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Mod 10

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Astha Adhikary
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11 views13 pages

Mod 10

Uploaded by

Astha Adhikary
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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The Role of

Financial Management

 What is Financial Management?


 The Goal of the Firm
 Corporate Governance
 Organization of the Financial Management Function

1
What is Financial
Management?

Concerns the acquisition,


financing, and
management of assets
with some overall goal in
mind.
2
Investment
Decisions
Most important of the three
decisions.
 What is the optimal firm size?
 What specific assets should be acquired?
 What assets (if any) should be reduced or eliminated?

3
Financing Decisions
Determine how the assets (LHS of
balance sheet) will be financed (RHS of
balance sheet).
 What is the best type of financing?
 What is the best financing mix?
 What is the best dividend policy
(e.g., dividend-payout ratio)?
 How will the funds be physically
acquired? 4
Asset Management
Decisions {OPERATING}

 How do we manage existing assets


efficiently?
 Financial
Manager has varying
degrees of operating responsibility
over assets.
 Greater
emphasis on current asset
management than fixed asset
management. 5
What is the
Goal of the
Firm?
Maximization of
Shareholder
Wealth!
Value creation occurs when we maximize the share
price for current shareholders.

6
Shortcomings of
Alternative Perspectives

Profit Maximization
 Maximizing a firm’s earnings after taxes.
Problems
 Could increase current profits while
harming firm (e.g., defer maintenance,
issue common stock to buy T-bills, etc.).
 Ignores changes in the risk level of the
firm. 7
Shortcomings of
Alternative Perspectives

Earnings per Share Maximization


 Maximizing earnings after taxes divided by
shares outstanding.
Problems
 Does not specify timing or duration of
expected returns.
 Ignores changes in the risk level of the
firm.
8

 Calls for a zero payout dividend policy.


Strengths of Shareholder
Wealth Maximization

 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.
 EPS [ earnings per share ]
 Thus, share price serves as a barometer for business performance.

DEBT AND EQUITY FINANCING


Debt : Additional capital needed by the business firm is raised through
issuance of bond. Payments will be in the form of fixed interest rate
( expense) and return of principal.
Equity : Provides an opportunity through return on investment dependent on
the performance of the firm
Profit and Loss sharing for a common stock
9
Fixed amount of percent ( contract made) as preference shares.
FINANCIAL INSTITUTIONS

 Central Banks.
 Retail and Commercial Banks.
 Savings and Loan (S&L) Associations.
 Investment Banks.
 Brokerage Firms.
 Insurance Companies.
 Mortgage Companies.

10
FINANCIAL STATEMENTS
 BALANCE SHEET
Financial statement that reports a company's assets, liabilities, and
shareholder equity at a specific point in time.
Provides a snap shot of financial status of the company.
computing rates of return for investors and evaluating a company's
capital structure
 OWNERS EQUITY STATEMENT
The two components of owner's equity are contributed capital and
retained earnings.
Contributed capital includes both common and preferred stock.
while retained earnings represent the portion of a company's profits that
have not been paid out as dividends.

11
Financial Statements Ctd
 INCOME STATEMENT
An income statement is report a company's financial performance over
a specific accounting period.
The income statement focuses on the revenue, expenses, gains, and
losses of a company during a particular period.
 STATEMENT OF CASH FLOWS
provides aggregate data regarding all cash inflows that a company
receives from its ongoing operations and external investment sources.
It also includes all cash outflows that pay for business activities and
investments during a given period.

12
Expenditure and Distribution of income

 Different types of Expenditures


the amount of money an individual pays out or spends.
Examples include payments for mortgages or rent, utility bills, shopping
and other lifestyle choices.

 Distribution of income
income earned earned by the business firm can be
- Distributed as dividends to the share holders
- Reinvested to the capital for the growth of the business firm

13

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