Corporate Finance : An

Overview

Financial Management : An Overview 1

 Learning Objectives
 Introduction to Finance;

 Financial Management – Objectives;

 Profit Maximization versus Wealth

Maximization;

 Changing role of Finance managers.

 Introduction

 Financial management refers to that part of

management activity which is concerned with the
planning and controlling of firm’s financial resources.
 It deals with the finding out various sources for raising
funds for the firm.
 The basic objective centers around:
 Procurement of funds from various sources like,

ESC, PSC, term loans and bonds.

 Effective utilization of the funds to maximize the

Profitability of the firm and Wealth of its owners.

 Financial Planning:
Management need to ensure that enough funding
is available at the right time to meet the needs of
the business.
 In the short term, funding may be needed to
invest in equipment and stocks, pay
employees and fund sales made on credit.
 In the medium and long term, funding may
be required for significant additions to the
productive capacity of the business or to
make acquisitions.
 Financial Control
Financial control is a critically important activity
to help the business ensure that the business is
meeting its objectives. Financial control
addresses questions such as:
 Are assets being used efficiently?

 Are the businesses assets secure?

 Do management act in the best interest of

shareholders and in accordance with

business rules?
 Scope of Financial Management
 Scope UNDER Traditional Approach

 Raising Funds

 External Reporting (Accounting

Function)
 Scope Under Modern Approach
 Financing Decisions: Estimation of Fund
Requirement, Procurement of Fund, Planning
the Capital Structure, Negotiating with Funding
Agencies.
 Investment Decisions: Capital Budgeting, Cash
Management, Working Capital Management,,
Portfolio Management, Risk Management,
Evaluation of Performance
 Dividend Policy Decisions: Profit Allocation and
Framing Dividend policies.
 Optimal Capital Structure
Decision
Debt as a Cost of debt Cost of equity
percentage of (%) (%)
total capital
employed
0 0 12.0
10 10.0 12.0
20 10.0 12.5
30 10.5 13.0
40 11.0 14.0
50 11.5 16.0
60 12.0 20.0
 Objectives/Goals of Financial
Management

 Profit/EPS Maximization

 Wealth Maximization
 PROFIT/EPS MAXIMISATION
 A business firm is a Profit-seeking organization.
 The objective of financial management is same
as the objective of a company which is to earn/
maximize profit.
 Financial decisions would be evaluated on the
basis of its contribution to the profits or earnings of
the enterprise.
CRUX: Actions that increase the profits or
earnings of the firm should be undertaken; &
actions that decrease the profits of the firm should
be avoided.
 Profits can be maximized by:
 Increasing the Sales;
 Reducing the Cost of Production through
efficient use of the resource;
 Judicious choice of the funds.
Technical Flaws of Profit
Maximization
 Ambiguity
 Ignores the timing of benefits
 Ignores the quality of benefits

Financial Management : An Overview 12

 Wealth Maximization
 The Primary objective of FM is to maximize the
Value of the Firm. It facilitates in maximizing
the value of equity share which serves as an
index of the performance of the company.

 It takes in to account Present and prospective

future Earnings per share, the timing and risk of
these earning, the dividend policy of the firm
and many other factors that bear upon the
market price of the stock. Market price acts as
the performance index or report card of the
firm's progress and potential.
 Wealth Maximization
(Value Maximization)
 The Share holder wealth is maximized
only if market share price increases,
hence WM is redefined as Value
maximization
 WM goals advocated on the following
grounds

 It takes into consideration the long-run

survival and growth of the firm.

 It suggests the consistent dividend payments

to the shareholders.

 It considers Risk and time value of money.

 It considers all future cash flows, dividends

and EPS
 The Maximization of firm’s value is
reflected in the Market price of share.
 Profit Maximization partly enables the
firm in wealth maximization.
 Shareholders prefer WM to PM.
 Actions to maximize
shareholder wealth
 Maximizing Earnings per share rather than
total profits
 Before : After:
Net Income = $1200 mn $1500 mn
Total Shares = 300 mn Sold 300 mn more shares
Earning Per Share = ? EPS = ?

Financial Management : An Overview 17

 Changing Role of Finance
Managers
 Performing Financial Analysis & Planning
 Financial Restructuring
 Portfolio Management
 Designing Innovative Instruments
 Enhancing Shareholders' Wealth
 Legal Compliance
 Monitoring Share Price Movement
 Searching for Investment Opportunities
 Facilitating Organic Growth
 Enabling Inorganic Growth
 Economic Value Added(EVA)
 Economic Value Added is equal to after
tax operating profits of a firm less the cost
of funds used to finance investments.

 EVA= PAT – KO

 PAT = Profit After Tax

 KO = Overall Cost of Capital

Financial Management : An Overview 19