Intro To FM12

Financial
Management Policy
Financial Management
Financial management is that managerial activity
which is concerned with the planning and controlling
of the firm’s financial resources. It was a branch of
economics till 1890.
In general financial management is the effective &

efficient utilization of financial resources.
Main Features Of Financial
Management:
Financial problems are analyzed and considered. Study
of trend of actual figures is made and ratio analysis is
done.
All Managerial decisions related to finance are taken
after considering the report prepared by the finance
manager.
Larger the risk in the business larger is the expectation
of profits. Financial management maintains balance
between the risk and profitability.
Maximize the Value of the Business
(Firm)
Three major decision in Finance:
1. The Investment Decision:
2. The Financing Decision
3. The Dividend Decision

Financial Management Policy
Course:
Module I – Investment Decision (35%)
Module II – Financing Decision (30%)
Module III – Operating Decision (35%)
Investing Decision:
Introduction to Finance
Review of TVM, Bonds & Stocks
Review of Capital Budgeting
Risk, Return & Opportunity Cost of Capital
Risk, Return & Capital Budgeting
The Cost of Capital
Financing Decision:
Corporate Financing
Capital Structure
Debt Policy
Dividend Policy
Term Loans & Leases
Operating Decision:
Financial Planning
Working Capital Management
Cash & Inventory Management
Credit Management
Recommended Readings:
Fundamentals of Corporate Finance by
(Brealey, Myers & Marcus)
Financial Management by
(Eugene F Brigham)
FMP Work Book (Available at IU book shop)

Few Questions:
How do corporation “go public” and continue to grow?
What are agency problems?
What should be the primary objective of Managers?
Three aspects of cash flows affect the value of any
investment?
What is WACC?
How do FCF and WACC determine Firm’s Value?
Different types of Markets?
Ten Principles That Form
The Foundations of
Financial Management
Principle 1: The Risk-Return Trade-off
The more risk an investment has, the higher will be its

expected return.
NO additional risk unless you expect to be
compensated with additional return.
Investment alternatives have different amounts of risk
and expected returns.
Principle 2: The Time Value of Money
A dollar received today is worth more than a dollar
received in the future.
Interest Rate Factor

Principle 3: Cash—Not Profits—Is King
CASH FLOWs, not accounting profit, is used to
measure wealth.
Cash flows, not profits, are actually received by the

firm and can be reinvested.
Principle 4: Incremental Cash Flows
The incremental cash flow is the difference between

the projected cash flows if the project is accepted,
versus what they will be, if the project is not accepted
Principle 5: The Curse of
Competitive Markets
Why it is hard to find exceptionally profitable
projects?????
If an industry is generating large profits, new entrants

are usually attracted. The additional competition and
added capacity can result in profits being driven down
to the required rate of return
Principle 6: Efficient Capital Markets
The markets are quick and the prices are right.
The values of all assets and securities at any instant in

time fully reflect all available information.
Principle 7: The Agency Problem
Managers won’t work for the owners unless it is in
their best interest
The separation of management and the ownership of

the firm creates an agency problem. Managers may
make decisions that are not in line with the goal of
maximization of shareholder wealth
Principle 8: Taxes Bias Business
Decisions
When a new project is evaluated, the after-tax

incremental cash flows should be considered
Principle 9: All Risk is Not Equal
• Diversification allows good and bad events or

observations to cancel each other out, thus reducing
total variability without affecting expected return
• Some risk can be diversified away, and some cannot

Principle 10: Ethical Behavior Is
Doing the Right Thing, and
Ethical Dilemmas Are
Everywhere in Finance
Each person has his or her own set of values, which
forms the basis for personal judgments about what is
the right thing
Goal of the Firm
The Goal of the firm is maximization of Business/ Firms
Value.
or
Maximize the price of the common stocks.

Legal Forms of Business Organization
Sole Proprietorship
Partnership
Corporation
Sole Proprietorship
Owned by an individual
Owner holds title to assets
Unlimited liability
Termination occurs on owner’s death or by owner’s
choice
Partnerships
More the ONE owner
General Partnership  Limited Partnership
 Each partner is fully  Allows one or more partners
responsible for liabilities limited liability
 Must have one general partner
or
with unlimited liability
 Jointly responsible for
 Names of limited partners may
Unlimited Liability not appear in name of firm
 Limited partners may not
participate in management
decisions.
Corporation
Business organized as a Separate legal entity owned by
stockholders/ Shareholder .
Limited Liability
Its can borrow or lend money/ it can be sue or be sued
and pay taxes.
Corporate Income
Sales $1,000
Cost of Goods Sold $ 200
Gross Profit $ 800
Operating Expenses
Administrative Expenses $150
Depreciation Expense $ 50
Total Operating Expenses $200
Operating Income (EBIT) $600
Other Income $0
Interest Expense $250
Taxable Income $350
Marginal Tax Rates
• Rates applicable to next dollar of income
• Used in financial decision (Module II)

Intro To FM12

Uploaded by

Copyright:

Available Formats

Intro To FM12

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Intro To FM12

Uploaded by

Copyright:

Available Formats

Financial

In general financial management is the effective &

2. The Financing Decision

3. The Dividend Decision

FMP Work Book (Available at IU book shop)

The more risk an investment has, the higher will be its

Interest Rate Factor

Cash flows, not profits, are actually received by the

The incremental cash flow is the difference between

If an industry is generating large profits, new entrants

The values of all assets and securities at any instant in

The separation of management and the ownership of

When a new project is evaluated, the after-tax

• Diversification allows good and bad events or

• Some risk can be diversified away, and some cannot

Maximize the price of the common stocks.

• Rates applicable to next dollar of income

• Used in financial decision (Module II)

You might also like