FINANCIAL

MANAGEMENT
SESSION 1

AN OVERVIEW OF FINANCIAL MANAGEMENT

By Prof. Biranchi Panigrahi

Pedagogy and Evaluation Criteria
▪ Pedagogy:
▪ Interactive lectures sessions
▪ Case study and presentation
▪ Project work and assignments
▪ Excel work
▪ Evaluation Criteria:
▪ Quizzes/ Class Tests: At least 4 Quizzes @ 5 marks
per quiz (20%)
▪ Mid-Semester examination: 20%
▪ Term paper/ Project work/Assignment: 10%
▪ Class Participation and Attendence:10%
▪ End semester examination: 40% 1-2
Text Books and Reference Books
▪ Text Book:
▪ Financial Management by IM Pandey; Vikas
▪ Reference Books:
▪ Financial Management: Theory and Practice by
Prasanna Chandra; McGraw Hill
▪ Principles of Corporate Finance by Brearly,Mayers,
Allen and Mohanty; TMH
▪ Corporate Finance: Theory & Practice by
Damodaran; Wiley
▪ Fundamentals of Financial Management by Brigham
& Houston; CENGAGE
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What is Finance?
▪ Finance aims to price assets based on their risk level,
and expected rate of return
▪ A key point in finance is the time value of money,
which states that a unit of currency today is worth
more than the same unit of currency tomorrow
▪ Finance as we know today grew out of economics and
accounting
▪ Economist’s developed the notion that an asset’s
value is based on the future cash flow the asset will
provide
▪ Accountants provided information regarding the
likely size of those cash flow.
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Finance Within the Organization

Board of Directors

Chief Executive Officer (CEO)

Chief Operating Officer (COO) Chief Financial Officer (CFO)

Marketing, Production, Human Accounting, Treasury, Credit,

Resources, and Other Operating Legal, Capital Budgeting, and
Departments Investor Relations

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 Corporate Finance, Capital Markets and
Investments
▪ Corporate Finance. Financial Management:
▪ Focuses on decisions relating to how much and what types of assets to
acquire, how to raise the capital needed to buy assets, and how to run firm so
as to maximise its value
▪ Capital Markets/Financial Institutions:
▪ These are markets where interest rates along with stock and bond price are
determined
▪ Also studied in these area are financial institutions – banks, investment banks,
stockbroker, mutual funds, insurance companies etc.
▪ Investments:
▪ It relates to decision concerning stocks and bonds and includes activities such
as:
▪ Security Analysis – deals with finding proper values of individual securities
▪ Portfolio Theory – deals with best way to structure portfolio of stocks and bonds
▪ Market analysis – Deals with the study of stock and bond market
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Forms of Business Organization (1/2)

▪ Proprietorship:
▪ It is an unincorporated business owned by one individual
▪ Example: All shops and establishment that you can see around you
▪ Partnership:
▪ It is a legal arrangement between two or more people who decide to do
business together
▪ It is a distinct legal and tax entity
▪ Example: many legal and auditing firms
▪ Limited Liability Partnerships (LLP):
▪ It is a partnership firm wherein the liability of the partners is limited.
▪ Example: Most of the consulting firms (Deloitte, PwC)

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Forms of Business Organization (2/2)

▪ Corporation/Company:
▪ It is legal entity created by law
▪ It is separate and distinct entity from its owners and managers
▪ It can own assets, incur liabilities, enter into contracts, sue and be sued
in its name
▪ Because of this separation, the shareholder’s loss is limited to his
investment in the firm
▪ Example: All the companies that you see around and get recruited
▪ Company pays corporate tax on its profits and shareholders pay taxes on
the dividend received by them. So in effect, there is double taxation.
▪ Private Limited company Vs Public Limited company:
▪ A private limited company must have minimum of two shareholders and
maximum of 50
▪ A public limited company must have minimum of seven shareholders and
there is no limit on the maximum no.s of share holder a public limited 1-8
company can have.
 Proprietorships and Partnerships

▪ Advantages
▪ Ease of formation: Can be formed easily and inexpensively
▪ Subject to few regulations
▪ No or lower corporate income taxes
▪ Disadvantages
▪ Unlimited liability: Proprietors have unlimited personal liabilities for
the business debts
▪ Can lose more than the money invested in the proprietorships
▪ Limited life: Life of the business is limited to the life of the
individual who created it
▪ To bring new equity, investors require a change in the structure of the
business
▪ Difficult to raise capital: 1-9
Corporation

▪ Advantages
▪ Unlimited life
▪ Easy transfer of ownership
▪ Limited liability
▪ Ease of raising capital
▪ Disadvantages
▪ Double taxation
▪ Cost of set-up and report filing

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What should a firm be???
▪ When deciding on its form of organization, a firm must
trade off the advantage of incorporation against a possible
higher tax burden
▪ However, because of the following reasons, the value of
any business other than a relatively small one will
probably be maximised if its is organised as corporation or
company;
▪ Limited liability reduces the risks borne by investors
▪ A firm’s value is dependent on its growth opportunities, which are
dependent on its ability to attract capital. Corporation or companies can
easily attract capital and hence can grow faster
▪ The value of an asset also depends on its liquidity, which means time and
effort it takes to sell the asset for cash at a fair market value. As the
shares of a corporation or company is easily transferable and hence more
liquid, it enhances the value of the corporation

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Stock Prices and Shareholder Value

▪ The primary financial goal of management is

shareholder wealth maximization, which
translates to maximizing stock price.
▪ Value of any asset is present value of cash flow
stream to owners.
▪ Most significant decisions are evaluated in terms
of their financial consequences.
▪ Stock prices change over time as conditions
change and as investors obtain new information
about a company’s prospects.

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Conflicts Between Managers and
Stockholders
▪ Managers are naturally inclined to act in their
own best interests (which are not always the
same as the interest of stockholders).
▪ But the following factors affect managerial
behavior:
▪ Managerial compensation packages
▪ Direct intervention by shareholders
▪ The threat of firing
▪ The threat of takeover
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Conflicts Between Stockholders and
Bondholders
▪ Stockholders are more likely to prefer riskier
projects, because they receive more of the
upside if the project succeeds. By contrast,
bondholders receiving fixed payments are
more interested in limiting risk.
▪ Bondholders are particularly concerned about
the use of additional debt.
▪ Bondholders attempt to protect themselves
by including covenants in bond agreements
that limit the use of additional debt and
constrain managers’ actions.
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