Page 16 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Self Assessment

Fill in the blanks:
9. Financial management can be divided into three major decisions which are investing;
Financing; and ……………decision.
10. Identification of sources of finance and determination of financing mix is a part of …………
decision.

11. Finance is defined as the ……………of an organization.
12. ………………decisions determine both the mix and the type of assets held by the firm.

1.4 Supplementary noteworthy Aspects related to Financial
Management
Modern financial management has come a long way from the traditional corporate finance.
The finance manager is working in a challenging environment, which changes continuously. As
the economy is opening up and global resources are being tapped, the opportunities available
to finance manager have no limits. At the same time one must understand the risk in the
decisions. Financial management is passing through an era of experimentation and excitement,
as a large part of the finance activities carried out today were not heard of a few years ago.

A few instances are enumerated below:
1. Interest rates have been deregulated. Further, interest rates are fluctuating, and minimum
cost of capital necessitates anticipating interest rate movements.

2. The rupee has become freely convertible in current account.
3. Optimum debt equity mix is possible. Firms have to take advantage of the financial
leverage to increase the shareholders wealth. However, financial leverage entails financial
risk. Hence a correct trade off between risk and improved rate of return to shareholders is
a challenging task.
4. With free pricing of issues, the optimum price of new issue is a challenging task, as
overpricing results in under subscription and loss of investor confidence, whereas
underpricing leads to unwarranted increase in a number of shares and also reduction of
earnings per share.
5. Maintaining share prices is crucial. In the liberalized scenario, the capital markets are the
important avenue of funds for business. The dividend and bonus policies framed have a
direct bearing on the share prices.
6. Ensuring management control is vital, especially in the light of foreign participation in
equity (which is backed by huge resources) making the firm an easy takeover target.
Existing managements may lose control in the eventuality of being unable to take up the
share entitlements. Financial strategies to prevent this are vital to the present management.

1.4.1 Methods and Tools of Financial Management

1. In the area of financing, funds are procured from long-term sources as well as short-term
sources. Long-term funds may be made available by owners, i.e., shareholders, lenders
through issue of debentures/bonds, from financial institutions, banks and public at large.
Short-term funds may be procured from commercial banks, suppliers of goods, public
deposits etc. The finance manager has to decide on optimum capital structure with a view

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