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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.
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