Professional Documents
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management
Limitations or weaknesses:
Internal decision making (i.e., insider-looking-out
approach) was completely ignored.
Focus was only on financing problem of corporate
enterprise.
Working capital management was not given
importance.
Modern Approach:
Financial Management
Provides a conceptual and analytical framework for
financial decision making.
Covers Acquisition as well as Allocation of funds.
Functions of finance: (decisions related to FM)
1. The financing decision
2. The investment decision
3. The dividend policy decision
INVESTMENT DECISION
ACTIVITY OF DECIDING
THE PATTERN OF INVESTMENT
Or
ALLOCATION OF CAPITAL
Covers-
a. Long term investment capital assets
b. Short term investment current assets.
It is concerned with the asset-mix or
composition of the assets of the firm.
FINANCING DECISION
ACTIVITY OF DECIDING
THE FINANCING MIX
OR
CAPITAL STRUCTURE
Capital structure refers to the proportion of debt (fixed
interest sources of financing)and equity capital
(variable-dividend securities source of funds)
Two aspects:
1. Theory of capital structure shows relationship
between the debt and equity
2. Optimum capital structure determines an appropriate
capital structure
DIVIDEND DECISION
Decision relating to dealing with the profits of the
firm.
Two alternatives available :
a. Distribute to shareholders in form of dividend
b. Retain in the business itself.
One of the main objective of business is to fulfill the
desires of equity shareholders.
So here it helps to decide about:
a. How much dividend must be paid?
b. How much profit must be flown back?
c. Maintenance of stable dividend rate over the period.
Functions of Financial
Management
LONG &
1. INVESTMENT
SHORT TERM CAPITAL BUDGETING
DECISION
FUNDS WORKING CAPITAL
MANAGEMENT
3.DIVIDEND PROFIT
DECISONS ALLOCATION DIVIDEND POLICY
RETAINED EARNINGS