Chapter one:- An Overview of Financial Management

Chapter two:- Financial Planning and Short –term Finance

Chapter three:- Capital Budgeting

Chapter four:-Cost of Capital

Chapter five:- Business Valuation

Chapter six:-Risk Management

Chapter one:- An Overview of Financial Management
 The field of finance can be generally divided in to three, yet interrelated areas.
1. Financial Management:-deals with management of funds in business
organizations.

2. Financial Investment: - deals with financial markets and security (bonds

and stocks) pricing and deals with the decision of investors: the management
of investment portfolios or pension funds on how to invest these funds.

3. Financial institution: - deals with financial funds (banks, insurance,

investment companies, credit unions and pension funds).

The treasurer is responsible for managing corporate assets and liabilities, planning the
finances, budgeting capital, financing the business, formulating credit policy, and managing the
investment portfolio. He or she basically handles external financing matters.
The controller is basically concerned with internal matters, namely, financial and cost
accounting, taxes, budgeting, and control functions
 Functions (Role) of a finance manager
The financial manager’s responsibilities include:
1. Financial analysis and planning: Determining the proper amount of funds to employ in the
firm, i.e., designating the size of the firm and its rate of growth
2. Investment decisions: The efficient allocation of funds to specific assets
3. Financing and capital structure decisions: Raising funds on as favorable terms as possible,
i.e. determining the composition of liabilities
4. Management of financial resources (such as working capital)
5. Risk management: protecting assets

 Goal of Financial Management (Firm)

Implication of the wealth maximization:
1. The Concept of wealth maximization is universally accepted, because it takes care of
interest of financial institution, owners, employees and society at large.
2. Wealth maximization guides the management in framing the consistent strong dividend
policy to reach maximum returns to the equity holders.
3. Wealth maximization objective not only serves the interest of the shareholder’s by
increasing the value of their holdings but also ensures the security to the lenders.
Criticism of wealth maximization:
1. It is a prescriptive idea. The objective is not descriptive of what the firm actually does.
2. The objective of wealth maximization is not necessarily socially desirable.
3. There is some controversy as to whether the objective is to maximize the stockholder’s
wealth or the wealth of the firm, which includes other financial claimholder’s such as
debenture holders, preference shareholders.

4. The objective of wealth maximization may also face difficulties when ownership and
management are separated, as is the case in most of the corporate form of organizations.
When managers act as the agents of the real owner, there is the possibility for a conflict
of interest between shareholders and the managerial interests.
  Agency problem
An agency relationship exists when one or more persons (called principals) employ one or more
other persons (called agents) to perform some tasks.

Primary agency relationships exist

(1) Between shareholders and managers and

(2) Between creditors and shareholders. They are the major source of
agency problems

The agency problem arises when a manager owns less than 100percent of the company’s
ownership.
As a result of the separation between the managers and owners, managers may make
decisions that are not in line with the goal of maximizing stockholder wealth.