Amity Business School

Amity Business School

Financial Management
Credit Units: 04

Dr. Deepika S. Tomar

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 Amity Business School

Schools ABS
Program & Semester BBA- III Sem

Course Title Financial Management

Course Code BBA 302

Credit Unit 04
Faculty Name Dr. Deepika S. Tomar

Email [email protected]

Contact no. +919407244254

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Pedagogy/Instruction Methodology

• Lecture/ presentation
• Practical Exercises
• Case Analysis
• Quiz
• Class Test

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Text & References:

Text:
Pandey, I. M, Financial Management. Ninth Edition,
Vikas Publishing House Pvt. Ltd.

References:
Van Horne, J.C Financial Management & Policy Twelfth
Edition, Prentice Hall
Chandra, P. Fundamentals of Financial Management,
Sixth Edition, Tata McGraw Hill.

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Evaluation Scheme
S. No. Evaluation Component Weight (%) Date for Evaluation Date of
Completion of
Evaluation

1 Quiz 5 Within 2-3 days

2 Home Assignment 5 Within a week

3 Class Test 15 As per academic Within a week

calendar

4 Attendance 5 Through out the

semester

5 End-Semester 70 As per University Within 2 weeks

Examination schedule

Total 100

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Module I: Introduction to
Financial Management

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What is finance?
 I am saving for retirement. Should I use a pension
fund, mutual fund, direct stock market investment ?
 I want that new car. Should I use my cash saving,
lease, borrow?
 Which is the best way to pay for my holidays, for my
house?
 I’m thinking about starting a new business. Will it
reward me adequately?
 Marocco has asked for major project financing.
– Should my organization provide the funds?

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• Why study finance?

• To manage your personal resources

• To deal with the world of business

• To pursue interesting and rewarding career

opportunities

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Importance..??

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• The R&D manager has to justify the money

spent on research by coming up with new
products and processes which would help to
reduce costs and increase revenue.
• If the R&D department is like a bottomless pit
only swallowing more and more money but not
giving any positive results in return, then the
management would have no choice but to close
it.
• No commercial entity runs a R&D department
to conduct infructuous basic research.
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• Likewise the material manager should be aware

that inventory of different items in stores is
nothing but money in the shape of inventory.
He should make efforts to reduce inventory so
that the funds released could be put to more
productive use.
• At the same time he should also ensure that the
inventory of materials does not reach such a
low level as to interrupt the production process.
• He has to make balance between too much and
too little inventory.
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Financial Management

• Financial management emerged as a distinct

field of study at the turn of this century. Its
evolution may be divided into three broad
phases: the traditional phase, the transitional
phase, and the modern phase.

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• The traditional phase lasted for about four

decades. The following were its important
features:
1. The focus of financial management was
mainly on certain episodic events like
formation, issuance of capital, major
expansion, merger, reorganization, and
liquidation in the life cycle of the firm.

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2. The approach was mainly descriptive and

institutional. The instruments of financing, the
institutions and procedures used in capital
markets, and the legal aspects of financial
events formed the core of financial
management.
3.The outsider’s point of view was dominant.
Financial management was viewed mainly
from the point of the investment bankers,
lenders, and other outside interests.

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• The transitional phase begins around the early

forties and continues through the early fifties.
Though the nature of financial mgmt during
this phase was similar to that of the traditional
phase, greater emphasis was placed on the day
to day problem faced by the finance managers
in the area of funds analysis, planning, and
control. These problems however were
discussed within limited analytical framework.

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• The modern phase begin in mid 50s and has

witnessed an accelerated pace of development
with the infusion of ideas from economic
theories and applications of quantitative
methods of analysis. The distinctive features
of modern phase are:
1. The scope of financial management has
broadened. The central concern of financial
management is considered to be a rational
matching of funds to their uses in the light of
appropriate decision criteria.
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2. The approach of financial management has

become more analytical and quantitative.
3. The point of view of the managerial decision
maker has become dominant.

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• Since the beginning of the modern phase many

significant and seminal developments have
occurred in the fields of capital budgeting,
capital structure theory, efficient market
theory, optional pricing theory, arbitrage
pricing theory, valuation models, dividend
policy, working capital management, financial
modeling, and behavioral finance.

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Role of Finance in a Typical

Business Organization

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The Role of a Finance Manager

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Objectives of the firm

• Profit Maximization
• Wealth Maximization

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Profit Maximization
• Profit maximization is also the traditional and
narrow approach, which aims at, maximizing
the profit of the concern.
• Profit maximization consists of the following
important features:
• Profit maximization is also called as cashing
per share maximization. It leads to maximize
the business operations for profit.

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• Ultimate aim of the business concern is

earning profit, hence, it considers all the
possible ways to increase the profitability of
the concern.
• Profit is the parameter of measuring the
efficiency of the business concern.
• Profit maximization objectives help to reduce
the risk of the business.

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Favorable Arguments for Profit

Maximization

• Main aim is earning profit.

• Profit is the parameter of the business concern.
• Profit reduces risk of the business concern.
• Profit is the main source of finance.
• Profitability meets the social needs also.

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Unfavorable Arguments for Profit

Maximization

• Profit maximization leads to exploiting

workers and consumers.
• It creates immoral practices such as corrupt
practice, unfair trade practices etc.
• Profit maximization objectives leads to
inequalities among the stakeholders such as
customers, suppliers, public shareholders etc.

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Wealth Maximization

• Wealth maximization is also known as value

maximization or net present worth
maximization. It is a modern approach which
involves latest innovations and improvements
in the field of business concern.
• The term wealth means shareholders wealth or
the wealth of the person involved in business
concern.

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Favorable Arguments for Wealth

Maximization
• Wealth maximization is superior to profit
maximization because the main aim of the
business concern under this concept is to
improve the wealth of the shareholders.
• Wealth maximization considers both time and
risk of the business concern.
• It provides efficient allocation of the
resources.
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• It ensures economic interest of the society.
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Unfavorable Arguments for Wealth

Maximization
• Wealth maximization is nothing, it is also profit
maximization, it is indirect name of profit
maximization.
• Wealth maximization creates ownership-
management controversy.
• Management alone enjoy certain benefits.
• Wealth maximization can be activated only with
the help of the profitable position of the business
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concern.