ch 1 financial management

7/29/2019 Ch 1 Financial Management

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SEMESTER-V

B.COM LLB & BBA LLB

2011-16 BATCH


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Traditional View:

Arrangement of short term and long term fundsfrom Financial Institutions

Mobilization of funds through traditional financial

instruments like shares, bonds, debentures etc.

Compliance of legal procedures relating toprocurement, use and distribution of funds

Modern View: The finance manager is expected to assess-

Total fund requirements

The assets to be acquired The pattern of financing of the assets

Additionally, he generally needs to make the following decisions


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Investing Decisions

Financing DecisionsDividend Decisions

Liquidity Decisions


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Assessment of total volume of funds a firm cancommit

Appraisal and selection of investment proposals

Measurement of risk and uncertainty in theinvestment proposals

Prioritization of the investment decisions Fund allocation and its rationing

Determination of fixed assets to be acquired

Buy or lease decisions

Asset replacement decisions Restructuring, reorganization, merger and

acquisitions


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Expected return

Cut off rate/Required rate of return Risk

Opportunity cost of capital

Replacement Cost


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Episodic Financing

Determination of degree or level of gearing

Determination of financing pattern of long termfunds

Raising of funds through issue of financialinstruments

Assessment of interest burden of the firm Determining the cost of capital of the firm

Assessment of the debt level changes and itsimpact on firms financial stability

Taking advantage of interest and depreciation and

in reducing the tax liability of the firm Consideration of various modes of improving the

EPS and Market value of shares

Optimizing the financing mix

Consideration of impact of overcapitalization and

under capitalization of the firms profitability


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Maintenance of balance between owners

capital and outside capital Study of the economic and financial

environment prevailing in the globe to be able

to access the best source of funds from any

destination.


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Determination of dividend and retention

policies of the firmConsideration of the impact of levels of

dividend and retention on the price of shares

of the company and future earnings of the

companyConsidering the legal and cash flow constraints

on dividend decisions

Issue of Bonus shares


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Profitability-Liquidity trade off

Determination of levels of investments incurrent assets

Security analysis and portfolio management

etc.

Financing long term assets with long term loansand short term assets with short term loans


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Wealth Maximization objective of the firm

Existence of efficient capital markets

The owners will have primary interest in thefirms working and success

The shareholders wealth is the determinant of

current share price

The firm will invest on proposals so long as itgenerates positive net present values


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The underlying logic is efficiency

A company has 10,000 shares outstanding, theprofit after taxes of Rs.50,000. If the company

issues 10,000 more shares and invests the

proceeds of Rs.500,000 in at 5% bonds, the

total net profit will rise to 75,000 but, whatabout the EPS.

ch 1 financial management

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