Description
It is concerned with the efficient use of an important economic resource namely, capital funds, Financial Management deals with procurement of funds and their effective utilization in the business.
Financial
Management
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Key Financial Decisions Key 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
“Financeis the
art and science art and science
of managing
money”
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Finance
Public Finance Private Finance
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“It is concerned with the efficient use of an important
economic resource namely, capital funds”
-solomon
“Financial Management dealswithprocurement of funds
andtheir effectiveutilizationinthebusiness”
-S. C. Kuchal
“asanapplicationof general managerial principlestothe
areaof financial decision-making”
-Howard & Upton -Howard & Upton
“is an area of financial decision-making, harmonizing
individual motivesandenterprisegoals”
-Western & Brigham
“is the operational activity of a business that is
responsible for obtaining and effectively utilizing the
fundsnecessaryfor efficient operations”
-Joseph & Massie
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Scope of Financial
Management Management
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Estimating Financial
Requirement
Deciding Capital
Structure Structure
Selecting Sourceof
Finance
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Selecting Pattern
of I nvestment of I nvestment
Proper Cash
Management
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Implementing Financial
Control Control
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
• Whenprofit earningisthemainaimof thebusiness
thanprofit maximizationistheobviousobjective.
• Profitability is the barometer of measuring
efficiency and economic prosperity of a business
enterprise, soprofit maximizationisjustifiedonthe
groundsof rationality. groundsof rationality.
• A business is able to survive under the adverse
situation only it has past earning to rely upon.
Therefore a business should earn more and more
whenconditionsarefavorable.
• Profitability is essential for fulfilling social goals
also. A firm by pursuing the objective of profit
maximization also maximizes socio-economic
welfare.
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Drawbacks of Profit
Maximisation
• The term profit is vague and it cannot be
preciselydefined.
• Profit maximization ignores the time value of
money and does not consider the magnitude money and does not consider the magnitude
andtimingof earnings.
• It does not takeinto consideration therisk of
prospective earnings stream. Some projects
are more risky than others and hence the
earnings streamwill also be risky in case of
riskyprojects.
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Wealth Maximisation
Stockholders Current Wealth in a Firm=
(No. of Shares owned) X (Current Stock Price
per share)
W
0
=NP
0
W
0
=NP
0
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Principles of Financial
Management
Principles of Financial
Management
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I nvestment
Decision
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Financial
Decision Decision
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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
• Therateof dividendinpreferencesharesisfixed.
• Preference shareholders must be paid dividend
beforepayingthedividendtoequityshareholders.
• Preferenceshareholdershavepreferential right toget
amount of capital incaseof windingupthecompany amount of capital incaseof windingupthecompany
beforethepayment totheequityshareholders.
• Preference shares are less risky than equity shares
because the rate of dividend is prefixed and paid
regularly.
• Preferenceshareholdersdonot havethevotingright.
• The preference dividend should not be deducted
fromtaxableincomeof thecompany
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Types of Preference Share
Cumulative Preference shares
Non-cumulative Preference shares
Redeemable Preference shares
Irredeemable Preference shares Irredeemable 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 periodic
payment of interest at afixedrate.
• Debentures are repayable after a fixed period
of time, say five years or seven years as per
agreedterms.
of time, say five years or seven years as per
agreedterms.
• Debentureholdersdonot carryvotingrights.
• Ordinarily, debentures are secured. In case the
companyfails to payinterest on debentures or
repay the principal amount, the debenture
holders can recover it from the sale of the
assetsof thecompany.
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Types of Debentures
Convertible and Non-convertible Debentures
Registered and Bearer Debentures Registered and Bearer Debentures
Secured and Unsecured Debentures
Redeemable and Irredeemable Debentures
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Distinction Between Shares & Debentures
Shares Debentures
Ashareisapartofownedcapital Adebentureisanacknowledgment of
adebt
Shareholders are paid dividend on
sharesheldbythem
Debentureholdersarepaidintereston
debentures
Therateofdividenddependsuponthe
amount of divisible profits andpolicy
A fixed rate of interest is paid on
debentures irrespective of profit or amount of divisible profits andpolicy
oftheBoardofDirectors
debentures irrespective of profit or
loss
Shareholders have votingrights. They
havecontrol over themanagement of
thecompany.
Debenture holders are only creditors
of the company. They have no say in
thecompany
Shares are not redeemable (with the
exception of redeemable preference
share)duringthelifeofthecompany
Debenture can be redeemed after a
certainperiod.
At the time of liquidation of the
company, sharecapital ispayableafter
meetingall outsideliabilities.
Debentures are payable in priority
oversharecapital.
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Public Deposits
• The term'public deposit' implies any money
received by a company through the deposits
or loanscollectedfromthepublic.
• The public includes the general public,
employees and shareholders of the company
but excludes the money received in the form
of sharesanddebentures.
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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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doc_871730823.pdf
It is concerned with the efficient use of an important economic resource namely, capital funds, Financial Management deals with procurement of funds and their effective utilization in the business.
Financial
Management
PDF created with pdfFactory Pro trial version www.pdffactory.com
Key Financial Decisions Key Financial Decisions
PDF created with pdfFactory Pro trial version www.pdffactory.com
Investment Decisions
PDF created with pdfFactory Pro trial version www.pdffactory.com
Financial Decision
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PDF created with pdfFactory Pro trial version www.pdffactory.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
Risk Return Trade-off
PDF created with pdfFactory Pro trial version www.pdffactory.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
What is Finance
“Financeis the
art and science art and science
of managing
money”
PDF created with pdfFactory Pro trial version www.pdffactory.com
Finance
Public Finance Private Finance
PDF created with pdfFactory Pro trial version www.pdffactory.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
“It is concerned with the efficient use of an important
economic resource namely, capital funds”
-solomon
“Financial Management dealswithprocurement of funds
andtheir effectiveutilizationinthebusiness”
-S. C. Kuchal
“asanapplicationof general managerial principlestothe
areaof financial decision-making”
-Howard & Upton -Howard & Upton
“is an area of financial decision-making, harmonizing
individual motivesandenterprisegoals”
-Western & Brigham
“is the operational activity of a business that is
responsible for obtaining and effectively utilizing the
fundsnecessaryfor efficient operations”
-Joseph & Massie
PDF created with pdfFactory Pro trial version www.pdffactory.com
Scope of Financial
Management Management
PDF created with pdfFactory Pro trial version www.pdffactory.com
Estimating Financial
Requirement
Deciding Capital
Structure Structure
Selecting Sourceof
Finance
PDF created with pdfFactory Pro trial version www.pdffactory.com
Selecting Pattern
of I nvestment of I nvestment
Proper Cash
Management
PDF created with pdfFactory Pro trial version www.pdffactory.com
Implementing Financial
Control Control
Proper Use of Surplus
PDF created with pdfFactory Pro trial version www.pdffactory.com
Approaches to Financial
Management
Approach
Modern
Approach
Traditional
Approach
PDF created with pdfFactory Pro trial version www.pdffactory.com
Objectives of Financial
Management
Objectives
Wealth
Maximisation
Profit
Maximisatio
n
PDF created with pdfFactory Pro trial version www.pdffactory.com
Profit Maximisation
• Whenprofit earningisthemainaimof thebusiness
thanprofit maximizationistheobviousobjective.
• Profitability is the barometer of measuring
efficiency and economic prosperity of a business
enterprise, soprofit maximizationisjustifiedonthe
groundsof rationality. groundsof rationality.
• A business is able to survive under the adverse
situation only it has past earning to rely upon.
Therefore a business should earn more and more
whenconditionsarefavorable.
• Profitability is essential for fulfilling social goals
also. A firm by pursuing the objective of profit
maximization also maximizes socio-economic
welfare.
PDF created with pdfFactory Pro trial version www.pdffactory.com
Drawbacks of Profit
Maximisation
• The term profit is vague and it cannot be
preciselydefined.
• Profit maximization ignores the time value of
money and does not consider the magnitude money and does not consider the magnitude
andtimingof earnings.
• It does not takeinto consideration therisk of
prospective earnings stream. Some projects
are more risky than others and hence the
earnings streamwill also be risky in case of
riskyprojects.
PDF created with pdfFactory Pro trial version www.pdffactory.com
Wealth Maximisation
Stockholders Current Wealth in a Firm=
(No. of Shares owned) X (Current Stock Price
per share)
W
0
=NP
0
W
0
=NP
0
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Principles of Financial
Management
Principles of Financial
Management
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I nvestment
Decision
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Financial
Decision Decision
PDF created with pdfFactory Pro trial version www.pdffactory.com
Dividend
Decision
PDF created with pdfFactory Pro trial version www.pdffactory.com
Liquidity
Decision
PDF created with pdfFactory Pro trial version www.pdffactory.com
Sources of Long Term Finance
Shares Debentures
Public Retained Public
Deposits
Retained
Earnings
Term Loans
from Banks
Loans from
financial
institutions
PDF created with pdfFactory Pro trial version www.pdffactory.com
Shares
Equity Preference Equity
Shares
Preference
Shares
PDF created with pdfFactory Pro trial version www.pdffactory.com
Features of Equity Share
Permanent in Nature
Declaration of Dividend
Voting right of shareholder
Transfer of Ownership
Representation of Ownership
PDF created with pdfFactory Pro trial version www.pdffactory.com
Features of Preference
Shares
• Therateof dividendinpreferencesharesisfixed.
• Preference shareholders must be paid dividend
beforepayingthedividendtoequityshareholders.
• Preferenceshareholdershavepreferential right toget
amount of capital incaseof windingupthecompany amount of capital incaseof windingupthecompany
beforethepayment totheequityshareholders.
• Preference shares are less risky than equity shares
because the rate of dividend is prefixed and paid
regularly.
• Preferenceshareholdersdonot havethevotingright.
• The preference dividend should not be deducted
fromtaxableincomeof thecompany
PDF created with pdfFactory Pro trial version www.pdffactory.com
Types of Preference Share
Cumulative Preference shares
Non-cumulative Preference shares
Redeemable Preference shares
Irredeemable Preference shares Irredeemable Preference shares
Participating Preference shares
Non-participating Preference
shares
Convertible Preference shares
Non-convertible Preference shares
PDF created with pdfFactory Pro trial version www.pdffactory.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
Debentures: Features
• Debenture holders are the creditors of the
company. They are entitled to periodic
payment of interest at afixedrate.
• Debentures are repayable after a fixed period
of time, say five years or seven years as per
agreedterms.
of time, say five years or seven years as per
agreedterms.
• Debentureholdersdonot carryvotingrights.
• Ordinarily, debentures are secured. In case the
companyfails to payinterest on debentures or
repay the principal amount, the debenture
holders can recover it from the sale of the
assetsof thecompany.
PDF created with pdfFactory Pro trial version www.pdffactory.com
Types of Debentures
Convertible and Non-convertible Debentures
Registered and Bearer Debentures Registered and Bearer Debentures
Secured and Unsecured Debentures
Redeemable and Irredeemable Debentures
PDF created with pdfFactory Pro trial version www.pdffactory.com
Distinction Between Shares & Debentures
Shares Debentures
Ashareisapartofownedcapital Adebentureisanacknowledgment of
adebt
Shareholders are paid dividend on
sharesheldbythem
Debentureholdersarepaidintereston
debentures
Therateofdividenddependsuponthe
amount of divisible profits andpolicy
A fixed rate of interest is paid on
debentures irrespective of profit or amount of divisible profits andpolicy
oftheBoardofDirectors
debentures irrespective of profit or
loss
Shareholders have votingrights. They
havecontrol over themanagement of
thecompany.
Debenture holders are only creditors
of the company. They have no say in
thecompany
Shares are not redeemable (with the
exception of redeemable preference
share)duringthelifeofthecompany
Debenture can be redeemed after a
certainperiod.
At the time of liquidation of the
company, sharecapital ispayableafter
meetingall outsideliabilities.
Debentures are payable in priority
oversharecapital.
PDF created with pdfFactory Pro trial version www.pdffactory.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
Public Deposits
• The term'public deposit' implies any money
received by a company through the deposits
or loanscollectedfromthepublic.
• The public includes the general public,
employees and shareholders of the company
but excludes the money received in the form
of sharesanddebentures.
PDF created with pdfFactory Pro trial version www.pdffactory.com
Retained Earnings
Merits
Cheap Source of Capital
Demerits
Huge Profit
Financial stability
Benefits to the
shareholders
Dissatisfaction among
shareholders
Mis-management of funds
PDF created with pdfFactory Pro trial version www.pdffactory.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
doc_871730823.pdf