Financial and Risk Management

• Financial management involves planning, organizing, directing, and controlling financial activities such as procurement and utilization of funds.
• Its aim is to maximize shareholder wealth.
• Key decisions include investment, financing, and dividend decisions.

Risk Management

• Risk management identifies, assesses, and prioritizes risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events.
• Common risk management strategies include risk avoidance, risk reduction, risk transfer, and risk acceptance.
• Financial risk includes market risk, credit risk, liquidity risk, and operational risk.
• Tools for managing financial risk include hedging, insurance, and diversification.

Financial Analysis

• Financial analysis assesses the viability, stability, and profitability of a business, sub-business or project.
• It is performed by professionals using ratios, trends, and comparative analysis.
• Key financial statements used in financial analysis include the balance sheet, income statement, and cash flow statement.
• Ratio analysis involves calculating and interpreting financial ratios such as liquidity ratios, profitability ratios, and solvency ratios.
• Trend analysis examines a company's financial performance over time to identify patterns and predict future performance.
• Comparative analysis benchmarks a company's performance against its competitors or industry averages.

Budgeting

• Budgeting is the process of creating a financial plan for a future period.
• It includes estimating revenues and expenses.
• Types of budgets include operating budgets, capital budgets, and cash budgets.
• Budgetary control involves monitoring actual performance against budgeted performance and taking corrective action where necessary.
• Variance analysis identifies and analyzes the differences between budgeted and actual results.

Investment Strategies

• Investment strategies are plans for allocating capital to generate future income or profit.
• Common investment strategies include value investing, growth investing, and income investing.
• Diversification involves spreading investments across different asset classes to reduce risk.
• Asset allocation involves determining the optimal mix of assets in a portfolio based on an investor's risk tolerance, time horizon, and investment goals.
• Passive investing seeks to replicate the returns of a market index, while active investing seeks to outperform the market through stock selection and market timing.

Capital Structure

• Capital structure refers to the mix of debt and equity financing used by a company.
• The optimal capital structure minimizes the cost of capital and maximizes shareholder value.
• Factors influencing capital structure decisions include business risk, tax rates, and financial flexibility.
• Debt financing offers tax advantages but increases financial risk, while equity financing reduces financial risk but dilutes ownership.
• Modigliani-Miller theorem provides a theoretical framework for understanding the relationship between capital structure and firm value.

Dividend Decision

• Dividend decision involves determining the amount of earnings to distribute to shareholders as dividends.
• Factors influencing dividend decisions include profitability, growth prospects, and shareholder preferences.
• Dividend policies include stable dividend policy, constant payout ratio, and residual dividend policy.
• Stock dividends and stock splits are alternative ways of distributing value to shareholders without distributing cash.
• The dividend relevance theory argues that dividends affect stock prices, while the dividend irrelevance theory argues that dividends have no effect on stock prices.

National Financial Market

• A national financial market is a marketplace where financial assets are traded within a country.
• It includes stock markets, bond markets, and money markets.
• The primary market is where new securities are issued, while the secondary market is where existing securities are traded.
• Key participants in the national financial market include investors, corporations, and financial institutions.
• Regulatory bodies oversee the national financial market to ensure fair and efficient trading practices.

International Financial Market

• An international financial market is a marketplace where financial assets are traded across national borders.
• It includes foreign exchange markets, eurocurrency markets, and international bond markets.
• Factors influencing international financial markets include exchange rates, interest rates, and political risks.
• International financial institutions such as the International Monetary Fund (IMF) and the World Bank play a role in regulating and stabilizing the international financial system.
• Foreign direct investment (FDI) and portfolio investment are two main types of international capital flows.