INTRODUCTION

Bob Marshell Ochieng

Email:bochieng@strathmore.edu
 Scope of Financial Management
Financial management (FM) can be defined as the
management of the finances of an organisation in
order to achieve the financial objectives of the
organisation
The scope of financial management in the firm is
explained by the functions performed by a finance
manager. These are:
Financing decision
Investment decision
Dividend decision
 Scope of Financial Management
Financing decisions
In regard to this function the manager has to do the
following
Determine the best sources of capital
Identify the capital with the lowest cost
Identify whether the firm needs short term /long term
capital
Establish the optimal mix /composition of various
capital components.
Scope of Financial Management
Investment Decisions
It involves the following issues
Identification of the appropriate investment opportunities
Estimation of future benefits /cash flows from each
investment opportunity project
Appraisal of each project

Dividend Decision
After generation of profits from the projects undertaken the
manager has to decide
How much of the profits should be paid out as ordinary
dividends to ordinary shareholders
What proportion of profits should be retained to finance
future projects
Scope of financial management
Dividend function involves 4 critical issues
How much dividend per share do we pay to
shareholders?
How do we pay dividends (cash dividends or bonus
shares)
When do we pay dividends (i.e. interim and final
dividends or final dividends only?
Why do we pay dividends i.e. does payment of
dividends affect the value of the firm?
Corporate strategy and
objectives
Strategy may be defined as a course of action
including specification of resources required to
achieve a specific objective.
Strategy can be long term or short term depending on
the time horizon of the objectives.
Corporate objectives on the other hand outline the
expectations of the firm as a whole. They include:
profitability, growth, market share, customer
satisfaction, industrial relations, cash flow and quality
of the firm’s products.
Financial objectives
Objectives of a firm can be classified into
Financial objectives
Non financial objectives
Financial objectives are pursued to achieve the
financial targets of the firm. There are two major
objectives
Profit maximization objectives
Shareholder wealth maximization
Other financial objectives are EPS growth, gearing
target, profit retention target, return on capital
employed target.
Profit maximization objective
Assumes firm is operating at full capacity (no volume
growth) in a competitive market
Profit can only be maximized by
 Maximize sales and keep expenses constant
 Minimize expenses while keeping sales constant
Limitations of the goal
 Short term goal
 Unclear
 Ignore the time value of money
 Ignores welfare of other stake holders
 Ignore uncertainty and risk
Shareholder wealth maximization
Developed to overcome the weaknesses of the profit
maximization goal
Shareholder wealth = no of shares held X share price
of the company
No of shares are constant but the share price keeps
fluctuating depending on the projects that the
company puts their funds into.
Positive NPV projects = increased cash flows=
increased share price
Total shareholder return = (P1–P0+D1)/ P0
Objectives of the firm
Advantages of shareholder wealth maximization
objective
Considers the welfare of all stake holders
Considers the time value of money
Considers the risks and uncertainties
associated with future benefits by discounting
at the time value of money
Earnings per share (EPS)growth
EPS is calculated by dividing the net profit or loss
attributable to ordinary shareholders by weighted
average number of ordinary shares.
It is a useful measure to compare performance over a
number of years
A company should be able to sustain its earnings in
order to pay dividends and re-invest.
Investors look out for growth in earnings per share
from one year to the next
Non-financial goals
The welfare of the top management
The welfare of society at large
Responsibilities towards customers
Responsibilities towards suppliers/creditors
Welfare of employees