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Unit 1: Introduction to Financial Management



            The important issues relating to maximizing share prices are Economic Value Added (EVA) and  Notes
            the focus on stakeholders.




               Notes  Economic Value Added (EVA) is a popular measure used by many firms to determine
              whether an investment –  proposed or existing – contribute positively  to the  owner’s
              wealth. EVA is calculated by subtracting, the cost of funds used to finance or investment
              from its after-tax-operations profits. Investments with positive EVA increase shareholder
              value as those with negative EVA reduce shareholders value.


                   Example:  The EVA of an investment with after tax operations profits of   510,000 and
            associated financing costs of   475,000 would be   35,000 (i.e.   410,000 – 375,000). Because this
            EVA is  positive, the  investment is  expected to  increase owner’s wealth  and is,  therefore,
            acceptable.

            What about Stakeholders?
            Stakeholders are groups such as employees, customers, suppliers, creditors, owners and others
            who have a direct economic link to the firm. A firm with a stakeholder focus, consciously avoids
            actions that would prove detrimental to stakeholders. The goal is not to maximize stakeholder
            well  being but  to preserve it. It is expected to provide  long-run benefit  to shareholders  by
            maintaining positive stakeholder relationships. Such relationship should minimize stakeholder
            turnover, conflicts and  litigation. Clearly, the firm  can better achieve its goal of  shareholder
            wealth maximization by maintaining cooperation with other stakeholders rather than having
            conflict with them.



              Did u know?  Besides the above basic objectives, the following are the other objectives of
              financial management:
              1.   Building up reserves for growth and expansion.

              2.   Ensuring maximum operational efficiency by efficient and  effective utilization of
                   finance.

              3.   Ensuring financial discipline in the management.

            The Role of Ethics
            Ethics is standards of conduct or moral judgment. Today, the business community in general
            and the financial community in particular are developing and enforcing ethical standards, purpose
            being to motivate business and market participants to adhere to both the letter and the spirit of
            laws and regulations concerned with  business and professional practice. An effective  ethics
            programme is believed to enhance corporate value. An ethics programme can reduce potential
            litigation  and judgment costs, maintain  a positive  corporate image,  and build shareholders’
            confidence, and gain the loyalty, commitment and respect of the firms stakeholders. Such actions,
            by maintaining and enhancing cash flow and reducing perceived risk, can positively affect the
            firm’s share prices. Ethical behaviour is, therefore, viewed as necessary for achieving the firm’s
            goal of owner wealth maximization.






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