FINANCIAL MANAGEMENT

PROF. RAJIV CHANDRA

MBA (IIMA), ICWA, CS
SEMESTER 1
CLASS OF 2023
 WHAT IS ROLE OF FINANCE
FUNCTION OF FINANCIAL MANAGEMENT
ROLE OF CFO
1. VALUE CREATION – NOT PROFITS BUT MARKET VALUE
MAXIMISATION
2. ARRANGING CAPITAL-DEBT, EQUITY – COST, FLEXIBILITY,
3. EVALUATING CAPEX/PRODUCTS
4. DEPLOYING CAPITAL – INVESTMENTS/TREASURY/CASH-
FLOW MONITORING
5. DIVIDEND POLICY / BUY-BACK OF SHARES
6. FOREX MGMT
7. INVESTOR RELATIONS
8. STRATEGY
9. OPERATIONS – ESP. IN WORKING CAP. MGMT.
 ROLE OF FINANCE
PROFIT MAXIISATION VERSUS MARKET VALUATION OR VALUE FOR
SHAREHOLDERS OR CASHFLOW GENERATION

CONFLICT BETWEEN MGMT, SHAREHOLDERS, LENDERS, CREDITORS,

EMPLOYEES

HERO HONDA – WE HAVE A HISTORY OF CREATING VALUE AND

MAXIMISING RETURNS FOR OUR SHAREHOLDERS
RELIANCE – VALUE CREATION IS A MANTRA FOR RIL. RELIANCE HAS
BEEN CREATING VALUE ON SUSTAINABLE AND INNOVATIVE BASIS.
HINDALCO – TO RELENTLESSLY PURSUE THE CREATION OF SUPERIOR
VALUE FOR SHAREHOLDERS, BY EXCEEDING CUSTOMER EXPECTATION
PROFITABLY, UNLEASHING EMPLOYEE POTENTIAL, WHILE BEING A
RESPONSIBLE CORPORATE CITIZEN, ADHERING TO OUR VALUES.
 ROLE OF FINANCE
• SOCIAL RESPONSIBILITY
1. TAKEN IMPORTANCE IN RECENT YEARS
2. COMPANIES ACT, 2013 ALSO MANDATES A
PERCENTAGE OF PROFITS TO BE SPENT FOR SOCIAL
COMMITENTS
3. HELPS CREATION OF BRAND
4. RETURN TO THE COMMUNITY, WHERE YOU ARE
UTILISING RESOURCES – LAND DEGRADATION
REVERSAL/FORESTATION, WATER CONSERVATION,
EDUCATION FOR VILLAGERS, ENVIRONMENT CARE
5. PROFITS AND SOCIAL GOALS CAN GO HAND IN HAND
 FUNCTIONS OF FINANCE
• 3 BROAD FUNCTIONS
A. INVESTMENT –
1. MOST IPORTANT WHEN COMES TO CREATION OF VALUE. CAPITAL INVESTMENT IS ALLOCATION
OF CAPITAL TO INVESTMENT PROPOSALS, WHOSE BENEFITS ARE TO BE REALISED IN FUTURE.
2. AS FUTURE INVOLVES UNCERTAINITY, THERE IS ALWAYS A RISK ASSOCIATED WITH EACH
INVESTMENT DECISION. THUS, THESE SHOULD BE EVALUATED FOR THE RISKS AND REWARDS
ASSOCIATED, AS THAT IS WHAT THE MARKET LOOKS AT. (RELIANCE JIO CASE)
3. VARIOUS METHODS ARE AVAILABLE, WHICH WE WILL STUDY IN DETAILS LATER ON, LIKE –
PAYBACK PERIOD, NET PRESENT VALUE, INTERNAL RATE OF RETURN, RETURN ON CAPITAL
EMPLOYED, ACCOUNTING RATE OF RETURN, ETC.
4. ALSO INVOLVES CONTINUOUS MONITORING OF ASSETS DEPLOYED IN EACH BUSINESS TO
DECIDE IF IT JUSTIFIES TO BE IN THAT BUSINESS OR TO SELL.
5. FINANCE MANAGERS ARE MORE INVOLVED IN MANAGING CURRENT ASSETS THAN FIXED
ASSETS. INVENTORY CONTROL, DEBTORS AGING/COLLECTIONS, CASH MANAGEMENT –
WORKING CAPITAL DEPLOYED IS CONTINUOUSLY MANAGED /MONITORED – WE WILL STUDY
THIS LATER ON – CREDIT POLICY, COLLECTION SYSTEM, CLASSIFICATION ON INVENTORIES, MIN-
MAX, EOQ, RE-ORDERING LEVEL
6. MERGERS & ACQUISITIONS – ORGANIC VS. INORGANIC GROWTH.
7. GLOBALISATION OF BUSINESSES, FUND RAISING, INVESTMENTS ABROAD, MERGERS ABROAD,
TAXATION, CONTROLS ARE AFFECTING FINANCIAL DECISION MAKING
 FUNCTIONS OF FINANCE
B. FINANCING DECISION
1. BEST FINANCING MIX OR CAPITAL STRUCTURE
2. IF COMPANY CAN CHANGE ITS TOTAL VALUATION BY VARYING ITS
CAPITAL STRUCTURE, AN OPTIMAL FINANCING MIX WOULD EXIST,
IN WHICH MARKET PRICE PER SHARE COULD BE MAXIMISED.
3. WILL STUDY IMPACT OF LEVERAGE, CASHFLOW ABILITY TO
SERVICE DEBT, SECURITY RATINGS, TAX BENEFITS, RESPONSE OF
SHARE MARKET, TIMING, COSTS, SIZE OF ISSUE, FLEXIBILITY, ETC
4. IS THERE A PECKING ORDER ? NORMALLY, YES.
a. INTERNAL RESOURCES
b. DEBT
c. PREFERRED SHARES
d. HYBRID – CONVERTIBLE BONDS
e. EQUITY SHARES
 FUNCTIONS OF FINANCE
5. EMERGING METHODS OF FINANCING
a. FOUNDERS AND ANGELS
b. PRIVATE EQUITY AND VENTURE CAPITAL
c. SECURITISATIONS
6. SOME OTHER METHODS
a. LEASING
b. EXCHANGEABLE DEBT
c. HYBRID SECURITIES
 FUNCTIONS OF FINANCE
C. DIVIDEND / SHARE REPURCHASE DECISION
1. 2 BROAD METHODS OF DISTRIBUTION
a. CASH DIVIDEND
b. SHARE REPURCHASE
2. DIVIDEND POLICY INCLUDES
a. THE PERCENTAGE OF EARNINGS PAID TO SHAREHOLDERS IN CASH DIVIDENDS
b. STABILITY OF ABSOLUTE DIVIDENDS ABOUT A TREND
c. STOCK DIVIDENDS
d. STOCK SPLITS
e. SHARE REPURCHASE AND TAX
3. POLICY TO EVALUATE LIKELY RETURN ON RETAINED EARNINGS AND
VALUE TO INVESTORS
4. BOTH DIVIDENDS AND REPURCHASE ARE IMPORTANT FINANCIAL
SIGNALS TO THE MARKET, WHICH CONTINUALLY TRIES TO ASSESS THE
FUTURE PROFITABILITYAND RISK OF A COMPANY.
 FINANCE AND OTHER AREAS OF MGMT.
• FINANCE AS A FUNCTION DOES NOT OPERATE IN A
VACUUM. INFACT, IT CONTINUOUSLY INTERACTS
WITH ALL OTHER FUNCTIONS LIKE, PRODUCTION,
MARKETING, HR, IT, STRATEGY, PURCHASE.
• SOME EXAMPLES –
– LEVEL OF STOCKS BASED ON MARKETING STRATEGIES
– REPLACEMET OF OLD PRODUCTION EQUIPMENT
– AUTOMATION / IT IMPLEMENTATION
– HR INITIATIVES – PERFORMANCE LINKED INCENTIVES
– ESOPs, COMPENSATION PLANS
– CREDIT PERIOD / POLICIES
• VIRTUALLY ALL DECISIONS REQUIRE QUANTIFICATION
 DISCUSSION POINTS
• SHOULD THE MANAGERS OF A COMPANY OWN A
SIZABLE AMOUNT OF STOCK IN THE COMPAY? WHAT
ARE THE PROS AND CONS?
– IMPACTS PROFIT POSITIVELY – MOTIVATION
– DO FUNCTIONS/TAKE DECISIONS THAT IMPACT SHARE VALUE
POSITIVELY

• AS AN INVESTOR, DO YOU BELIEVE THAT SOME

MANAGERS ARE PAID TOO MUCH? DO NOT THEIR
REWARDS COME AT YOUR EXPENSE? (INFOSYS CASE)
• AGENCY PROBLEM
• MGMT IS AN AGENT FOR SHAREHOLDERS
• AGENT INTERESTS ARE –SALARY, COMPENSATION, GROWTH IN
FUTURE
• SHAREHOLDERS INTEREST IS HIGHER DIVIDENDS AND CAPITAL
APPRECIATION (MARKET VALUE)
• ESOPs / PROFIT SHARING/VARIABLE PAY LINKED TO METRICS
SET BY SHAREHOLDERS
• AGENCY COST = MAXIMUM THEORETICAL PROFIT THAT CAN
BE MADE – ACTUAL PROFIT
• MKT VALUE = 100 – 72
 ASSIGNMENT
• NEWS ITEMS AS MENTIONED IN THE EXCEL FILE
• NEWS PAPER /CNBC TV /MONEYCONTROL.COM - FINANCIAL NEWS PICK AND PASTE 4
NEWS ITEM EVERY WEEK - ATLEAST 2 DIFFERENT DAYS ALONG WITH YOUR COMMENTS
FOR THE NEXT 5 WEEKS. NO ECONOMY RELATED NEWS LIKE INFLATION, GDP GROWTH,
UNEMPLOYMENT. NO GENERAL NEWS.
• TOTAL 20 ITEMS
• COMMENT ON - IMPACT ON ECONOMY/SENTIMENTS OF SHAREHOLDERS / GOOD THING
OR NOT. ALSO EXPLAIN THE THEORETICAL RELEVANCE TO WHAT YOU HAVE LEARNT.
• MENTION SOURCE AND DATE OF NEWS FOR EACH ITEM
1. EXAMPLES IPO NEWS /BUYBACK OF SHARES
2. DIVIDEND ANNOUNCEMENTS SUBMISSION BY 10/7
3. RIGHTS ISSUE EMAIL - RCHANDRA59@GMAIL.COM
4. BONDS ISSUE/G-SEC CELL - 9871115150
5. TAX RELATED - INCOME TAX/GST WEIGHTAGE - 5 MARKS
6. ESOPs ACTUAL MARKS – 50 (25 FOR NEWS
7. SEBI NEWSAND 25 FOR COMMENTS)
8. SOVEREIGN GOLD BONDS
 TYPES OF BUSINESS
1. SOLE PROPRIETORSHIP / HUF
2. Hindu undivided family
3. PARTNERSHIP
4. LLP – LIMITED LIABILITY PARTNERSHIP
5. COMPANIES – PRIVATE, PUBLIC, GOVT. COS. (PSUs)
6. CO-OP. SOCIETY
• TAX ANGLE – DEBT VS. EQUITY (INTEREST VS.
DIVIDEND), CARRY FORWARD OF LOSSES
• SHARE ISSUE, BONDS, PUBLIC DEPOSITS, PPP
• BANK BORROWING
• PERSONAL LIABILITY
CONCLUSION

THANK YOU