Intro To Finance

CA V.K.Mahipal; vkmahipal@in.
com, 9324633 4840
Business & its objectives Meaning of Corporate Finance Agency Problem
CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840
economic activity directed towards producing or acquiring wealth through buying and selling of goods and services.
Business activity has two branches
An
Industry, Commerce.
goods and services. Industry provides two types of goods namely consumer goods and Industrial goods.
Commerce
Industry activity concerned with production or possessing of
- processes which are engaged in the removal of the hindrance of persons (trade), Place (transport and insurance), and time (warehousing) in the exchange (banking) of commodities.
To do business is to create an economic entity with the purpose of

Wealth creation Wealth management, and Wealth distribution
Objective of an enterprise To create the best possible values and share them in the equitable manner among all the stakeholders
Profits are a primary mechanism for motivating any business activity.
Does it mean that
Profit = Wealth ?
It is a short term goal It can be achieved at the expense of long tern profitability of the entity It simply ignores the importance of risk and return It ignores timing of the returns
CA V.K.Mahipal; vkmahipal@in.com; 9246334840
It is a long term goal It can be achieved by maximizing the market value of the firm / share price. It recognizes risk and return It recognizes the timing of the returns
Accounting is the language of business. Finance uses accounting information together with other information to make decisions that affect the market value of the firm. There are three primary decision areas that are of concern.
Investment decisions - What assets should the company hold? Financing decisions - How should the company pay for the investments it makes? Dividend decisions - What should be done with the profits of the business?
When stockholders are dissatisfied they will simply sell their stock shares. This action by stockholders will cause the market price of the companys stock to fall.
The
process of financial management is associated with financial planning and financial control.
Financial
planning seeks to quantify various financial resources available and plan the size and timing of expenditures.
Financial control refers to monitoring cash flow. Inflow is
the amount of money coming into a particular company, while outflow is a record of the expenditure being made by the company. Managing this movement of funds in relation to the budget is essential for a business.
The two main aspects of financial management are procurement of funds and an effective use of funds to achieve business objectives. The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities. Financial accounting is performed according to Generally Accepted Accounting Principles (GAAP) guidelines.
Accounting and Finance often focus on different things. Finance is more focused on market values rather than book values. Finance is more focused on cash flows rather than accounting income.
Book values are often based on dated values. They consist of the original cost of the asset from some past time, minus accumulated depreciation (which may not represent the actual decline in the assets value). Maximization of market value of stockholders shares is the goal of the firm. the
Cash flow to stockholders (in the form of dividends) is the one of the common basis for valuation of the common stock shares. Since the goal is to maximize stock price, cash flow is more directly related than accounting income. Accounting methods recognize income at times other than when cash is actually received or spent.
When cash is actually received is important, because it determines when cash can be invested to earn a return. Also: When cash must be paid determines when we need to start paying interest on money borrowed.
Credit sales are recognized as accounting income, yet cash has not been received. Depreciation expense is a legitimate accounting expense when calculating income, yet depreciation expense is not a cash outlay. A loan brings cash into a business, but is not income.
When new capital equipment is purchased, the entire cost is a cash outflow, but only the depreciation expense (a portion of the total cost) is an expense when computing accounting income. When dividends are paid, cash is paid out, though dividends are not included in the calculation of accounting income.
Mobilization of Funds Finance Manager has to plan and mobilize the required funds from various sources (issue of shares, debentures, Bank loans, Loans from Financial Institutions) when they are required and at an acceptable cost. This decision is called financing decision.
Deployment of Funds Finance Manager, in consultation with the various departmental heads, has to decide on the manner of deployment of funds in various assets such as land, building, machinery, stock etc. This decision is called investment decision.
Control Over the use of Funds
Once the funds are procured and deployed, the FM has to continuously monitor their use in order to ensure that procurement and deployment of funds proceeds according to the plan. This task is called Financial Control. The FM sends frequent reports (known as Control Reports) to the MD. These reports contain information related to the extent to which the procurement and deployment of funds is proceeding according to the plan, fund requirement at different dept. levels, fund due to suppliers and due from customers, etc..
Maintaining a balance between Risk and Return ( Risk Return Trade Off) FM has to decide whether the investment opportunity is worth more than its cost and whether the additional burden of debt can be safely borne. If the firm borrows heavily to finance its operations and thing dont work out as planned then the firm is unable to meet out its obligations then the firm is even exposed to the risk of insolvency.
The Objective of Financial Management is to maximize the wealth of the owners (shareholders) by increasing the value of the firm which is reflected in its EPS and the market price of the share.
Some of the key challenges faced by FM are

Striking
a balance between risk and return - maintain adequate control (voting rights) over the business. Restructuring - in terms of proper mix of capital and debt if interest cost is to high then capital would be a better option. share price - by adopting appropriate dividend and bonus policies.
Foreign Exchange Fluctuation - proper use of Hedging Financial
Maintain
Allows managers to evaluate the profitability & solvency of a business Allows sound economic decisions Integrate financial concepts and policies into the management decision and budgeting process Evaluate the financial viability of projects and activities. Employ cash flow to analyze business status Calculate the cost of business activities Control business through effective budget management
Conflict
arises when the people (agents) entrusted to look after the interests of others(principals) use their authority given by their principals for their own benefit instead.
It
is pervasive problem which exists in every type of organizations.

Also
called principal agent problem , principal agency problem.

Organizations
try to solve it by instituting measures such as: - Tough screening processes - Incentive for good behavior - Punishment for bad behavior - Watchdog bodies etc.
No
organization can remedy it 100% because the cost of doing so sooner or later outweigh t he worth of the result.
Strategic
Corporate Finance is related to identifying possible strategies and methodologies that can maximize the market value of a particular organization. not only involves allocation of limited sources of capital among the competing opportunities, but also encompasses monitoring and implementation of chosen strategies for achieving the desired objectives.
It
Strategic Corporate Finance function includes the following decisions: deal with the sources of finance. The capital structure that maximizes the market vale of the company is selected. decisions: deals with best usage of the companys funds, particularly in the long-term capital projects. These projects are evaluated with relation to their anticipated risks and returns. Dividend decisions: deals with division of income between payments to the share holders and re-investment in the organization. Although both dividends and growth are desirable, the goals are usually conflicting to each other. CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840
Investment Financial
Ability to raise short term and long-term capital To maintain good corporate level resource. To know the cost of capital relative to industry. Tax consideration. To know the leverage position: capacity to utilization financial strategies, like lease or sale and lease back. To aware of the cost of entry and barriers of the entry. To know the price earning ratio. Present working capital position of the organization. Effective cost control and ability to minimize cost of expenditure for production of goods and service.
Thank You & Have a nice Day


Intro To Finance

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CA V.K.Mahipal; vkmahipal@in.

com, 9324633 4840

Business & its objectives Meaning of Corporate Finance Agency Problem

CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840

Industry activity concerned with production or possessing of

To do business is to create an economic entity with the purpose of

CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840

Profits are a primary mechanism for motivating any business activity.

Does it mean that

CA V.K.Mahipal; vkmahipal@in.com; 9246334840

CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840

CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840

CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840

Control Over the use of Funds

CA V.K.Mahipal; vkmahipal@in.com, 9324633 4840

Some of the key challenges faced by FM are

Foreign Exchange Fluctuation - proper use of Hedging Financial

is pervasive problem which exists in every type of organizations.

called principal agent problem , principal agency problem.

Thank You & Have a nice Day

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