Professional Documents
Culture Documents
Financial Management
Financial Management
Financial Management
MANAGEMENT
WHAT IS FINANCE???
YES!!!
MONEY!!!
MANAGEMENT???
ART!!!
OR
SCIENCE!!!
Profit Maximization
Wealth Maximization
Profit Maximisation
Profit /EPS maximisation 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 :
Ambiguity
Timing of benefits
Quality of benefits.
Wealth Maximisation
Wealth maximisation is also known as Value or Net present
worth maximisation. 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
maximisation are:
Merits
It helps in future cash flow
It considered the time value of money.
This concept allows the dividend policy of the company
to have its effect of the market value of the equity
shares.
It also contributes to the maximization of other
objectives of financial management.
Cash flows from projects subject to greater risks are
discounted at a higher discount rate
De-merits
It is subjected to the social responsibilities of the firm.
It is also subject to government restrictions.
The objective of wealth maximization is not necessarily
socially desirable.
Financial
planning and
fund-raising
manager
Capital
Expenditure
Manager
Cash
Manager
Controller
Credit
Manager
Foreign
Exchange
Manager
Pension
Fund
Manager
Tax
Manager
Corporate
Accounting
Manager
Cost
Accounting
Manager
Financial
Accounting
Manager
Investment analysis
Working Capital Management
Sources and cost of funds
Determination of capital structure
Dividend Policy
Analysis of risk and returns
SupportPrimary Disciplines
1.
2.
3.
Support
Resulting in
Shareholder wealth maximization
Accounting
Macroeconomics
Microeconomics
Marketing
Production
Quantitative methods
FUNCTIONS OF FINANCE
CAPITAL BUDGETING
CAPITAL STRUCTURE
WORKING CAPITAL MAANGEMENT
DIVIDEND POLICY
AGENCY
RELATIONS
HIP
AGENCY PROBLEM
A problem in determining
managerial accountability that
arises when delegating authority to
managers
Conflict of interest between the
principal and the agent, or the
shareholder and the manager
Shareholders are at information
disadvantage as compared to the
managers
It takes considerable time to see
the effectiveness of decisions
managers can make
Very difficult to evaluate how well
the agent has performed because
In theory, managers
should at in the best
interest of the shareholders
In practice, managers may
maximize their own wealth
(in the form o f high salaries
and perks) at the cost of
shareholders
Buy other companies to
expand power, venturing
onto fraud, manipulate
financial figures to optimize
BETWEEN
SHAREHOLDE
RS AND
MANAGERS
RESOLVING
CONFLICTS
Managerial
Compensation
Direct
Intervention By
Shareholders
The Threat of
Firing
The Threat of
Hostile
Takeovers
BETWEEN
SHAREHOLD
ERS AND
CREDITORS
Shareholders through
managers make decisions
for shareholders value
maximization by ignoring
the interest of creditors
Manager may decide to
invest in a risky project. If
the project succeeds, all
the benefits goes to the
shareholders and the
creditors will receive only
the already fixed low rate
RESOLVING
CONFLICTS
Compensating
Creditors for
Increased Risk
Protective Terms
and Conditions
for Creditors