LECTURE IN FINANCIAL MANAGEMENT

WHAT IS FINANCE?

 Is the art and science of managing money.

 Is about maintenance and creation of economic value or wealth.

2 BROAD TOPICS:

PERSONAL FINANCE

- About how people manage their own money

- This is more for individual financial planning

Answers questions:

*How much money they spend, how much they save, how they invest their savings

CORPORATE FINANCE

- It is all about how to manage company’s money

Answers questions:

*How firms raise money from investors, how firms invest money to earn profit, whether to
reinvest profits in the business or distribute them back to investors.

FINANCE

 Treasurer
 Always focus on how to invest
 How to make more money for the company
(They are just like the accelerator of a car)
 It deals with cash flow
 The focus of Finance is on how to manage cash

GOAL OF A FIRM:

PROFIT MAXIMIZATION

 It refers to how much dollar profit the company makes.

 How to make the most profits from the business.
 Some companies may choose to increase the current profits by cutting research and
development expenditures
 It is a short-term approach, mostly concerned about short term benefits.
 It ignores the timing of returns, magnitude of returns, and risk.
Ex: When you will receive money. How money will you receive? And how much is the risk?

 Fulfilling the objectives of earning profit may not help in creating wealth in the long run.
 It does not consider the social responsibility.

SHAREHOLDER WEALTH MAXIMIZATION

 It focuses on maximizing the value of a company, i.e. value of the stock/share.

 It is a long-term approach, mostly concerned about the value of financial assets. (includes
bonds, shares, etc.)
 Next, it considers the timing of returns, magnitude of returns, and risk.

Answers questions:

When you will receive the money. How much will you receive? And how much is the risk?

Importance criteria in doing business:

How to increase the value of a company?

Ex: Invest in new projects, improve the quality of products, control the cost by improving the
production process.

Companies like UBER & GRAB- they were selling their products without making profit. Some
companies may even sell their products at a loss in order to gain a market share.

Companies like GOOGLE- we uses their services for free because they aims at creating value for
the company. That’s why the share of price of Google is so expensive.

 In short the shareholder wealth means the share price of the firm’s value.
 Maximizing the shareholder wealth means maximizing share price and also maximizing
the firm’s value