Financial Management Unit 1 Class
Transcript of Financial Management Unit 1 Class
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Financial management
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Finance
To provide or raise the funds or capital for: ex :
financed a new car.
Provision of money at the time it is wanted
Procurement of fund and their effective
utilization
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Business finance
Activity concerned with
Planning
Raising Controlling
Administering of the funds used in business
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Financial management
Raising of funds and effective utilization of
funds in keeping in view ofall the overall
objectives of firm
it is an operational activity of a business that is
responsibility for obtaining and effectively
utilizing funds necessary for efficient
operations
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Scope of Financial Management
Financial Management involves
the application of general
management principles to
particular financial operation
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Financial Management Decisions
Fund requirement decision - Working capital
fixed capital
Financing decisionraising of funds - mix
Investment decision -capital assets and
current assets
Dividend decision -dividend payout ration Liquidity decision - current assetsidle
current assetsprofitability
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Finance function
1.Raising of fundsfinance decision
2.Investing them in assetsinvestment decision
3. Distributing profits to SH
dividend decisions4. Maintain cash inflow and outflowliquidity
decision
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The Financial Management Function
Managing daily cash inflows and outflows
Forecasting cash balances
Building long-term financial plans
Choosing the right mix of debt and equity
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Basic principles of finance decisions
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Risk return trade off
Maximization of wealth
Liquidity and profitablity
Raising of funds
Time value of money
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Objectives of Financial Management
Wealth maximiztion - Maximization ofshareholders wealth
Profit maximization
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Profit maximization
Success of any concern
Overall efficiency
Survival depends upon profit SH- investdividendhigh profit- high
dividend
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Profit maximisation
Performance of business unit is measured
Profit maximisedSH . Ees, prompt mayment
to creditors
Increase the confidence of management
Attracts the investors to invest their savings
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Profit against profit maximisation
1. Terms are vague
short run profitlong run
rate of profit
amt of profitaccounting profiteconomic profit
PAT/PBT
NP/GP
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Contd.
It ignores time :Rs received is more valuable
It does not take elements of risk
A huge profits invites problems from workers
True picture is not reflected
Industry leadershipincrease the profit
increase the cost
Consumers moralehe is exploited amway
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What Should Managers Maximize?
Profit maximization as goal:
Maximize shareholder wealth
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wealth maximisation
Gradual growth of financial assets
Wealth - attained by a company is reflected in
the market through the value of shares
Wealth of shareholders
Wealth maximisation is NPV
NPV = GPV of benefits receivedinvestmentsmade
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Maximize stock price, not profits
Accounts for risk
Takes time value of money
Postive NPVcreate wealth to the organistion
Negative NPVreduces the existing wealth ofshareholder
Ie total cash inflow should be more than outflow Excess of outflow is added to assets --- that is
wealth
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Example
A company has
50000 shares of rs 10 each
EPS = .40
Profit = 20000
Additional capital of rs 50000
Profit 30000
EPS = .30 Though the profit increases wealth of
shareholder decreased
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Advantages of wealth maximisation
Wealth maximisation is in clear term
PV of cash inflows are taken
Time value of money is considered Accepted by employees , creditors , bankers
etc
Risk factor is taken into accountbycalculating the NPV at discount factor
Li idit d fit bilit t
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Liquidity and profitabilitytwo
competing goals of a financial
manager Liquidity
The firm has adequate cash to pay it liabilities
The firm has adequate cash to large purchaseThe firm has cash reserve to meet emergencies
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Profitability
Requires funds to earn more profit / returns
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Liquidity vs profitability
Liquidity increases profitability decreases
Large amt of inventoryprofitability increases
and liquidty increases
Liberal credit policyincreses sales
increases profitliquidity decreases
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Risk return trade off
Higher riskhiher return
Hiher riskdecreases the liquidity
Higher returns
increases the profitabilty Level of operations Return and risk is
optimised
At this level - Market level of the company ismaximum
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Liquidity vs profitabilty
Debt equity ratioincrease
Fixed interest to be paiddecreases the
liquidity is reduced