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23 views15 pages

Chapter 1

Uploaded by

Tibebeselassie Teklemariam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Advanced Financial Management

MBA 641
By: Abdi Dufera(PhD)

1
Contens of the Course

Unit- I: Nature, Scope and Objectives of Financial Management


Unit II: investment decisions
Unit III: Financing Decision:
Unit IV: Current Asset Management Deciosion
Unit V : Corporate restructuring decision

2
Unit- I: Nature, Scope and Objectives
of Financial Management
Important Business Activities

Production

Marketing

Finance
Real And Financial Assets
Real Assets: Can be Tangible or Intangible
Tangible real assets are physical assets that include
plant, machinery, office, factory, furniture and building.
Intangible real assets include technical know-how,
technological collaborations, patents and copyrights.
Financial Assets are also called securities, are
financial papers or instruments such as shares and
bonds or debentures.
Shares represent ownership rights of their holders.
Shareholders are owners of the company.
Loans, Bonds or Debts: represent liability of the
firm towards outsiders. Lenders are not owners of the
 Finance is the study of money
 Finance is a distinct area of study that comprises facts,
theories, concepts, principles, techniques and practices
related with raising and utilizing of funds (money) by
individuals, businesses, and governments.
 Financial management can also be defined as a decision
making process concerned with planning for raising, and
utilizing funds in a manner that achieves the goal of a
firm.

-5
Objectives of Financial Management

1. Profit maximization happens when marginal cost is equal to marginal


revenue . This is the main objective of Financial Management.
2. Wealth maximization means maximization of shareholders' wealth. It is
an advanced goal compared to profit maximization.
3. Survival of company is an important consideration when the financial
manager makes any financial decisions. One incorrect decision may lead
company to be bankrupt.
4. Maintaining proper cash flow is a short run objective of financial
management. It is necessary for operations to pay the day-to-day expenses
e.g. raw material, electricity bills, wages, rent etc.

-6
Objectives of Financial Management

 Profit maximization, though widely professed, should not be used as


a good goal of a firm in financial management.
1. Ambiguity :It is very illusive and has no precise connotation.
Different people understand profit in different several ways-short-
term or long-term profit, total profit or profit on a per share basis
(earnings per share), and before or after text profit
2. Cash flows: The profit a firm has reported does not represent the
cash flows to the business.
3. Quality of Benefits (Risk of Benefits):
Wealth maximization or maximization of the value of a firm is
considered to be an ideal goal of a firm in financial management.

-7
Shareholders’ Wealth Maximization

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


shareholders.
 Accounts for the timing and risk of the expected benefits.
 Benefits are measured in terms of cash flows.
 Fundamental objective—maximize the market value of the firm’s
shares.

-8
Agency problem : Managers Versus
Shareholders’ Goals

In a corporate form of business organization owners (stockholders) do not run the activities of
the firm.
Managers are agents in a corporation to maximize the common stockholders’ well-being.
There is a Principal Agent relationship between managers and shareholders.
In theory, Managers should act in the best interests of shareholders.
In practice, managers may maximise their own wealth (in the form of high salaries and perks)
at the cost of shareholders.
The natural conflict of interest between stockholders and managerial interest create agency
problems.
Agency problems are the likelihood that mangers may place their personal goals a head of
corporate goals.
Theoretically, agency problems are always there as long as mangers are agents of owners.

-9 9
Function of Financial Management

The finance function mainly deals with the following three decisions
1.Investment Decision: relates to the selection of assets in which
funds will be invested by a firm.
2.Financing Decision: determining the best financing mix or capital
structure of the firm.
3.Dividend Decision. developing a dividend policy which divides the
net earnings into dividends and retained earnings in an optimum way
to achieve the objective of maximizing the market value of firm.

-10
Function of Financial Management
Investment
Decisions
Return

Market Value
Financing of the firm
Decisions

Risk

Dividend
Decisions

-11
Status and Duties of
Finance Executives
The exact organisation structure for financial management will
differ across firms.
The financial officer may be known as the financial manager in
some organisations, while in others as the vice-president of
finance or the director of finance or the financial controller.

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Status and Duties of Finance
Executives
13

 Theexact organisation structure for financial


management will differ across firms.
 The financial officer may be known as the
financial manager in some organisations, while
in others as the vice-president of finance or the
director of finance or the financial controller.

-13
Organisation of Finance
14
Function

Organization for finance


Organization for finance function in a
function multidivisional company
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Role of Treasurer and
15
Controller
 Twoofficers—the treasurer and the controller
—may be appointed under the direct
supervision of CFO to assist him or her.
 The treasurer’s function is to raise and
manage company funds while the controller
oversees whether funds are correctly applied.

-15

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