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Financial Management: An: Semester II

This document provides an overview of financial management topics including capital budgeting, capital structure, working capital management, and the goal of financial management. It discusses evaluating investment projects based on their cash flows, optimal debt-equity ratios, and short-term asset and liability management. The goal of financial management is to maximize shareholder wealth through increasing the firm's value, though some argue firms should balance stakeholder interests or have social responsibilities.

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Rahul Shukla
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57 views

Financial Management: An: Semester II

This document provides an overview of financial management topics including capital budgeting, capital structure, working capital management, and the goal of financial management. It discusses evaluating investment projects based on their cash flows, optimal debt-equity ratios, and short-term asset and liability management. The goal of financial management is to maximize shareholder wealth through increasing the firm's value, though some argue firms should balance stakeholder interests or have social responsibilities.

Uploaded by

Rahul Shukla
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Financial Management: An Overview

Semester II

Financial Decisions in a Firm


1. Capital Budgeting Strategic Planning: Define the business or businesses How capital is allocated in the firm- i.e. investing in long-lived assets Evaluating costs and benefits spread out over time

Focus should be on Magnitude of cash flows Timing of cash flows Riskiness of cash flows Options embedded in the investment projects

2. Capital Structure Ways and means of financing the investment projects Objective is to minimize the cost of financing Key considerations are:
Optimal debt-equity ratio Instruments of equity and debt finance Capital markets Time of issue Price of security

3. Working Capital Management Short-term financial management dealing with current assets and current liabilities Key considerations are: Appropriate sources of short term finance Optimal level of inventory Credit policy and terms Cash balance to be maintained Investment of temporary cash surplus

Goal of Financial Management


Value of the Firm = Value of its Equity + Value of its Debt Claims If a firm seeks to maximize the current market price of the share, they serve the interest of short-term shareholders If a firm seeks to maximize the intrinsic value of the share, they serve the interest of long-term shareholders

Shareholder Wealth Maximization Goal


Critique The capital market skeptics argue that stock prices fail to reflect true values Defense Financial economists argue that stock prices are the least biased estimates of intrinsic values in developed markets Balancing the interests of various stakeholders is not a practical governing objective
The only social responsibility of business is to create value and do so legally and with integrity

The balancers argue that a firm should seek to balance the interests of various stakeholders Advocates of social responsibility argue that a business firm must assume wider social responsibilities

Alternative Goals
Maximization of Profit It is not as inclusive a goal as well as have following limitations: Profit in absolute terms is not a proper guide to decision making Undefined timing & duration, Also uncertainty is there Maximization of EPS or ROE Also have few limitations

Risk-Return Tradeoff
Capital Budgeting Decisions Return Market Value of the Firm Dividend Decisions Risk Working Capital Decisions

Capital Structure Decisions

The Fundamental Principle of Finance


A business proposal-regardless of whether it is a new investment or acquisition of another company or a restructuring initiative raises the value of the firm only if the present value of the future stream of net cash benefits expected from the proposal is greater than the initial cash outlay required to implement the proposal.

Cash Alone Matters


Investors provide the initial cash required to finance the business proposal
Investors
Shareholders Lenders The Business Proposal

The proposal generates cash returns to investors

Organization of the Finance Function


Chief Finance Officer

Treasurer

Controller

Cash Manager

Credit Manager

Financial Accounting Manager

Cost Accounting Manager

Capital Budgeting Manager

Fund Raising Manager

Tax Manager

Data Processing Manager

Portfolio Manager

Internal Auditor

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