Podcast Scope of Fin Mgt

5/26/2018 Podcast Scope of Fin Mgt

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Nature and purpose of financial management

Prepared by William Armah forwww.warmah.com


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Financial management can be defined as themanagement of the finances of anorganisation in order to achieve the financialobjectives of the organisation.

Profitability for the organisation to minimisecost and to maximise return

Liquidity the ability to meet its operatingactivities

Safety or security to overcome undue risk



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Investment decisionShort-term: working capital managementLong-term: capital budgeting

Financing decisionFinancing mix, capital structure

Dividend decisionDividend policy: zero, residual, constant,stable dividend policies



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Primary objective:Maximisation of return to the shareholder

Secondary objectives customer satisfaction

increase in market shares

Growth

Survival

innovation



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Shareholders

Employees

Management

Community

Customers

Environment

Government

Supplier



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AGENCY RELATIONSHIP: A description of therelationship between management andshareholders expressing the idea thatmanagers act as agent for the shareholders,

using delegated power to run the company inthe shareholders best interest.



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Issues where there may be conflict of interestbetween managers and shareholders are:

Information asymmetry Rewards

Risk

Takeover

Time horizon



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Value for money (VFM) this is also referred toas the 3Es

Economy: lies in operating at minimum cost. Effectiveness: is achieving established

objectives.

Efficiency: consist of attaining desired resultsat minimum cost. It therefore combineseffectiveness with economy.



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These are financial institution, which linkslenders (those with surplus funds) withborrowers (those with deficit funds).



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Convenience

Provision of funds to borrowers

Aggregation

Risk diversification

Diversified portfolio

Maturity transformation



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Financial markets are: market for buying andselling financial instrument

Money or bankers) marketMarket for buying and selling short term

financial instrument

Capital marketMarket for buying and selling long-term

financial instrument



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Examples of short-term financial instrumentsare:

Commercial paper (CP)

Certificate of deposit (CD)

Bills (government or local authority bills)

Term bill



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Examples of long-term financial instrumentsare:

Ordinary shares (equity)

Preference shares

Government bonds

Corporate bonds:

Redeemable bond

Irredeemable bondsConvertible bonds



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The international money market is referred to as:Euro currency market.

International capital market is referred to as Eurobonds market and Euro equity market.

A Eurobond is a bond dominated in a currency thatoften differs from that of the country of issue.

Note that these international markets financialinstruments should not be suggested as possiblesource of finance for smaller business.



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Advantages of euro bonds Suitable for large organization with excellent

credit rating.

Its long term in nature.

Can be used to finance a big capitalexpansion programmed.

Borrowing is not subject to national exchange

controls of any government. Eurobond issues can be made whenever

market conditions seem favourable.



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Interest rates are effectively the price governinglending and borrowing

Factors affecting the rate of interest includes:

The term

Risk

The need to make profit on re-lending

Size of the loan or deposit:



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A yield curve is a diagrammaticrepresentation of the term structure ofinterest rates.

Factors affecting the yield curve are: Liquidity preference

Expectation

Market segmentation



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Podcast Scope of Fin Mgt

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