10/5/20151 A CREATION OF VALUE TO (INVESTORS)SHARE HOLDERS By M.P.NAIDU

 An overview of Financial Management  The Environment of Finance  Managerial Finance Functions  The Goals of Financial management 10/5/20152

Finance can be defined as the art & science of managing money  Finance consists of 3 interrelated areas as 10/5/20153

 Where the firm issues & investors buys and sells financial securities  These markets assist investors for buying and selling stock and other securities  These markets involve a variety of financial intermediaries and middle man such as ( financial institutions ), commercial banks, stock brokers, insurance companies, finance companies, pension funds, etc..  Financial instruments: stocks, bonds, certificates, deposits, mortgages etc… 10/5/20154

 Financial consulting firms which advise to individual investors ( or by own analysis, of investor) how to invest their funds  There three main function in the investments area are:  sales  The analysis of individual securities and  Determining the optimal mix of securities 10/5/20155

Def: Financial Management( planning &control) defined as the management of capital sources and use in order to achieve a desired goal ( value creation). Capital sources: Management of ( planning & control)  Investing  Financing  Dividend 10/5/20156

7 Investments Financial Markets Financial Management Investors Funds Firms Financial Securities Profit

 The securities are issued by the firms to potential investors in financial markets.  The investor will analyze the risk- return feature of securities issued by the firm  One the investor choose the security or securities for investment, he will provide capital to the firm( purchase securities)  This capital, the firm will use in investment activities ( financial management) with the purpose of earning returns on their investment, part of profits distributed to investors as dividend. 10/5/20158

 This Field is separated from economics in  The reason behind, mergers, formation of new firms,& various types of securities issued by firms to raise capital, in 1900s.  In 1930s the emphasis shifted to Bankruptcy & reorganization, to corporate liquidity & to regulation of security markets. 10/5/20159

 In 1950sm a movement towards theoretical analysis began and focus of financial management shifted to managerial decisions regarding investment, finance decisions, for maximizing the firms value.  In earlier times the marketing manager would project sales, the engineering and production staff would purchase the required plant assets, and inventories. 10/5/201510

 determine the assets necessary to meet those demands, and the financial manager’s job was simply to raise the money needed to  The situation no longer exist- decision are how made in a much more coordinated manner and the financial manager generally has direct responsibility for the control process.  Financial management useful to all type of business l as well as Govt.operation like hospitals, and schools…… 10/5/201511

 Financial management focuses on how an organization can create and maintain ‘ Value” for its stock holders.  Value represented by the market price of the company’s (FM) Investment, Financing & Dividend, decisions. 10/5/201512

 Investment ( Capital Budgeting) decision has two major aspects: 1. evaluation of the prospective profitability of new investments. 2. The measurement of “ cut of Rate” against that the prospective return of new investments could be compared.  Future benefits of investment are uncertain, so it involves risk.  So investment proposal should be evaluated in terms of both expected Return and Risk. 10/5/201513

 The financial manager must decide When, Where, and How to acquire the funds to meet the firms investment needs.  The Financial manager must determine the proportion of equity and Debt( Mix), is known as capital structure.  The best finance mix provides the optimal capital structure. . 10/5/201514

 The use of debt affects the return and risk of share holders; it may increase the return on equity funds but it always increase risk( the edge bankruptcy).  When share holder return is maximized with minimum risk, the market value per share will be maximized and the firms capital structure would be considered optimum 15

 The Financial manager must decide whether the firm should distribute all profits or retain them or distribute a portion.  The optimum dividend policy is one that maximize the market value of the firm’s share. 10/5/201516

 The financial manager must determine the optimum dividend payout ratio.( earnings available & dividend paid ),for maximizing the share holder wealth.  Most profitable companies pay cash dividends regularly, along with bonus shares or stock dividend issues periodically. 10/5/201517