3. Real And Financial Assets
Real Assets: Can be Tangible or Intangible
◦ Tangible real assets are physical assets that include plant, machinery, office, factory, furniture and
building.
◦ Intangible real assets include technical know-how, technological collaborations, patents and copyrights.
Financial Assets are also called securities, are financial papers or instruments such as shares and
bonds or debentures.
4. Equity and Borrowed Funds
Shares represent ownership rights of their holders. Shareholders are owners of the company.
Shares can of two types:
◦ Equity Shares: Equity shares are shares that represent ownership in a company. There
are several types of equity shares that companies may use to raise capital
◦ Preference Shares:a share which entitles the holder to a fixed dividend, whose payment takes priority
over that of ordinary share dividends.
Loans, Bonds or Debts: represent liability of the firm towards outsiders. Lenders are not
owners of the company. These provide interest tax shield.
5. Debentures
Debenture is a long-term security yielding a fixed rate of interest, issued by a company and secured against
assets.
Different Types of Debentures:
Secured Debentures
Unsecured Debentures
Redeemable Debentures
Irredeemable Debentures
Convertible Debentures
Non-Convertible Debentures
Coupon Rate Debentures
Etc . (Types of Debentures - Meaning, Examples (byjus.com))
6. Finance and Management Functions
All business activities involve acquisition and use of funds.
Finance function makes money available to meet the costs of production and marketing
operations.
Financial policies are devised to fit production and marketing decisions of a firm in practice.
8. FINANCIAL MANAGEMENT
Financial management is that managerial activity which is concerned with the planning and
controlling of the firm’s financial resources.
In other words it is concerned with acquiring, financing and managing assets to accomplish the
overall goal of a business enterprise
9. Nature of fm:
It is an indispensable organ of business management.
Its function is different from accounting function.
It is a centralised function.
Helpful in decisions of top management.
It is applicable to all types of concerns.
It needs financial planning, control and follow-up.
It is related to different disciplines like economics, accounting, law, information technology,
mathematics, etc.
12. Profit Maximization
Maximizing the rupee income of firm
Resources are efficiently utilized
Appropriate measure of firm performance
Serves interest of society also
13. Wealth Maximization
Maximizes the net present value of a course of action to shareholders.
Fundamental objective—maximize the market value of the firm’s shares.
15. Risk-return Trade-off
Financial decisions of the firm are guided by the risk-return trade-off.
The return and risk relationship:
Return = Risk-free rate + Risk premium
Risk-free rate is a compensation for time and risk premium for risk.
16. Risk Return Trade-off
Risk and expected return move in tandem; the greater the risk, the greater the
expected return.
17. Sources of finance
For a businessperson or entrepreneur, finding the sources of
business finance is the most important aspect when starting a
business or a new venture.
It needs the maximum effort and dedication.
The sources of business finance are categorized based on
ownership, time, period, control, etc., evaluated, and used in
different situations.
18. Classification of Sources of
Funds
Businesses can raise capital through various sources of funds
which are classified into three categories.
Based on Period :
◦ Long Term Source of Finance (more than 5 years )
◦ Medium Term Source of Finance ( 1-5 years)
◦ Short Term Source of Finance ( less than 1 year)
Based on Ownership
◦ Owner’s Fund
◦ Borrowed Funds
Based on Generation
◦ Internal source
◦ External source
19. Sources of long term finance
•Equity shares
•Preference shares
•Ploughing back of profits
•Debentures
•Financial institutions
20. Sources of short term finance
•Deferred income: A business receives payment in advance before delivering the agreed
upon services or goods delivered.
•Trade credit: A major source of short-term financing that happens during the normal
course of business transaction.
•Commercial banks loans
•Commercial papers
•Accruals
21. Time Value of Money
The time value of money (TVM) is the concept that a sum of
money is worth more now than the same sum will be at a
future date due to its earnings potential in the interim.
The time value of money is a core principle of finance.
A sum of money in the hand has greater value than the same
sum to be paid in the future.
The time value of money is also referred to as the present
discounted value.
22. Time Value Adjustment
Two most common methods of adjusting cash flows for time value of money:
◦ Compounding—the process of calculating future values of cash flows and
◦ Discounting—the process of calculating present values of cash flows.
23. Future value
Compounding is the process of finding the future values of cash flows by applying the concept
of compound interest.
Compound interest is the interest that is received on the original amount (principal) as well as
on any interest earned but not withdrawn during earlier periods.
Simple interest is the interest that is calculated only on the original amount (principal), and
thus, no compounding of interest takes place.
24. Present value
Present value of a future cash flow (inflow or outflow) is the amount of current cash that is of
equivalent value to the decision-maker.
Discounting is the process of determining present value of a series of future cash flows.
The interest rate used for discounting cash flows is also called the discount rate.
