Page 20 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 1: Introduction to Financial Management

Bhatt Industries is a corporation and pays a 30 per cent tax on income, because of the Notes
paperwork involved. Mr. Bhatt invests his excess cash on September 6 in one year treasury
bonds. He does not invest for shorter periods.
Questions
1. How does this level affect long-term prospects of wealth maximization?
2. What should be the level of production to maximize the profit?

1.5 Summary

 Financial Management is broadly concerned with the acquisition and use of funds by a
business firm.
 It has been traditionally argued that the objective of a company is to earn profit. This
means that the finance manager has to make decision in a manner that the profit is
maximised.
 The alternative to profit maximization is wealth maximization. This is also known as
Value maximization or Net Present Worth maximization.
 The important aspects of the finance function have to be carried on by the top management
i.e., the Managing Director and the Board of Directors.

 Finance is defined as the lifeblood of an organization. It is a common thread, which binds
all the organizational functions as each function when carried out creates financial
implications.
 The three most common forms of business organization are sole proprietorship,
partnership and the company.

 In the area of financing, funds are procured from long-term sources as well as short-term
sources.
 For evaluating investment decisions, a finance manager uses various methods such as
average rate of return, payback, internal rate of return, net present value and profitability
index.
 In the area of dividend decision, a firm is faced with the problem of declaring dividend or
postponing dividend declaration, a problem of internal financing.

1.6 Keywords

Corporate Finance: Corporate finance is the activity concerned with planning, raising, controlling
and administering of the funds used in the business.

Dividend: Dividend is a part of profits that are available for distribution to shareholders.
Financial Management: It is the operational activity of a business that is responsible for obtaining
and effectively utilising the funds necessary for efficient operations.

Financing Decision: It is related to the financing mix or capital structure or leverage and the
determination of the proportion of debt and equity.
Investment Decision: Investment decision is related with the selection of assets, that a firm will
invert.
Wealth Maximization: It is maximizing the present value of a course of action (i.e. NPV = GPC
of benefits – Investment).

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