The document provides an overview of key concepts in financial management, including:
1) It defines finance and outlines the goals and functions of financial management, such as profit and wealth maximization.
2) It discusses the evolution of finance as a field and important developments like modern portfolio theory.
3) It describes the forms of business organization and functions and activities of financial managers, such as investment, financing, and dividend decisions.
The document provides an overview of key concepts in financial management, including:
1) It defines finance and outlines the goals and functions of financial management, such as profit and wealth maximization.
2) It discusses the evolution of finance as a field and important developments like modern portfolio theory.
3) It describes the forms of business organization and functions and activities of financial managers, such as investment, financing, and dividend decisions.
The document provides an overview of key concepts in financial management, including:
1) It defines finance and outlines the goals and functions of financial management, such as profit and wealth maximization.
2) It discusses the evolution of finance as a field and important developments like modern portfolio theory.
3) It describes the forms of business organization and functions and activities of financial managers, such as investment, financing, and dividend decisions.
The document provides an overview of key concepts in financial management, including:
1) It defines finance and outlines the goals and functions of financial management, such as profit and wealth maximization.
2) It discusses the evolution of finance as a field and important developments like modern portfolio theory.
3) It describes the forms of business organization and functions and activities of financial managers, such as investment, financing, and dividend decisions.
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Chapter 1
The Goals and Functions of
Financial Management Chapter 1 - Outline Definition of Finance The Field of Finance The Evolution of Finance The Goals of Financial Management Functions and Activities of Financial Management Agency problem and Corporate Governance Forms of Organization Summary and Conclusions What is Finance?
The science and art of managing money.
Finance, in general terms, is the raising of required fund. Finance is the process of planning, identification, selection, raising and utilization of fund in order to achieve the objective of an organization Finance is efficient raising and allocation of funds in order to attain certain objective FINANCE
Investment Financing The Field of Finance: Importance of Managerial Finance You must have some understanding of finance People in ◦ Economics > Firm Vs. Economy ◦ Accounting > Supplies information for finance ◦ Management > personnel decisions, financial impact of strategic planning ◦ Marketing > Pricing of product
ALL OF THEM NEED TO UNDERSTAND FINANCE TO DO THEIR JOB WELL
Major objectives – Profit Maximization Wealth Maximization Stockholder Value Stakeholder Value Social Responsibility and Ethical Behavior Goal of Financial Management
Profit Maximization Vs. Wealth Maximization
Corporate Profits Vs Earning Per Share
Arguments against profit maximization Provides vague concept regarding profit and ignores time value of money as well as risk. Wealth maximization provides a clear concept regarding profit i.e. it considers Net Cash Benefit (NCB), & it considers time value of money as well as risk. Certain Goals? Goal of Financial Management
1. What are the advantages and disadvantages of profit
maximization? 2. What should be the ultimate goal of a finance manager? Evolution of the Field of Finance Emergence as a separate field of study Early 1900s Emphasis on mergers and capitalization Forming BIG corporations Wave of mergers during 1920s Bankruptcies in 1930s (Depression Era) Evolution of the Field of Finance
Liquidity stressed during 1940s & ‘50s: Short Term
Analysis and maximizing value in late 1950s and the 1960s: Long Term Increased competition> Reduction of profit Need to identify future investment opportunity Shift in goal to maximize firms value Birth of Modern Finance>>>>
Innovative risk management in 1970s
Uncertainty > managing financial risk Inflation, Technological changes etc. Markowitz and Finance
Harry Markowitz is considered as the father of Modern Portfolio Theory (MPT)
In 1950s Harry Markowitz developed the basic principles of MPT Published in 1952 Markowitz won the Nobel Prize in Economic Sciences in 1990
So about five minutes into my PhD defense, Friedman says, well Harry I’ve read this. I don’t find any mistakes in the math, but this is not a dissertation in economics, and we cannot give you a PhD in economics for a dissertation that is not in economics. It’s not economics, it’s not mathematics, it’s not business administration, and Professor Marschak said, “It’s not literature”. ..Interview at Rady School of Management at the University of California San Diego Evolution of the Field of Finance Focus on valuation continued in 1980s, analysis expanded to include: Inflation and effects on business decisions Deregulation of financial institutions Increase in computer analysis and electronic information transfer Increased importance of global markets Innovative financial products Evolution of the Field of Finance
1990s have seen evolution continue
Continued globalization of business Further increase in use of technology Regulatory attitude of government 2010s Recent Issues in Finance: Inflation Internet: e-commerce B2C: Business to consumer model B2B: Business to business model Functions of Financial Management
Functions of Finance Manager
Managerial Functions Routine Functions
• Financial planning, • Source identification, Investment Financing Dividend • Raising of fund, Decision Decision Decision • Investment of fund, • Distribution of fund, • Protection of capital, • Managing of fund, Working Capital Capital • Forecasting of cashflow, Management Budgeting • Managing assets, • Cost Control, • Pricing. Agency Problem and Corporate Governance
Financial manager in a corporation must act in the best interest of the shareholder..
But sometimes management and shareholder interest might differ and cause “agency problem”
“Do Managers Act in the Stockholders' Interest?”
Whether managers act in the best interest of stockholders depends on two factors: Managerial Compensation
Control of the Firm
Forms of Organization
Business
Law Offices Sally’s Grocery
Proprietorship Partnership Corporation
Characteristics of Business Organizations Characteristics Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes
**Limited Limitedpartnerships partnershipsand andlimited limitedliability liabilitypartnerships partnershipsspecifically specificallyrestrict restrict certain certainpartners’ partners’liabilities. liabilities. Public and Private Corporations
Public corporations’ shares are available for purchase on the market for the general public The shares in a private corporation are held by a small group of individuals and are not sold to the public Financial Markets Money markets: Deals with short-term securities that have a life of one year or less Capital markets: Deals with securities have a life of more than one year ◦ Securities include: ◦ Common stock ◦ Preferred stock ◦ Bond/ Debenture Primary markets Capital >>raised in Secondary markets Securities>> traded in Summary and Conclusions The financial manager: controls the daily cash inflows and outflows resulting from business operations makes the occasional investment and financing decisions essential for the future financial success of the business may work in a corporation or other form of business organization Their overriding goal is to maximize the wealth of the owners by earning an attractive return in the business at an acceptable level of risk
