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Financial Management : An Overview

Financial Management : An Overview. Question. Why is it that some companies, in some industries, provide more value to shareholders? In answering this question, you might like to use the information provided separately on the market capitalization of some large Indian companies.

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Financial Management : An Overview

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  1. Financial Management : An Overview Financial Management : An Overview

  2. Question Why is it that some companies, in some industries, provide more value to shareholders? In answering this question, you might like to use the information provided separately on the market capitalization of some large Indian companies Financial Management : An Overview

  3. Concepts of Value • Gross Profit/ Net Profit • ROA/ ROCE/ RONW • Market value or market capitalization • Market value added • Economic value added Financial Management : An Overview

  4. An overview of financial management Financial Management Maximization of Share Value Financial Decisions Liquidity Decision Investment Decision Financing Decision Dividend Decision Risk Return Financial Management : An Overview

  5. Liabilities Debt ( borrowed money ) Equity ( owners’ Funds ) Assets A simple view of a firm Investments already made. These generate cash flows today Investments yet to be made. These future investments are expected to create additional value Financial Management : An Overview

  6. Total Value of Assets: Total Firm Value to Investors: Current Liabilities Current Assets Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity The Balance-Sheet Model of A Firm Financial Management : An Overview

  7. The Balance-Sheet Model of A Firm The Capital Investment Decision Current Liabilities Current Assets Long-Term Debt What long-term investments should the firm engage in? Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Financial Management : An Overview

  8. The Balance-Sheet Model of A Firm The Capital Structure Decision Current Liabilities Current Assets Long-Term Debt How can the firm raise the money for the required investments? Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Financial Management : An Overview

  9. The Balance-Sheet Model of A Firm The Net Working Capital Investment Decision Current Liabilities Current Assets Net Working Capital Long-Term Debt How much short-term cash flow does a company need to pay its bills? Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Financial Management : An Overview

  10. Stakeholders and their expectations • SECURITY • COMPENSATION • JOB SATISFACTION • FAIR • EMPLOYMENT • NO DISCRIMINATION • COMPENSATION • PRESTIGE • POWER EMPLOYEES • TAXES • EMPLOYMENT • EMPLOYMENT • PRESERVATION OF • THE ENVIRONMENT MINORITY GROUP MANAGERS FIRM GOVERNMENT COMMUNITY • REGULAR • PAYMENT • CONTINUITY • OF BUSINESS CREDITORS SUPPLIERS • INTEREST • SECURITY OF • CAPITAL SHARE HOLDERS CUSTOMERS • PRODUCT QUALITY • SERVICE • VALUE • DIVIDENDS • CAPITAL GROWITH • SAFETY OF INVESTMENT Financial Management : An Overview

  11. Question : Agency Costs • There is a conflict of interest between shareholders and managers. In theory, shareholders are expected to exercise control over managers through the annual meeting or the board of directors. In practice, why might these disciplinary mechanisms not work? Financial Management : An Overview

  12. Question • Maximizing firm value, defined as its market capitalization, has been suggested as the major goal in corporate finance. Does this conflict with a firm’s responsibility to its customers, to employees and to society in general? Financial Management : An Overview

  13. Possible answers • Maximizing stock price is not incompatible with meeting employee needs/objectives. In particular: • Employees are often stockholders in many firms • Firms that maximize stock price generally are firms that have treated employees well. Financial Management : An Overview

  14. Possible answers • Maximizing stock price does not mean that customers are not critical to success. In most businesses, keeping customers happy is the route to stock price maximization. Financial Management : An Overview

  15. Possible answers • Maximizing stock price does not imply that a company has to be a social outlaw. • In fact, companies, such as ONGC and Hindustan Lever, who are among the most valuable companies in India today, are also the companies who have shown a high degree of sensitivity to the needs of society. Financial Management : An Overview

  16. Building a profitable business is hard work Maximizing firm value Increasing return Managing Investment Investment in Fixed assets Increasing revenues and ontrolling costs Working capital management Quantity Quality Operating risk / Leverage Financial risk / Leverage Financial Management : An Overview

  17. The DU PONT Formula Return on Net Worth (RONW) = Net Profit Sales to Total Assets To Sales x Total Assets x to Net Worth Margin Activity Leverage Financial Management : An Overview

  18. Which of these two companies is more risky ? Financial Management : An Overview

  19. Which of these two companies is more risky ? Financial Management : An Overview

  20. Risk matrix High (1) High financial and low operating risk (2) High financial and high operating risk Financial leverage (3) Low financial and low operating risk (4) High operating risk and low financial risk Low High Operating leverage Financial Management : An Overview

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