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CLASS-2

CLASS-2

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Published by Kumar Vivek

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Published by: Kumar Vivek on Feb 16, 2011
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02/05/2014

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Financial Management -1 covers following topics

       

Overview of Financial Management Financial Institutions &Markets Risk & Return Analysis Time Value of money Valuation of securities Capital Structure &Sources Of Finance Cost of Capital Capital Expenditure Decisions

Introduction to Financial Management Chapter 1 .

CHAPTER       OUTLINE  Basic Areas Of Finance Role of finance manager Objective of Financial Management Forms of Business Organization Finance and other Functions The Agency Problem and Control of the Corporation Environment of Corporate Finance .

Basic Areas Of Finance Corporate finance Business Finance Public Finance International Finance Financial institutions &markets .

Return Trade -off .Role of finance manager ‡Raising of funds (Financing Decision) ‡Allocation of funds(Investment Decision) ‡Distribution of profits(Dividend Decision) ‡Risk.

Objective of financial management ‡Profit Maximization ‡Minimise Cost ‡Maximize Market share ‡Maximize the current value of the compay s stock ‡Wealth Maximization .

Finance and other functions  Marketing  Production  Human Resource  International business  Top Management(Strategy Formulation) .

major form of business organization Sole proprietorship Partnership General Limited 3. 2.Forms of Organization Three 1. Corporation Private limited company Public limited company .

Forms of Business Organization (Sole Proprietorship) Advantages Disadvantages Easiest to start  Least regulated  Single owner keeps all the profits  Taxed once as personal income  Limited to life of owner  Equity capital limited to owner s personal wealth  Unlimited liability  Difficult to sell ownership interest  .

Form Of Business Organisation (Partnership) Advantages  Disadvantages  Two or more owners  More capital available  Relatively easy to start  Income taxed once as personal income  Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell  Difficult to transfer ownership  .

Form of Business Organization (Corporation/Company)  Advantages  Disadvantages Limited liability  Unlimited life  Separation of ownership and management  Transfer of ownership is easy   Easier to raise capital Separation of ownership and management  Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)  .

The Agency Problem  Agency relationship Principal hires an agent to represent their interest  Stockholders (principals) hire managers (agents) to run the company  Agency problem  Conflict of interest between principal and agent  .

Managing Goals and Agency cost  Managerial compensation Incentives can be used to align management and stockholder interests  The incentives need to be structured carefully to make sure that they achieve their goal  Corporate control  The threat of a takeover may result in better management  .

Environment of Corporate Finance FEMA 2001 MRTPA 1969 COMPETITION ACT 2002  INDIAN COMPANIES ACT 1956  INDIAN PARTNERSHIP ACT 1932  SEBI INDUSTRIAL POLICY .

Let us recall what we have learn today  What are the basic areas of finance?  What is the role of role of finance manager?  Objective of financial management  What are the three major forms of business organization?  Finance and other functions  What are agency problems and why do they exist within a corporation? .

What Next ?  We will go through Financial Institutions and markets in the next class .

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