SESSION 1 & SESSION 2

Reflective Notes on key learning: 5 Marks Quizzes and Class Test :20 Marks Presentations: 15 Marks Assignment: 20 Marks

Finance may be defined as the art and science of managing money. The major areas of finance are: 1. Financial Services Financial services is concerned with the design and delivery of advice and financial products to individuals, business and governments. 2. Financial Management

Financial Management is concerned with the duties of the financial managers in the business firm.
Financial managers actively manage the financial affairs of any type of business, namely, financial and non-financial, private and public, large and small, profit-seeking and not-for-profit.

Financial Decision Areas

Primary Disciplines Accounting Macroeconomics Microeconomics

1. Investment analysis 2. Working capital management 3. Sources and cost of funds 4. Determination of capital structure 5. Dividend policy 6. Analysis of risks and returns Resulting in

Support

Support Other Related Disciplines Marketing Production

Quantitative methods

Shareholder wealth maximisation

Figure 1: Impact of Other Disciplines on Financial Management

Most important of all the decisions.

Short Term as well as Long Term What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be reduced or eliminated?

Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). What is the best type of financing? What is the best financing mix? What is the best dividend policy (e.g., dividend-payout ratio)? How will the funds be physically acquired?

How do we manage existing assets efficiently? Financial Manager has varying degrees of operating responsibility over assets. Greater emphasis on current asset management than fixed asset management.

Maximization of Shareholder Wealth!

Value creation occurs when we maximize the share price for current shareholders.

Profit Maximization
Maximizing

taxes.

a firms earnings after

Problems

Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.). Ignores changes in the risk level of the firm.

Earnings per Share Maximization

Maximizing

earnings after taxes divided by shares outstanding.

Does not specify timing or duration of expected returns. Ignores changes in the risk level of the firm. Calls for a zero payout dividend policy.

Problems

Takes account of: current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors. Thus, share price serves as a barometer for business performance.

Modern Corporation
Shareholders Management

There exists a SEPARATION between owners and managers.

Management acts as an agent for the owners (shareholders) of the firm.

An agent is an individual authorized by another person, called the principal, to act in the latters behalf.

Jensen

and Meckling developed a theory of the firm based on

agency theory.

Agency Theory is a branch of economics

relating to the behavior of principals and their agents.

Principals

must provide incentives so that management acts in the principals best interests and then monitor results.
Incentives include, stock options, perquisites, and bonuses.

 Corporate governance refers to a code of conduct through which companies are directed and controlled

Stakeholder model Vs Shareholder model

Restricted

to Clause 49 of the companies Act directors vs. Dependent

Independent Committees

Commercial Banking Corporate Finance Financial Planning Hedge Funds Insurance Investment Banking Private Equity

Credit Analyst Loans Retail Banking Services

A career in corporate finance means one would work for a company to help it find money to run the business, grow the business, make acquisitions, plan for its financial future and manage any cash or other current assets on hand

A good financial planner understands investments, taxes, estate planning issues and knows how to listen

The hedge fund manager makes calls on a wide range of financial assets from corporate bonds to stocks to currencies.

Jobs in insurance involve helping individuals and business manage risk to protect themselves from catastrophic losses and to anticipate potential problems

Investment Banks help companies and governments issue securities, help investors purchase securities, manage financial assets, trade securities and provide financial advice

The activity of purchasing all or part of the equity of companies away from a normal stock purchase in the public equity markets.