Faculty of Management Sciences

What is today’s class recipe?

Financial Management Decisions
Forms of Business organizations
Goals of finanacial management
Ownership & control
Stakeholders
Financial markets
Faculty of Management Sciences KEY POINTS/ CONCEPTS
Objectives of a company
 Primary objective
Maximization of Shareholders Wealth
 Secondary Objectives
Maximize Profits
Maximize Sales Revenue
Minimize Cost
Increase Market Share
Customer Satisfaction
Organization Growth
Faculty of Management Sciences Financial Objectives
 High return on capital employed
 Increase in profit margins
 Maintaining cash flows
 Increase in earning per share
 Increase in dividend payments
 Maintaining gearing level

Faculty of Management Sciences
Non-Financial Objectives
 Welfare of employees
 Welfare of management
 Fulfillment of responsibilities towards
customers/ suppliers
 The welfare of society
FINANCIAL STATEMENTS AT A
GLANCE
 Income Statement
 Balance Sheet
 Cash Flow Statement
 Statement of Owners Equity
What comes first in your mind
when you plan to start
your own business?
 1- Investment Decisions/ Capital
Faculty of Management Sciences
Budgeting Decisions
What should we do? In which project
should we invest or not?
2- Financing Decisions
How would we finance the investments in
projects?
3- Working Capital Decisions
How would we manage running finances?
 Financial Manager
Faculty of Management Sciences The person responsible to answer all
three above stated decisions in a
corporation
WHAT IS Corporate FINNACE?
Corporate Finance focuses on decisions
relating to how much and what type
of assets to acquire, how to raise the
capital needed to buy assets and how
to run the firm so as to maximize its
value
 Concerns of Financial Manager
Faculty of Management Sciences
Investment Decisions
Size, Timings and Risk Factor of future
cash flows
Financing Decisions/Capital Structuring
Decisions
Debt or Equity financing
Working Capital Decisions
Management of short term assets &
liabilities
Faculty of Management Sciences Forms of Business
Organizations
1- Sole proprietorship
2- Partnership
General
Limited
3- Corporations
 Goals of Financial
Faculty of Management Sciences
Management
Primary Goal
Maximize the Market Value of the
existing owners equity

Reason?
Do you think Liquidity and
Profitability goals will
conflict each other?
 Agency Problem/ Ownership &
Faculty of Management Sciences Control
Principal – Agent Relationship
Financial Mangers should act in the best
interest of the stockholders
Agency Relationship
The relationship between the stockholders
and the management
Agency Problem
Conflict of interest between stockholders
and management
Example ??
Faculty of Management Sciences
Agency Cost
Cost of the conflict of interest between
stockholders and management
Types of Agency Cost
Direct Agency Cost
Indirect Agency Cost
Faculty of Management Sciences
Direct Agency Cost
1- Corporate expenditure that benefits
management but costs the
stockholders
i-e Purchase of luxurious and un-needed corporate
asset
2- Expense that arises from the need to
monitor management action
i-e Paying outside auditors to assess the accuracy of
financial statement information
Faculty of Management Sciences
Indirect Agency Cost

Cost of lost opportunity

i-e Not taking a project (might be riskier one)
but in the interest of shareholders
Faculty of Management Sciences Do managers act in the
stockholders
interest?

Managerial compensation
Control of the firm
 Do managers act in the
Faculty of Management Sciences stockholders interest?
Managerial compensation
Reasons:
1. Financial Performance (General Terms)
2. Increase in share value (Particular Terms)
Terms:
1. Option to buy stock
2. Promotions/High Salaries
 Do managers act in the
Faculty of Management Sciences stockholders interest?

Control of the firm

Control of the firm rests with the
stockholders
1. Election of board of directors
2. Hiring / Firing of managers
 Do managers act in the
stockholders interest?
Faculty of Management Sciences

Control of the firm (contd.)

Proxy Fighting
A mechanism by which unhappy
stockholders can act to replace the
existing management

i-e Acquiring of a target company by persuading

current shareholders
STOCKHOLDERS CONTROLS THE FIRM AND
THE STOCKHOLDERS WEALTH
MAXIMIZATION IS THE RELEVANT GOAL
OF THE CORPORATION/ MANAGEMENT
 STAKEHOLDERS OF A
Faculty of Management Sciences
CORPORATION
Anyone that can affect or be affected by a
company’s actions, objectives and policies
OR
Anyone who has a claim on the cash flows of
the firm
Types of Stakeholders
Internal
External
 INTERNAL
STAKEHOLDERS

MANAGERS EMPLOYEES

JOB SECURITY
PAY INCENTIVES
 SHAREHOLDERS
GOVERNMENT Profitability
Market Share SUPPLIERS
Taxation
Legalities Business
Opportunities
Reporting's

EXTERNAL
INVESTORS STAKEHOLDERS CUSTOMERS
Customer care
Return on
Investment Ethical Products

COMMUNITIES CREDITORS

Environmental Liquidity
Protection Contracts
 FINANCIAL MARKETS &
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THE CORPORATIONS
Markets where financial instruments/
securities are traded

Types of Financial Markets

Primary Markets
Secondary Markets
Faculty of Management Sciences PRIMARY MARKETS
Primary markets refers to the markets where
the securities are issued first time or the
market of original sale of securities by
government and corporations
Types of Primary Markets
IPO’S (Selling securities to general public)
Private Placements ( Selling securities to
specific buyers)
i-e Financial Institutions, Insurance Companies,
Mutual Funds
IS SECP REGISTRATION MANDATORY FOR
PRIMARY MARKETS?
Faculty of Management Sciences SECONDARY MARKETS
Market in which securities are bought
and sold after the original sale

TYPES OF SECONDARY MARKETS

Dealer Markets
Auction Markets
Faculty of Management Sciences SECONDARY MARKETS
Dealer Markets
Dealer markets in stocks/Debt are called OTC (Over
the Counter)
What will be the Model of OTC?
Physical LOCATION?
COMMUNICATION MODE?
Faculty of Management Sciences SECONDARY MARKETS
Auction Markets

What will be the Model of Auction market?

Physical LOCATION?
COMMUNICATION MODE?
 ACCOUNTING PROFITS &
CASH FLOWS
Faculty of Management Sciences

Why it is more appropriate to evaluate future

cash flows rather than accounting profits
for the purpose of capital investment?

Relation between cash flows and

profits

Profits= Net Cash Flows – Depreciation

Net Cash Flows= Profits + Depreciation