Question

1. Corporate finance and the role of the financial manager in the corporation.

2. The main goal of financial management.

Answer 1

Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial financewhich studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

Role of finance manager

1. Raising of Funds

   In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt.

2. Allocation of Funds

   Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered

   • The size of the firm and its growth capability
   • Status of assets whether they are long-term or short-term

     Mode by which the funds are raised

   These financial decisions directly and indirectly influence other managerial activities. Hence formation of a good asset mix and proper allocation of funds is one of the most important activity

3. Profit Planning

   Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm.

   Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm.

   Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to maintain a tandem it is important to continuously value the depreciation cost of fixed cost of production. An opportunity cost must be calculated in order to replace those factors of production which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

4. Understanding Capital Markets

   Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved. Therefore a financial manger understands and calculates the risk involved in this trading of shares and debentures.

   Its on the discretion of a financial manager as to how to distribute the profits. Many investors do not like the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to enhance growth. The practices of a financial manager directly impact the operation in capital market.

Goal of financial management

The goals of financial management can be classified in many ways. Official goals, operative goals and operational goals are one classification. Official goals are the general aims of the organization. Maximization of return on investment and market value per sharemay be termed as official goals of financial management. Operative goals indicate what the organization is really attempting to do. They are focused and help in choice making. Expected return on investment, cost of capital, debt-equity norms, etc dong with time horizon are specified or their acceptable ranges/limits are static keeping in view the official goals. The operational goals of financial management are more directed quantitative and verifiable. The scale, mix and timing of specific form of finance are detailed. The official, operative and operational goals are structured with a pyramidal shape, the official goals at the top (concerned with the top executives), operative goals at the middle (concerned with middle management) and operational goals at the base.

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