Introduction to Financial Management

By Prof. Divya Gupta

Three Most Important Activities of a business firm:

Production Marketing Finance A firm secures whatever capital it needs and employs it (finance activity) in activities, which generate returns on invested capital (production & marketing activities).

Real and Financial Assets

Real Assets 1. Tangible Real Assets 2. Intangible Real Assets Financial Assets

Scope of Financial Management:

Three major decisions: Investment Decision Financing Decision Dividend Policy Decision

Finance Functions Include:

Long Term asset-mix or investment decision Capital-mix or financing decision Profit allocation or dividend decision Short term asset mix or liquidity decision

Investment Decision
A firms investment decision involve capital expenditure. A capital budgeting decision involves the decision of allocation of funds to long term assets that would yield benefits in the future.

Financing Decision
Financing decision is the second important to be performed by the finance manager. The mix of debt and equity is known as the firms capital structure. Optimum capital structure.

Dividend Decision
Profit distribution approach Dividend payout ratio Optimum dividend policy Bonus shares

Liquidity decision
A conflict exists between profitability and liquidity while managing current assets. Appropriate current asset.

Main Functions of a Financial Manager

Funds Raising Funds Allocation Profit Planning

Financial Goal:
Profit maximization Vs Wealth Maximization.

Objections to Profit Maximization

Stakeholders It suffers following limitations: It is vague It ignores the timing of returns It ignores risk Example

Goals of financial management

The goal is profit maximization Vs Shareholders Wealth maximization. The maximization of wealth of equity shareholders , as reflected in the market value of the equity, appears to be the most appropriate goal of financial management

Fundamental principle of financial management

Any decision will lead to a question: will the decision raise the market value of the firm SWM - It means maximizing the NPV of a course of action to shareholders. (Inflation) NPV= PV (Future cash benefits)- PV (initial cash flow) Need for a valuation approach

Risk Return Trade-off

Fig.
Capital Budgeting Decision

Capital structure Decision

Risk

MV of Firm
Return

Dividend Decision

WCM Decision

Organization of Finance function

There are, however, many tasks of financial management and allied areas-like accounting-which are specialized in nature and which are attended to by specialists These tasks and their typical distribution between the two key financial officers of the firm, the treasurer, and the controller.

Thank You!!!