Amity business school

1. Amity Business School
Amity Business School
MBA(HR) Class of 2017,
Semester II
FINANCIAL MANAGEMENT
Lecture 2

2. Amity Business School
Financial Environment
A firm operates in an environment. Financial environment also
Known as financial system forms part of the overall environment.
The environment influences the financial system and the latter, in
Turn ,impacts the firm’s investing & financing decisions.
As there is a interrelationship between the financial environment
& the financial decision making of the firm, it is essential for
the finance manager to have a sound knowledge of the financial
System.

3. Amity Business School
Financial System
Financial Markets Financial Assets
Or instruments
or Products
Financial intermediaries
Or Institutions
Debt
Equity
Banks
Mutual Funds
NBFC……
Money
Market
Capital
Market
Primary
Market
Secondary
Market
Regulatory Frame work
RBI
SEBI
Companies Act …..

4. Amity Business School
Objective of the FM
Profit Maximisation
Vs
Wealth Maximisation

5. Amity Business School
PROFIT MAXIMIZATION
•Business earns profits (Accounting profits) to cover its costs
and provide funds for growth.
•Profit earnings is the main aim of every economic activity.
• Profit is a measure of efficiency of a business enterprise.
• The accumulated profits enables a business to face risks
like fall in prices, competition from other units adverse
government policies etc.

6. Amity Business School
1. Profit Maximization as an objective is vague
and ambiguous.
Short term profit or Long term profit ?
Profit after Tax or Profit before Tax ?
Gross Profit or Net Profit?

7. Amity Business School
2.It ignores the timing of costs & returns and thereby
ignores the time value of money.
Profit (Rs. in crore)
Time Alternative A Alternative B
Period I 50 -
Period II 100 100
Period III 50 100
Total 200 200

8. Amity Business School
3. It ignores risk
Arguments against this objective
Profit (Rs. in crore)
State of Economy Alternative A Alternative B
Recession (Period I) 9 0
Normal
(Period II)
10 10
Boom
(Period III)
11 20
Total 30 30

9. Amity Business School
Wealth Maximization
• It is also known as value maximization
or net present worth maximization.
• This objective is generally expressed in
terms of maximization of the value of a
share of a firm.

10. Amity Business School
•The shareholder’s wealth is represented by
the present value of all the future cash
flows in the form of dividends or other
benefits expected from the firm.
•The market price of the share reflects this
present value.

11. Amity Business School
Therefore, maximization of shareholder’s
wealth as an objective of Financial
Management implies that the financial
decisions will be taken in such a way that the
shareholders receive highest combination of
dividends and the increase in market price of
share.