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LECTURE NOTES

Tasneema Afrin

Assistant Professor

IBA,DU

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THE ROLE OF FINANCIAL MANAGEMENT

Van Horne & Wachowicz #1

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Financial Management

Decision Functions

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  • Investment Decision
  • Size of firm
  • Composition of assets
  • Disinvestment
  • Financing Decision
  • Capital structure
  • Dividend & RE policy
  • Acquisition of needed fund
  • Asset Management Decision
  • Focus more on CA
  • Acquisition of assets
  • Financing of assets
  • Management of assets

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The Goal of the Firm

Shortcomings of Profit Maximization

  • Managers may continue to show profit by issuing stock
  • Decrease in EPS

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Shortcomings of EPS Maximization

  • Duration and TVM
  • Risk of earnings
  • Dividend policy

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Market price appreciation and value creation should be the ultimate goal of the firm.

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  • Profit Maximization (Short term)
  • Wealth Maximization (Long term)
  • EPS
  • Market price appreciation

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Agency Conflict

  • Agency conflict arises between agents and principal
  • Conflict of goals- profit maximization vs wealth maximization
  • Appropriate incentives to resolve conflicts
  • Monitoring and Governance & disclosures
  • Efficient Capital Market
  • Managerial Labor Market
  • Social Responsibility (stakeholders)

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  • Agents are appointed by the principal to act on behalf of the principal
  • Agents are managers
  • Principals are owners

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