intro im pandey

8/4/2019 Intro IM Pandey

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Nature of FinancialManagement


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2Financial Management, Ninth Edition I M Pandey

Vikas Publishing House Pvt. Ltd.

Business Activities

Production

Marketing

Finance


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Finance Functions

Investment or Long Term Asset MixDecision

Financing or Capital Mix DecisionDividend or Profit Allocation Decision

Liquidity or Short Term Asset Mix

Decision


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Financial Goals

Profit maximization (profit after tax)

Maximizing Earnings per Share

Shareholders Wealth Maximization


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Profit Maximization

Maximizing the Rupee Income ofFirm

Resources are efficiently utilizedAppropriate measure of firm

performance

Serves interest of society also


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Objections to Profit Maximization

It is Vague It Ignores the Timing of Returns It Ignores RiskAssumes Perfect Competition In new business environment profit

maximization is regarded as

UnrealisticDifficult Inappropriate Immoral.


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Maximizing EPS

Ignores timing and risk of theexpected benefit

Market value is not a function of EPS.Hence maximizing EPS will not resultin highest price for company's shares

Maximizing EPS implies that the firm

should make no dividend payment solong as funds can be invested atpositive rate ofreturnsuch a policymay not always work


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Shareholders Wealth

MaximizationMaximizes the net present value of a

course of action to shareholders.

Accounts for the timing and risk ofthe expected benefits.

Benefits are measured in terms ofcash flows.

Fundamental objectivemaximizethe market value of the firms

shares.


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Risk-return Trade-offRisk and expected return move in

tandem; the greater the risk, thegreater the expected return.

Financial decisions of the firm areguided by the risk-return trade-off.

The return and risk relationship:Return = Risk-free rate + Riskpremium

Risk-free rate is a compensation fortime and risk premium for risk.


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Organisation of the Finance

FunctionsReason for placing the finance

functions in the hands of top

management Financial decisions are crucial for the

survival of the firm. The financial actions determine

solvency of the firm Centralisation of the finance functions

can result in a number of economies tothe firm.


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Status and Duties of Finance

ExecutivesThe exact organisation structure for

financial management will differ

across firms.The financial officer may be known

as the financial manager in someorganisations, while in others as thevice-president of finance or thedirector of finance or the financialcontroller.


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Role of Treasurer and

ControllerTwo more officersthe treasurer and

the controllermay be appointed

under the direct supervision of CFOto assist him or her.

The treasurers function is to raise

and manage company funds whilethe controller oversees whetherfunds are correctly applied.

intro im pandey

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