Introduction to Financial

Management
[Lecture 01]
By
Dr. Trilochan Tripathy
What are Your expectations?
……………………
Contract !!
 Outline of this lecture
• Browse through the Course handout
• Finance: A Quick Look
• Business Finance and Financial Manager
• Forms of Business Organization
• Goal of Financial Management
• Agency Problem and Control of the Corporation
• Financial Markets and the Corporation
• Coverage and some snippets
 Introduction
• Management is a borrowed science
• Management is heavily dependent on:
– Accounting, Finance, Economics, Statistics, Mathematics, Physics,
Taxation, Law, Operations Research, Production and Marketing etc.
• Art and science of Managing money: Finance
• Finance is concerned with the process, institutions,
markets and instruments involved in the transfer of
money among individuals, business, and governments.
• Plaining, raising, controlling and administering funds for
business activity: Business finance
 Areas of Finance & Financial System
• Finance:
– Financial Management/CF/BF
– Financial Economics
• Financial Markets
– Money (TBill, CDs, BA, DCP, MMMF) and capital (stocks, Bonds
and Currencies) Markets
• Financial instruments: (Financial and Non Financial)
– Bonds, stocks debentures, currency, Deposits, post office
savings, MFs, cash equivalents, and GOLD, Real estate,
commodity
Areas of Finance & Financial System
• Financial Institutions:
– Regulatory institution s:RBI, SEBI, CBDT, IRDA,
PFRDA, CCI, NHB, RC …responsible for maintaining
the transparency and the national interest in the
operations of the institutions under their
supervision
– Intermediaries: Banking institutions and NBFCs (
asset financing and Investment financing
institutions)
– Specialized: Companies that specialize in financial
matters: UTI, NABARD, SIDBI, HUDDCO, STCI, IDBI,
LIC, GIC, NHB, Brokerage Firms ……
Finance and Financial System contd.
– Security analysis (investment Science)
– Portfolio Management
– Financial Risk management
– Empirical Finance
– Behavioral Finance
– International finance
– Personal Finance
– Public Finance
– Entrepreneurial Finance
– Investment banking
– Business Ethics and Corporate Governance
– Financial Econometrics
– Financial and Commodity Derivatives
– ………………Evolving…….
 Forms of Business Organization
Three major Forms:
–Sole proprietorship (single ownership)
» Features: Easy to start, least regulated &conflict, personal
income tax, unlimited liability, difficult to sell, limited
equity capital
–Partnership (same as partnership but greater scope)
–Corporation: A legal person distinct from owner and
resident of a state
» Features: limited liability, longer life, separation of
management from ownership, easy transfer of ownership
and raising capital, double taxation- income and dividend
–Domestic &International (JSC, PLC & LLC)
Corporate Organogram
 Goal of Financial Management
– Maximize profit?
• Will profit maximization also results in stock rice
maximisation?
– Minimize costs?
– Maximize the current value per share of the company’s
existing stock
– Maximize the market value of the existing owners’ equity
Aim of Financial Management contd.
• Will maximization of earnings per share maximize
the stockholder welfare?
– Should projected earning matters?
– Should timing of earning matters?
– Should Riskiness of projected earning matters?
– Should capital structure matters?
– Should dividend policy matters?
[ common stock, preferred stock and bond]
Goal of the Firm: Maximize
Shareholder Fund
 Goal of the Firm: What About
Stakeholders?
• Stakeholders are groups such as employees,
customers, suppliers, creditors, owners, and others
who have a direct economic link to the firm.
• A firm with a stakeholder focus consciously
avoids actions that would prove detrimental to
stakeholders. The goal is not to maximize
stakeholder well-being but to preserve it.
• Such a view is considered to be "socially
responsible."
Financial Management Decisions

Investment Financing
Decision Decision

Dividend
Decision

Scope of Fin. Management

 Financial Management Decisions
• Investment Decision
• What long-term investments or projects should the business take on?
– Cash flow, ROI, Risk and investment criteria ( labour, technology, legal, input, machinery..)

• Financing Decision:
• How should we pay for our assets?
– Raising optimum finance at minimum cost to meet the objective of the firm.
– Deciding the appropriate mix of short term long term financing.
– Deciding which individual short term and long term sources of financing are best at a given point of time.

• Dividend Decision
– How to distribute surplus fund?
• Earning, stability of earning, cash flow position, growth opportunity
• Working Capital Management
– How do we manage the day-to-day finances of the firm?
• Nature of business, scale of operation, business cycle, production cycle, level of competition.
 The Agency Problem
• Agency relationship
– Principal hires an agent to represent its
interests
– Stockholders (principals) hire managers
(agents) to run the company
• Agency problem
– Conflict of interest between principal and
agent (Agency problems arise when an agent
does not act in the best interest of the
principal)
• Management goals and agency costs
 Can you try this?
Suppose you want to buy a house 10 years from
now, you estimated that an initial down
payment of Rs. 1,00,00,000. To accumulate the
aforesaid amount, you wish to make equal
annual end of year deposits into an account
paying annual interest of 6% . How much you
should deposit in the account , which will result
in aforesaid amount at the end of 10 years
period? $758,679.58
 Why money has a time value?
• Fundamental value, Intrinsic value, Present
value, Future value, discounted value, annuity,
annuity due, perpetuity, mixed streams of
future values, compounding: h-d-w-m-sa-y
..continuous
• risk free rate of interest, nominal and real
effective RI,
 Have you come across with the
following terms?
-Time value of Money, Coupon rate, face value,
indenture, yield and yield cure, term structure of
interest rates, yield to maturity, callable bond,
non callable bond…
- Zero growth model, constant growth model,
variable growth model, FCF- BV- PE methods of
valuations
 What Affects the Stock Price?
• The stock price is the sum of present and
future dividends.
• Future dividends are affected by three major
factors:
– The amount of the dividends
– When the dividends are received
– The risk associated with the dividends
 Do you know the followings?

• How do we measure risk and trade of risk with

return?
• Do you know the followings?
-CAPM, Risk premium, market risk premium, security market
line, Capital market line, diversifiable risk, non diversifiable
risk, market risk, idiosyncratic risk, correlation-covariance link
– Single Index Model
– FFTFM, CFM, FFFFM
– Security and portfolio, portfolio diversification, portfolio
optimization
 Do you know the followings?
• How investment decisions are made?
• Is a higher rate of return on investment always
better?
• You are required to know the followings?
– Initial investment, operating cash flows, terminal cash
flows
– Capital structure decision
• Cost of equity, cost of debt, WACC
– International capital budgeting
– Working capital management- CCC
 Is negative cash flow always bad?
• Cash hoarding, cash management, factors
affecting CM….
• CM in a international business context
 Are you exposed to a few concepts?
• How does investors/ business entity hedge risks?
• One is supposed to know the followings
– Market, Exchanges, OTC ….
– Money, Currency, Stock, Bond, Commodity , real
estate, mortgages, ABS, loans, credit products,
structured products ….
– Cash, derivative- forward, futures, options, Swaps,
– Dealers, market makers, brokers
– Individual investors, retail investors
– Arbitrageurs, speculators
 Have you ever hard about
the Story of
Alpha
Beta
Delta
Gamma
Theta
Rho
Vega ……?
What is Kappa?
 Perhaps many of you know about
trading strategies
• Technical
(BB, CS, MA, WMA, MACD…………..)
• Fundamental
( BM, PS, EPS, ROA, ROE, RONW…….)

Long and Short

-How do you distinguish between Sale and Short sale?

-Do you trade in stock Market?
-How big is your portfolio?
Perhaps some of you know about F& O
and its trading strategies
• Forward premium, forward discount…..
• Margin: Margin call, initial margin,
maintenance margin ……
• Options [ It is hot and spicy but good for health]
– call, put, European, American, Asian, Bermuda……
– ITM, OTM ATM
– BS, BS & BS (Bull, Bear and Butterfly)
– CC, NC, S &S (covered, naked, straddle, strangle)……
 Reactions/ Opinions/ Feelings
Is it over shooting?
Enjoyed or confused?

No matter, what it is?

“Your mentor is with you”.

Fortune favours the brave
 Quick Wrap Up
• What are the diverse areas of finance?
• What are the three types of financial
management decisions, and what questions
are they designed to answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
What are agency problems, and why do they
exist within a corporation?
• Brief discussion on the course coverage
Thank You
 All the PPTs will be available in the following location:

\\192.168.100.9

For GMP
• User - public
• Pass - welcome

• Shared Folders:
Prof. Trilochan /Financial Management.