Introduction to Financial Management :

Financial management :

Is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Thus the decision function of financial management can be broken down into three major areas: the investment, financing and asset management decisions.

Shareholder :

Any person, company or other institution that owns at least one share of a company’s stock. Shareholders are a company’s owners. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly. A shareholder may also be referred to as a “stockholder”.

Creditor :

A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow if it is paid back at a later date. Creditors can be classified as either “personal or real”.

• Personal Creditor: those people who load money to friends or family are called personal creditor.
• Real Creditor (i.e. a bank or finance company): have legal contracts with the borrower granting the lender the right to claim any of the debtor’s real assets (e.g. real estate or car) if he or she fails to pay back the loan.

Goal of the Firm :

In finance, the goal of the firm is always described as “maximization of shareholders’ wealth”.

Shares of common stock give evidence of ownership in a corporation. Shareholder wealth is represented by the market price per share of the firm’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and asset management decisions. The idea is that the success of a business decision should be judged by the effect that it ultimately has on share price.

Drawbacks of Profit Maximization :

• Profit maximization is a short-term concept.
• Profit maximization does not consider the timing of returns.
• Profit maximization ignores risk.

Dividend :

A dividend is a distribution of a portion of a company’s earning, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

Interest :

Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate. Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.

There are two types of interest that can be applied to loans:

• Simple
• Compound

Agency problems :

An agency relationship occurs when a principal hires an agent to perform some duty. A conflict, known as an “Agency Problem” arises when there is a conflict of interest between the needs of the principal and the needs of the agent.
In finance, there are two primary agency relationships:

• Managers and stockholders
• Managers and creditors

1. Stockholders versus Managers :

• If the manager owns less than 100% of the firm’s common stock, a potential agency problem between mangers and stockholders exists.
• Managers may make decisions that conflict with the best interests of the shareholders. For example, managers may grow their firms to escape a takeover attempt to increase their own job security. However, a takeover may be in the shareholders’ best interest.

2. Stockholders versus Creditors :

• Creditors decide to loan money to a corporation based on the riskiness of the company, its capital structure and its potential capital structure. All of these factors will affect the company’s potential cash flow, which is a creditors’ main concern.
• Stockholders, however, have control of such decisions through the managers.
• Since stockholders will make decisions based on their best interests, a potential agency problem exists between the stockholders and creditors. For example, managers could borrow money to repurchase shares to lower the corporation’s share base and increase shareholder return. Stockholders will benefit; however, creditors will be concerned given the increase in debt that would affect future cash flows.

Types of company meetings :

Several types of meetings take place in the business organizations. Especially the company meetings can be show as follows

1. Statutory meeting : The Company arranges a meeting after one month of six months. This is the first general meeting of the company and during the life of the company this type of meeting held once. The company gives the circular before 21 days of the meeting. The decisions of the meeting are called statutory decision.
2. Annual meeting : After registration of the company, the company is bound to invites the first general meeting with in eighteen months. Then the general meeting will be held in very year. The differences of the two general meeting cannot be more then fifteen months. The decisions of the meeting are called general decision.
3. Extra Ordinary general meeting : If necessary of the company this type of meeting can be held on any time. The director or some shareholders can invite this meeting one tenth of the shareholders may give the requisition to the board of directors to arrange this type of meeting. After getting the requisition of the board of directors fail to arrange a meeting with in twenty one days, the shareholder can invite the meeting within three months. The decision taken by the meeting is called special decision.