SUMMARY Homework Help


~ Financial management/corporate finance/managerial finance is concerned with the duties of the finance manager in a business firm. He performs such varied tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis and funds procurement. The recent trends towards globalization of business activity has created new demands and opportunities in managerial finance.

~  Finance is closely related to both macroeconomics and microeconomics. Macroeconomics provides an understanding of the institutional structure in which the flow of finance takes place. Microeconomics provides various profit maximization strategies based on the theory of ,the firm. A financial manager uses these to run the firm efficiently and effectively. Similarly, he depends on accounting as a source of information/data relating to the past, present and future financial position of the firm. Despite this interdependence, finance and accounting differ in that the former is concerned with cash flows, while the lamer provides accrual-based information and the focus of finance is on’the decision making but accounting concentrates on collection of data.

~ The financial management function covers decision making in three inter-related areas, namely investment including working capital management, financing and dividend policy. The three key activities of the financial manager are (1) performing psychoanalysis; (2) making investment! decisions and (3) making financing decisions.

~ The goal of the financial manager is to maximize the owners/shareholders wealth as reflected in share prices rather than profiteers maximization because the latter ignores the timing of returns, does not directly consider cash flows and ignores risk. As key. determinants of share price, both return and risk must be assessed by the financial manager when evaluating
decision alternatives. The EVA is a popular measure to determine whether an investment positively contributes to the owners wealth. However, the wealth maximizing action of the finance managers should be consistent with the .preservation of the wealth of stakeholders, that is, groups such as employees, customers, suppliers, creditors, owners and others who have a direct link to the firm. Corporate India paid scant attention to the goal of shareholders wealth maximization till the eighties. In the post-Liberalization era, it has emerged at the center-stage of corporate financial practices the contributory factors being greater dependence on capital market, growing importance of institutional investors and foreign exposure.

~ An agency problem results when managers as agents of owners place personal goals ahead of corporate goals. Market forces and the threat of hostile takeover tend to act to prevent/ miniseries agency problems. In addition, firms incur agency costs in the form of monitoring and bonding expenditures, opportunity costs and structuring expenditures which involve.

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