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Chapter 1Chapter 1The Role of Financial ManagementThe Role of Financial Management

What is Financial Management?What is Financial Management?Financial management Concerns the acquisition, financing, and

management of assets with some overall goaloverall goal in mind.There are three major decisions of firms when its comes in valueThere are three major decisions of firms when its comes in value

creationcreation.

Investment DecisionsInvestment Decisions

According to the firm size they take decision of investment.

What specific assets should be acquired,

2. Financing Decisions2. Financing Decisions

From where will take financing,What is the best financing mix.To set the best dividend policy (e.g., dividend-payout ratio)?

3. Asset Management Decisions3. Asset Management Decisions

To manage the existing asset efficiently,Financial Manager has varying degrees of operating responsibility

over assets.Good command over current asset management than fixed asset

management .What is the Goal of the Firm? What is the Goal of the Firm?

Maximization of Shareholder Wealth! Maximization of Shareholder Wealth! Value creation occurs when we maximize the share price for current

shareholders.Strengths of Shareholder Wealth MaximizationStrengths of Shareholder Wealth MaximizationTakes account of: current and future profits and EPScurrent and future profits and EPS; the timing,the timing,

duration, and risk of profits and EPSduration, and risk of profits and EPS; dividend policydividend policy; and all other relevant factors.

Thus, share priceshare price serves as a barometer for business performance.

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The Modern Corporation:The Modern Corporation:

There exists a SEPARATION between owners and managers .

Role of Management:Role of Management:

An agent agent is an individual authorized by another person, called theprincipal, to act in the latters behalf.

Agency Theory: Ag ency Theory:

It is a branch of economics relating to the behavior of principals andtheir agents.

Agency Theory Agency Theory Incentives include stock options, perquisites,stock options, perquisites, and bonusesbonuses.

Social Responsibility:Social Responsibility:

Wealth maximization does not preclude the firm from being sociallysocially responsibleresponsible.

Assume we view the firm as producing both private and social goods.Then shareholder shareholder wealthwealth maximizationmaximization remains the appropriate goal

in governing the firm.

Corporate GovernanceCorporate Governance

Represents the system by which corporations are managed and controlled .Includes shareholders, board of directors, and senior

management.Then shareholder shareholder wealthwealth maximizationmaximization remains the appropriate goal

in governing the firm.

Board of DirectorsBoard of Directors

Typical responsibilities:

Set company-wide policy; Advise the CEO and other senior executives;Hire, fire, and set the compensation of the CEO;

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Review and approve strategy, significant investments, andacquisitions; and

Oversee operating plans, capital budgets, and financial reportsto common shareholders.

CEO/Chairman roles commonly same person in US, but separate inBritain (US moving this direction).

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QUI

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