stakeholders.
 Profit maximisation increases the confidence of management
for modernization, expansion and diversification.
 Profit maximisation attracts the investors to invest.
 Profits indicate efficient utilization of funds.
 Profits ensure survival during adverse business conditions.

Points Against Profit Maximisation
• It may encourage corrupt and unethical practices.
• It ignores time value of money.
• It does not take into account the element of risk.
• It attracts cut throat competition.
• Huge amount of profit may attract Government intervention.
• Huge profits may invite problems from workers who may demand
increased wages and salaries.
• Customers may feel exploited.
• Profit maximisation may adversely affect the long term liquidity
position of the company.

Points Against----
• The term profit is vague and it cannot be defined
precisely.
• The effect of dividend policy on the market price of
shares is not considered.
• All said and done there is no denying the fact that no
organization can ignore the aspect of profit. The point to
be taken care of is that it is earned following ethical
practices. The interests of all the stakeholders should be
kept in mind. The point of view of the society at large
should not be ignored.

Wealth Maximisation
 The goals of the management should be such all the
stakeholders are benefited. A financial action that has a
positive NPV creates wealth for shareholders and, therefore,
is desirable. Between mutually exclusive projects the one with
the highest NPV should be adopted. This is referred to as the
principle of value additivity. The wealth will be maximized if
NPV criteria is followed in making financial decisions.
 The objective of wealth maximisation takes care of the
questions of the timing and risk of the expected benefits. It is
important to emphasize that benefits are measured in terms
of cash flows. In investment and financing decisions, it is the
flow of cash that is important, not the accounting profits.

Elements Of Wealth Maximisation
• Increase in profits
• Reduction in costs
• Judicious choice regarding sources of funds
• Minimum risk
• Long term value

Points in Favour of Wealth
Maximisation
• As the net present value of cash flows is considered, the
net effect of investments and benefits can be measured
in quantitative terms.
• It considers the concept of time value of money. The
present values of cash inflows and outflows helps the
management to achieve the overall objective of the
company.
• It takes care of the interests of all the stakeholders.
• It guides the management in formulating a consistent
dividend policy.

Points in Favour
• It considers the impact of risk factor and while
calculating the NPV at a particular discount rate,
adjustment is made to cover the risk that is
associated with investments.
• It implies long run survival and growth of the
firm.
• It leads to maximizing stockholders’ utility or
value maximisation of equity shareholders
through increase in stock price per share.

Point Against Wealth Maximisation
• It may not be socially desirable.
• There is some confusion as to whether the
objective is to maximize stockholders’ wealth or
the wealth of the firm , the latter includes other
financial claimholders also such as debenture
holders and preference shareholders etc.
• Because of divorce between ownership and
management, the latter may be more interested
in maximizing managerial utility than
shareholders wealth.

Risk Return Trade Off
 Financial decisions incur different degrees of risk. Financial decisions of a
firm are guided by the risk return trade-off. These decisions are
interrelated and jointly affect the market value of its shares by influencing
return and risk of the firm. The relationship between return and risk can
be expressed as follows:
Return= Risk free rate+Risk premium
 Risk free rate is a rate obtainable from a default-free Government
security. Risk free rate is a compensation for time and risk premium for
risk. Higher the risk of an action, higher will be the risk premium leading
to higher required return on that action. A proper balance between return
and risk should be maintained.

Risk----
 To maximize the market value of a firm’s shares. Such balance is
called risk-return trade-off, and every financial decision involves
this trade off.
 The financial manager , in a bid to maximize shareholders’ wealth,
should strive to maximize returns in relation to the given risk; he or
she should seek courses of actions that avoid unnecessary risks. To
ensure maximum return, funds flowing in and out of the firm
should be constantly monitored to ensure that they are
safeguarded and properly utilized. The financial reporting system
must be designed to provide timely and accurate picture of the
firm’s activities.

• All said and done, both the basic objectives of financial
management are important, though in the present day
set up , wealth maximisation has emerged to be the
premier.
• There is no harm in maximizing the profits, if they are
earned in a fair, just, transparent and judicious manner.
Profits earned by resorting to unethical, corrupt and
undesirable practices are not welcome. Profits earned in
a fair manner will certainly lead to the achievement of
ultimate object of financial management.

Other Objectives
Ensuring a fair return to shareholders
Building up reserves for growth and
expansion
Ensuring maximum operational
efficiency by efficient and effective
utilization of finances.
Ensuring financial discipline in the
organization
Maintenance of liquid assets

Ob. Of Financial Management
• Hampton has given the following objectives of financial
management:
• Profit Risk Approach to Financial Management:
• 1. Maximize profits;
• 2. Minimize risk;
• 3. Maintain control;
• 4. Achieve flexibility.
• Liquidity-Profitability Approach to Financial Goals:
• 1. Maximize liquidity;
• 2. Maximize profitability.

FINANCIAL SYSTEM
• The financial system refers to a system of borrowing and
lending of funds or the demand for and supply of funds of
all individuals, institutions, companies and of the
Government. Financial system involves industrial finance,
agricultural finance, developmental finance and
Government finance.
• Functions of Financial System: Financial system performs
the following interrelated functions which are essential to
a modern economy: The crucial role of financial system is
through saving-investment process, what we call Capital
Formation. The purpose of the financial system is to
mobilize the savings
•

FIN. SYSTEM
• effectively and allocating the same efficiently among
the ultimate users of funds i.e. investors.
• 1. It provides a payment mechanism for the exchange
of goods and services.
• 2. It enables in pooling of funds for undertaking large
scale enterprises.
• 3. It provides a system for spatial and temporal
transfer of resources.
• 4. It provides a way for managing uncertainty and
minimizing risk.
• 5. It generates information that helps in coordinating

FIN. SYSTEM
• decentralized decision-making.
• 6. It helps in dealing with the incentive problem when
one party has an informational advantage.
• ASSETS: Broadly speaking an asset whether tangible
or intangible is any possession that has value in
exchange. A tangible asset is one the value of which
depends on its physical properties. The examples of
such assets are Land and Building, Plant and
Machinery and vehicles etc. An intangible asset
represents claim to some future benefits. Financial
assets, for instance, are intangible assets as they
represent claims to future cash flows.

FIN. SYSTEM
• The entity that offers future cash flows is called the
Issuer of the financial asset and the owner of the
financial asset is called the Investor. Financial assets
are traded in the financial market and generally
include the following:
• Cash and Bank balance(coins, notes and bank
balance)
• Securities:
• i) Debt(short term such as bank overdraft and trade
credit etc. and long term such as bonds, mortgages
and debentures etc.)
• Ii) Equity

FIN. SYSTEM
• In case of a debt security the owner is generally
entitled to a fixed amount whereas in equity the
entitlement in on the residual amount.
• In recent years, however, there has been a
proliferation in the range of financial assets/products
which are available in the financial market. These
include Derivatives which generally include Futures
and Options. Derivatives are financial assets whose
values are derived from the underlying assets such as
shares, bonds, commodities and properties etc. They
are used either as hedging (reduction of risk) or
speculative instruments.

Production
Marketing
Finance
Finance function is the most important of all
business functions.
Business Activities

Areas of
finance
Financial
services
Financial
management

 Financial services is concerned with the
design and delivery of advice and
financial products to individuals,
businesses and governments.
Financial management is concerned with
the duties of the financial managers in the
business firm.

Financial management is an applied branch of
management that looks after the finance
function of a business.
“Financial management is the operational
activity of the business that is responsible for
obtaining and effectively utilizing the funds
necessary for efficient operations”.

• Financial management deals with how the
corporation obtains the funds and how it
uses them”-- Hoagland

• Financial management emerged as a distinct field
of study at the turn of 20th century. Its evolution
can be divided into three broad phases:
Evolution
Traditional
Transitional
Modern

Traditional phase lasted for about four decades. Following
were its important features:
1) The focus of financial management was mainly on
certain episodic events like formation, issuance of
capital, major expansion, merger, reorganization and
liquidation in the lifecycle of the firm.
2) The approach was mainly descriptive and institutional.
3) The approach placed great emphasis on long term
problems.
4) Financial management was not considered to be a
managerial function.
Traditional Phase

• The Transitional Phase began around the early
1940s and continued through the early 1950s.
• Nature of financial management during was
similar to that of the traditional phase.
• Greater emphasis was placed on the day-to-day
problems faced by financial managers in the areas
of funds analysis, planning and control.
Transitional Phase

The distinctive features of the modern phase are:
1) The central concern is considered to be a rational
matching of funds to their uses so as to maximize
the wealth of the shareholders.
2) The approach is more logical.
3) Covers security markets and studies security
analysis and portfolio management.
Modern Phase

• Procurement of funds
needed by business
• Utilization of funds beyond
its purview
Traditional
Approach
• Includes both raising of
funds as well as effective
utilization.
• Finance function does not
stop only by raising funds.
Modern
approach

Thus, the new
approach is an
analytical way of
dealing with financial
problems of a firm.

Scope of financial management
Estimating Financial Requirements
Deciding capital Structure
Selecting a Source of Finance
Selecting a pattern of Investment
Cash Management
Implementing Financial Controls
Proper use of Surpluses

Investment
Decision
Dividend
Decision
Financing
Decision
Liquidity
Decision
Functions of financial management

Business Activities
Raising
funds
• Financing
decision
Investing
in assets
• Investment
decision
Distributing
returns
• Dividend
decision
Balancing
flows
• Liquidity
Function

There exists an inseparable relationship between finance on one
hand and other functional areas on the other. All business
activities, directly or indirectly, involve the acquisition and use
of funds. This finance function though has a significant effect
on other functions yet it need not necessarily limit or constraint
the normal functioning of the enterprise.
The functions of raising funds, investing them in assets,
distributing returns earned from assets to stakeholders and
attempting to balance cash flows are respectively called:
1) Financing decision
2) Investment decision
3) Dividend decision
4) Liquidity decision
Finance Function

This decision is concerned with, where from and how to
acquire funds. The central issue is the determination of
appropriate proportion of debt and equity. An attempt has to be
made to have optimal capital structure which means
maximizing the value of shares.
The use of debt may increase the return and risk for
shareholders and hence, a proper balance has to be struck
between return and risk.
Financing Decisions

A firm’s investment decision involves capital expenditure, which
is generally referred to as capital budgeting. There are two
important aspects of investment decisions:
a) The evaluation of the prospective profitability of new
investments;
b) The measurement of a cut-off rate against which the
prospective return of the new investments could be compared.
Risk in investment arises because of uncertain returns. Investment
proposals should be evaluated in terms of expected return and
risk. There is a broad agreement that the correct cut-off rate is the
opportunity cost of capital.
Investment Decisions

A finance manager is confronted with a problem that
whether a firm should distribute whole of the profits earned
or retain them or distribute a part and retain the balance.
Called, dividend policy, it should be designed in terms of its
impact on the shareholders wealth. A desirable dividend
policy is one which maximizes the market value of the
firm’s shares. As far as possible a firm should try to have a
stable dividend policy.
Dividend is generally paid in cash or in form of Bonus
shares.
Dividend Decision

Investment in current assets affects the firm’s profitability and
liquidity. Current assets should be managed efficiently for
safeguarding the firm against ill-effects of illiquidity. A conflict
generally exists between profitability and liquidity while
managing current assets and an all out effort has to be made to
have a trade-off between the two.
For ensuring such a trade-off the finance manager has to develop
sound techniques of managing current assets. In this context
precise estimates regarding current assets have to be worked out
and it has to be made certain that funds are made available when
required.
Liquidity Decision

Profit Maximization
 Profit maximization implies that a firm either produces
maximum output for a given amount of input, or uses
minimum input for producing a given output. Profit
earning is the main aim of every business activity.
 A business being an economic institution must earn
profit to cover its costs and provide funds for growth.
Profit is the measure of efficiency. Profits provide
protection against risks. Accumulated profits help an
organization to face market oscillations. Thus profit
maximization is considered to be the main objective of a
business enterprise .Profit is considered as the most
appropriate measure of a firm’s performance.

Points in favour of Profit maximisation.
 Profit is a barometer through which the performance of a
business unit can be measured.
 Profit ensures maximum welfare of all the stakeholders.
 Profit maximization increases the confidence of management
for modernization, expansion and diversification.
 Profit maximization attracts the investors to invest.
 Profits indicate efficient utilization of funds.
 Profits ensure survival during adverse business conditions.

Points Against Profit Maximisation
• It may encourage corrupt and unethical practices.
• It ignores time value of money.
• It does not take into account the element of risk.
• It attracts cut throat competition.
• Huge amount of profit may attract Government
intervention.
• Huge profits may invite problems from workers who
may demand increased wages and salaries.
• Customers may feel exploited.
• Profit maximization may adversely affect the long term
liquidity position of the company.

Points Against----
• The term profit is vague and it cannot be defined
precisely.
• The effect of dividend policy on the market price of
shares is not considered.
• All said and done there is no denying the fact that
no organization can ignore the aspect of profit. The
point to be taken care of is that it is earned
following ethical practices. The interests of all the
stakeholders should be kept in mind. The point of
view of the society at large should not be ignored.

Wealth Maximisation
 The goals of the management should be such all the
stakeholders are benefited. A financial action that has a positive
NPV creates wealth for shareholders and, therefore, is
desirable. Between mutually exclusive projects the one with the
highest NPV should be adopted. This is referred to as the
principle of value additivity. The wealth will be maximized if
NPV criteria is followed in making financial decisions.
 The objective of wealth maximization takes care of the
questions of the timing and risk of the expected benefits. It is
important to emphasize that benefits are measured in terms of
cash flows. In investment and financing decisions, it is the flow
of cash that is important, not the accounting profits.

Elements Of Wealth Maximisation
• Increase in profits
• Reduction in costs
• Judicious choice regarding sources of
funds
• Minimum risk
• Long term value

Points in Favour of Wealth
Maximisation
• As the net present value of cash flows is considered,
the net effect of investments and benefits can be
measured in quantitative terms.
• It considers the concept of time value of money. The
present values of cash inflows and outflows helps
the management to achieve the overall objective of
the company.
• It takes care of the interests of all the stakeholders.
• It guides the management in formulating a
consistent dividend policy.

Points in Favour
• It considers the impact of risk factor and while
calculating the NPV at a particular discount rate,
adjustment is made to cover the risk that is
associated with investments.
• It implies long run survival and growth of the
firm.
• It leads to maximizing stockholders’ utility or
value maximization of equity shareholders
through increase in stock price per share.

Point Against Wealth Maximisation
• It may not be socially desirable.
• There is some confusion as to whether the
objective is to maximize stockholders’ wealth or
the wealth of the firm , the latter includes other
financial claimholders also such as debenture
holders and preference shareholders etc.
• Because of divorce between ownership and
management, the latter may be more interested in
maximizing managerial utility than shareholders
wealth.

Risk Return Trade Off
 Financial decisions incur different degrees of risk.
Financial decisions of a firm are guided by the risk
return trade-off. These decisions are interrelated and
jointly affect the market value of its shares by
influencing return and risk of the firm. The relationship
between return and risk can be expressed as follows:
Return= Risk free Rate+ Risk premium
 Risk free rate is a rate obtainable from a default-free
Government security. Risk free rate is a compensation
for time and risk premium for risk. Higher the risk of an
action, higher will be the risk premium leading to higher
required return on that action. A proper balance between
return and risk should be maintained.

Risk----
 To maximize the market value of a firm’s shares. Such
balance is called risk-return trade-off, and every financial
decision involves this trade off.
 The financial manager , in a bid to maximize shareholders’
wealth, should strive to maximize returns in relation to the
given risk; he or she should seek courses of actions that avoid
unnecessary risks. To ensure maximum return, funds flowing
in and out of the firm should be constantly monitored to
ensure that they are safeguarded and properly utilized. The
financial reporting system must be designed to provide timely
and accurate picture of the firm’s activities.

• All said and done, both the basic
objectives of financial management are
important, though in the present day set up
, wealth maximization has emerged to be
the premier.
• There is no harm in maximizing the
profits, if they are earned in a fair, just,
transparent and judicious manner. Profits
earned by resorting to unethical, corrupt
and undesirable practices are not
welcome. Profits earned in a fair manner
will certainly lead to the achievement of
ultimate object of financial management.

Objectives Of Financial Management
• Hampton has given the following objectives of financial
management:
Profit Risk Approach to Financial Management:
• 1. Maximize profits;
• 2. Minimize risk;
• 3. Maintain control;
• 4. Achieve flexibility.
Liquidity-Profitability Approach to Financial Goals:
• 1. Maximize liquidity;
• 2. Maximize profitability.

Capital Market
• Institutional arrangement for lending and borrowing
of long term funds.
• Consists of series of channels through which the
savings of the community are made available for
industrial and commercial enterprises and public
authorities.

Functions
• Mobilization of financial resources on a nation wide
scale.
• Leads to economic growth at a faster rate.
• Directs the flow of savings into most profitable
channels

Primary Market Or New Issue Market
• Primary market is a market for raising long term
sources of finance.
• New securities that have never been previously issued
are offered.
• Both the new and existing companies can raise capital
from this market.
• Facilitate the transfer of funds from willing investors
to entrepreneurs setting up new companies or going
in for expansion, growth or modernization.

Securities dealt in primary market
Securities
Ownership
securities
Equity
Shares
Preference
shares
No par
stock
Creditorship
securities
Debentures

1. Equity Shares
• Equity shareholders are the real owners of the
company.
• Have a control over the working of the company.
• Paid dividend after paying it to preference
shareholders.
• Rate of dividend depend upon the profits of the
company.
• No dividend in case of no profits.
• Cannot be redeemed during the lifetime of the
company.

Characteristics of equity shares
Maturity Right to income
Claims on
assets
Voting rights
Pre-emptive right

2. Preference Shares
• These shares have certain preferences as compared to
other types of shares.
• Fixed rate of dividend is paid on preference share capital.
2 Preferences
Preference for
payment of dividend
Repayment of capital

Features of preference shares
Features
Maturity
Claims on
income
Control
Claims on
assets

Types of preference shares
• Cumulative preference shares
• Non-cumulative preference shares
• Convertible preference shares
• Non-Convertible preference shares
• Redeemable preference shares
• Irredeemable preference shares
• Participating preference shares
• Non-Participating preference shares

3. No Par Stock
• Shares having no face value
• Capital of the company issuing such shares is divided into a
number of specified shares without any specific denomination
• Share certificate of the company states number of shares held
by the owner without mentioning any face value
• Value of such share determined by dividing the real net worth
of the company with the total number of shares of the
company
• Dividend is paid on per share

Debentures or Bonds
• It is a document under the company’s seal which
provides for the payment of a principal sum and
interest thereon at regular intervals.
• Debenture holder is the creditor of the company.
• A fixed rate of dividend is paid on the debentures.

Types of Debentures
Unsecured debentures
Secured debentures
Bearer debentures
Redeemable debentures
Convertible debentures
Irredeemable debentures

Features of Debentures
Maturity
Claims on
income
Claims on
assets
Control

Financial mangement unit 1

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