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Unit 1 Financial Management Introduction Notes

The document outlines the fundamentals of financial management, focusing on investment, financing, and dividend decisions, as well as capital budgeting and working capital management. It emphasizes the objectives of profit and value maximization, the role of the CFO, and the importance of the financial environment and time value of money. Additionally, it discusses compounding and discounting techniques, along with the risk-return relationship in decision-making.

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5 views2 pages

Unit 1 Financial Management Introduction Notes

The document outlines the fundamentals of financial management, focusing on investment, financing, and dividend decisions, as well as capital budgeting and working capital management. It emphasizes the objectives of profit and value maximization, the role of the CFO, and the importance of the financial environment and time value of money. Additionally, it discusses compounding and discounting techniques, along with the risk-return relationship in decision-making.

Uploaded by

kumarsinghashutosh1007
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

UNIT 1 – FINANCIAL MANAGEMENT

CHAPTER 1 – INTRODUCTION & BASIC CONCEPTS

Financial  
Management  
Functions  

Investment   Financing   Dividend  


Decisions   Decisions   Decisions  

Capital  
Budgeting  

Working  capital  
management  

Objectives of the Firm:


• Profit maximisation – Financial management has to endeavour for maximising the rupee
income of the firm. The firm must maximise output out of scarce resources and minimise cost of
production in order to achieve this objective.
• Value maximisation – Emphasizes on time value of money. It means maximisation of the net
present value.
W=V–C
Where, W = net present value
V = gross present value of benefit
C = total value of investment required to acquire the asset or to purchase the
course of action

Role of Chief Financial Officer:


• Development of new financial system
• Emergence of financial service sector
• Recent innovations and development of financial tools, techniques, instruments, & products

Financial environment:
Financial environment refers to that environment, which consists of those factors of economic
environment that influence the financial activities of industry, trade, and commerce.

Time value of money:


It refers to the concept that money available at the present time is worth more than the same sum of
money in the future due to its potential earning capacity.
UNIT 1 – FINANCIAL MANAGEMENT
CHAPTER 1 – INTRODUCTION & BASIC CONCEPTS

Reasons for time value of money:


• Inflation
• Most individuals in general have subjective preference for present consumption over future
either because of the urgency of their consumption or because of the uncertainty of the future
• Where the money is receivable after a long time-gap, the receivable may lose the opportunities
of investing it in a more profitable manner

Compounding techniques:
• Graphical view of future value growth
• Rule of 69 or 72
• Shorter compounding year
• Nominal rate and effective rate

Discounting technique:
• Present value of a single cash flow
• Perpetual annuity

Risk return relationship:


Frequently non-financial decisions involve choice among different alternative courses of action such
as –
• Selection of plant capacity
• Fixation of a debt equity mix
• Adoption of a restrictive or liberal credit policy
• Fixation of a dividend policy
Different alternative courses of action have a different combination of risk and return associated to
it. Proper balance between risk and return is necessary for the satisfaction of shareholders wealth
maximization objective. Such a balance is called risk return tradeoff.

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