Reliance Industries declares 150% dividend India Nippon shareholders approve 7:10 bonus issue
Financing Decisions
Dividend Decisions
Investment Decisions
Firms have scarce resources which must be allocated among competing uses. Resources may be used for :
Revenue Generating Cost Saving Projects Strategic Decisions Introduction of a New Product Line Replacing old equipment with new equipment Which markets to enter Acquisition of other companies
While taking Investment Decisions, we measure the Benefits (Returns) from the proposed Investment projects and compare with Minimum Acceptable Hurdle rate to decide acceptance or rejection.
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16% 9%
Less Risky
More Risky
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Invest in assets that earn a return greater than the minimum acceptable hurdle rate
Financing Decisions
How should firms raise Financial resources required? Businesses can broadly raise funds either through: Owners Fund (Equity) Borrowed Funds (Debt) Financing Decision involves : Finding a mix between Debt & Equity (Capital Structure), and Type of Instrument Long Term Vs. Short Term, Fixed Rate Vs. Floating Rate, Straight Vs. Convertible, Domestic Markets Vs. International Markets.
Choose the financing mix that maximizes the value of the projects taken and matches the assets being financed.
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Dividend Decisions
Dividend is any reward by the firm to its shareholders. Firms have to decide about what to do with the surplus generated by the firm i.e.:
Share Repurchase
If there are not enough investments that earn the hurdle rate, return the cash to the owners.
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Investment Decision
Invest in assets that earn a return greater than the minimum acceptable hurdle rate
Financing Decision
Choose the financing mix that maximizes the value of the projects taken , and matches the assets being financed.
Dividend Decision
If there are not enough investments that earn the hurdle rate, return the cash to the owners.
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Owners (Shareholders)
Agents (Top Management)
Main Features Separation of Ownership & Management Legal Person Limited Liability of shareholders Shareholders are distinct from the company
Level-I Management
Agency Problem
Shareholders appoint agents (Management) to conduct the business of the company. As agents, the management should take decisions to maximize shareholders wealth. Shareholders delegate decision-making authority to Management hoping that agents will act in shareholders best interests. However, in actual practice, the objectives of the management may differ from those of the shareholders. Managers may take decisions in their own interest rather than in the interest of the shareholders. This problem of management (agents) not acting in the interests of their principals (shareholders) is called the Agency Problem.
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Asymmetry of information: Management, as a consequence of running the company on a day-to-day basis, has access to inside information while shareholders receive annual reports which may themselves be manipulated by the management.
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Monitor the actions of the Management: Audit of Financial statements by independent Auditors; Shadowing of Senior Managers; Employment of External Analysts.
Incentives to Managers: Stock options; Bonus ; Perquisites & Punishments Both methods involve costs- an inevitable result of the separation of ownership and control of a company. Lower the control, lower chances of managers behaviour being consistent with the shareholders, higher the Agency costs. Agency costs-(a) when managers do not attempt to maximizes firm value , and (b) shareholders incur cost to monitor managers.
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Financial System
-An Overview
Financial System
Provide Funds Receive Funds
Financial System
Suppliers of Funds
Financial Markets Financial Institutions Financial Instruments & Services
Users of Funds
Buy Securities
Issue Securities
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Financial System - Defined Financial system refers to a set of complex, interlinked markets, institutions, instruments and services in the economy which facilitate the transfer and allocation of funds efficiently and effectively.
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No physical location, but an Over-the-Counter (OTC) Market; trades are conducted via telephones, wire transfers, and 23 Computer trading.
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Functions of Financial System (Contd.) Risk Management: Financial System provides various instruments for pooling, pricing & sharing of risks by way of: Hedging (Forward Cover); Diversification (Mutual Funds- pooling & sub-division of risks) Insurance (the Insured retains the economic benefit of ownership while laying off the possible losses). Price Information for Decentralised Decision-making: Interest rates and security prices help in Investment decisions by each individual unit Surplus Units would want to the Highest returns while the Deficit Units would want the Lowest Costs.
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Ministry of Finance
(GOI)
Developmental Financial Institutions (DFIs) All India: State Level: -SFCs -IFCI -SIDCs -IIBI -TFCI -IDFC -PFC -IRFC
Commercial Banks Public Sector: -SBI Group -Nationalised Private Sector: -Indian -Foreign
NBFCs
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Supervising Authority
SIDBI
1988
NHB
1988
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Specialised FIs
IIBI 1997 Industrial Investment Bank of India formerly IRBI: Industrial Reconstruction Bank of India(1971) Tourism Finance Corporation of India Power Finance Corporation Ltd Indian Railway Finance Corporation Ltd Infrastructure Development Finance Corporation
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Mutual Funds Public Sector: -UTI, SBI & Others Private Sector: -Indian -Foreign
Capital Markets
-Stock Exchanges -Merchant Bankers -Underwriters -Stock Brokers -Custodians -Depositories/DP -FIIs -Investors
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Securities & Exchange Board of India (SEBI) Regulatory Authority to oversee & regulate the functioning of the Capital Markets in India. Set up in 1988 through an administrative order but became a statutory organization in 1992. Objective : to protect the interest of the investors & promote the development, regulate the securities market.
www.sebi.gov.in
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Life Insurance
Non-Life Insurance
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Insurance Regulatory & Development Authority (IRDA) Regulatory authority to oversee & regulate the functioning of the Insurance sector in India. Set up in 1999. Objective : To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.
Chairman Mr.J. Hari Narayan
www.irda.gov.in
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Pension Fund Regulatory & Development Authority (PFRDA) Established by the Government of India on 23rd August 2003 Objective: to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto Chairman : Mr. Yogesh Agarwal
www.pfrda.gov.in
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www.fmc.gov.in
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Tangible Assets:
Plant & Equipments Building
Finance Manager
Financial Markets
Funds reinvested Funds returned to investors
Intangible Assets:
Patents
Funds generated by firms operations
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