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A CREATION OF VALUE TO (INVESTORS)SHARE HOLDERS

ByM.P.NAIDU

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 of managing money

Finance consists of 3 interrelated areas as

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Where the firm issues & investors buys and sells financial securities

These markets assist investors for buying and selling stock and other securities

These markets involve a variety of financial intermediaries 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 to individual investors ( or by own analysis, of investor) how to invest their funds

There three main function in the investments area 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 sources and use in order to achieve a desired goal

( value creation).Capital sources: Management of ( planning & control) Investing Financing Dividend

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Investments

Financial Markets

Financial Managemen

t

Investors

Funds

Firms

Financial Securities

Profit

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

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

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

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

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This Field is separated from economics in 1900.

The reason behind, mergers, formation of new firms,& various types of securities issued by firms to raise capital, in 1900s.

In 1930s the emphasis shifted to Bankruptcy & reorganization, to corporate liquidity & to regulation of security markets.

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In 1950sm a movement towards theoretical analysis began and focus of financial management shifted to managerial decisions regarding investment, finance decisions, for maximizing the firms value.

In earlier times the marketing manager would project sales, 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 manager’s job was simply to raise the money needed to

The situation no longer exist- decision are how made in a much more coordinated manner and the financial manager generally has direct responsibility for the control process.

Financial management useful to all type of business l as well as Govt.operation like hospitals, and schools……

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Financial management focuses on how an organization can create and maintain ‘ Value” for its stock holders.

Value represented by the market price of the company’s (FM)

Investment, Financing & Dividend , decisions.

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Investment ( Capital Budgeting) decision has two 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 be compared.

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 decide When, Where, and How to acquire the funds 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 of share holders; it may increase the return on equity funds but it always increase risk( the edge bankruptcy).

When share holder return is maximized with minimum risk, the market value per share will be maximized and the firms capital structure would be considered optimum

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The Financial manager must decide whether the firm should distribute all profits or retain them or distribute a portion.

The optimum dividend policy is one that maximize the market value of the firm’s share.

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The financial manager must determine the optimum dividend payout ratio.(earnings available & dividend paid ) ,for maximizing the share holder wealth.

Most profitable companies pay cash dividends regularly, along with bonus shares or stock dividend issues periodically.

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