Class notes
Notes
- Course
- Institution
- Book
Lecturer notes on Financial Mana calculations, concepts and theories.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Notes
-
Notes
-
Notes
Seller
Follow
mainluxx
Content preview
CHAPTER1FINANCIAL MANAGEMENT OVERVIEW
NOTES
OUTCOMES
• Define financial management.
• What is Financial Management?
• Why is the objective of financial management to maximize the value of the firm?
• What is the role of a financial manager?
• What is the relationship of corporate finance to accounting and economics?
• What are the various forms of business organization?
• How do agency issues that arise between managers and owners impact on wealth maximization?
• What are some of the underlying concepts of financial management?
• What is the role of corporate governance and King III?
• How does a firm decide on its corporate strategy?
• What is the role of ethics in business?
Introduction
Financial management is concerned with the acquisition, financing, and management of assets with
some overall goal in mind. Thus the decision function of financial management can be broken down
into three major areas: the investment, financing, and asset management decisions (Van Horne and
Wachowics, 2008:2).
The fundamental objective of financial management is to seek to maximise the value of the firm and
thereby maximising the shareholders’ value and the share price. “Financial management focuses on
decision making gave readily available information and other information that may be not available.”
(Correira, 2019). The major question to be answered is how the management can invest capital to
earn returns that are above the cost of capital given the underlying risks of the company’s
investments.
, The objective of financial management to maximize the value of the firm!
The investment decision is the most important of the firm’s three major decisions when it comes to
value creation. It begins with a determination of the total amount of assets needed to be held by the
firm. Picture the firm’s balance sheet in your mind for a moment. The financial manager needs to
determine the dollar amount of assets – that is, the size of the firm. Managers decide the
composition of the assets. For example, how much of the firm’s total assets should be devoted to
cash or to inventory? Also, the flip side of investment – disinvestment – must not be ignored. Assets
that can no longer be economically justified may need to be reduced, eliminated, or replaced.
The objective of financial management to maximize the value of the firm!
Financial decision efficiency must be made in light of some standard. Although various objectives are
possible, we assume in this book that the goal of the firm is to maximize the wealth of the firm’s
present owners.
Shares of common stock give evidence of ownership in a corporation. Shareholder wealth is
represented by the market price per share of the firm’s common stock, which, in turn, is a reflection
of the firm’s investment, financing, and asset management decisions. The idea is that the success of
a business decision should be judged by the effect that it ultimately has on share price.
DISCUSION FORUM QUESTION
Why is profit maximization not the right objective for corporate firms?
• Manipulation of accounting profits- management increase profitability by reducing costs.
This has an impact on future profits and may result in decrease in quality e.g. reducing
research and development costs of a pharmaceutical company. Maximizing profits by
retaining profits has a detrimental effect on shareholders who are not getting return on
investment.
• Accounting profits depend on accounting policies and management selection of policies may
not reflect economic reality. E.g when to expense cost of assets( depreciation)
• Timing- profit maximization does not factor in time value of money. If a project promises to
give the firm a higher profit in a short term it will be preferred over another with low profits
but for a longer period.
• Cash flows - accounting profits does not factor in flow of cash
• Accounting profits factor in actual costs but are not adjusted for cost of capital financing
which is an opportunity cost of shareholders’ funds.
• Risk impact of risk is ignored by profit maximization
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller mainluxx. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $16.55. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
64438 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now