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Introduction

1) The document introduces strategic financial management and discusses how financial objectives should maximize shareholder wealth through optimal investment and financing decisions that balance risk and return. 2) Financial managers are responsible for making investment and financing decisions using risk-adjusted models to generate sufficient cash returns to satisfy shareholders and other stakeholders like creditors, employees, and society. 3) The two key functions of financial management are the investment policy, which selects projects to maximize returns, and the finance policy, which identifies funding sources and mixes them to minimize costs while sustaining investment.

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Lara Lewis Achilles
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4 views13 pages

Introduction

1) The document introduces strategic financial management and discusses how financial objectives should maximize shareholder wealth through optimal investment and financing decisions that balance risk and return. 2) Financial managers are responsible for making investment and financing decisions using risk-adjusted models to generate sufficient cash returns to satisfy shareholders and other stakeholders like creditors, employees, and society. 3) The two key functions of financial management are the investment policy, which selects projects to maximize returns, and the finance policy, which identifies funding sources and mixes them to minimize costs while sustaining investment.

Uploaded by

Lara Lewis Achilles
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

INTRODUCTION TO STRATEGIC FINANCIAL MANAGEMENT

the emphasis is on how strategic financial decisions should be made by management

Financial objectives and shareholder wealth


Management are ultimately responsible to whom???? Rational and risk-averse Maximize their wealth by selecting optimum investment and financing opportunities, using financial models that maximize expected returns at minimum risk Risk vs return

Normative objective of financial management


Implement investment and financing decisions using risk-adjusted wealth maximizing criteria, which satisfy the firms owners by placing them all in an equal, optimum financial position

Other stakeholders of the firm


Alternative providers of capital Creditors Employees Customers Government Society

Shareholder maximization

In our ideal world, firms exist to convert inputs of physical and money capital into outputs of goods and services that satisfy consumer demand to generate money profits. * economic resources vs societys demand * money capital is typically the limiting factor - the strategic problem for financial management is how limited funds are allocated between alternative uses

market price of equity (shares) acts as a control on managements actions the law of demand and supply

Wealth creation and value added


Financial managers maximize stakeholder wealth by generating cash returns that are more favorable than those available elsewhere. Sources of capital Debt Equity Element of government aid

Firms should generate profit that at least equal their overall cost of capital to have (EVA) Demand for a companys shares, driven by its EVA , should then rise The market price of shares will also rise creating (MVA) fair pricing function.

The investment and finance decision


The two distinct but inter-related functions: Investment policy- selects an optimum portfolio of investment opportunities that maximize anticipated net cash inflows at minimum risk Finance policy- identifies potential fund sources required to sustain investment, evaluates the riskadjusted returns expected by each and then selects the optimum mix that will minimize their overall weighted average cost of capital (WACC)

How are the 2 functions related?


Financial returns required by capital providers must be compared to its business returns from investment proposals to establish whether they should be accepted.

Two broad categories of investment and financial decisions


Longer term (strategic) Involves significant fixed asset expenditure but uncertain future gains Subsequent penalty for error can be severe; in the extreme corporate death Short term (operational) The domain of working capital management Repetitious, divisible, and funds may be acquired piecemeal Cost and returns are usually quantifiable

Investment and financial decision process always involve:


Continual search for investment opportunities Selection of most profitable opportunities Determination of optimal mix of internal and external funds required to finance those opportunities Establishment of a system of financial controls governing the acquisition and disposition of funds Analysis of financial results as a guide to future decision-making

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