Financial Management

Financial Management or Corporate Financial

Management is a managerial activity which is
concerned with the planning and controlling the
firms financial resources.
Finance is the Science or Art to manage Money
and other Assets.
It was a branch of Economics till 1980s but now
considered as a separate body of knowledge.
Corporate Finance is concerned with the
maintenance and creation of economic value or
wealth.
Consequently this course focuses on decision
making towards creating wealth.
Accounting Vs. Finance

When to invest in new assets?

When to replace existing assets?
When to borrow from banks?
When to issue Debenture or Bonds?
When to issue Equity Shares?
How much Profit to be distributed?
When to extend credit to a customer?
How much cash to maintain?

 The Finance manager of a business

firm generally involves in the
following decisions:
(i) Investment Decisions
(ii) Financing Decisions
(iii) Pay out Decisions

Objective of Corporate Finance

Profit Maximization
Vs.
Wealth Maximization

The Agency Problem

Shareholders as owners of a company are the
principals and managers are their agents.
Theoretically managers should act in the best interests
of shareholders.
In practice, managers may pursue their own personal
goals.
They may play safe.
Agency Cost: A special type of cost, resolving the
conflicts of interest between managers and
shareholders. It is the sum of:
(i) Monitoring cost of the shareholders.
(ii)Cost of implementing control device.
(iii)Less than optimal share price.
How to manage the agency costs???

 Shareholders determine the member of

the board by voting.
Fear of takeover.
Competition in the managerial labor
market.
Contracts with management and
arrangements for compensation.