Financial Management

By Bharat Singh Thapa Apex College

Financial Management: Introduction; By Bharat Singh Thapa 1

Course Contents in Brief

1. Nature of Financial Management 2. Time Value of Money 3. Financial Statements, Cash Flow, and Taxes 4. Financial Planning and Forecasting 5. Bond and Stock Valuation 6. Cost of Capital 7. Strategic Investment Decision Making (Capital Budgeting Decision) 8. Strategic Financing Decision Making- Leverage and EBIT-EPS Analysis 9. Dividend Policy
Financial Management: Introduction; By Bharat Singh Thapa 2

Evaluation Scheme
Activities Weight

1. Class Participation and Attendance 10%

2. Case Analysis and Presentation 3. Assignment and Quiz 10% 15%

4. Project Work
4. Class Test 5.Mid-tem Exam Total

15%
10% 40% 100%

Financial Management: Introduction; By Bharat Singh Thapa

References
Brigham. E. F.. & Ehrhardt. M.C. (2008). Financial Management-Text and Cases. New Delhi: Cengage Learning India Private Limited Van Horn. J.C. (2002). Financial Management and Policy. (12th ed.). New Delhi: Pearson Education Brealey,R.A., Myers S.C.. Marcus A.J. (2007). Fundamentals of Corporate Finance, McGraw Hill International edition. Paudel R.B. et al. (2007). Corporate Financial Management. Kathmandu: Ashmita Publication Articles and handouts/ tutorial provided by instructor.

Financial Management: Introduction; By Bharat Singh Thapa

 Financial management Finance in organizational structure of the firm Value maximization goal as a financial decision criterion Finance functions Financial management and other discipline Agency problems of stockholders vs. managers and creditors
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Chapter 1 Nature of Financial Management

Financial Management
Defining Finance: Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects.
Personal Finance Corporate Finance Public Finance

Financial Management: Introduction; By Bharat Singh Thapa

Financial Management
Corporate Financial Management addresses the following three questions:
1. What long-term investments should the firm engage in? 2. How can the firm raise the money for the required investments? 3. How much short-term cash flow does a company need to pay its bills?

Financial Management: Introduction; By Bharat Singh Thapa

Understanding Financial Management

The Balance-Sheet Model of the Firm
Total Firm Value to Investors: Current Liabilities Long-Term Debt

Shareholders Equity
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Understanding Financial Management

The Capital Budgeting Decision
Current Assets

Current Liabilities
Long-Term Debt

Fixed Assets 1 Tangible 2 Intangible

What longterm investments should the firm engage in?

Shareholders Equity

Financial Management: Introduction; By Bharat Singh Thapa

Understanding Financial Management

The Capital Structure Decision
Current Assets

Current Liabilities
Long-Term Debt

How can the firm raise the money for the required Fixed Assets investments? 1 Tangible
2 Intangible
Financial Management: Introduction; By Bharat Singh Thapa

Shareholders Equity
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Understanding Financial Management

The Net Working Capital Investment Decision
Current Assets Current Liabilities
Net Working Capital

Long-Term Debt

Fixed Assets 1 Tangible 2 Intangible

How much short-term cash flow does a company need to pay its bills?

Shareholders Equity
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Financial Management: Introduction; By Bharat Singh Thapa

Why to study finance?

To manage personal resources without being solely dependent on the financial advisor. To deal world with business even if the focus is not finance. To make informed public choices as citizen. To expand the mind. To peruse interesting and rewarding career in finance.

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 Career in Finance: A career in corporate finance means you would work for a company to help it find money to run the business, grow the business, make acquisitions, plan for it's financial future and manage any cash on hand. You might work for a large multinational company or a smaller player with high growth prospects.

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 Investment Banking: Security Analysts Corporate Finance: Financial analyst, credit manager, Chief financial officer Commercial Banking: Loan officer, Department manager Money Management: portfolio manager, Bank trust department Financial Planning Real Estate Insurance Other Job Options
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Finance in organizational structure of the firm

BOD

President

Sales

Chief Financial Officer (CFO) Responsibility for: Financial Policy Corporate planning

Manufacturing

Treasurer Responsible for: Cash management Raising Capital Banking Relationship

Controller Responsible for: Preparation of financial statement Accounting Taxes

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Finance Functions
Broadly finance functions can be categorized into three groups- investments, financing and dividend decision. All the finance functions are related with the following areas:
Forecasting and planning Major investment and financing decision Coordination and control Dealing with the financial market

Financial managers make decisions regarding which assets their firms should acquire (investing), how those assets should be financed (financing), and how firm should manage its existing resources (other).
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Finance Function Aiming at

Acquiring sufficient fund Proper utilization of fund Increasing profitability Maximizing value of firm

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Value Maximization Goal as a Financial Decision Criterion

A firm may set its goal as increase thee sale, minimize loss, avoid insolvency, maximize profit, beat competition etc. The major objective of a corporation is to maximize shareholders wealth which is reflected in market price of the shares. So, smarts and effective financial manager makes decisions that increase the current value of the companys share and the wealth of its stockholders.

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Profit Maximization Vs. Value Maximization

The financial managers select assets, projects and the decisions that are profitable and reject those which are not The objective of profit maximization is very traditional and not well defined because: It leaves open the question of which years profits. Different accountants use the different accounting methods. It ignores time value of money and risk factors.
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 Shareholders wealth maximization is the best goal! Shareholders value maximizing goal also satisfies the goal of social welfare maximization. To maximize value, innovation requires, it further cuts the costs and creates the jobs so the overall employment level and income level will increase. Finally the life standard of public will also improve.
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Corporate goals and corporate Governance

Major question is, how can the shareholders ensure that management dont simply look after their own interest? Shareholders cant spend their lives watching managers to check that they are perusing the shareholders interest rather than the managements own interest. However, good systems of corporate governance can help to ensure that the shareholders pockets are close to the managers hearts.
Introduction: Theory of Firm: By Bharat Thapa 21

Corporate goals and

Corporate governance ensures that few managers at the top are lazy or inattentive to stockholders interest. When company performance starts to slide and managers do not offer a credible recovery plan, board do act. If shareholders believe that the corporation is underperforming and that the board of directors is not sufficiently aggressive in holding managers to task, they can try to replace the board in the next election.
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Corporate goals and..

Should managers look after the interest of their shareholders?
Profitable firms are those with satisfied customers and loyal employees; firms with dissatisfied customers and a disgruntle (Disappointed) workforce will probably end up with declining profits and low stock price. Reputation is most important asset of all.

Should firm be managed for shareholders or all stakeholders( Customers, employees, suppliers, and communities)?
US, UK: Shareholders wealth maximization. Germany: Employees welfare is first. Japan: Employees and customers are the first.

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Financial Management and Other Discipline

Marketing management Production management Human resource management

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Agency Problem
The potential conflict of interest among managers, owners and creditors is called agency problem.
Managers are representatives of the owners. Managers, owners and creditors have their own interest in the firm, which is conflicting.

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 Shareholders desire wealth maximization Major Question is

Do managers maximize shareholder wealth?

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 What is the nature of conflict of interest in Nepal?

Promoter shareholders and public shareholders! Solution???
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Solving the Agency Problem

Voting for the board of directors, who decide on the management team and management compensation. Executive Compensation arrangements such as stock option plans and performance based pay.

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Solving the Agency Problem

Takeovers by another group or company if management undertakes policies that do not maximize shareholder value. Competition in managerial labor markets. Better performing managers are lured away and are given better positions at other firms.
Rise in institutional shareholders like pension funds and mutual funds (to monitor managers).
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Ask???
Whose company is it? The shareholders. All stakeholders. Which is more important? Dividends. Job security. What is the nature of conflict of interest in your company? Shareholders Vs. Management Public shareholders Vs. Promoters shareholders Shareholders Vs. Creditors

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Assignments
How finance function is organized in your company? What is the real problem with Gurkha Development Bank?
Agency problem? Corporate governance? Poor financial management?

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Thank You!

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