Financial Management

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: BBA Fifth Semester
Name of the Subject:
FINANCIAL MANAGEMENT
Unit - 1

• Have a good understanding of the:
– basic types of financial management decisions
and the role of the financial manager
– goal of financial management
– financial implications of the different forms of
business organization
– conflicts of interest that can arise between
managers and owners
Unit – 1
Key concepts and skills

Chapter outline
• Finance: A quick look
• Business finance and the financial manager
• Forms of business organisation
• The goal of financial management
• The agency problem and control of the
corporation
• Financial markets and the corporation

The four basic areas of finance
1. Corporate finance or business finance
2. Investments
3. Financial institutions
4. International finance

Investments
• Working with financial assets such as
shares and bonds
• Value of financial assets, risk versus return
and asset allocation
• Job opportunities
– Stockbroker
– Financial advisor
– Portfolio manager
– Security analyst

Objectives of Financial Management
• Profit Maximisation
• Wealth Maximisation

Maximizing Shareholder Wealth
• The objective of financial management is to
maximize shareholder wealth as reflected in
share prices.

Role of Management
• Management serves as an arbitrator and moderator
between conflicting interest groups or stakeholders
and objectives.
• Creditors, managers, employees and customers hold
contractual claims against the firms revenues
• Shareholders have residual claims against the
company

Sources of Finance
• Sources of finance are equity, debt, debentures,
retained earnings, term loans, working capital loans,
letter of credit, euro issue, venture funding etc.
These sources of funds are used in different
situations. They are classified based on time period,
ownership and control, and their source of
generation. It is ideal to evaluate each source of
capital before opting it.

Long-Term Sources of Finance
• Share Capital or Equity Shares
• Preference Capital or Preference Shares
• Retained Earnings or Internal Accruals
• Debenture / Bonds
• Term Loans from Financial Institutes, Government,
and Commercial Banks
• Venture Funding
• Asset Securitization

Medium Term Sources of Finance
• Preference Capital or Preference Shares
• Debenture / Bonds
• Medium Term Loans from
– Financial Institutes
– Government, and
– Commercial Banks

Short Term Sources of Finance
• Short Term Loans like Working Capital Loans from
Commercial Banks
• Fixed Deposits for a period of 1 year or less
• Advances received from customers
• Creditors
• Payables
• Factoring Services
• Bill Discounting etc

Factoring
• Factoring, receivables factoring or debtor financing, is when a
company buys a debt or invoice from another company.
Factoring is also seen as a form of invoice discounting in many
markets and is very similar but just within a different context.
In this purchase, accounts receivable are discounted in order
to allow the buyer to make a profit upon the settlement of the
debt. Essentially factoring transfers the ownership of accounts
to another party that then chases up the debt.

Venture Capital
• Venture capital is financing that investors provide
to startup companies and small businesses that are
believed to have long-term growth potential. Venture
capital generally comes from well-off investors,
investment banks and any other financial
institutions. However, it does not always take just a
monetary form; it can be provided in the form of
technical or managerial expertise.

Commercial Bank
• A commercial bank is a type of financial institution
that accepts deposits, offers checking account
services, makes business, personal and mortgage
loans, and offers basic financial products
like certificates of deposit (CDs) and savings accounts
to individuals and small businesses. A commercial
bank is where most people do their banking, as
opposed to an investment bank.

Certificate of Deposit
• The certificate of deposit indicates that the investor has
deposited a sum of money for specified period of time and at
a specified rate of interest. CD rates, terms and dollar
amounts will vary from institution to institution. CDs are not
publicly traded securities. As such, you will not find them
traded on any exchange. You can also purchase CDs through
a stockbroker. Because brokers have access to CDs from many
institutions across the country, investors have more choices in
regard to terms and yield.

Global Depositary Receipt
• A global depositary receipt (GDR) is a bank certificate
issued in more than one country for shares in a
foreign company. The shares are held by a foreign
branch of an international bank. The shares trade as
domestic shares but are offered for sale globally
through the various bank branches. A GDR is
a financial instrument used by private markets to
raise capital denominated in either U.S. dollars or
Euros

Time Value of Money
• The time value of money (TVM) is the concept that
money available at the present time is worth more
than the identical sum in the future due to its
potential earning capacity. This core principle
of finance holds that, provided money can earn
interest, any amount of money is worth more the
sooner it is received. TVM is also sometimes referred
to as present discounted value.

Valuation of Financial Securities,
Instruments & Derivatives
• Security valuation is important to decide on the
portfolio of an investor. All investment decisions are
to be made on a scientific analysis of the right price
of a share. Hence, an understanding of the valuation
of securities is essential. Investors should buy
underpriced shares and sell overpriced shares. Share
pricing is thus an important aspect of trading.
Conceptually, four types of valuation models are
discernible.

Summary
1. With the increasing complexity and uncertainty in
the marketplace, finance is emerging as the
business function that holds the corporation
together at the top management level.
2. If markets are "perfect", (perfect competition,
perfect information, rational market participants,
no externalities), economic theory has
demonstrated that an efficient allocation of
resources will result.

Semester : BBA Fifth Semester
Unit-2

Unit – 2
Time Value of Money
• Time value of money - Money has the ability
to increase over time (if it is invested)
• Interest - The amount of money that is earned
over a certain time period
• Interest rate - The rate interest is earned

Bond Valuation
• Bonds are debt instruments used by business and
government to raise large sums of money
• Most bonds share certain basic characteristics
– First, a bond promises to pay investors a fixed amount of
interest, called the bond’s coupon.
– Second, bonds typically have a limited life, or maturity.
– Third, a bond’s coupon rate equals the bond’s annual
coupon payment divided by its par value.
– Fourth, a bond’s coupon yield equals the coupon payment
divided by the bond’s current market price

Capital Structure
• The value of a firm is defined to be the sum of the
value of the firm’s debt and the firm’s equity.
V = B + S

Basic Definitions
• V = value of firm
• FCF = free cash flow
• WACC = weighted average cost of capital
• rs and rd are costs of stock and debt
• re and wd are percentages of the firm that are
financed with stock and debt.

Capital Structure Theory
• MM theory
– Zero taxes
– Corporate taxes
– Corporate and personal taxes
• Trade-off theory
• Signaling theory
• Debt financing as a managerial constraint

Optimal capital structure
• An optimal capital structure is the best debt-
to-equity ratio for a firm that maximizes its
value. The optimal capital structure for a
company is one that offers a balance between
the ideal debt-to-equity range and minimizes
the firm's cost of capital.

Cost of capital
• Cost of capital refers to the opportunity cost of
making a specific investment. It is the rate of return
that could have been earned by putting the same
money into a different investment with equal risk.
Thus, the cost of capital is the rate of return required
to persuade the investor to make a given investment.

Importance cost of capital
• Designing the capital structure
• Capital budgeting decisions
• Comparative study of sources of financing
• Evaluations of financial performance
• Knowledge of firms expected income and inherent
risks
• Financing and Dividend Decision

Classification of Cost of Capital
• Explicit Cost and Implicit Cost
• Future Cost and Historical Cost
• Specific Cost
• Average Cost and Marginal Cost

Leverage
• Leverage refers to the employment of assets
or sources of fund bearing fixed payment to
magnify EBIT or EPS respectively. So it may be
associated with investment activities or
financing activities.

Types of leverages
• Operating leverage
• Financial leverage

Importance of Leverage
• Measurement Of Operating Risk
• Measurement Of Financial Risk
• Managing Risk
• Designing Appropriate Capital Structure Mix
• Increase Profitability

Semester: SEVENTH Semester
WOMEN AND LAW
RAPE LAWS IN INDIA
Unit-3

Capital Budgeting
Capital budgeting is the process in which a business
determines and evaluates potential expenses or
investments that are large in nature. These
expenditures and investments include projects such
as building a new plant or investing in a long-term
venture. Often times, a prospective project's lifetime
cash inflows and outflows are assessed in order to
determine whether the potential returns generated
meet a sufficient target.

Importance Of Capital Budgeting
• Develop and formulate long-term strategic
goals
• Seek out new investment projects
• Estimate and forecast future cash flows
• Facilitate the transfer of information
• Monitoring and Control of Expenditures

Capital Budgeting Techniques
• Payback Period measures the time in which the initial cash
flow is returned by the project. Cash flows are not discounted.
Lower payback period is preferred.
• Net Present Value (NPV) is equal to initial cash outflow less
sum of discounted cash inflows. Higher NPV is preferred and
an investment is only viable if its NPV is positive.
• Accounting Rate of Return (ARR) is the profitability of the
project calculated as projected total net income divided by
initial or average investment. Net income is not discounted.

• Internal Rate of Return (IRR) is the discount rate at which net
present value of the project becomes zero. Higher IRR should
be preferred.
• Profitability Index (PI) is the ratio of present value of future
cash flows of a project to initial investment required for the
project.
Capital Budgeting Techniques

Capital Rationing
• Capital rationing is the act of placing restrictions on
the amount of new investments or projects
undertaken by a company. This is accomplished by
imposing a higher cost of capital for investment
consideration or by setting a ceiling on specific
portions of a budget.

Sensitivity Analysis
• Sensitivity Analysis is a tool used in financial
modeling to analyze how the different values of a set
of independent variables affect a specific dependent
variable under certain specific conditions.

Standard Deviation
• The standard deviation is a statistic that measures
the dispersion of a dataset relative to its mean and is
calculated as the square root of the variance. It is
calculated as the square root of variance by
determining the variation between each data point
relative to the mean. If the data points are further
from the mean, there is higher deviation within the
data set; thus, the more spread out the data, the
higher the standard deviation.

Decision Tree
• A decision tree is a graphical representation of
possible solutions to a decision based on
certain conditions. It's called a decision tree
because it starts with a single box (or root),
which then branches off into a number of
solutions, just like a tree.

Risk-Adjusted Discount Rate
• An estimation of the present value of cash for high risk
investments is known as risk-adjusted discount rate. A very
common example of risky investment is the real estate. Risk
adjusted discount rate is representing required periodical
returns by investors for pulling funds to the specific property.
It is generally calculated as a sum of risk free rate and risk
premium. The variation of risk premium is depending on the
risk aversion of investor and the perception of investor about
the size of property’s investment risk.
Risk-adjusted discount rate = Risk free rate + Risk premium

Semester: SEVENTH Semester
WOMEN AND LAW
RAPE LAWS IN INDIA
Unit-4

Working Capital Management
• Working capital management refers to a company's
managerial accounting strategy designed to monitor
and utilize the two components of working capital,
current assets and current liabilities, to ensure the
most financially efficient operation of the company.
The primary purpose of working capital management
is to make sure the company always maintains
sufficient cash flow to meet its short-term operating
costs and short-term debt obligations.

Cash management
• Cash management is the corporate process of
collecting and managing cash, as well as using
it for (short-term) investing. It is a key
component of ensuring a company's financial
stability and solvency.

Inventory management
• Inventory management is the supervision of
non-capitalized assets (inventory) and stock
items. A component of supply
chain management, inventory
management supervises the flow of goods
from manufacturers to warehouses and from
these facilities to point of sale.

Accounts receivable management
• Accounts receivable management
incorporates is all about ensuring that
customers pay their invoices. Good
receivables management helps prevent
overdue payment or non-payment. It is
therefore a quick and effective way to
strengthen the company's financial or liquidity
position.

Account Payables Management
• Account Payables Management refers to the
set of policies, procedures, and practices
employed by a company with respect
to managing its trade credit purchases.

Dividend policy
• Dividend policy is the set of guidelines a
company uses to decide how much of its
earnings it will pay out to shareholders. Some
evidence suggests that investors are not
concerned with a company'sdividend
policy since they can sell a portion of their
portfolio of equities if they want cash

Irrelevance Theory of Dividend
• The dividend irrelevance theory is the theory
that investors do not need to concern
themselves with a company's dividend policy
since they have the option to sell a portion of
their portfolio of equities if they want cash.

Relevance concept of Dividend
• They would discount future dividends. The
retained earnings are evaluated by the
investors as a risky promise. In case the
earnings are retained, the market price of the
shares would be adversely affected. In case
the earnings are retained, the market price of
the shares would be adversely affected.

Financial Management

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