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FUNDAMENTALS OFFINANCIAL MANAGEMENT

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A FOOL AND HIS MONEY ARESOON PARTED.

DEFINING FINANCE1) Finance is

Science and Art of managing money.

2) Finance is the study which shows thathow people allocate their resources over atime period.

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Why to study Finance? To manage your personal resources e.g

Budgeting. To deal with the world of business To pursue interesting and rewarding

career. To help the public in making better

choice e.g investment decision. To expand your mind.

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Financial Decision of Households Consumption and saving decision. Investment decision.

Financing decision. Risk management.

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FINANCIAL RISK MANAGEMENT Risks related to interest rate, stock price, and exchange rate

fluctuations in the financial markets.

Reduce financial risks by holding a broadly diversified portfolioof stocks and debt securities.

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World of Business Financial services Managerial finance

a) Financial Analyst

b) Capital Budgetingc) Project Finance Manager e) Cash Manager

f) Credit Analystg) Pension Fund Manager Career opportunities

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CAREER OPPORTUNITIESa) Banking and related

institution

b) Personal financial servicesc) Investmentd) Real estatee) Insurance

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KEY ACTIVITIES OR FUNCTIONSOF FINANCIAL MANAGER

BALANCE SHEET

CURRENT ASSETS

FIXED ASSETS

CURRENT LIABILITIES

LONG TERM DEBT

OWNERS EQUITY

TOTAL ASSETS TOTAL LIABILITIES & S.E

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DISTINCTION BETWEENSHARES AND BONDS

Bond is a debt instrument whereasShareholders are the owner.

Interest on bonds is a fixed charge,whereas dividend is distribution of profit.

Shares are perpetual whereas bonds arealways issued for stipulated period.

Shares are more risky for shareholder Shares enjoy the voting right, whereas

bonds dont.

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FINANCE AND OTHERRELATED DISCIPLINES

FINANCIAL DECISION AREASa) Investment Analysis

b) Working Capital Managementc) Sources and Cost of Fundsd) Capital Structure

e) Dividend Policyf) Analysis of Risk & Return

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RELATED DISCIPLINES

PRIMARY DISCIPLINEa) Accounting

b) Economics

SECONDARY DISCIPLINEa) Marketing

b) Productionc) Statistics

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GOAL OF THE FINANCIALMANAGER

PROFIT MAXIMIZATIONRepresented by EPS

EPS = Net profit after tax / No: of Commonshares

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DRAWBACKS

Ignores the timings of returns It does not represent dividend paid to

Shareholders Risk factor Quality of benefits

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MAXIMIZATION OFSHAREHOLDERS

Measures the price of the Stock,basedupon

1) Timings of Cash flows2) Their magnitude available to

Shareholders3) Risk4) Quality of benefits

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ECONOMIC VALUE ADDED

Operating profit after tax = $410,000 Cost of funds = $350,000

EVA = $ 60,000