Financial Management

(PGDM: 2021-23)

Session -1: Introduction

Sriranga Vishnu
Faculty (F&A Area)
 Financial Management– Topics
• Introduction to Financial Management

• Financial Statement Analysis – Ratio Analysis

• Financial Planning and Forecasting

• Working Capital Management

• Time Value of Money

– Bond Valuation

– Stock Valuation

• Concept of Risk and Return- CAPM, APT

 Financial Management– Topics
• Capital Budgeting – DCF and Non-DCF methods

• Cost of Capital –Cost of Equity and Debt, WACC

• Capital Structure – Leverage

• Dividend Policy

• Introduction to Financial System – Market Efficiency

– Capital Market and Money Market

• Derivatives and its Market

 Financial Management– Course Evaluation

• Class Participation - 10%

• Group Project - 10%

• Quizzes - 20%

• Mid-term Examination - 20%

• End-term Examination - 40%

 Financial Management– Introduction
• All business activities involve acquisition and use of
funds

• Finance function makes money available to meet the costs

of production and marketing operations

• Financial policies are devised to fit production and

marketing decisions of a firm in practice
 Financial Management– Introduction
• Roles of Financial Manager:-
– Financing (Raising Funds)

– Investing (Allocation of Funds)

– Controlling (Profit Planning)

– Understanding Capital Markets

– Dividend decisions
 Financial Management– Introduction
• Finance functions or decisions can be divided as follows:
• Long-term financial decisions:-
– Long-term asset-mix or investment decision or capital
budgeting decisions

– Capital-mix or financing decision or capital structure and

leverage decisions

– Profit allocation or dividend decision

• Short-term financial decisions:-

– Short-term asset-mix or liquidity decision or working
capital management
 Financial Management– Introduction
• Some routine Finance Functions:-
– Supervision of receipts and payments and safeguarding of
cash balances

– Custody and safeguarding of securities, insurance policies

and other valuable papers

– Taking care of the mechanical details of new outside

financing

– Record keeping and reporting

 Financial Management– Introduction
• Objectives of a Firm:-
– Profit Maximization

– Wealth Creation &Value Maximization

• Profit maximization:-
– Maximizing the rupee income of firm

– Resources are efficiently utilized

– Appropriate measure of firm performance

– Serves interest of society also

 Financial Management– Introduction
• Wealth creation:-
– 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
 Financial Management– Introduction
• Profit maximization Vs Wealth creation:-
– Profit maximization is a short term objective of the firm
while the long-term objective is wealth creation

– Profit maximization ignores risk and uncertainty unlike

wealth maximization, which considers both

– Profit maximization avoids time value of money, but

wealth creation recognises it
 Financial Management– Introduction
• Agency Problem:-
– There is a Principal-Agent relationship between managers
and shareholders.

– In theory, Managers should act in the best interests of

shareholders

– In practice, managers may maximise their own wealth (in

the form of high salaries and perks) at the cost of
shareholders
 Financial Management– Introduction
• Agency Problem:-
– Managers may avoid taking high investment and financing
risks that may otherwise be needed to maximize
shareholders’ wealth

– Such “satisfying” behaviour will frustrate the objective of

shareholders’ wealth maximization

– 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
 Financial Management– Introduction
• Conflict between Managers and Shareholders:-
– Managers are naturally inclined to act in their own best
interests (which are not always the same as the interest of
stockholders)

– But the following factors affect managerial behaviour:

• Managerial compensation packages
• Direct intervention by shareholders
• The threat of firing
• The threat of takeover
 Financial Management– Introduction
• Conflict between Shareholders and Bondholders:-
– Stockholders are more likely to prefer riskier projects,
because they receive more of the upside if the project
succeeds. By contrast, bondholders receive fixed payments
and are more interested in limiting risk

– Bondholders are particularly concerned about the use of

additional debt

– Bondholders attempt to protect themselves by including

covenants in bond agreements that limit the use of
additional debt and constrain managers’ actions
 Financial Management– Introduction
• Structure of Finance Department :-
– Financial Controller – Accounts, Credit, Taxation functions
– Treasurer – Cash and Forex Management, Project Finance, etc.
– Internal Auditor

• Two officers—the treasurer and the controller—may be

appointed under the direct supervision of CFO to assist him
• The treasurer’s function is to raise and manage company funds
while the controller oversees whether funds are correctly
applied
 Financial Management– Introduction
• The exact organisation structure for financial management will
differ across firms
• The financial officer may be known as the financial manager
in some organisations, while in others as the vice-president of
finance or the director of finance or the financial controller
• Reason for placing the finance functions in the hands of
top management:-
– Financial decisions are crucial for the survival of the firm
– The financial actions determine solvency of the firm
– Centralisation of the finance functions can result in a
number of economies to the firm
 Financial Management– Introduction
• Business trends today:-
• Corporate scandals have reinforced the importance of business
ethics, and have spurred additional regulations and corporate
oversight
• Increased globalization of business
• The effects of ever-improving information technology have
had a profound effect on all aspects of business finance
• Stockholders now have more control of corporate governance
• Career opportunities in Finance