Welcome to

Financial Management
Class
 FINANCIAL MANAGEMENT
Chowdhury Saleh Ahmed. Ph. D
salehahmed4081@yahoo.com

Week No. 1 Introductory Issues

3 hour
Importance and Scope of Financial Management
Goal of the Firm.
Organization of the Financial Management function.

Week No. 2 The Time Value of Money

3 hour
Present and Future Values
Simple and Compound Interest rates
Functional and Tabular Forms

Week No. 3 Annuities and perpetuities

3 hour Present and Future Value Interest Factors
Annuities and perpetuities
Implication for buyers and sellers
Week No. 4 Valuation of Financial Instruments
3 hour
Types of Loans and advances,
Amortizing a Loan
Comparative Analysis
Week No. 5 Risk and Return
3 hour
Measuring Risk
Concept of Probability Distribution
Portfolio Risk
Week No. 6 MID TERM EXAMINATION
--------------------------------------------------------
Week No. 7 Capital Asset Pricing Model
3 hour
Calculating Returns to Capital Assets
Risk and Term Structure
Risk Premium
Week No. 8 Financial Analysis and Planning
3 hour Du Pont Approach
Implications of the Approach
Proving the Identity for different Financial and Income Ratios.
Week No. 9 Sustainable Growth Model
3 hour
Implication of Sustainable Growth Model
Comparison with Du Pont
Week No.10 Inventory Management
3 hour
Types of Inventory Costs
Optimal Level of Inventory
Economic Ordering Quantity Determination
Week No. 11 Capital Budgeting Techniques
3 hour
Principles of Valuation
Financial Measures of Project Evaluation
Limitations of Capital Budgeting Techniques
Week No. 12 Financial and Economic Viability Gap Estimation
3 hour
Sensitivity Analysis
Economic Analysis
Implications of
Week No. 13 FINAL EXAM ---------------------------------
3 hour
 Course Evaluation Method
Criteria % marks
Class attendance 10
Class tests 10
Home Assignments 10
Mid term examination 30
Final examination 40
 Course Objectives:

The course aims to introduce major elements of

Financial Management to the students so as to allow
them specialize in these areas.

The focus of the course will be upon identifying

major challenges faced by management in financial
decision-making.

Students will also be exposed to Bangladeshs

financial management situations.
Text Book

1.Fundamentals of Financial Management (13th ed)

by James C. Van Horne et.al. PHI Learning Private
Ltd.

2. Corporate Finance by Stephen A. Ross et.al,

McGraw-Hill International Edition, 2011
 What is Finance?
Finance is the art and science of
managing money.

Finance is concerned with the process,

markets and institutions involved in the
transfer of money among and between
individuals, businesses and governments.
 Money flows within and among
following groups:

Individuals Businesses Government

Process Institutions
Markets

Finance is the art and science of managing money flows

 Examples of Money Flows:
Financial Process Markets Institutions
Activity
Taking Home Application Loan or Credit Banks
Loan market
Investing in Opening a BO Share market Stock
share Account Exchanges
Buying Endorsing in Foreign F/E Dealers
foreign Passport exchange
currency market
Hiring Labor Negotiate a Labor Market Labor
service contract Contractors
Buying a Negotiation of Retail Market Shop
product from price
shop
What is Financial Management?

Management of financial affairs of

organizations is called Financial
Management.
 What are the duties of Financial
Managers
1.
Financing decision making. Arranging
financing or funding needed for various
activities of the organization.

This can be done through loan/credit

arrangement, equity arrangement, FDI, etc.
The tools required for enabling this decision
making are financial forecasting, cash
management, budgeting, etc.
 2. Investment decision making
Once fund is available, next decision
making is about best utilization of fund
through investment analysis.

This can be done through capital

investment
The tools that can enable Investment
decision-making are Feasibility analysis,
budgeting, risk consideration etc.
 3. Asset management decision making

Asset management decision means

making means proper balancing of assets
and liabilities, riskiness and returns.

The tools available for Asset management

decision-making are Risk and Return
considerations, Portfolio analysis,
Safeguard and Sustainability analysis.
An working definition of financial
management can be:

Studying decision-making in financing,

financial investment and asset management
functions of a corporate body for the benefit of
the share holder and the Economy at large.

Economy at large is added because goals of

corporate bodies are not only the share holders
of the company but also economy as a whole.
This is not only from welfare/philanthropic
point of view but also from efficiency points of
view.
 Importance of Financial Management
Financial Management has assumed a greater importance
now-a days due to following reasons:
Increase in the Size and complexity of corporate bodies
Corporate bodies becoming important economic players and
influencer of decision makings.

Besides, there are factors like

intense corporate competition,
technological change,
volatility of interest and inflation rates,
fluctuating exchange rates,
tax law changes
All of the above have great financial impacts.
Financial managers need quicker flexibility to respond to the need.
 Important Functions of Financial
Management
A financial manager must be able to:
Arrange Financing or raise funds for the
organization
Invest in capital assets
Achieve balance between assets and liabilities,
risk and returns wisely
adapt to change to the economic facts of life as
mentioned in previous slide
for benefit of the shareholders and the economy
as a whole.
 Schematic diagram of the Scope of Financial
Management Functions
Share holders
Debt holders
Customers
Communities External Stakeholders
Regulators
Media etc.

Board
Chief Executive
CEO Internal
Stakeholders
Operations Manager Financial Manager Marketing Manager

Other Employees
 Examples of Financial Decision-makings are
the followings:

Types of Stakeholders Financial Decisions Involved

Shareholders Dividend, Bonus share, Right share

Debtors Terms of Loan, Amortization schedule

Community Corporate Social responsibility (CSR)

Functional Managers Working Capital/ Fund Management

Regulators Compliance
 Reason for
Renewed Interest in Financial Management

During the earlier part of the last decade,

there has been corporate and financial
governance breakdown for the largest
corporate bodies of the world
like Enron, World com, Tyco, Global
crossing etc.
 Therefore, In USA, there were renewed
interests for effective corporate governance
and efficient financial management of the
corporate bodies.

These were manifested through Serbanes-

Oxley Act, 2002
The Act calls for:

A high standard in corporate governance and financial

management , and this S-O Act led to the:

Establishment of the Public Company Accounting Oversight

Board (PCAOB) for purpose of overseeing corporate bodies of
USA.

The PCAOB has been given the power to ensure financial

management of the corporate bodies through a number of
measures, among which some are the following:
.Timely auditing
. Disclosure Standards
.Appointment of independent directors/ Financial
Manager,
.Making Audit independent of management etc.
.CSR
 Cont..
In Bangladesh and other developing countries,
Securities and Exchange Commission has issued

Code of Corporate governance in 2006. There were

amendments in later years.

The code is binding for all Public companies.

The code describes financial and other requirements to be
satisfied by the corporate bodies.
 Relationship of Financial Management with
Economics and Accounting
Financial Management and Economics are
closely related:
Every business firm must operate within the
economic principles.
Financial manger must understand economic
consequences of change.
Financial manager must be able to use
economic theories as guidelines for efficient
business operation.
 Economic Equilibrium of a Firm under Perfect Competition:
Impact of technological change

Perfect Comp(long run) MR = MC

MC Demand
AC
Price Supply
P D=AR
=MR
Quantity
Q
Long term Short
eqlm. term
eqlm.
 Relationship with Accounting
Finance and accounting activities are closely
related and generally overlap.
In small firms, accountants often carryout finance
functions.
While in large firms, the functions are separate.
Accountants give decisions regarding whether
accounts of some organizations conforms to some
accepted standards like BAS, IAS, World Bank
standards etc.)
The difference between the two is that financial
management involves financial -wide decision-
making while accountants provide decision-
making regarding conformity to standards.
 The Goal of the firm and hence of the
Financial Manager:

1. Value Creation
2. Solving the agency problem
3. Discharging corporate social
responsibilities.
 Value Creation means generation of surplus
for distribution to shareholders/owners.

I In Financial Management, Value Creation is

usually represented by Earnings Per share
Earnings per share (EPS) is that portion of profit
that is attributable to shareholders (after various
provisions such as

incentive bonus,
bad loan provision,
reserve build-up,
Corporate social responsibility
Etc.
For example, some organization A has a net profit
after tax is Tk 150 million for the year 2015-16.
Financial Manager proposes following provisions:

Incentive bonus Tk 20 million

Reserve fund Tk 50 million
CSR Tk 10 million
Bad loan provision Tk 5 million
Past tax liability Tk 5 million
Other Tk 20 million
Total provision Tk110 million

Fund available for distribution to shareholders is 40

million.
Supposing 10 million shares have been issued.
Therefore, EPS is Tk 4 per share.
Limitations: 1

Profit maximization is not an appropriate indicator of

management efficiency: Profit can be increased by many
unethical means like
investing in share market,
FDRs,
speculative trading,
hoarding etc.

Therefore EPS which is based on profit is not morally

just. (Justifiability)
2
EPS does not consider risk. Wrong decision s
may be made if investment in shares are done on EPS
of the current years.

The two companies shares may have same or higher

Earning per share, but one firms share may not be
sustainable or risky to possess. (Risk Assess-ability)
Diagram

EPS
Risky share

Time
3.
Another limitation is that if the only objective were
to maximize earning per share, the firm would never
pay a dividend.

It could always increase earning per share of the

following year by retaining earning. (Appropriate-
ability)
(Retained earning would raise EPS)
Difference Between Earning per share and
Share price.

Earning per share shows result of past

performance.

But Share price shows final judgment of all

market participants as to the value or worth
of the particular firm taking present and
future considerations..
 Difference Between EPS and Dividends
1.
EPS (Earnings per share, that is Income available for each common
outstanding share) and dividends per share, both indicate the future
prospects of shareholders return.

The difference is that EPS measures the Taka or $ value of net income
that is available (ex ante) for each of the companys outstanding common
shares, while DIVIDENDS per share shows the portion of profits that is
actually paid (ex post) out to shareholder.

EPS is a measure at calculating stage . Board may not agree to pay-out

EPS as calculated.

What is actually paid out is Dividend.

2.
High EPS means more profit and growth prospect

On the other hand, Higher Dividend may indicate that the

firm cannot reinvest enough funds back into the firm and so
they are paying high dividends.

There are high growth firms who pay LOW OR DO NOT PAY
any DIVIDENDS but reinvest the profit.
 Other Important Measures of Value Creation

PRICE/EARNINGS RATIO

A popular ratio is the price/earnings ratio (P/E). This is simply

the Market Price of share divided by the EPS:

Price Earnings Ratio = Market Price Per Share/EPS

For example, a share/ stock selling at Tk15 per share with EPS
of Tk 2 would have a P/E of 7.5.

Normally lower the P/E ratio, better it is.

However, the LOW ratios do not always represent better

opportunities.

Because "E" in P/E represents Past EPS and P reflects

future prospects.
 PEG Ratio
A related ratio is the "PEG" ratio.

This is the P/E ratio divided by the company's "growth" rate G.

PEG = (P/E ) / G

For example, a company with a P/E of 20 that is experiencing

average growth in income of 10% would have a PEG of 2.

If the same company instead had annual growth rate of 5%, then the
PEG would be 4.

As a rule of thumb, the lower the PEG number, the more attractive
the investment appears.
But similar limitation holds as in P/E Ratio.
 Solving Agency Problem
Management may be considered as the agents of the
owners.
However, the management s actions may not always
match with the desires of those of the owners
or vice versa
Owners role may fall short of expectations of management.

The goal of the firm and the Financial Management is to

reduce the gap for long run efficiency of the firm .
Financial Manager need to play a pivotal role.
 PROBLEM WITH MANAGEMENT

One way may be to apply X and Y Theory of Management

X and Y theory are theory of human motivation and

management.

Y Theory considers employees to be sincere, dedicated and

rule abiding.

Under Y theory, owners trust on the motivating role of the

managers / workers and approach the task without direct
supervision. But by incentive structure.

Here the agency problem is attempted to be solved through

various incentives to Management by the Owners like timely
promotions, rewards, Pay hike, bonus etc.
However, all employees may not be responding to these
incentives.

There will be some employees who will have little or no

ambition, will shy away from work or responsibilities, and
would be individual-goal oriented.

Therefore according to X theory, the approach for these

types of employees should be one of Hands-on" approach of
management meaning greater monitoring and supervision, strict
compliance requirements, limiting decision making power etc.
A mix of Y and X theory would help to solve the agency
problem relating to management.

PROBLEM OF BOARD

Agency problem resting with the Board can be solved by

self-evaluation of the Board members in confidential
sessions.

Non-value adding members may be dropped in next AGM.

 Corporate Social Responsibility

Corporate social responsibility (CSR also called corporate

conscience, corporate citizenship or responsible business) is a
form of corporate regulation.

It is usually complied with the spirit of the law, ethical standards

and national or international norms regarding social welfare.
Corporate Social Responsibility has much broader aspect than
usually thought, such as,

1.
Protecting the consumer- for long term goal of Value Creation
Paying fair wages to employees,
Maintaining fair hiring practices,
Productivity and Efficiency in organization

2.
Neighborhood Relationship Reducing Operational Risk
Building local roads,
Recreation Club

3.
Supporting education and environmental programs such as
clean water and air etc.---Philanthropic
The aim of CSR is to
increase long-term profits through positive public relations,
high ethical standards to reduce business and legal risk, and
ensure state trust by taking philanthropic actions.

CSR strategies encourage the company to make a positive impact

on the environment and stakeholders including consumers,
employees, investors, communities, and others.
The End