Download - Lec 01 & Lec 02 Introduction to Fm

7/26/2019 Lec 01 & Lec 02 Introduction to Fm

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FINANCIAL

MANAGEMENT


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Introduction: Defnition, Scope and Objective o

Financia! Mana"e#ent$ %a&ic Financia! Concept&

Lon" Ter# Source& O Finance

Capita! %ud"etin" 'rincipa! Tec(ni)ue&

Concept and Mea&ure#ent o Co&t o Capita!

Ca&( F!o*& For Capita! %ud"etin"

Financia! State#ent and Ana!+&i& Levera"e and Capita! Structure Deci&ion

or-in" Capita! Deci&ion

Dividend 'o!ic+

S+!!abu&


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FORMS OFFORMS OF

BUSINESSBUSINESS

ORGANIZATIONORGANIZATION


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FO.MS OF %/SINESSO.GANI0ATION

Three Organizational Forms

developed by Business Owners

Sole Proprietorship

General Partnership

Corporation


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DEF!TO!S

Sole

Proprietorship

General

Partnership

Corporation

"ny BusinessOwned and

Operated by anndividual

Two or #orePersons

Operating aBusiness $or a

Pro$it

%egislativelyCreated and&egulated

Governan'e(Ownership and

Finan'ialStru'ture


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FO"TO!

SoleProprietorship

GeneralPartnership Corporation

!o Formalities or%egal

Do'umentation)#ay be mplied$rom Condu't or

"'tions

*ritten or Oral"greement or

#ay be mplied$rom Condu't or

"'tions

Filing o$ "rti'leso$ n'orporation

with Se'retary o$State andPayment o$

Fees


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GO+E&!!G DOC,#E!TS

Sole

Proprietorship

General

Partnership Corporation

!one &e-uired

!one &e-uired)#ost have

"greementspe'i$ying &ights(

Duties andObligations

"rti'les o$n'orporation

'reateCorporation)

Bylaws pres'ribeits Operation


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!"T,&E OF O*!E&S.P

SoleProprietorsh

ip

General

PartnershipCorporation

*holly Owned

by Singlendividual

For Contribution(Partner re'eives

Proportionate Shareo$ Pro$its/%ossesand Partnership

Property

&esidual Claim onCorporate E-uity

and &ight to +ote$or Dire'tors andEssentialGovernan'e


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%"B%T0

SoleProprietors

hip

GeneralPartnership

Corporation

Sole Proprietor

Personally%iable $or "llDebts and

Obligations

Partners are 1ointly

and Severally %iable$or all PartnershipObligations( in

Contra't and in Tort

Shareholder2s

%iability limited toE3tent o$ CapitalContribution4%imited %iability5


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T"6"TO!

SoleProprietors

hip

General

PartnershipCorporation

!ot a Ta3able

Entity) n'ome7%oss8 passesthrough to Sole

Proprietor

Partnership not aTa3able Entity)

"llo'ations o$n'ome and %oss

allowed withinPartnership be$ore

Pass9Through

Corporation ta3edas Separate EntityandDividends/CapitalGains also Ta3ed4Double Ta3ation5


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#"!"GE#E!T

Sole

Proprietorship


Sole Proprietorhas Complete#anagement

Control

"ll Partners have

E-ual &ights inPartnership2s

#anagement andCondu't

#anaged by Boardo$ Dire'tors ele'tedby Shareholders)Board may Delegate"uthority to

"ppointed O$$i'ers


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T&"!SFE& O*!E&S.P !TE&ESTS

SoleProprietorshi

p

General

Partnership

Corporation

SoleProprietorship not

Trans$erable)Property andProdu'ts areTrans$erable

%imited &ight o$

Trans$er sub:e'tto Consent by all

Partners

FreelyTrans$erable

through Formal7!0SE8 andn$ormal 7PrivateE-uity8 Capital

#ar;ets


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*T.D&"*"% OF O*!E&

Sole

Proprietorship


Terminates SoleProprietorship

Partner Death or*ithdrawal may

TerminatePartnership

Corporation has,nlimited %i$e

I t t


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De&pite o t(e variation& bet*eenbu&ine&&e& t(e ba&ic fnance i&&ue& t(e+

ace are e&&entia!!+ t(e &a#e$ T(e #o&t i#portant activitie& o a bu&ine&&

fr# are

Intro uct on

I t d ti


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Financia! Mana"e#ent peror#& aci!itation,reconci!iation and contro!& unction& in an

or"ani1ation$ A!! t(e deci&ion (avin" #onetar+ i#p!ication&

co#e& under t(e purvie* o fnancia!#ana"e#ent$

Financia! deci&ion #a-in" invo!ve& procure#ento und& and t(eir opti#a! uti!i1ation t(rou"(inve&t#ent, fnancin" dividend and *or-in"capita! deci&ion&$

T(e -e+ i&&ue in fnance are

(ere to rai&e fnancia! re&ource& ro#

(ere to inve&t t(e re&ource&

2o* to be&t #ana"e t(e production di&tribution

Introduction


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4$ Inve&t#ent or Lon" Ter# A&&et Mi5 Deci&ion Function o inve&tin" rai&ed und& in a&&et& are -no*n

a& inve&t#ent deci&ion$ E5a#p!e& inc!ude E5pan&ion, Moderni1ation,

.ep!ace#ent o Lon" Ter# A&&et&, . 6 D 7(avin" !on"

ter# i#p!ication&8$

T(e 9 i#portant a&pect o inve&t#ent deci&ion are7a8 Eva!uation o t(e pro&pective proftabi!it+ o

ne* inve&t#ent&

7b8 T(e #ea&ure#ent o a cuto; rate< a"ain&t t(at

t(e pro&pective return o ne* inve&t#ent& cou!d

be co#pared$ Deci&ion& are ta-en in t(e !i"(t o t(eir i#pact on t(e

*ea!t( o &(are(o!der&$ T(e deci&ion invo!ve (u"e capita! out!a+, (ave !on"

ter# i#p!ication&, and are u&ua!!+ irrever&ib!e$

Finance Function&

Fi F ti


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9$ Financin" or Capita! Mi5 Deci&ion Financin" deci&ion& are #ain!+ concerned *it( t(e

identifcation o potentia! &ource& o und& andtappin" o t(e&e &ource&$

Main i&&ue invo!ved in &uc( deci&ion& are

(ere ro# to procure t(e re)ui&ite und&=

2o* #uc( &(ou!d be t(e proportion o &(ort ter#and !on" ter# und&=

2o* do t(e e5pectation& o provider& o eac(&ource o capita! c(an"e *it( a!teration in capita!#i5=

(at &(ou!d be t(e opti#a! #i5 o debt ande)uit+ in capita!=

T(e #i5 o debt and e)uit+ i& -no*n a& t(e fr#>&capita! &tructure$

T(e+ deter#ine t(e fnancia! ri&- prof!e o t(e

Finance Function&


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?$ Dividend or 'roft A!!ocation Deci&ion Di&tributin" return& earned ro# a&&et& to

&(are(o!der& are -no*n a& dividend deci&ion$ T(e fnancia! #ana"er #u&t decided *(et(er t(e fr#

&(ou!d di&tribute a!! proft&, or retain t(e#, ordi&tribute a portion and retain t(e ba!ance$

Suc( a deci&ion depend& on trade o; bet*een t(e

uture fnancin" need& o t(e fr# and currentcon&u#ption re)uire#ent o &(are(o!der&$

T(e proportion o proft& di&tributed a& dividend& i&ca!!ed t(e dividend pa+out ratio and t(e retained

portion o proft& i& -no*n a& retention ratio$ Nor#a!!+ fr#& o!!o* a po!ic+ o &tab!e dividend, butfr#& *it( (i"( "ro*t( rate "enera!!+ o;er& a (i"(retention and !o* pa+out ratio$

Dividend& are "enera!!+ paid in ca&(, but it can a!&obe "iven in or# o bonu& &(are&$

nance unc on&

F nance Funct on&


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@$ or-in" Capita! Deci&ion Li)uidit+ Deci&ion or-in" Capita! deci&ion& are re!ated to t(e

#ana"e#ent o current a&&et&$ T(e t*o -e+ deci&ion point& in *or-in" capita!

#ana"e#ent are !eve! o inve&t#ent in current a&&et&

and fnancin" o &uc( a&&et&$

Current a&&et #ana"e#ent a;ect t(e fr#>& !i)uidit+$

A fr# atte#pt& to ba!ance ca&( in3o*& and out3o*&

*(i!e peror#in" t(e&e unction&$ T(e&e are ca!!ed

!i)uidit+ deci&ion&$

A con3ict e5i&t& bet*een proftabi!it+ and !i)uidit+*(i!e #ana"in" current a&&et&$ 2ence, a proper

tradeo; #u&t be ac(ieved bet*een proftabi!it+ and

!i)uidit+$

F nance Funct on&

Obj ti Fi


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9B

Objective of the Firm the primary goal of the

rm is to maximize stockholer !ealth

"ealth #aximization vers$s Prot#aximization

%iming prot maximization oes not takeinto acco$nt the timing of earnings& !hile!ealth maximization oes'

(isk !ealth maximization takes risk intoacco$nt prot maximization oes not'

)ivien payments if prot maximization

!as the goal& a rm !o$l never pay

Objective o Fir#

Obj ti Fi


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94

"ealth #aximization vers$s Prot

#aximization *cont+

,$alitative factors proft #a5i#i1ationdoe& not ta-e into account uture activitie&&uc( a& &a!e& "ro*t(, &tabi!it+ anddiver&ifcation'

Stock price maximization &ince inve&tor&*ant to #a5i#i1e t(eir o*n *ea!t(, t(e+ preer

t(e fr# adopt &trate"ie& t(at *i!! #a5i#i1e&toc- price'

Objective o Fir#

Download - Lec 01 & Lec 02 Introduction to Fm

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