financial management introduction · approaches to financial management approach modern approach...
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Financial Management
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Key Financial DecisionsKey Financial Decisions
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Investment Decisions
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Financial Decision
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Risk Return Trade-off
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What is Finance
“Finance is the art and science art and science of managing
money”
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Finance
Public FinancePrivate Finance
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“It is concerned with the efficient use of an important economic resource namely, capital funds”
-solomon“Financial Management deals with procurement of funds
and their effective utilization in the business”-S. C. Kuchal
“as an application of general managerial principles to thearea of financial decision-making”
-Howard & Upton-Howard & Upton“is an area of financial decision-making, harmonizing
individual motives and enterprise goals”-Western & Brigham
“is the operational activity of a business that isresponsible for obtaining and effectively utilizing thefunds necessary for efficient operations”
-Joseph & Massie
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Scope of Financial Management Management
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Estimating Financial Requirement
Deciding Capital StructureStructure
Selecting Source of Finance
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Selecting Pattern of Investmentof Investment
Proper Cash Management
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Implementing Financial ControlControl
Proper Use of Surplus
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Approaches to Financial Management
Approach
Modern Approach
Traditional Approach
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Objectives of Financial Management
Objectives
Wealth Maximisation
Profit Maximisatio
n
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Profit Maximisation• When profit earning is the main aim of the business
than profit maximization is the obvious objective.• Profitability is the barometer of measuring
efficiency and economic prosperity of a businessenterprise, so profit maximization is justified on thegrounds of rationality.grounds of rationality.
• A business is able to survive under the adversesituation only it has past earning to rely upon.Therefore a business should earn more and morewhen conditions are favorable.
• Profitability is essential for fulfilling social goalsalso. A firm by pursuing the objective of profitmaximization also maximizes socio-economicwelfare.
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Drawbacks of Profit Maximisation• The term profit is vague and it cannot be
precisely defined.• Profit maximization ignores the time value of
money and does not consider the magnitudemoney and does not consider the magnitudeand timing of earnings.
• It does not take into consideration the risk ofprospective earnings stream. Some projectsare more risky than others and hence theearnings stream will also be risky in case ofrisky projects.
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Wealth MaximisationStockholders Current Wealth in a Firm=(No. of Shares owned) X (Current Stock Price per share)
W0 = NP0W0 = NP0
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Principles of Financial Management
Principles of Financial Management
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Investment Decision
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Financial DecisionDecision
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Dividend Decision
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Liquidity Decision
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Sources of Long Term Finance
Shares Debentures
Public Retained Public Deposits
Retained Earnings
Term Loans from Banks
Loans from financial
institutions
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Shares
Equity Preference Equity Shares
Preference Shares
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Features of Equity Share
Permanent in Nature
Declaration of Dividend
Voting right of shareholder
Transfer of Ownership
Representation of Ownership
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Features of Preference Shares• The rate of dividend in preference shares is fixed.• Preference shareholders must be paid dividend
before paying the dividend to equity shareholders.• Preference shareholders have preferential right to get
amount of capital in case of winding up the companyamount of capital in case of winding up the companybefore the payment to the equity shareholders.
• Preference shares are less risky than equity sharesbecause the rate of dividend is prefixed and paidregularly.
• Preference shareholders do not have the voting right.• The preference dividend should not be deducted
from taxable income of the company
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Types of Preference ShareCumulative Preference shares
Non-cumulative Preference shares
Redeemable Preference shares
Irredeemable Preference sharesIrredeemable Preference shares
Participating Preference shares
Non-participating Preference shares
Convertible Preference shares
Non-convertible Preference shares
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Debentures: Features• Debenture holders are the creditors of the
company. They are entitled to periodicpayment of interest at a fixed rate.
• Debentures are repayable after a fixed periodof time, say five years or seven years as peragreed terms.of time, say five years or seven years as peragreed terms.
• Debenture holders do not carry voting rights.• Ordinarily, debentures are secured. In case the
company fails to pay interest on debentures orrepay the principal amount, the debentureholders can recover it from the sale of theassets of the company.
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Types of Debentures
Convertible and Non-convertible Debentures
Registered and Bearer DebenturesRegistered and Bearer Debentures
Secured and Unsecured Debentures
Redeemable and Irredeemable Debentures
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Distinction Between Shares & Debentures
Shares DebenturesA share is a part of owned capital A debenture is an acknowledgment of
a debt
Shareholders are paid dividend onshares held by them
Debenture holders are paid interest ondebentures
The rate of dividend depends upon theamount of divisible profits and policy
A fixed rate of interest is paid ondebentures irrespective of profit oramount of divisible profits and policy
of the Board of Directorsdebentures irrespective of profit orloss
Shareholders have voting rights. Theyhave control over the management ofthe company.
Debenture holders are only creditorsof the company. They have no say inthe company
Shares are not redeemable (with theexception of redeemable preferenceshare) during the life of the company
Debenture can be redeemed after acertain period.
At the time of liquidation of thecompany, share capital is payable aftermeeting all outside liabilities.
Debentures are payable in priorityover share capital.
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Public Deposits
• The term 'public deposit' implies any moneyreceived by a company through the depositsor loans collected from the public.
• The public includes the general public,employees and shareholders of the companybut excludes the money received in the formof shares and debentures.
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Retained Earnings
Merits
Cheap Source of Capital
Demerits
Huge Profit
Financial stability
Benefits to the shareholders
Dissatisfaction among shareholders
Mis-management of funds
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