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WINTERTemplate

Introduction toFinancial

Chapter 1

Management

Prof. Tarunika J. Agrawal

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Demonstrate an understanding of finance and financial

management nature.

Understand the interrelations between finance and various otherrelated disciplines

Explain how the role of the financial manager today has

transformed and is so important.

Learning Objectives

Describe "financial management" in terms of the three majordecision areas that confront the financial manager.

Identify the goal of the firm and understand why shareholders'

wealth maximization is preferred over other goals.

Understand the potential problems arising when management ofthe corporation and ownership are separated (i.e., agency

problems).

Discuss the changing organizational structure of finance functions .

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Roadmap What is finance & financial

Management Interdisciplinary approach

Changing role of finance

manager

Different finance function Goals & objective of financial

management

Agency Problem

Changing organizationalstructure of finance functions

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Role of Finance Manager

Traditional Outlook

It is concerned with raising of fundsand administration of funds

Issuing securities and raise funds

Raising funds from financial institutions

Modern Outlook

To decide how much amount isrequired from where and maintain

records.

What type of assets are required

activities.

.

optimum utilization Taking dividend decision

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1. Investment analysis

2. Working capital

management

3. Sources and cost of

Primary Disciplines

Accounting

Macroeconomics

Microeconomics

Financial Decision Areas

Support

4. Determination of capital

structure

5. Dividend policy

6. Analysis of risks and

returns

Other Related Disciplines

Marketing

Production

Quantitative methods

Shareholder wealth maximization

Support

Resulting in

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Organizational Structure of

Finance functions

BOARD OF

DIRECTORS

President /

VP HumanResource

VPFinance

Treasurer Controller

VP MarketingVP

Operations

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Finance Decisions

Investing decision

Asset mix

Optimal firm size

Relates to the selection

of assets in which funds

Financing decision

Capital mix

Minimize cost of

capital

Covers two

Dividend Decision

Profit Allocation mixAnalyzed in relation to

the financing decision of a

firm. Two alternatives are

available in dealing with

firm.o Long-term assets

(Capital Budgeting)

o Short-term or current

assets (Working Capital

Management).

o Capital structuretheory

o Capital structure

decision

the profits of a firm:o they can be distributed

to the shareholders in the

form of dividends or

othey can be retained in

the business itself.

The decision as to whichcourse should be followed

depends largely on a, the

dividend-pay out ratio

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Financial ObjectivesProfit maximization(Maximizing the Rupee Income of Firm)

OR

EPS maximization(Maximizing earning per share of the Firm)

Arguments For

Arguments Against

Appropriate measure of firmperformance

Serves interest of society also

It Ignores the risk and timing ofreturns

Assumes Perfect Competition

In new business environment profit

maximization is regarded as

Unrealistic

Difficult

Inappropriate

Immoral.

Market value is not a function of

EPS.

Calls for a zero dividend payoutpolicy

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Financial ObjectivesShareholders Wealth Maximization

Strengths

Unambiguous measure

Benefits are measured in terms of cash flows.

Maximizes the net present value of a course of action to shareholders

Takes account of: current and future profits and EPS; the timing,duration, and risk of profits and EPS; dividend policy; and all other

relevant factors.

Fundamental objectivemaximize the market value of the firms

shares, reflection of shareholders wealth.

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Jensen and Meckling developed a theory of the firm based on

agency theory.

There exists a SEPARATION between owners and managers Management acts as an agent for the owners (shareholders) of

the firm.

Principals must provide incentives so that management acts in

Agency Problem

the principals best interests and then monitor results. Incentives include, stock options, perquisites, and bonuses.