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Transcript of lokesh ppt
By Lokesh Kumar Varshney
PGDM Final YearRoll No: 26 04/10/23 08:03 AM 1
Lokesh Kumar Varshney, PGDM , GLA University
04/10/23 08:03 AM 2Lokesh Kumar Varshney, PGDM , GLA University
Objectives of the firm• Objectives are targets or goals is that a business
sets for itself to achieve the desired position.
• They are achieved through proper Vision and Mission.
• Financial Decisions includes two things :»A) Return»B) Risk attached
04/10/23 08:03 AM 3Lokesh Kumar Varshney, PGDM , GLA University
There are Two main objectives of the Firm
1st : To maximise the current value of the Share holders wealth
2nd : To reduce the Cost of the Production etc..
Objectives of the firm
04/10/23 08:03 AM 4Lokesh Kumar Varshney, PGDM , GLA University
Objective should be sure to have
• Value Maximisation objective donot ignore the Multi Period character of the Financial & other decisions
• It incorporates uncertainty in some way
04/10/23 08:03 AM Lokesh Kumar Varshney, PGDM , GLA University
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Theory of Firm• The theory of the firm is based on
the assumption that all businesses will operate to make a profit
• Businesses face should be upward while slopes among total cost and revenue curves – as more is produced costs increase and as more is sold revenue increases
04/10/23 08:03 AM 7Lokesh Kumar Varshney, PGDM , GLA University
Marginal costs and revenues
• If a business has a downward sloping demand curve revenue will rise at a decreasing rate as production rises until marginal revenue equals zero
• At this point any additional units don’t add anything to total revenue
• Assuming the law of diminishing returns in the short run total costs will eventually start to rise at a faster rate as marginal costs increase
04/10/23 08:03 AM 8Lokesh Kumar Varshney, PGDM , GLA University
Marginal costs and marginal benefits
• The point of profit maximisation is where the difference between Total revenue and total costs is greatest
• At the point of profit maximisation MC = MR
04/10/23 08:03 AM 9Lokesh Kumar Varshney, PGDM , GLA University
Additional Objectives
• There are additional objectives that a business could pursue including:– Growth– Sales revenue maximisation– Limit pricing to gain monopoly power– Customer satisfaction
• The satisficing principal sets a minimum acceptable level of achievement
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RISK MANAGEMENT &
WEALTH MAXIMIZATION
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The Goal of Management
• Maximization of shareholders’ wealth is the dominant goal of management in the Anglo-American world.
• In the rest of the world, this perspective still holds true (although to a lesser extent in some countries).
• In Anglo-American markets, this goal is realistic; in many other countries it is not.
04/10/23 08:03 AM 12Lokesh Kumar Varshney, PGDM , GLA University
The Goal of Management
• There are basic differences in corporate and investor philosophies globally.
• In this context, the universal truths of finance become culturally determined norms.
04/10/23 08:03 AM 13Lokesh Kumar Varshney, PGDM , GLA University
Shareholder Wealth Maximization
• In a Shareholder Wealth Maximization model (SWM), a firm should strive to maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a given level of risk.
• Alternatively, the firm should minimize the level of risk to shareholders for a given rate of return.
04/10/23 08:03 AM 14Lokesh Kumar Varshney, PGDM , GLA University
Shareholder Wealth Maximization
• The SWM model assumes as a universal truth that the stock market is efficient.
• An equity share price is always correct because it captures all the expectations of return and risk as perceived by investors, quickly incorporating new information into the share price.
• Share prices are, in turn, the best allocators of capital in the macro economy.
04/10/23 08:03 AM 15Lokesh Kumar Varshney, PGDM , GLA University
Shareholder Wealth Maximization
• The SWM model also treats its definition of risk as a universal truth.
• Risk is defined as the added risk that a firm’s shares bring to a diversified portfolio.
• Therefore the unsystematic, or operational risk, should not be of concern to investors (unless bankruptcy becomes a concern) because it can be diversified.
• Systematic, or market, risk cannot however be eliminated.
04/10/23 08:03 AM 16Lokesh Kumar Varshney, PGDM , GLA University
Shareholder Wealth Maximization
• Agency theory is the study of how shareholders can motivate management to accept the prescriptions of the SWM model.
• Liberal use of stock options should encourage management to think more like shareholders.
• If management deviates too extensively from SWM objectives, the board of directors should replace them.
• If the board of directors is too weak (or not at “arms-length”) the discipline of the capital markets could effect the same outcome through a takeover.
• This outcome is made more possible in Anglo-American markets due to the one-share one-vote rule.
04/10/23 08:03 AM 17Lokesh Kumar Varshney, PGDM , GLA University
Shareholder Wealth Maximization
• Long-term value maximization can conflict with short-term value maximization as a result of compensation systems focused on quarterly or near-term results.
• Short-term actions taken by management that are destructive over the long-term have been labeled impatient capitalism.
• This point of debate is often referred to a firm’s investment horizon (how long it takes for a firm’s actions, investments and operations to result in earnings).
04/10/23 08:03 AM 18Lokesh Kumar Varshney, PGDM , GLA University
Shareholder Wealth Maximization
• In contrast to impatient capitalism is patient capitalism.
• This focuses on long-term SWM.
• Many investors, such as Warren Buffet, have focused on mainstream firms that grow slowly and steadily, rather than latching on to high-growth but risky sectors.
04/10/23 08:03 AM 19Lokesh Kumar Varshney, PGDM , GLA University
What’s Special about “International” Finance?
• Foreign Exchange Risk
• Political Risk
• Market Imperfections
• Expanded Opportunity Set
04/10/23 08:03 AM 20Lokesh Kumar Varshney, PGDM , GLA University
What’s Special about “International” Finance?
• Foreign Exchange Risk– The risk that foreign currency profits may
evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.
• Political Risk– Sovereign governments have the right to
regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways.
04/10/23 08:03 AM 21Lokesh Kumar Varshney, PGDM , GLA University
• Market Imperfections
– Legal restrictions on movement of goods, people, and money
– Transactions costs
– Shipping costs
– Tax arbitrage
What’s Special about “International” Finance?
04/10/23 08:03 AM 22Lokesh Kumar Varshney, PGDM , GLA University
• Expanded Opportunity Set
– It doesn’t make sense to play in only one corner of the sandbox.
– True for corporations as well as individual investors.
What’s Special about International Finance?
04/10/23 08:03 AM 23Lokesh Kumar Varshney, PGDM , GLA University
• The focus of the text is to equip the reader with the “intellectual toolbox” of an effective global manager—but what goal should this effective global manager be working toward?
• Maximization of shareholder wealth?
or
• Other Goals?
Goals for International Financial Management
04/10/23 08:03 AM 24Lokesh Kumar Varshney, PGDM , GLA University
Maximize Shareholder Wealth
• Long accepted as a goal in the Anglo-Saxon countries, but complications arise.
– Who are and where are the shareholders?
– In what currency should we maximize their wealth?
04/10/23 08:03 AM 25Lokesh Kumar Varshney, PGDM , GLA University
Other Goals
• In other countries shareholders are viewed as merely one among many “stakeholders” of the firm including:– Employees
– Suppliers
– Customers
• In Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs.
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Other Goals
• No matter what the other goals, they cannot be achieved in the long term if the maximization of shareholder wealth is not given due consideration.
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THANKS
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