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Strategic financial management (Finance | Money)

Strategic financial management

In a world of geo-political, social and economic uncertainty, strategic financial management is in a process of change, which requires a reassessment of the fundamental assumptions that cut across the traditional boundaries of the subject.
Read on and you will not only appreciate the major components of contemporary finance but also find the subject much more accessible for future reference.
The emphasis throughout is on how strategic financial decisions should be made by management, with reference to classical theory and contemporary research. The mathematics and statistics are simplified wherever possible and supported by numerical activities throughout the text.
Let us begin with an idealised picture of investors to whom management are ultimately responsible. All the traditional finance literature confirms that investors should be rational, risk- averse individuals who formally analyse one course of action in relation to another for maximum benefit, even under conditions of uncertainty. What should be (rather than what is) we term normative theory. It represents the foundation of modern finance within which:

"Investors maximise their wealth by selecting optimum investment and financing opportunities, using financial models that maximise expected returns in absolute terms at minimum risk. "

What concerns investors is not simply maximum profit but also the likelihood of it arising: a risk- return trade-off from a portfolio of investments, with which they feel comfortable and which may be unique for each individual. Thus, in a sophisticated mixed market economy where the ownership of a company’s portfolio of physical and monetary assets is divorced from its control, it follows that:

"The normative objective of financial management should be: To implement investment and financing decisions using risk-adjusted wealth maximising criteria, which satisfy the firm’s owners (the shareholders) by placing them all in an equal, optimum financial position."

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