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8LAL Anu llnAnClAL ASSL1S

1he wealLh of a socleLy ls dependenL on Lhe producLlve capaclLy of lLs economy 1hls means all Lhe
goods and servlces LhaL Lhe members of one counLry can produce 1hls capaclLy ls a funcLlon of Lhe
real asseLs of Lhe economy 1hls conslsLs of Lhe land bulldlngs machlnes and knowledge LhaL can be
used Lo produce Lhe goods and servlces wlLhln Lhe counLry
ln conLrasL flnanclal asseLs such as sLocks and bonds ls a hold of clalms on real asseLs 1hls ls
because when you buy a sLock you recelve noLhlng more Lhan a cerLlflcaLe of purchase and Lhls does
noL conLrlbuLe dlrecLly Lo Lhe producLlvlLy of Lhe economy
llnanclal asseLs are baslcally clalms Lo any lncome generaLed by real asseLs lf we are dlscusslng
bonds Lhen we are maklng clalms on lncome from Lhe governmenL for loanlng money
Whlle real asseLs generaLe neL lncome dally Lo Lhe economy flnanclal asseLs ls slmply movlng money
from one person (or accounL) Lo Lhe oLher WlLh Lhls Lype of asseLs you can choose Lo cash ln now
(sell your sLocks) or conLlnue your lnvesLmenL ln hope of hlgh reLurns ln Lhe end (long Lerm sLock or
bond lnvesLmenL)
1o go a llLLle furLher lnLo flnanclal asseLs we noLlce 3 broad groups 1hey are flxed lncome equlLy
and derlvaLlves 1he flrsL Lype flxed lncome ls elLher a flxed sLream of lncome or a sLream of lncome
LhaL ls deLermlned wlLh a speclflc formula A corporaLe bond wlLh flxed yearly lnLeresL ls a good
example LqulLy ls anoLher word for common sLock and lL represenLs your parL ownershlp ln a
corporaLlon LhaL you LrusL llnally derlvaLlve securlLles such as opLlons and fuLures provlde large
reLurns deLermlned by Lhe prlce of oLher asseLs such as bonds or sLock prlces
LCul1? Anu 8C88CWLu lunuS

TIere ure Lwo Lypes oI Iunds LIuL u IIrm cun ruIse:- EquILy Iunds und borrowed Iunds.

A IIrm seIIs sIures Lo ucquIre equILy Iunds. SIures represenL ownersIIp rIgILs oI LIeIr IoIders. Buyers
oI sIures ure cuIIed sIure IoIders und LIey ure IeguI owners oI LIe IIrm wIose sIure LIey IoId sIure
IoIders InvesL LIeIr money sIures oI u compuny In expecLuLIon oI reLurn on LIeIr InvesLed cupILuI. TIe
reLurn on sIures IoIder`s cupILuI consIsLs oI dIvIdend und cupILuI guIn by seIIIng LIeIr sIures.


AnoLIer ImporLunL source oI securIng cupILuI Is credILors or Ienders. enders ure noL LIe owners oI LIe
compuny. TIey muke money uvuIIubIe Lo IIrm on u IendIng busIs und reLuIn LILIe Lo LIe Iunds IenL. TIe
reLurn on Iouns or borrowed Iunds Is cuIIed InLeresL. ouns ure IurnIsIed Ior u specIIIed perIod uL u
IIxed ruLe oI InLeresL. PuymenL oI InLeresL Is u IeguI obIIguLIon. TIe umounL oI InLeresL Is uIIowed Lo be
LreuLed us expense Ior compuLIng corporuLe Income Luxes. TIus LIe puymenL oI InLeresL on borrowIngs
provIdes Lux sIIed Lo u IIrm. TIe IIrm muy borrow Iunds Irom u Iurge number oI sources, sucI us
bunks, IInuncIuI InsLILuLIons, pubIIc or by IssuIng bonds or debenLures. A bond or debenLure Is u
cerLIIIcuLe ucknowIedgIng LIe money IenL by u bond IoIder Lo LIe compuny. L sLuLes LIe umounL, LIe
ruLe InLeresL und muLurILy oI bonds or denLures.


ProfIt haxImIzatIon Approach - The FInancIaI hanagement DbjectIves
The company must take the Investment and the decIsIons of fInancIng on a basIs of
contInuatIon. To take the wIse optImum and the decIsIon, a clear arrangement of the
objectIves Is a need. There are two approaches broaddIscussed concernIng objectIves
fInancIal management. Dne Is approach of maxImIzatIon of benefIt and second Is approach of
maxImIzatIon of rIchness.
n thIs artIcle we are dIscussIng on ProfIt |axImIzatIon Approach
The objectIves are employed In the dIrectIon of a crIterIon of goal or decIsIon for the decIsIon
ImplIed In fInancIal management.
ProfIt maxImIzatIon approach
The economIsts belIeves that one long perIod that the maxImum benefIt of Income Is the sIngle
goal of any organIzatIon of busInesses, because that wIll also lead to the optImum allocatIon of
resources. ActIons whIch Increase the benefIt of companIes are undertaken and those whIch
decrease the benefIt are avoIded. Thus, of the prospect for the economIc theory, the
maxImIzatIon of benefIt Is sImple a crIterIon of economIc effIcIency. There Is also an extensIve
agreement whIch under the perfect competItIon, where all the prIces reflect true values
exactly and consume them are quIte Informed, benefIt maxImIzIng the behavIor by companIes
leads to the effectIve allocatIon of resources and the maxImum good socIal beIng.
The ratIonale behInd profIt maxImIzatIon objectIves Is sImple. A busIness fIrm Is s profIt
seekIng organIzatIon. ProfIt Is a test of economIc effIcIency, t Is assumed to lead to effIcIent
allocatIon of resources, t ensure maxImum socIal welfare
LImItatIon of profIt maxImIzatIon objectIves
The concept of the benefIt Is vague
The defInItIon of the benefIt of lImIt Is vague and ambIguous. 0oes It refer to the gross profIt
or profIts after tax: Total benefIt or benefIt by share: The benefIt Is Interpreted by varIous
people In varIous manners.
gnores tIme value of money
The fact that one rupee receIved today Is of more than value than one rupee receIved later.
ThIs concept Is to lead been unaware of to the errors In decIsIon makIng.
t Ignores rIsk
The future advantages can have varIous degrees of certaInty. The more certaIn the return
envIsaged Is, the more Is Its hIgh value or recIprocally more Is the return envIsaged dubIous.
|ore Is Its lower value. ThIs concept Is also completely Ignored. t also arranges the two
proposals ImplyIng varIous degrees of rIsk.
A system based on the prIvate property and the maxImIzatIon of benefIt could be effectIve,
but It carrIes out It leads to the serIous InequalIty of the Income and the rIchness among
varIous groups. Naturally, the contrary argument Is that the company as a whole Is clearly
easIer because It leads to the optImum allowance of the resources of the company.


Investopedia expIains After-Tax Profit Margin
Often, a company's earnings don't tell the entire story. The amount of profit can increase, but that
doesn't mean the company's profit margin is improving. For example, a company's sales could
increase, but if costs also rise, that leads to a lower profit margin than what the company had when it
had lower profits. This is an indication that the company needs to better control its costs.


The term earnings per share (EPS) represents the portion of a company's earnings, net of
taxes and preferred stock dividends, that is allocated to each share of common stock. The figure
can be calculated simply by dividing net income earned in a given reporting period (usually
quarterly or annually) by the total number of shares outstandingduring the same term. Because
the number of shares outstanding can fluctuate, a weighted average is typically used.
LS ls a carefully scruLlnlzed meLrlc LhaL ls ofLen used as a baromeLer Lo gauge a companys
proflLablllLy per unlL of shareholder ownershlp As such earnlngs per share ls a key drlver of share
prlces lL ls also used as Lhe denomlnaLor ln Lhe frequenLly clLed /L raLlo

LS can be calculaLed vla Lwo dlfferenL meLhods baslc and fully dlluLed lully dlluLed LS whlch
facLors ln Lhe poLenLlally dlluLlve effecLs of warranLs sLock opLlons and securlLles converLlble lnLo
common sLock ls generally vlewed as a more accuraLe measure and ls more commonly clLed

The risk/return tradeoff could easily be called the "ability-to-sleep-at-night test." While some people
can handle the equivalent of financial skydiving without batting an eye, others are terrified to climb the
financial ladder without a secure harness. Deciding what amount of risk you can take while remaining
comfortable with your investments is very important.

n the investing world, the dictionary definition of risk is the chance that an investment's actual return
will be different than expected. Technically, this is measured in statistics by standard deviation. Risk
means you have the possibility of losing some, or even all, of our original investment.

Low levels of uncertainty (low risk) are associated with low potential returns. High levels of uncertainty
(high risk) are associated with high potential returns. The risk/return tradeoff is the balance between
the desire for the lowest possible risk and the highest possible return. This is demonstrated
graphically in the chart below. A higher standard deviation means a higher risk and higher possible
return.


A common misconception is that higher risk equals greater return. The risk/return tradeoff tells us that
the higher risk gives us the 5488-9 of higher returns. There are no guarantees. Just as risk means
higher potential returns, it also means higher potential losses.

On the lower end of the scale, the risk-free rate of return is represented by the return on U.S.
Government Securities because their chance of default is next to nothing. f the risk-free rate is
currently 6%, this means, with virtually no risk, we can earn 6% per year on our money.

The common question arises: who wants to earn 6% when index funds average 12% per year over
the long run? The answer to this is that even the entire market (represented by the index fund) carries
risk. The return on index funds is not 12% every year, but rather -5% one year, 25% the next year,
and so on. An investor still faces substantially greater risk and volatility to get an overall return that is
higher than a predictable government security. We call this additional return the risk premium, which
in this case is 6% (12% - 6%).

Determining what risk level is most appropriate for you isn't an easy question to answer. Risk
tolerance differs from person to person. Your decision will depend on your goals, income and
personal situation, among other factors.


Vision: It is the vivid descriptive image of what a company wants to be 'or' wants to be
known for; it preserves the core of future. Its a hallmark of an en-lighten forward
looking organization.

Mission: It is a statement of intent of what a company wants to create and though which
type of business. It is a definition of the business. It is an answer to the question -i)
what business the firm is in; ii) why the firm is in this business; iii) what could be the
business if the firm was not in the existing business. It is process of legitimization for
existence of the business. It reflects the culture, philosophy and grand design of the
firm.


The vision and mission for any firm is very very important, these are two artifacts for
any company's strategy for market. And strategy gap may leads a company to zero %
market share. There are so many examples, talk about bajaj chetak scooter they didn't
change their strategy with the changing market and there market share from 90 % came
to 0%; yes they have stopped the production. Similarly Colgate, they lost their market
share 90 % to 52% due to strategy gap. All that due lack of proper vision and mission

The traditional approach of financial management was all about profit
maximization.The main objective of companies was to make profits.
The traditional approach of financial management had many limitations:
1.Business may have several other objectives other than profit
maximization.Companies may have goals like: a larger market share, high
sales,greater stability and so on.The traditional approach did not take into account
so many of these other aspects.
2.Profit Maximization has to defined after taking into account many things like:
a.Short term,mid term,and long term profits
b.Profits over period of time
The traditional approach ignored these important points.
3.Social Responsibility is one of the most important objectives of many firms.Big
corporates make an effort towards giving back something to the society.The big
companies use a certain amount of the profits for social causes.It seems that the
traditional approach did not consider this point.
Modern Approach is about the idea of wealth maximization.This involves
increasing the Earning per shareof the shareholders and to maximize the net
present worth.
Wealth is equal to the the difference between gross presentworth of some
decision or course of action and theinvestment required to achieve the expected
benefits.
Gross present worth involves the capitalised value of the expected benefits.This
value is discounted a some rate,thisrate depends on the certainty or
uncertainty factor of the expected benefits.
The Wealth Maximization approach is concerned with theamount of cash
flow generated by a course of action rather than the profits.
Any course of action that has net present worth above zero or in other
words,creates wealth should be selected.


SIorL-Term InuncIuI DecIsIons
O A short-term financial decision spans a period that does not exceed one year. n other words, it
requires a company's physical and financial resources for up to 12 months. To render short-term
financial decisions, corporate executives heed short-term, or current, assets and liabilities.
Current resources include cash, accounts receivable, marketable investment assets and
inventories. Short-term debts include accounts payable and salaries due. Short of an adequate
financial-management policy, department heads may have no way to determine how much cash
the company will need in the next six to 10 months and how to raise funds on stock markets.

The third major financial decision type is that of longterm financing. The types of issues
addressed include:
O The lease or buy decision,
O Debt versus equity as a means of raising capital,
O Safe debt limitations and sources of financing.
The leaseorbuy decision can involve the following:
O Production equipment,
O Notor vehicles,
O Buildings,
O Office equipment,
O Computers,
O Tools.
A spreadsheet can be used to determine the net cash outflow associated with leasing versus
buying a given item. This can help in making the best decision, since the lower present value of net
cash outflow of the two given options is the cheaper one. When deciding on the use of debt versus
equity financing, the financial manager can set up formulas in the spreadsheet to show the effects of
each option on the following:
O Cash flow,
O Net income,
O Degree of company solvency,
O Company value,
O Debt capacity.
This is accomplished by projecting certain elements of the balance sheet and income statement,
as well as certain financial ratios for each alternative. By analyzing the results and determining which
alternative yields the highest earnings per shareand considering other factors such as if the debt
ratio is acceptableyou arrive at the optimum alternative.