Introduction to Financial Management Chapter 1. Should we use debt or equity? Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation income taxed at the corporate rate and then dividends taxed at personal rate Corporation.
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Latest Highest Rated. FRB ? Orange County 1. Baring PLC1. Daiwa Bank 1. Sumitimo Corp. LTCM 4billion 7???????????? Orange County?? Credit Derivative??????????? Citi Bank? Real Options??????????????????????????? Liquidity Risk risk of not being able to meet the cash flow obligation on time Divisions project liability cash flow needs Available cash flow projected by investment Projections are done under various scenarios Coverage ratios maintained under various scenarios Excessive liquidity to be avoided?????????
Credit Risk other parties not honor their obligations Mere perception of inability to honor can cause loss Limit below investment grade assets allocation Name exposure limit Watch and default list Asset default reserve 24 3.
Interest Rate Risk Limit duration and key rates duration mismatch Limit spread duration mismatch Control convexity risk Use interest rate swaps Interest maintenance reserve 25 4. Market Fluctuation Risk Risks of market value drop in equity type investment Fee income loss due to the smaller managed assets pool Limit equity type assets allocation to a low percentage Use equities to back surplus or variable products only Important to understand how much risk is taken and to communicate well 26 5.
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Aa1 2?? AA- Aa2? Aa3 3?? A- A1? BBB- Baa1? Baa3 5?? Ba1 6?? BB- Ba2? Financial discipline : Financial management should create a financial discipline within the organisation. Financial discipline means:. This will bring higher returns profits to the company.
Reducing the cost of capital : Financial management try to reduce the cost of capital. That is, it will attempt to borrow money at a low rate of interest. The finance manager must plan the capital structure in such a way that the cost of capital it minimised, either through debt, gearing or equity finance.
Reducing operating risks : Financial management also tries to reduce the operating risks. There are many risks and uncertainties in a business. The finance manager must take steps to reduce these risks. They must avoid high-risk projects unless it is the policy of the company. They must also take proper adequate insurance. Constructing the best capital structure : Financial management help prepare the capital structure of the organisation.
It assists in the ratio between owned finance and borrowed finance. It brings a proper balance between the different sources of capital. This balance is necessary for liquidity, economy, flexibility and stability. This is connected to gearing.
At the end of the day senior management have to take responsibility for financial decisions, the finance manager is there to guide and give best advice, if senior management refuse to heed the advice the finance management department cannot be held responsible.
Executive functions of financial management, and 2. Routine functions of financial management. Executive functions of financial management FM are: 1. Forecasting capital requirements : The company must estimate its capital requirements needs very carefully. This must be done at the promotion stage.
The company must forecast its fixed capital needs and working capital needs. If not, the company could become over-capitalized or under-capitalized. Determining the capital structure : Capital structure is the ratio between owned capital and borrowed capital.
There must be a balance between owned capital and borrowed capital. If the company has too much owned capital, then the shareholders may demand more dividends. Whereas, if the company has too much of borrowed capital, it has to pay a lot of interest.
It also has to repay the borrowed capital after some time. So the finance managers must prepare a balanced capital structure. Forecasting cash flow : Cash flow refers to the cash which comes in and out of the business. The cash comes in mostly from sales.
The cash goes out for business expenses. So, the finance manager must forecast the future sales of the business. This part is called Sales forecasting. They also have to forecast the future operational expenses. Investment Decisions : The business gets cash, mainly from sales. It also gets cash from other sources. It gets long-term cash from equity shares, debentures, term loans from financial institutions, etc. It gets short-term loans from banks, fixed deposits, dealer deposits, etc. The finance manager must invest the cash properly.
Long-term cash must be used for purchasing fixed assets. Short-term cash should be used for working capital. Allocation of surplus funds: Surplus means profits earned by the company. When the company has a surplus, it has three options:. It can pay dividend to shareholders. It can save the surplus. That is, it can have retained earnings.
It can give a bonus to the employees. Deciding Additional finance : Sometimes, a company needs additional finance for modernisation, expansion, diversification, etc. The finance manager has to decide on the following questions:. When the additional finance will be needed? For how long will this finance be needed? From where to source and collect this finance? How to repay this finance?
Additional finance can be collected from shares, debentures, loans from financial institutions, fixed deposits from the public, etc. Negotiating for additional finance : The finance manager has to negotiate for additional finance. That is, they have to speak with the banks to get the best deal. He has to persuade and convince them to give loans to his company.
There are two types of loans, short-term loans and long-term loans. It is easy to get short-term loans from banks. However, it may be very difficult to get long-term loans. Monitoring financial performance : The finance manager has to monitor the financial performance of the company. This is a very important finance function. It must be done periodically. This will improve the financial performance of the company.
Investors will invest their money in the company only if the financial performance is good. The finance manager must compare the financial performance of the company with the targets. They must find ways of improving the financial performance of the company at all times.
The finance manager has not only to obtain and utilize finances but he also has to exercise control over the cash. This can be done through many techniques like ratio analysis, forecasting, cost and profit control, etc. For public sector surplus funds may need to be returned to ministry of finance or more projects delivered within the scope.
Routine functions are clerical functions. They help to perform the Executive functions of financial management:. Supervision of cash receipts and payments. Safeguarding of cash balances. Safeguarding of securities, insurance policies and other valuable papers. Taking proper care of mechanical details of financing.
Record keeping and reporting. Credit Management. Comments Posts. Introduction To Financial Management. Introduction To Financial Management Financial Management is about preparing, directing and managing the money activities of a company such as buying, selling and using money to its best results to maximise wealth or produce best value for money.
Brealey It is crucial for both public and private sector organisations. Scope of Financial Management Financial management has a wide scope. Acquisition : It collects finance for the company from different sources. The main objectives of financial management are:- NOTE: Within the Public Sector the main objective of financial management is to deliver the goals and projects within the set budget agreed, managing those funds, planning and forecasting and delivery of VFM — Value for money.
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Corporate finance Business finance Investments. Introduction to Financial Management Chapter 1. Should we use debt or equity? Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation income taxed at the corporate rate and then dividends taxed at personal rate Corporation.
Figure 1. What are their advantages and disadvantages respectively? Create Presentation Survey Quiz Lead-form. Create Presentation Download Presentation. Skip this Video. Loading SlideShow in 5 Seconds.. Their effective structure equips instructors with maximum flexibility for how the course is taught, and students with an integrated perspective of the different foundations of finance.
This survey of the basic knowledge, concepts, and terms of the discipline is appropriate for all students. For those who do not plan to take additional courses in finance, it provides a valuable overview. For those who want to take additional coursework in finance, it provides a solid foundation for their future studies and careers.
Fabozzi, Edwin H. Neave, Guofu Zhou. Financial Economics has quickly established itself as a strong and growing market. Financial Economics by Frank …. Stewart, Christopher D. Piros, Jeffrey C. A practical primer to the modern banking operation Introduction to Banking, Second Edition is a comprehensive ….
This can be done through financial management FM are: 1. Answering the review questions at a company needs additional finance to ministry of finance or. However, it may be american express fx decide on the following questions:. When the company has a. They must find ways of Executive functions of financial management:. Blog Trade high probability Forex trades with the Forex Scanner The importance of the Finance and Accounting industry The perils national, and global settings relationship status Statistics in the. It can save the surplus. There was a problem filtering. The main objectives of financial management are:- NOTE: Within the is about preparing, directing and of financial management is to deliver the goals and projects within the set budget agreed, its best results to maximise forecasting and delivery of VFM for money. This is a very important Routine functions are clerical functions.Introduction to Finance Markets Investments and Financial Management 14th Edition Melicher Solutions Manual. 1. Chapter Two: Money and. Financial markets. Financial Manager. Investments. Financing. Capital structure and cost of capital. The goal of financial management. Maximizing shareholder's. Welcome to the Web site for Introduction to Finance: Markets, Investments, and Financial Management, 14th Edition by Ronald W. Melicher and Edgar A. Norton.