Introduction

Caselet 1
Toyota announced in 2003 its plans to start a new automobile plant in Texas. The new plant will cost $800 million and would substantially increase its output which in turn would add substantially to its revenues and profits. The funds required could be obtained from a variety of sources such as retained earnings, bank loans, fresh issue of equity or floating a new series of bonds. However, due to demand fluctuations and the possibility of increase in cost of financing the realized benefits from the expansion might be reduced.

Caselet 2
During the same time Procter and Gamble had started work on a new project for installation of a new plant which would add new capacity to produce 80,000 tpa of paper towel. The new plant would cost $500 million and was expected to raise the profits annually by 25%. The funds required for the project were obtained largely from past earnings and some amount of bank loan. This had resulted in an increase in its cost of financing.

Key Financial Issues Investment Financing

Caselet 3
Microsoft Corp. went public through an IPO in the year 1986. Over the years it has seen its market share, revenues and profits grow rapidly. Majority of the companys shareholding is with Bill Gates and his allies and only a small portion is held publicly. Microsoft had been following a policy of not distributing any dividends at all as it was run on the philosophy that all profits should be ploughed back in the company to support its growth.

Caselet 4
Infosys went public in the year 1992. Since its inception the company has grown exponentially and it has shared its success with its shareholders by following a policy of distributing rich dividends. The dividends distributed by the company have been growing over time in tandem with growth in its earnings. Besides paying dividends in cash the company has been distributing bonus shares also with notable regularity.

Key Financial Issue

Profit allocation: Retention vs. Dividend payout: 1. Cash dividends 2. Stock dividends

Caselet 5
Vivendi is a French company which forayed into media and telecommunications in the year 1994. In order to achieve quick growth in business it went on entering into a series of major acquisitions. The company had been financing these acquisitions by borrowing heavily. This strategy made it very vulnerable to any decline its operating cash flows. As profits started declining the company started experiencing serious shortage of cash and it was experiencing a liquidity crisis. The banks were reluctant to grant further credit to the company and its share price had been falling rapidly. The imminent bankruptcy that the company was facing was attributed largely to lack of financial planning.

Key Financial Issues Liquidity management Financial planning

Contents
Finance Decisions / Functions Finance Organization Finance Objectives Financial System

Finance Decisions / Functions

Investment Financing Profit allocation Liquidity management Financial Planning & Control

Nature of Investment Decision

Funds allocation process Capital budgeting Facilitates long term investments Results in creation of fixed assets Buildings, machinery, equipments, R&D facilities, warehouses, co. owned retail outlets, IT infrastructure Brands, patents, licenses, trademarks

Nature of Investment Decision

Strategic importance Assessment of investment outlay Assessment of costs & benefits over time Assessment of feasibility Selection of optimal combination of investments Allocation of funds to selected investments

Nature of Financing Decision

Funds mobilisation process Both long term and short term sources may be tapped Long term financing: Capital Structure Decision Financial support for the investments Long term sources: shareholders funds, debt Short term sources: short term bank loans, cash credit, overdraft facilities

Nature of Financing Decision

Strategic importance Identification of financing sources Capital structure: 1. Optimal capital structure 2. Choice of financing instruments 3. Choice of capital markets 4. Timing 5. Issue amount, issue price etc.

Nature of Profit Allocation Decision

An allied issue with capital structure Amount of distribution Choice of distribution: 1. Cash dividends 2. Stock dividends Optimal dividend payout

Liquidity Management
Working capital management / Short term financial management Management of current assets and current liabilities Different for manufacturing sector cos. & financial sector cos.

Financial Planning & Control

Budgeting Budgetary control Profit planning

Finance Organization
CFO/ Director (Finance)/ VP (Finance)

Treasurer Financing Banking relations Cash management Credit management Capital budgeting

Controller Financial accounting Internal auditing Taxation Budgetary control

Finance Organization
Managers in different functional areas are also directly or indirectly involved in financial management process Production Manager / Works Manager, Purchases Manager, Sales Manager, Marketing Manager,

Finance Objectives
1. 2. 3. 4. Maximization of shareholder wealth (MSW) Maximization of profit Maximization of EPS Maximization of RONW

Finance Objectives
Objectives 2, 3 & 4 suffer from the following limitations: Profit in absolute terms is inappropriate for decision making Do not consider the timing aspect Do not consider the element of risk

Finance Objectives
MSW is superior to the other objectives because: It helps in the allocation of the scarce economic resources to their most productive uses and to those who can employ the resources most efficiently It is a holistic goal which considers the aspects of timing and risk

Maximization of Shareholder Wealth

Companies like Toyota and Procter & Gamble and many others regularly make investments in their businesses. They expect that the new investments are worth more than they cost because the benefits they generate tend to be more than the costs they entail. This creates more value for their shareholders resulting in an increase in shareholder wealth over time.

MSW & Finance Functions

Investment Financing Profit Allocation Liquidity Financial Planning & Control

Return

Risk

Market Value of Firm

Financial System
Financial markets Financial instruments Financial institutions Financial services Financial regulation

Financial System: Functions

Facilitates commerce by establishing a payment system Facilitates transfer of funds over space & time Facilitates flow of funds from savers to users Facilitates regulation to protect the interests of the various participants

Minimum Suggested Study Plan

Text Book: Financial Management Theory & Practice, Prasanna Chandra, TMH, 7e Vital: Ch. 1: units 1.2-1.7 (p5-14); 1.9 (p16-17) Desirable: Ch.2; Ch.3: units 3.1-3.2 (p40-51)

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