Lecture 2. introduction to financial management
- 1. Amity Business School Amity Business School MBA(HR) Class of 2017, Semester II FINANCIAL MANAGEMENT Lecture 2
- 2. Amity Business School Financial Environment A firm operates in an environment. Financial environment also Known as financial system forms part of the overall environment. The environment influences the financial system and the latter, in Turn ,impacts the firm’s investing & financing decisions. As there is a interrelationship between the financial environment & the financial decision making of the firm, it is essential for the finance manager to have a sound knowledge of the financial System.
- 3. Amity Business School Financial System Financial Markets Financial Assets Or instruments or Products Financial intermediaries Or Institutions Debt Equity Banks Mutual Funds NBFC…… Money Market Capital Market Primary Market Secondary Market Regulatory Frame work RBI SEBI Companies Act …..
- 4. Amity Business School Objective of the FM Profit Maximisation Vs Wealth Maximisation
- 5. Amity Business School PROFIT MAXIMIZATION •Business earns profits (Accounting profits) to cover its costs and provide funds for growth. •Profit earnings is the main aim of every economic activity. • Profit is a measure of efficiency of a business enterprise. • The accumulated profits enables a business to face risks like fall in prices, competition from other units adverse government policies etc.
- 6. Amity Business School 1. Profit Maximization as an objective is vague and ambiguous. Short term profit or Long term profit ? Profit after Tax or Profit before Tax ? Gross Profit or Net Profit?
- 7. Amity Business School 2.It ignores the timing of costs & returns and thereby ignores the time value of money. Profit (Rs. in crore) Time Alternative A Alternative B Period I 50 - Period II 100 100 Period III 50 100 Total 200 200
- 8. Amity Business School 3. It ignores risk Arguments against this objective Profit (Rs. in crore) State of Economy Alternative A Alternative B Recession (Period I) 9 0 Normal (Period II) 10 10 Boom (Period III) 11 20 Total 30 30
- 9. Amity Business School Wealth Maximization • It is also known as value maximization or net present worth maximization. • This objective is generally expressed in terms of maximization of the value of a share of a firm.
- 10. Amity Business School •The shareholder’s wealth is represented by the present value of all the future cash flows in the form of dividends or other benefits expected from the firm. •The market price of the share reflects this present value.
- 11. Amity Business School Therefore, maximization of shareholder’s wealth as an objective of Financial Management implies that the financial decisions will be taken in such a way that the shareholders receive highest combination of dividends and the increase in market price of share.