Financial System

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to

securities
Investment Bankers Capital Market, Credit Corporate advisory
Market services, Issue of
securities
Underwriters Capital Market, Money Subscribe to
Market unsubscribed portion
of securities
Registrars, Capital Market
Depositories, Issue securities to the
Custodians investors on behalf of
the company and
handle share transfer
activity

Forex Dealers Forex Market Ensure exchange ink

currencies

The financial system is characterized by the
presence of integrated, organized and
regulated financial markets, and institutions
that meet the short term and long term
financial needs of both the household and
corporate sector
 What is finance ?

 Why do I learn finance ?

Why Financial Management for
Non Finance Managers?

 Cutting down layers of corporate pyramid

 Broadening of responsibilities
 Vertical & Horizontal responsibility
 Cross functional capabilities-the rule and
not the exception
 What the general activities of the firm?
How they are related

PRODUCTIO
MARKETING FINANCE
N
 EVOLUTION OF FM
Changing role of Financial managers

• Traditional

• Transitional

• Modern: Wealth maximization-analytical &

quantitative
 Early 1900 : instrument, institution, and procedures of
capital market and money market
 Around 1920 : focus on security and banking sector,
and investment in common stock
 Around 1930 : focus on liquidity, debt, regulation,
bankruptcy, reorganization
 Early 1940 and 1950 : internal analysis, planning and
controlling cash flow
 End of 1950 : capital budgeting, valuation, and
dividend policy
 Around 1960 : development of portfolio theory
 Around 1970 : CAPM model and APT model that can be
used to value the financial assets
 Around 1980 : focus on uncertainty, asymmetric
information, financial signaling
 Around 1990 : multinational financial management,
behavioral finance, enterprise risk management, good
corporate governance
 Objectives
 Profit Maximization
Implies that ,the investment, financing and dividend
policy decisions of a firm should be oriented to the
maximization of profits

 Wealth Maximization
Maximize value of its shares
Value maximization or net present worth
Maximization
W= V-C
 Share Holder Orientation In
India
Dependence on Capital Market

Importance of Institutional Investors

Abolition of wealth tax on Financial Assets

Foreign Exposure
 Finance function
Liabilities Assets
Net fixed asset
Equity
Financing investment
Debt Net working capital

dividen
d
 Principle of Finance

Provides
initial cash
to finance
Investors The business proposal
-Shareholders
-Lenders

Generates
cash return
Financial Decisions & Risk-Return
trade off

Market value of the firm

Capital budgeting

Capital Structure Risk

Dividend Return

Working Capital
 Emerging Role of Finance Managers in
India
 MANAGERS Vs Shareholders
 Principal agent relationship

 Agency problem
Scope of Financial Management

Financial Management
involves the application of
general management
principles to particular
financial operation
 Role of Financial Manager

 Formulating objectives
 Forecasting and estimating capital requirement
 Designing capital structure
 Determining suitable sources of finance
 Dispersal of ratio
 Maintaining proper liquidity
 Preserving stakeholders wealth
 Risk Return Trade Off
Expected return

Risk Premium

Risk Free Return

risk

Return = Risk free rate + risk premium

 Time value of money
 “ the sum of money received today is more
than its value received after some times
 2 technique
 Compounded value – future value

 Discounting --- present value

 Mr. X invests in a savings bank account Rs.
1000 at 5 per cent interest compounded
annually . What will be the value of his fund
after 3 years