Overview of Corporate Finance
By
Prof. Anirban Dutta
Scope of Financial Management
• The scope of the financial management is to
secure the capital needed by the enterprise,
and employ it in production and marketing
activities, in such a way that it can generate the
sufficient returns on invested capital, with an
intention to maximise the wealth of the
owners.
Role of Financial Manager
• The financial manager plays the crucial role in
the modern enterprise by supporting
investment decision, financing decision, and
also the profit distribution decision.
• He/she also helps the firm in balancing cash
inflows and cash outflows, and in turn to
maintain the liquidity position of the firm.
Modern vs. Traditional Financial Manager
Traditional Financial Manager Modern Financial Manager
• Generally involved in the • Takes an active role in
regular finance activities, financing, investment,
e.g., banking operations, distribution of profits, and
record keeping, liquidity decisions. In
management of the cash addition, he/she is also
flow on an regular basis, involved in the custody and
and informing the funds safeguarding of financial
requirements to the top and physical assets, efficient
management, etc. allocation of funds, etc.
Role of Financial Manager in a Diversified Firm
• The role of financial manager in case of
diversified firm is more complicated in
comparison with a small and medium size firm.
• A diversified firm has several products and
divisions and varied financial needs.
• The conflicting interests of divisional managers
make the work of financial manager quite
difficult in a diversified firm.
Basic Financial Decisions
• The basic financial decisions include the
following:
– long-term investment decision,
– capital structure decision, (i.e., financing decision),
– profit allocation decision (i.e., dividend
distribution decision), and
– liquidity decision.
Profit Maximization vs. Wealth
Maximization
• Profit Maximization:
– The profit maximising objective tries to maximise the profit after
tax, i.e., net profit, which in the long term may reduce the net
worth of the owner. The profit maximisation concept basically
ignores the time value of money and the risk involved in firm's
activities, which are very well taken care by wealth
maximisation concept.
• Wealth Maximization:
– The wealth maximising objective means maximising the net
present value, i.e., wealth of the owner. The net wealth of the
owner is the difference between the present value of its benefits
and the present value of its costs.
– Any action that has a positive NPV creates wealth for the owner.
Goal Congruence
• The company is a complex organisation of various
interested stakeholders like owners, employees, creditors,
customers and government, etc.
• It should be the endeavour of the management to reconcile
the objectives of the different stakeholders.
• Shareholders are principals and managers are their agents.
• Managers may not necessarily work in the interest of
shareholders. They may work in their self-interest and
appropriate company funds in the form of higher perks
and salaries.
Goal Congruence
• To control managers’ actions, shareholders will have to
incur monitoring costs. To minimise the conflict,
managers should be given incentives to become owners
along with shareholders (through stock options).
• Since shareholders get their wealth only when the firm
has created value for customers and kept the employees
satisfied, the wealth maximisation is generally in
harmony with the interests of all stakeholders. It is also
consistent with the management objective of survival.
Case Study
1. “Bamboozling: A Field Guide”, Geoffrey
Colvin, Fortune, July 8, 2002
2. “Don’t Get Burned”, Shawn Tully, Fortune,
February 18, 2002
3. “IAG Co Ltd. - A Prospective Turnaround
Case. Read on!”, Ekansh Mittal, Multibagger
Pennystocks, December 1, 2009
