lokesh ppt

By Lokesh Kumar Varshney

PGDM Final YearRoll No: 26 04/10/23 08:03 AM 1

Lokesh Kumar Varshney, PGDM , GLA University

04/10/23 08:03 AM 2Lokesh Kumar Varshney, PGDM , GLA University

Objectives of the firm• Objectives are targets or goals is that a business

sets for itself to achieve the desired position.

• They are achieved through proper Vision and Mission.

• Financial Decisions includes two things :»A) Return»B) Risk attached


There are Two main objectives of the Firm

1st : To maximise the current value of the Share holders wealth

2nd : To reduce the Cost of the Production etc..

Objectives of the firm


Objective should be sure to have

• Value Maximisation objective donot ignore the Multi Period character of the Financial & other decisions

• It incorporates uncertainty in some way

04/10/23 08:03 AM Lokesh Kumar Varshney, PGDM , GLA University

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04/10/23 08:03 AM Lokesh Kumar Varshney, PGDM , GLA University

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Theory of Firm• The theory of the firm is based on

the assumption that all businesses will operate to make a profit

• Businesses face should be upward while slopes among total cost and revenue curves – as more is produced costs increase and as more is sold revenue increases


Marginal costs and revenues

• If a business has a downward sloping demand curve revenue will rise at a decreasing rate as production rises until marginal revenue equals zero

• At this point any additional units don’t add anything to total revenue

• Assuming the law of diminishing returns in the short run total costs will eventually start to rise at a faster rate as marginal costs increase


Marginal costs and marginal benefits

• The point of profit maximisation is where the difference between Total revenue and total costs is greatest

• At the point of profit maximisation MC = MR


Additional Objectives

• There are additional objectives that a business could pursue including:– Growth– Sales revenue maximisation– Limit pricing to gain monopoly power– Customer satisfaction

• The satisficing principal sets a minimum acceptable level of achievement


RISK MANAGEMENT &

WEALTH MAXIMIZATION


The Goal of Management

• Maximization of shareholders’ wealth is the dominant goal of management in the Anglo-American world.

• In the rest of the world, this perspective still holds true (although to a lesser extent in some countries).

• In Anglo-American markets, this goal is realistic; in many other countries it is not.


The Goal of Management

• There are basic differences in corporate and investor philosophies globally.

• In this context, the universal truths of finance become culturally determined norms.


Shareholder Wealth Maximization

• In a Shareholder Wealth Maximization model (SWM), a firm should strive to maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a given level of risk.

• Alternatively, the firm should minimize the level of risk to shareholders for a given rate of return.



• The SWM model assumes as a universal truth that the stock market is efficient.

• An equity share price is always correct because it captures all the expectations of return and risk as perceived by investors, quickly incorporating new information into the share price.

• Share prices are, in turn, the best allocators of capital in the macro economy.



• The SWM model also treats its definition of risk as a universal truth.

• Risk is defined as the added risk that a firm’s shares bring to a diversified portfolio.

• Therefore the unsystematic, or operational risk, should not be of concern to investors (unless bankruptcy becomes a concern) because it can be diversified.

• Systematic, or market, risk cannot however be eliminated.



• Agency theory is the study of how shareholders can motivate management to accept the prescriptions of the SWM model.

• Liberal use of stock options should encourage management to think more like shareholders.

• If management deviates too extensively from SWM objectives, the board of directors should replace them.

• If the board of directors is too weak (or not at “arms-length”) the discipline of the capital markets could effect the same outcome through a takeover.

• This outcome is made more possible in Anglo-American markets due to the one-share one-vote rule.



• Long-term value maximization can conflict with short-term value maximization as a result of compensation systems focused on quarterly or near-term results.

• Short-term actions taken by management that are destructive over the long-term have been labeled impatient capitalism.

• This point of debate is often referred to a firm’s investment horizon (how long it takes for a firm’s actions, investments and operations to result in earnings).



• In contrast to impatient capitalism is patient capitalism.

• This focuses on long-term SWM.

• Many investors, such as Warren Buffet, have focused on mainstream firms that grow slowly and steadily, rather than latching on to high-growth but risky sectors.


What’s Special about “International” Finance?

• Foreign Exchange Risk

• Political Risk

• Market Imperfections

• Expanded Opportunity Set



• Foreign Exchange Risk– The risk that foreign currency profits may

evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.

• Political Risk– Sovereign governments have the right to

regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways.


• Market Imperfections

– Legal restrictions on movement of goods, people, and money

– Transactions costs

– Shipping costs

– Tax arbitrage



• Expanded Opportunity Set

– It doesn’t make sense to play in only one corner of the sandbox.

– True for corporations as well as individual investors.

What’s Special about International Finance?


• The focus of the text is to equip the reader with the “intellectual toolbox” of an effective global manager—but what goal should this effective global manager be working toward?

• Maximization of shareholder wealth?

or

• Other Goals?

Goals for International Financial Management


Maximize Shareholder Wealth

• Long accepted as a goal in the Anglo-Saxon countries, but complications arise.

– Who are and where are the shareholders?

– In what currency should we maximize their wealth?


Other Goals

• In other countries shareholders are viewed as merely one among many “stakeholders” of the firm including:– Employees

– Suppliers

– Customers

• In Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs.


Other Goals

• No matter what the other goals, they cannot be achieved in the long term if the maximization of shareholder wealth is not given due consideration.


THANKS


lokesh ppt

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