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FINANCIAL
MANAGEMENT
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Introduction: Defnition, Scope and Objective o
Financia! Mana"e#ent$ %a&ic Financia! Concept&
Lon" Ter# Source& O Finance
Capita! %ud"etin" 'rincipa! Tec(ni)ue&
Concept and Mea&ure#ent o Co&t o Capita!
Ca&( F!o*& For Capita! %ud"etin"
Financia! State#ent and Ana!+&i& Levera"e and Capita! Structure Deci&ion
or-in" Capita! Deci&ion
Dividend 'o!ic+
S+!!abu&
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FORMS OFFORMS OF
BUSINESSBUSINESS
ORGANIZATIONORGANIZATION
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FO.MS OF %/SINESSO.GANI0ATION
Three Organizational Forms
developed by Business Owners
Sole Proprietorship
General Partnership
Corporation
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FO.MS OF %/SINESSO.GANI0ATION
DEF!TO!S
Sole
Proprietorship
General
Partnership
Corporation
"ny BusinessOwned and
Operated by anndividual
Two or #orePersons
Operating aBusiness $or a
Pro$it
%egislativelyCreated and&egulated
Governan'e(Ownership and
Finan'ialStru'ture
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FO.MS OF %/SINESSO.GANI0ATION
FO"TO!
SoleProprietorship
GeneralPartnership Corporation
!o Formalities or%egal
Do'umentation)#ay be mplied$rom Condu't or
"'tions
*ritten or Oral"greement or
#ay be mplied$rom Condu't or
"'tions
Filing o$ "rti'leso$ n'orporation
with Se'retary o$State andPayment o$
Fees
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FO.MS OF %/SINESSO.GANI0ATION
GO+E&!!G DOC,#E!TS
Sole
Proprietorship
General
Partnership Corporation
!one &e-uired
!one &e-uired)#ost have
"greementspe'i$ying &ights(
Duties andObligations
"rti'les o$n'orporation
'reateCorporation)
Bylaws pres'ribeits Operation
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FO.MS OF %/SINESSO.GANI0ATION
!"T,&E OF O*!E&S.P
SoleProprietorsh
ip
General
PartnershipCorporation
*holly Owned
by Singlendividual
For Contribution(Partner re'eives
Proportionate Shareo$ Pro$its/%ossesand Partnership
Property
&esidual Claim onCorporate E-uity
and &ight to +ote$or Dire'tors andEssentialGovernan'e
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FO.MS OF %/SINESSO.GANI0ATION
%"B%T0
SoleProprietors
hip
GeneralPartnership
Corporation
Sole Proprietor
Personally%iable $or "llDebts and
Obligations
Partners are 1ointly
and Severally %iable$or all PartnershipObligations( in
Contra't and in Tort
Shareholder2s
%iability limited toE3tent o$ CapitalContribution4%imited %iability5
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FO.MS OF %/SINESSO.GANI0ATION
T"6"TO!
SoleProprietors
hip
General
PartnershipCorporation
!ot a Ta3able
Entity) n'ome7%oss8 passesthrough to Sole
Proprietor
Partnership not aTa3able Entity)
"llo'ations o$n'ome and %oss
allowed withinPartnership be$ore
Pass9Through
Corporation ta3edas Separate EntityandDividends/CapitalGains also Ta3ed4Double Ta3ation5
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FO.MS OF %/SINESSO.GANI0ATION
#"!"GE#E!T
Sole
Proprietorship
GeneralPartnership Corporation
Sole Proprietorhas Complete#anagement
Control
"ll Partners have
E-ual &ights inPartnership2s
#anagement andCondu't
#anaged by Boardo$ Dire'tors ele'tedby Shareholders)Board may Delegate"uthority to
"ppointed O$$i'ers
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FO.MS OF %/SINESSO.GANI0ATION
T&"!SFE& O*!E&S.P !TE&ESTS
SoleProprietorshi
p
General
Partnership
Corporation
SoleProprietorship not
Trans$erable)Property andProdu'ts areTrans$erable
%imited &ight o$
Trans$er sub:e'tto Consent by all
Partners
FreelyTrans$erable
through Formal7!0SE8 andn$ormal 7PrivateE-uity8 Capital
#ar;ets
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FO.MS OF %/SINESSO.GANI0ATION
*T.D&"*"% OF O*!E&
Sole
Proprietorship
GeneralPartnership Corporation
Terminates SoleProprietorship
Partner Death or*ithdrawal may
TerminatePartnership
Corporation has,nlimited %i$e
I t t
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De&pite o t(e variation& bet*eenbu&ine&&e& t(e ba&ic fnance i&&ue& t(e+
ace are e&&entia!!+ t(e &a#e$ T(e #o&t i#portant activitie& o a bu&ine&&
fr# are
Intro uct on
I t d ti
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Financia! Mana"e#ent peror#& aci!itation,reconci!iation and contro!& unction& in an
or"ani1ation$ A!! t(e deci&ion (avin" #onetar+ i#p!ication&
co#e& under t(e purvie* o fnancia!#ana"e#ent$
Financia! deci&ion #a-in" invo!ve& procure#ento und& and t(eir opti#a! uti!i1ation t(rou"(inve&t#ent, fnancin" dividend and *or-in"capita! deci&ion&$
T(e -e+ i&&ue in fnance are
(ere to rai&e fnancia! re&ource& ro#
(ere to inve&t t(e re&ource&
2o* to be&t #ana"e t(e production di&tribution
Introduction
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4$ Inve&t#ent or Lon" Ter# A&&et Mi5 Deci&ion Function o inve&tin" rai&ed und& in a&&et& are -no*n
a& inve&t#ent deci&ion$ E5a#p!e& inc!ude E5pan&ion, Moderni1ation,
.ep!ace#ent o Lon" Ter# A&&et&, . 6 D 7(avin" !on"
ter# i#p!ication&8$
T(e 9 i#portant a&pect o inve&t#ent deci&ion are7a8 Eva!uation o t(e pro&pective proftabi!it+ o
ne* inve&t#ent&
7b8 T(e #ea&ure#ent o a cuto; rate< a"ain&t t(at
t(e pro&pective return o ne* inve&t#ent& cou!d
be co#pared$ Deci&ion& are ta-en in t(e !i"(t o t(eir i#pact on t(e
*ea!t( o &(are(o!der&$ T(e deci&ion invo!ve (u"e capita! out!a+, (ave !on"
ter# i#p!ication&, and are u&ua!!+ irrever&ib!e$
Finance Function&
Fi F ti
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9$ Financin" or Capita! Mi5 Deci&ion Financin" deci&ion& are #ain!+ concerned *it( t(e
identifcation o potentia! &ource& o und& andtappin" o t(e&e &ource&$
Main i&&ue invo!ved in &uc( deci&ion& are
(ere ro# to procure t(e re)ui&ite und&=
2o* #uc( &(ou!d be t(e proportion o &(ort ter#and !on" ter# und&=
2o* do t(e e5pectation& o provider& o eac(&ource o capita! c(an"e *it( a!teration in capita!#i5=
(at &(ou!d be t(e opti#a! #i5 o debt ande)uit+ in capita!=
T(e #i5 o debt and e)uit+ i& -no*n a& t(e fr#>&capita! &tructure$
T(e+ deter#ine t(e fnancia! ri&- prof!e o t(e
Finance Function&
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?$ Dividend or 'roft A!!ocation Deci&ion Di&tributin" return& earned ro# a&&et& to
&(are(o!der& are -no*n a& dividend deci&ion$ T(e fnancia! #ana"er #u&t decided *(et(er t(e fr#
&(ou!d di&tribute a!! proft&, or retain t(e#, ordi&tribute a portion and retain t(e ba!ance$
Suc( a deci&ion depend& on trade o; bet*een t(e
uture fnancin" need& o t(e fr# and currentcon&u#ption re)uire#ent o &(are(o!der&$
T(e proportion o proft& di&tributed a& dividend& i&ca!!ed t(e dividend pa+out ratio and t(e retained
portion o proft& i& -no*n a& retention ratio$ Nor#a!!+ fr#& o!!o* a po!ic+ o &tab!e dividend, butfr#& *it( (i"( "ro*t( rate "enera!!+ o;er& a (i"(retention and !o* pa+out ratio$
Dividend& are "enera!!+ paid in ca&(, but it can a!&obe "iven in or# o bonu& &(are&$
nance unc on&
F nance Funct on&
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@$ or-in" Capita! Deci&ion Li)uidit+ Deci&ion or-in" Capita! deci&ion& are re!ated to t(e
#ana"e#ent o current a&&et&$ T(e t*o -e+ deci&ion point& in *or-in" capita!
#ana"e#ent are !eve! o inve&t#ent in current a&&et&
and fnancin" o &uc( a&&et&$
Current a&&et #ana"e#ent a;ect t(e fr#>& !i)uidit+$
A fr# atte#pt& to ba!ance ca&( in3o*& and out3o*&
*(i!e peror#in" t(e&e unction&$ T(e&e are ca!!ed
!i)uidit+ deci&ion&$
A con3ict e5i&t& bet*een proftabi!it+ and !i)uidit+*(i!e #ana"in" current a&&et&$ 2ence, a proper
tradeo; #u&t be ac(ieved bet*een proftabi!it+ and
!i)uidit+$
F nance Funct on&
Obj ti Fi
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9B
Objective of the Firm the primary goal of the
rm is to maximize stockholer !ealth
"ealth #aximization vers$s Prot#aximization
%iming prot maximization oes not takeinto acco$nt the timing of earnings& !hile!ealth maximization oes'
(isk !ealth maximization takes risk intoacco$nt prot maximization oes not'
)ivien payments if prot maximization
!as the goal& a rm !o$l never pay
Objective o Fir#
Obj ti Fi
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94
"ealth #aximization vers$s Prot
#aximization *cont+
,$alitative factors proft #a5i#i1ationdoe& not ta-e into account uture activitie&&uc( a& &a!e& "ro*t(, &tabi!it+ anddiver&ifcation'
Stock price maximization &ince inve&tor&*ant to #a5i#i1e t(eir o*n *ea!t(, t(e+ preer
t(e fr# adopt &trate"ie& t(at *i!! #a5i#i1e&toc- price'
Objective o Fir#