Fm -Gvs-Lecture 1 Complete

8/3/2019 Fm -Gvs-Lecture 1 Complete

1/24

FINANCIAL MANAGEMENT

Unit -I

Lecture 1: What is finance?*Dr.G.V.Satya Sekhar,MBA, Ph.D


2/24

Lecture 1: What is finance?

Introduction

Defining finance

Corporate Finance: the financial function

The financial objective: value creation

Financial main principles

Finance: historic evolution


3/24

Why study financial management?

To manage your organizational resources

To make decisions relating to all financialissues in corporate entity

To pursue interesting and rewarding careeropportunities


4/24

Financial claims are also called financial assets and

liabilities, securities, loans, and financialinvestments.

For every financial asset, there is an offsettingfinancial liability.

Total receivable equal total payable in the financial system Loans outstanding match borrowers liabilities

Financial Claims


5/24

Financial markets offer opportunity for:

Financing for corporate entities ( primarymarket)

Financial investing option for business firms(primary and secondary)

Providing liquidity via trading financial claimsin secondary markets

1.1. Introduction:Financial Claims (2)


6/24

THE FLOW OF FUNDS DIAGRAM

Deficit SpendingUnit (DSU)

Surplus SpendingUnit (SSU)

FundsFunds

Financial Assets = Financial Claims


7/24




FundsFunds

Financial Assets = Financial Claims

Borrowerdemander of loanable fundsseller of securities

Saver, lenderbuyer of financial assets

financial investorsupplier of loanable funds

buyer of securities.


8/24

Assets: any possession that has value in an

exchange

tangible: value depends on particular physicalproperties (reproducible and non-reproducible)

intangible: legal claims to some future benefit.Financial assets

Real & Financial assets


9/24

Rate of return (R): expected return Risk (r): credit risk, market risk

Liquidity (L): how much sellers stand to lose if

they wish to sell immediately against engaging ina costly and time-consuming search (J.Tobin)

Main properties of financial assets


10/24


DIRECT FINANCING (Markets)



INDIRECTFINANCIAL INVESTMENT

OR INTERMEDIATION FINANCING

BrokersDealers

Intermediaries

FundsFunds

Funds Funds


11/24


DIRECT



INDIRECT

BrokersDealers

Intermediaries

FundsFunds

Funds Funds

Direct Financial AssetsPurchase

Indirect Financial AssetsPurchase

Direct Financial AssetsIssue

Direct Financial AssetsIssue


12/24

Finance is the study of how organisations

allocate resources over time costs and benefits are distributed over time but the actual timing and size of future cash

flows are often known only probabilistically

Understanding finance helps you evaluatethese uncertain cash flows

Defining Finance

Bodie and Merton


13/24

W

hen implementing decisions, people makeuse of the Financial System which can bedefined as the set of markets and otherinstitutions used for financial contracting and

exchange of assets and risks

Defining Finance

Bodie and Merton


14/24

the set of concepts that help to organize onesthinking about how to allocate resources over

time the set of quantitative models used to help

evaluate alternatives, make decisions, andimplement them

These concepts and models apply at all levels andscales of decision making

Financial theory consists of:

Bodie and Merton


15/24

The practice of finance exists for the creation ofvalue

Financial contracting brings about the substitutionof real wealth (i.e. real business assets) for financialwealth (i.e. securities)

Investing in financial securities has better attributes that in

real assets. Value is created in tthe real assets held bybusinesses, and then transmitted into the value of financialwealth issued by businesses and held by investors.

Defining Finance: a new paradigm. TheValue Creation Function of Finance

Norton y Scott, A new Paradigm: the value creationfunction of finance, january 2001


16/24

Financial management (Corporate finance) dealswith how firms raise and use funds to make short-

term and long-term investments. Investment deals with how the securities markets

work and how to evaluate and manage investments instocks and bonds.

Financial Markets and Institutions includes the studyof the banking system and markets.

The three primary areas of finance

Peterson and Fabozzi


17/24


18/24

Corporate Finance: the financial function Corporations face two broad financial questions:

- What investments should the firm make?- How should it pay for those investments?

Financial managers are concerned with :

Investment Decisions (use of funds):

The buying, holding or selling of types of assets

Financing Decisions (acquisitions of funds)


19/24

Corporate Finance: the financial function

FINANCIALMANAGEMENT

(CORPORATE

FINANCE)

r ( r > k ) k

FINANCIAL SYSTEMREAL SYSTEM

INVESTMENT FINANCING

INVESTMENT / FINANCIAL SUBSYTEM

RETURNREPAYMENTAND RETURN

FINANCIAL

MARKETS

FIRM

OPERATIONS

(Real goods & services


20/24

The Financial objective: value creation

Goal of management: maximize the economic well-being, orwealth, of the owners (current shareholders)

=> maximize the price of the stock

Share price today = Present value of all future expecteddividends at required return

g

!

!1 1

.max.Pr..i

i

i

kdiceShareMax


21/24

The Financial objective: value creation

Financial managers must create or generate value for theirshareholders.

Economic Value Added (EVA) is a measure of a company'sfinancial performance based on the residual wealth calculated bydeducting cost of capital from its operating profit (adjusted fortaxes on a cash basis).

The formula for calculating EVA is as follows:

EVA = Net Operating Profit After Taxes - (Capital * Cost ofCapital)


22/24

Financial main principles

Rational Financial behavior Risk aversion Budgetary diversification

Existence of two parts in all financial transaction ( debit andcredit)

Measurement by cash flows Efficiency of financial markets

Direct relation of risk and return Existence of valuable ideas The Time Value of the money


23/24

Main Issues in finance

Financial Planning

Financial Forecasting Capital Structure Cost of Capital Managements of Investments Capital Budgeting. Working capital management Dividend Policy.


24/24

Kidwell, Peterson, Blackwell, Whidbee: FinancialInstitutions, Markets, and Money, Eighth Edition, John

Wiley & Sons, 2003 Fabozzi, Modigliani: Capital Markets. Institutions and

Instruments. Prentice Hall, 2003

Bodie, Zvi and Merton, Robert C.: Finance. Prentice

Hall, 1999 Pamela P. Peterson and Frank Fabozzi: Financial

Management and Analysis, 2nd Edition, John Wiley &Sons, 2003

References:

Fm -Gvs-Lecture 1 Complete

Documents

Transcript of Fm -Gvs-Lecture 1 Complete