Finance is the lifeblood of any business. Every decision a company makes — whether to launch a new product line, acquire a competitor, or return cash to — is ultimately a financial decision. Financial Management is the discipline that provides the framework for making these decisions optimally. At Infosys, the CFO allocates billions of rupees in every year; the decisions are guided by the same principles you will study here. The objective of financial management is to maximise shareholder wealth — represented by the market price of equity . This is superior to the older "profit maximisation" goal because it considers the time value of money (₹100 today is worth more than ₹100 a year from now), risk, and the interests of all stakeholders. The three core decisions in financial management are the investment decision (where to deploy capital), the financing decision (how to raise capital), and the decision (how much to return to shareholders).
Before You Start
🎯 Why learn this?
This chapter establishes the foundation and vocabulary of financial management — all subsequent topics build on these concepts.
📚What you'll learn
- •Scope and objectives of financial management
- •Profit maximisation vs wealth maximisation
- •Three key decisions: investment, financing,
- •Time value of money — PV, FV, annuity, perpetuity
- •Discounting and compounding
✅ After this chapter, you can…
- ✓Explain why wealth maximisation is superior to profit maximisation
- ✓Calculate present value, future value, and annuity values
- ✓Apply discounting to evaluate multi-period
💼 Real problems this solves at work
- →Evaluating investment proposals using discounted
- →Comparing financial decisions across different time horizons
- →Communicating investment returns to boards using NPV and IRR
01Objectives of Financial Management
| Objective | Limitation |
|---|---|
| Profit Maximisation | Ignores time value of money; ignores risk; focuses on short-term; ignores non-financial stakeholders |
| Wealth Maximisation (EPS / Market Price) | Considers timing of returns, risk, and long-term value — the preferred objective |
| Decision | Question answered | Tools |
|---|---|---|
| Investment ( Budgeting) | Which long-term to invest in? | NPV, IRR, Payback, ARR |
| Financing ( Structure) | How to raise funds — debt vs equity mix? | WACC, leverage, structure theories |
| How much to distribute vs retain? | payout ratio, dividend theories |
02Time Value of Money
| Concept | Formula | Example |
|---|---|---|
| Future Value (FV) | FV = PV × (1 + r)ⁿ | FV of ₹1,000 at 10% for 3 years = ₹1,000 × 1.1³ = ₹1,331 |
| Present Value (PV) | PV = FV / (1 + r)ⁿ | PV of ₹1,331 at 10% in 3 years = ₹1,331 / 1.1³ = ₹1,000 |
| Annuity PV | PV = A × [1 − (1+r)⁻ⁿ] / r | PV of ₹500 p.a. for 4 years at 10% = ₹500 × 3.170 = ₹1,585 |
| Perpetuity PV | PV = A / r | PV of ₹200 p.a. forever at 8% = ₹200 / 0.08 = ₹2,500 |
| Growing Perpetuity PV | PV = A / (r − g) | PV of ₹200 growing at 3% p.a. at 8% = ₹200 / (0.08 − 0.03) = ₹4,000 |
Exam tip: Effective Annual Rate (EAR): when compounding is more frequent than annual — EAR = (1 + r/m)ᵐ − 1. Example: 12% p.a. compounded monthly → EAR = (1 + 0.01)¹² − 1 = 12.68%. Always check whether questions use nominal or effective rates.
Chapter Summary
- 1Objectives: wealth maximisation (market price) preferred over profit maximisation (ignores TVM and risk).
- 2Three decisions: Investment (where to invest), Financing (how to raise funds), (how much to return).
- 3TVM: FV = PV(1+r)ⁿ. PV = FV/(1+r)ⁿ. Annuity PV = A × [1−(1+r)⁻ⁿ]/r. Perpetuity = A/r.
- 4Growing perpetuity: PV = A/(r−g). Use EAR for intra-year compounding.
Key Terms
Wealth Maximisation
Primary objective of financial management — maximise market price of equity, considering time, risk, and all cash flows.
Present Value (PV)
The current worth of a future cash flow, discounted at the required rate of return.
Future Value (FV)
The value of a current amount at a future date, compounded at the interest rate.
Annuity
A series of equal cash flows at regular intervals — PV of annuity = A × annuity factor.
Perpetuity
An infinite series of equal cash flows — PV = A/r.
Discount Rate
The rate used to convert future cash flows to present value — reflects the opportunity cost of capital.