An Overview of Fin Mgt

8/3/2019 An Overview of Fin Mgt

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Financial Management : An Overview 2

Question

Why is it that some companies, in some

industries, provide more value to

shareholders? In answering this question, you might

like to use the information provided

separately on the market capitalization

of some large Indian companies




Concepts of Val

ue

Gross Profit/ Net Profit

ROA/ ROCE/ RONW

Market value or market capitalization

Market value added

Economic value added




An overview of financial management

Financial Management

Maximization of Share Value

Financial Decisions

Investment DecisionFinancing Decision Dividend Decision Liquidity Decision

Risk Return




A simple view of a firmLiabilities

Debt ( borrowed money )

Equity ( owners¶ Funds )

AssetsInvestments already made.

These generate cash flowstoday

Investments yet to be

made. These futureinvestments are expectedto create additional value




The Balance-Sheet Model of A Firm

Current

Assets

Fixed

Assets

1 Tangible

2 Intangible

Total Value of Assets:

Shareholder

s¶ Equity

Current

Liabilities

Long-Term

Debt

Total Firm Value to Investors:





Current

Assets

Fixed

Assets

1 Tangible

2 Intangible

Shareholder

s¶ Equity

Current

Liabilities

Long-Term

Debt

What long-

terminvestments shouldthe firmengage in?

The Capital Investment Decision





How can the

firm raise the

money for the

requiredinvestments?

The Capital Str ucture Decision

Current

Assets

Fixed

Assets

1 Tangible

2 Intangible

Shareholder

s¶ Equity

Current

Liabilities

Long-Term

Debt





How much

short-termcash flowdoes acompany needto pay its

bills?

The Net Working Capital Investment

Decision

NetWorking

Capital

Shareholder

s¶ Equity

Current

LiabilitiesCurrent

Assets

Fixed

Assets

1 Tangible

2 Intangible

Long-Term

Debt




Stakeholders and their expectations

EMPLOYEES

MANAGERS MINORIT Y

GROUP

GOVERNMENT COMMUNIT Y

SUPPLIERS

FIRM

CREDITORS

CUSTOMERSSHARE

HOLDERS

COMPENSATION

PRESTIGE

POWER

SECURIT Y

COMPENSA

TION

JOB SATISFACTION

FAIR

EMPLOYMENT

NO DISCRIMINATION

TAXES

EMPLOYMEN

T

REGULAR

PAYMENT

CONTINUIT Y

OF BUSINESS

PRODUCT QUALIT Y

SERVICE

VALUE

DIVIDENDS

CAPITAL GROWITH

SAFET Y OF INVESTMENT

EMPLOYMENT

PRESERVATION OF

THE ENVIRONMENT

INTEREST

SECURIT Y OF

CAPITAL




Question : Agency

Costs

There is a conflict of interest between

shareholders and managers. In theor y,

shareholders are expected to exercise

control over managers through the

annual meeting or the board of

directors. In practice, why might thesedisciplinar y mechanisms not work?




Question

Maximizing firm value, defined as its

market capitalization, has been

suggested as the major goal incorporate finance. Does this conflict

with a firm¶s responsibility to its

customers, to employees and tosociety in general?




Possible answers

Maximizing stock price is not

incompatible with meeting employee

needs/objectives. In particular:

Employees are often stockholders in

many firms

Firms that maximize stock price generallyare firms that have treated employees

well.




Possible answers

Maximizing stock price does not mean

that customers are not critical to

success. In most businesses, keepingcustomers happy is the route to stock

price maximization.




Possible answers

Maximizing stock price does not imply that a

company has to be a social outlaw.

In fact, companies, such as ONG

C andHindustan Lever, who are among the most

valuable companies in India today, are also

the companies who have shown a high

degree of sensitivity to the needs of society.




Building a profitable business is hard work

Maximizing firm value

Increasing return Managing Investment

Increasing revenues andontrolling costs

Quantity Quality

Operating risk / Leverage

Financial risk / Leverage

Investment inFixed assets

Working capitalmanagement




The DU PONT Formula

Net Profit Sales to Total AssetsTo Sales x Total Assets x to Net

Worth

Margin Activity Leverage

Return on Net Worth (RONW) =




Which of these two companies is more risky ?

(Figures in rupees) Firm A Firm B

1 Sales 100,000 100,000

2 Variable costs 40,000 60,000

3 Contribution ( 1- 2) 60,000 40,000

4 Less Fixed operating

costs

40,000 20,000

5 Operating profit ( 3-4) 20,000 20,000

6 Less interest on loans 12,000 8,000

7 Profit before tax 8,000 12,000




Which of these two companies is more risky ?

Leverage measures

8 Operating leverage

( Line 3 / Line 5 )

3.0 2.00

9 Financial leverage

( Line 5 / Line 7 )

2.5 1.67

10 Total or combined

leverage ( Line 8 xLine 9 )

7.5 3.34




Risk matrix

Financialleverage

Operating leverageLow

High

High

(1) Highfinancial andlow operatingrisk

(2) Highfinancial andhighoperating risk

(3) Lowfinancial andlow

operatingrisk

(4) Highoperating

risk and lowfinancial risk

Documents

An Overview of Fin Mgt