intro to fm12
TRANSCRIPT
8/7/2019 Intro to FM12
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Financial
Management Policy
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Financial Management
y Financial management is that managerial activity
which is concerned with the planning and controllingof the firms financial resources. It was a branch of economics till 1890.
y In general financial management is the effective &efficient utilization of financial resources.
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Main Features Of Financial
Management:Financial problems are analyzed and considered. Study
of trend of actual figures is made and ratio analysis is
done.All Managerial decisions related to finance are taken
after considering the report prepared by the finance
manager.
Larger the risk in the business larger is the expectationof profits. Financial management maintains balance
between the risk and profitability.
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Maximize the Value of the Business
(Firm)
Three major decision in Finance:
1. The Investment Decision:
2. The Financing Decision
3. The Dividend Decision
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Financial Management PolicyCourse:
yModule I Investment Decision (35%)
yModule II Financing Decision (30%)
yModule III Operating Decision (35%)
8/7/2019 Intro to FM12
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Investing Decision:y Introduction to Finance
y Review of TV M, Bonds & Stocks
y Review of Capital Budgetingy Risk, Return & Opportunity Cost of Capital
y Risk, Return & Capital Budgeting
y The Cost of Capital
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Financing Decision:y Corporate Financing
y Capital Structure
y Debt Policy y Dividend Policy
y Term Loans & Leases
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Operating Decision:y Financial Planning
y Working Capital Management
y Cash & Inventory Managementy Credit Management
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Recommended Readings:y Fundamentals of Corporate Finance by
(Brealey , Myers & Marcus)
y FinancialManagement by (Eugene F Brigham)
y FMP Work Book (Available at IU book shop)
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Few Questions:y How do corporation go public and continue to grow?
What are agency problems?
y What should be the primary objective of Managers?y Three aspects of cash flows affect the value of any
investment?
y What is WACC?
y How do FCF and WACC determine Firms Value?y Different types of Markets?
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Principle 1: The Risk-Return Trade-off
y The more risk an investment has, the higher will be its
expected return.
y NO additional risk unless you expect to be
compensated with additional return.
y Investment alternatives have different amounts of risk
and expected returns.
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Principle 2: The Time Value of Money
y A dollar received today is worth more than a dollar
received in the future.
y Interest Rate Factor
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Principle 3: CashNot ProfitsIs King
y CASH FLOWs, not accounting profit, is used to
measure wealth.
y Cash flows, not profits, are actually received by the
firm and can be reinvested.
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Principle 4: Incremental Cash Flows
yThe incremental cash flow is the difference betweenthe projected cash flows if the project is accepted,
versus what they will be, if the project is not accepted
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Principle 5: The Curse of
Competitive Markets
y Why it is hard to find exceptionally profitable
projects?????
y If an industry is generating large profits, new entrantsare usually attracted. The additional competition andadded capacity can result in profits being driven downto the required rate of return
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Principle 6: Efficient Capital
Markets
y The markets are quick and the prices are right.
y The values of all assets and securities at any instant in
time fully reflect all available information.
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Principle 7: The Agency Problem
y Managers wont work for the owners unless it is in
their best interest
y The separation of management and the ownership of the firm creates an agency problem. Managers maymake decisions that are not in line with the goal of maximization of shareholder wealth
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Principle 8: Taxes Bias Business
Decisions
y When a new project is evaluated, the after-tax
incremental cash flows should be considered
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Principle 9: All Risk is Not Equal
� Diversification allows good and bad events or
observations to cancel each other out, thus reducing
total variability without affecting expected return
� Some risk can be diversified away, and some cannot
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Principle 10: Ethical Behavior Is
Doing the Right Thing, and
Ethical Dilemmas Are
Everywhere in Finance
y Each person has his or her own set of values, which
forms the basis for personal judgments about what isthe right thing
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Goal of the Firm
y TheGoal of the firm is maximization of Business/ FirmsValue.
or
yMaximize the price of the common stocks
.
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Legal Forms of Business Organization
y Sole Proprietorship
y Partnership
y Corporation
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Sole Proprietorshipy Owned by an individual
y Owner holds title to assets
y Unlimited liability
y Termination occurs on owners death or by owners
choice
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Partnershipsy General Partnership
y Each partner is fully
responsible for liabilities
or
y Jointly responsible for
Unlimited Liability
� Limited Partnership
y Allows one or more partnerslimited liability
y Must have one general partnerwith unlimited liability
y Names of limited partners maynot appear in name of firm
y Limited partners may notparticipate in management
decisions.
y More the ONE owner
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Corporationy Business organized as a Separate legal entity owned by
stockholders/ Shareholder .
y Limited Liabilityy Its can borrow or lend money/ it can be sue or be sued
and pay taxes.
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Corporate Income
Sales $1,000
Cost of Goods Sold $ 200
Gross Profit $ 800
Operating ExpensesAdministrative Expenses $150
Depreciation Expense $ 50
Total Operating Expenses $200
Operating Income (EBIT) $600Other Income $0
Interest Expense $250
Taxable Income $350
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Marginal TaxR
ates
� Rates applicable to next dollar of income
� Used in financial decision (Module II)