Slides on Introduction of financial management

1. 1
Introduction to FinancialIntroduction to Financial
ManagementManagement

2. 2
What is FinancialWhat is Financial
Management?Management?
Concerns the acquisition,
financing, and
management of assets
with some overall goaloverall goal in
mind.

3. 3
Financial ManagementFinancial Management
DecisionsDecisions
Investment Decisions
Financing Decisions
Asset Management Decisions

4. 4
Investment DecisionsInvestment Decisions
What is the optimal firm size?
What specific assets should be
acquired?
What assets (if any) should be
reduced or eliminated?
Most important of the threeMost important of the three
decisions.decisions.

5. 5
Financing DecisionsFinancing Decisions
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy (e.g.,
dividend-payout ratio)?
How will the funds be physically
acquired?
Determine how the assets (LHS ofDetermine how the assets (LHS of
balance sheet) will be financed (RHSbalance sheet) will be financed (RHS
of balance sheet).of balance sheet).

6. 6
Asset ManagementAsset Management
DecisionsDecisions
How do we manage existing assets
efficiently?
Financial Manager has varying degrees
of operating responsibility over assets.
Greater emphasis on current asset
management than fixed asset
management.

7. 7
What is the GoalWhat is the Goal
of the Firm?of the Firm?
Goals of a firm are the purpose for
which the finance functions are
carried out. It is a desired state of
affairs which the organization
attempts to realize. It includes
mission, vision, objectives, targets,
quotes and deadlines whenever a
decision is to be made.

8. 8
Profit MaximizationProfit Maximization
Profit maximization simply means the maximizing theProfit maximization simply means the maximizing the
income of the firm. In other words, Profit maximization isincome of the firm. In other words, Profit maximization is
the process of identifying the most efficient manner ofthe process of identifying the most efficient manner of
obtaining the highest rate of return from its productionobtaining the highest rate of return from its production
model.model.

9. 9
Arguments in FovourArguments in Fovour
Simplicity
Standard of Investment
Measurement of Efficiency
Maximize social welfare
Motivation
Profit Maximization Cont...Profit Maximization Cont...

10. 10
Profit Maximization Cont..Profit Maximization Cont..
This objective is criticized in
following ways
 Objective not clear
 Ignores time value of money
 Ignores risk elements
 Incomplete

11. 11
Shareholders wealthShareholders wealth
maximization objectivemaximization objective

12. 12
Shareholder WealthShareholder Wealth
Maximization Cont….Maximization Cont….
Maximizing NPV of a course of action
It includes maximization of profit as
well as capital gain due to
appreciation in market value of
common stock.
Thus, share priceshare price serves as a
barometer for business performance.

13. 13
Shareholder WealthShareholder Wealth
Maximization Cont….Maximization Cont….
Arguments in favour
The meaning is clear
Consider time value of money
Consider risk elements
Emphasis of Cash flow

14. 14
Agency RelationshipAgency Relationship
An agentagent is an individual
authorized by another person,
called the principal, to act in
the latter’s behalf.
Management acts as an agentagent
for the owners (shareholders)
of the firm.

15. 15
Agency ProblemAgency Problem
Agency problem refers to the conflict of interest between
the company’s management and shareholders.

16. 16
Agency ProblemAgency Problem: Shareholders Vs: Shareholders Vs
ManagersManagers

17. 17
Shareholders Vs ManagersShareholders Vs Managers
Cont….Cont….
Mechanism to resolve the conflict of interests between
Shareholders and Managers
Managerial Compensation
 Basic Remuneration
 Bonus
 Performance Shares
 Executives stock options
Direct Intervention by Shareholders
Threats of firing
Threats of takeover

18. 18
Shareholders Vs CreditorsShareholders Vs Creditors

19. 19
Shareholders Vs Creditors Cont…Shareholders Vs Creditors Cont…
Mechanism to resolve the conflict of interest between
Shareholders and Creditors
Compensate creditors for increased risk
(high rate of interest or interest rate is risk adjusted)
Protective terms and conditions for creditors
(restriction on repurchase of shares, restructure of capital
structure, dividend policy, maintain certain level of working
capital)

20. 20
Corporate GovernanceCorporate Governance
Corporate governance: represents the
system by which corporations are
managed and controlled.
Includes shareholders, board of
directors, and senior management.
Then shareholdershareholder wealthwealth maximizationmaximization
remains the appropriate goal in
governing the firm.