Unit 5 6TH Sem Cem

UNIT 5.
Meaning of Financial Management
Financial Management means planning, organizing, directing and controlling

the financial activities such as procurement and utilization of funds of the
enterprise. It means applying general management principles to financial
resources of the enterprise.
Scope/Elements of Financial Management

1. Investment decisions includes investment in fixed assets (called as
capital budgeting). Investment in current assets are also a part of
investment decisions called as working capital decisions.
2. Financial decisions- They relate to the raising of finance from various
resources which will depend upon decision on type of source, period of
financing, cost of financing and the returns thereby.
3. Dividend decision- The finance manager has to take decision with
regards to the net profit distribution. Net profits are generally divided into
two:
4.Dividend for shareholders- Dividend and the rate of it has to be decided.
Retained profits- Amount of retained profits has to be finalized which will
depend upon expansion and diversification plans of the enterprise.
Objectives of Financial Management
The financial management is generally concerned with procurement,

allocation and control of financial resources of a concern. The objectives can
be-
 To ensure regular and adequate supply of funds to the concern.

 To ensure adequate returns to the shareholders which will depend upon
the earning capacity, market price of the share, expectations of the
shareholders.
 To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
 To ensure safety on investment, i.e, funds should be invested in safe
ventures so that adequate rate of return can be achieved.
 To plan a sound capital structure-There should be sound and fair

composition of capital so that a balance is maintained between debt and
equity capital.
1.
Functions of Financial Management
1.Estimation of capital requirements: A finance manager has to make
estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programmes and policies
of a concern.
Estimations have to be made in an adequate manner which increases earning

capacity of enterprise.
Determination of capital composition: Once the estimation have been
made, the capital structure have to be decided.
This involves short-term and long-term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and additional
funds which have to be raised from outside parties.
Choice of sources of funds: For additional funds to be procured, a company
has many choices like-
. Issue of shares and debentures

. Loans to be taken from banks and financial institutions
. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source
and period of financing.
2. Investment of funds: The finance manager has to decide to allocate
funds into profitable ventures so that there is safety on investment and
regular returns is possible.
3. Disposal of surplus: The net profits decision have to be made by the

finance manager. This can be done in two ways:
. Dividend declaration - It includes identifying the rate of dividends
and other benefits like bonus.
. Retained profits - The volume has to be decided which will
depend upon expansional, innovational, diversification plans of the
company.
4. Management of cash: Finance manager has to make decisions with
regards to cash management.
Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current
liabilities, maintainance of enough stock, purchase of raw materials, etc.
5 Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances.This can be
done through many techniques like ratio analysis, financial forecasting, cost
and profit control, etc.
Mergers and Acquisitions

Both terms often refer to the joining of two companies, but there are key
differences involved in when to use them. A merger occurs when two
separate entities combine forces to create a new, joint
organization. Meanwhile, an acquisition refers to the takeover of one entity by
another.
What are Mergers & Acquisitions (M&A)?
Mergers and acquisitions (M&A) refer to transactions between two companies

combining in some form. Although mergers and acquisitions (M&A) are used
interchangeably, they come with different legal meanings. In a merger, two
companies of similar size combine to form a new single entity.
In the other hand, an acquisition is when a larger company acquires a smaller

company, thereby absorbing the business of the smaller company. M&A deals
can be friendly or hostile, depending on the approval of the target company’s
board.
Mergers and Acquisitions (M&A) Transactions – Types
1. Horizontal
A horizontal merger happens between two companies that operate in similar

industries that may or may not be direct competitors.
2. Vertical
A vertical merger takes place between a company and its supplier or a

customer along its supply chain. The company aims to move up or down
along its supply chain, thus consolidating its position in the industry.
3. Conglomerate
This type of transaction is usually done for diversification reasons and is

between companies in unrelated industries.
Mergers and Acquisitions (M&A) – Forms of Integration
1. Statutory
Statutory mergers usually occur when the acquirer is much larger than the
target and acquires the target’s assets and liabilities. After the deal, the target
company ceases to exist as a separate entity.
2. Subsidiary
In a subsidiary merger, the target becomes a subsidiary of the acquirer but

continues to maintain its business.
3. Consolidation
In a consolidation, both companies in the transaction cease to exist after the

deal, and a completely new entity is formed.
Reasons for Mergers and Acquisitions (M&A) Activity
Mergers and acquisitions (M&A) can take place for various reasons, such as:
1. Unlocking synergies
The common rationale for mergers and acquisitions (M&A) is to create

synergies in which the combined company is worth more than the two
companies individually. Synergies can be due to cost reduction or higher
revenues.
Cost synergies are created due to economies of scale, while revenue

synergies are typically created by cross-selling, increasing market share, or
higher prices. Of the two, cost synergies can be easily quantified and
calculated.
2. Higher growth
Inorganic growth through mergers and acquisitions (M&A) is usually a faster

way for a company to achieve higher revenues as compared to growing
organically. A company can gain by acquiring or merging with a company with
the latest capabilities without having to take the risk of developing the same
internally.
3. Stronger market power

In a horizontal merger, the resulting entity will attain a higher market share
and will gain the power to influence prices. Vertical mergers also lead to
higher market power, as the company will be more in control of its supply
chain, thus avoiding external shocks in supply.
4. Diversification
Companies that operate in cyclical industries feel the need to diversify their
cash flows to avoid significant losses during a slowdown in their industry.
Acquiring a target in a non-cyclical industry enables a company to diversify
and reduce its market risk.
5. Tax benefits
Tax benefits are looked into where one company realizes significant taxable
income while another incurs tax loss carryforwards. Acquiring the company
with the tax losses enables the acquirer to use the tax losses to lower its tax
liability. However, mergers are not usually done just to avoid taxes.
Forms of Acquisition
There are two basic forms of mergers and acquisitions (M&A):
1. Stock purchase
In a stock purchase, the acquirer pays the target firm’s shareholders cash
and/or shares in exchange for shares of the target company. Here, the
target’s shareholders receive compensation and not the target. There are
certain aspects to be considered in a stock purchase:
 The acquirer absorbs all the assets and liabilities of the target – even
those that are not on the balance sheet.
 To receive the compensation from the acquirer, the target’s
shareholders must approve the transaction through a majority vote,
which can be a long process.
 Shareholders bear the tax liability as they receive the compensation
directly.
2. Asset purchase
In an asset purchase, the acquirer purchases the target’s assets and pays the
target directly. There are certain aspects to be considered in an asset
purchase, such as:
 Since the acquirer purchases only the assets, it will avoid assuming
any of the target’s liabilities.
 As the payment is made directly to the target, generally, no
shareholder approval is required unless the assets are significant (e.g.,
greater than 50% of the company).
 The compensation received is taxed at the corporate level as capital
gains by the target.
3. Method of payment
There are two methods of payment – stock and cash. However, in many
instances, M&A transactions use a combination of the two, which is called a
mixed offering.
4. Stock
In a stock offering, the acquirer issues new shares that are paid to the target’s
shareholders. The number of shares received is based on an exchange ratio,
which is finalized in advance due to stock price fluctuations.
5. Cash
In a cash offer, the acquirer simply pays cash in return for the target’s shares.
Mergers and Acquisitions (M&A) – Valuation
In an M&A transaction, the valuation process is conducted by the acquirer, as

well as the target. The acquirer will want to purchase the target at the lowest
price, while the target will want the highest price.
Thus, valuation is an important part of mergers and acquisitions (M&A), as it

guides the buyer and seller to reach the final transaction price. Below are
three major valuation methods that are used to value the target:
 Discounted cash flow (DCF) method: The target’s value is calculated

based on its future cash flows.
 Comparable company analysis: Relative valuation metrics for public
companies are used to determine the value of the target.
 Comparable transaction analysis: Valuation metrics for past
comparable transactions in the industry are used to determine the
value of the target.

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UNIT 5.

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling

Scope/Elements of Financial Management

Objectives of Financial Management

The financial management is generally concerned with procurement,

 To ensure regular and adequate supply of funds to the concern.

 To plan a sound capital structure-There should be sound and fair

Estimations have to be made in an adequate manner which increases earning

. Issue of shares and debentures

3. Disposal of surplus: The net profits decision have to be made by the

Mergers and Acquisitions

What are Mergers & Acquisitions (M&A)?

Mergers and acquisitions (M&A) refer to transactions between two companies

In the other hand, an acquisition is when a larger company acquires a smaller

Mergers and Acquisitions (M&A) Transactions – Types

A horizontal merger happens between two companies that operate in similar

A vertical merger takes place between a company and its supplier or a

This type of transaction is usually done for diversification reasons and is

Mergers and Acquisitions (M&A) – Forms of Integration

In a subsidiary merger, the target becomes a subsidiary of the acquirer but

In a consolidation, both companies in the transaction cease to exist after the

Reasons for Mergers and Acquisitions (M&A) Activity

The common rationale for mergers and acquisitions (M&A) is to create

Cost synergies are created due to economies of scale, while revenue

Inorganic growth through mergers and acquisitions (M&A) is usually a faster

3. Stronger market power

There are two basic forms of mergers and acquisitions (M&A):

Mergers and Acquisitions (M&A) – Valuation

In an M&A transaction, the valuation process is conducted by the acquirer, as

Thus, valuation is an important part of mergers and acquisitions (M&A), as it

 Discounted cash flow (DCF) method: The target’s value is calculated

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