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A CREATION OF VALUE TO(INVESTORS)SHARE HOLDERS

By

M.P.NAIDU


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An overview of Financial

Management

The Environment of Finance

Managerial Finance Functions The Goals of Financial management

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Finance can be defined as the art & science ofmanaging money

Finance consists of 3 interrelated areas as

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Finance

Investments

(Analysis)

FinancialMarkets

Business financeor Finical

management


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Where the firm issues & investors buys andsells financial securities

These markets assist investors for buying andselling stock and other securities

These markets involve a variety of financialintermediaries and middle man such as (financial institutions ), commercial banks,stock brokers, insurance companies, finance

companies, pension funds, etc.. Financial instruments: stocks, bonds,

certificates, deposits, mortgages etc

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Financial consulting firms which advise toindividual investors ( or by own analysis, ofinvestor) how to invest their funds

There three main function in the investmentsarea are:

sales

The analysis of individual securities and Determining the optimal mix of securities

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Def: Financial Management( planning &control)defined as the management of capital sourcesand use in order to achieve a desired goal

( value creation).

Capital sources:

Management of ( planning & control)

Investing Financing

Dividend

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InvestmentsFinancialMarkets

FinancialManagement

Investors

Funds

Firms

Financial Securities

Profit


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The securities are issued by the firms to potentialinvestors in financial markets.

The investor will analyze the risk- return feature ofsecurities issued by the firm

One the investor choose the security or securitiesfor investment, he will provide capital to the firm(purchase securities)

This capital, the firm will use in investmentactivities ( financial management) with thepurpose of earning returns on their investment,part of profits distributed to investors as dividend.

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This Field is separated from economics in1900.

The reason behind, mergers, formation ofnew firms,& various types of securitiesissued by firms to raise capital, in 1900s.

In 1930s the emphasis shifted toBankruptcy & reorganization, tocorporate liquidity & to regulation ofsecurity markets.

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In 1950sm a movement towards theoreticalanalysis began and focus of financialmanagement shifted to managerial decisions

regarding investment, finance decisions, formaximizing the firms value.

In earlier times the marketing manager would projectsales, the engineering and production staff would

purchase the required plant assets, and inventories.

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determine the assets necessary to meet those demands,and the financial managers job was simply to raise themoney needed to

The situation no longer exist- decision are how made ina much more coordinated manner and the financialmanager generally has direct responsibility for thecontrol process.

Financial management useful to all type of business las well as Govt.operation like hospitals, andschools

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Financial management focuses on how an organizationcan create and maintain Value for its stock holders.

Value represented by the market price of thecompanys (FM)

Investment,

Financing &Dividend , decisions.

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Investment ( Capital Budgeting) decision hastwo major aspects:

1. evaluation of the prospective profitability of new

investments.2. The measurement of cut of Rate against that the

prospective return of new investments could becompared.

Future benefits of investment are uncertain, so

it involves risk. So investment proposal should be evaluated in

terms of both expected Return and Risk.

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The financial manager must decideWhen,Where, and How to acquire thefunds to meet the firms investment

needs. The Financial manager must determine

the proportion of equity and Debt( Mix),

is known as capital structure. The best finance mix provides the

optimal capital structure. .

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The use of debt affects the return and risk ofshare holders; it may increase the return onequity funds but it always increase risk( the

edge bankruptcy). When share holder return is maximized with

minimum risk, the market value per share willbe maximized and the firms capital structurewould be considered optimum

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The Financial manager must decidewhether the firm should distribute allprofits or retain them or distribute a

portion.

The optimum dividend policy is one thatmaximize the market value of the firms

share.

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The financial manager must determine theoptimum dividend payout ratio.(earningsavailable & dividend paid ) ,for maximizing the

share holder wealth.

Most profitable companies pay cash dividends

regularly, along with bonus shares or stockdividend issues periodically.

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