This document provides an overview of the key topics covered in the BA 5203 Financial Management unit on the foundations of finance. It introduces concepts such as financial management objectives and functions, the time value of money, risk and return analysis of single assets and portfolios. Methods for calculating present and future values are presented. The differences between equity shares and bonds are outlined. Overall it serves as an introductory guide to fundamental principles of corporate finance.
This presentation is made by Toran Lal Verma. Meaning, nature, and scope of Financial Management are discussed. scope and objectives of financial management have been discussed along with merits and demerits.
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
Chapter 1 Introduction to Financial ManagementSafeer Raza
Chapter 1 of Financial Management by Van horn
Introduction to Financial management
Topics
Introduction
What is Financial Management
Investment Decision
Financing decision
Asset management Decision
Goal of the firm
Value creation or profit maximization
wealth maximization
Agency problems
Corporate Social Responsibility
Corporate governance
Organization of the financial management function
This presentation is made by Toran Lal Verma. Meaning, nature, and scope of Financial Management are discussed. scope and objectives of financial management have been discussed along with merits and demerits.
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
Chapter 1 Introduction to Financial ManagementSafeer Raza
Chapter 1 of Financial Management by Van horn
Introduction to Financial management
Topics
Introduction
What is Financial Management
Investment Decision
Financing decision
Asset management Decision
Goal of the firm
Value creation or profit maximization
wealth maximization
Agency problems
Corporate Social Responsibility
Corporate governance
Organization of the financial management function
1.1 identify the type of accounting
1.2 difference between Cost Accounting , Cost Accountancy and Costing
1.3 understand the Management information needs
1.4 identify the objectives of cost accounting
1.5 difference between Cost Accounting Vs. Financial Accounting
1.6 identify the role of cost accountant
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
1.1 identify the type of accounting
1.2 difference between Cost Accounting , Cost Accountancy and Costing
1.3 understand the Management information needs
1.4 identify the objectives of cost accounting
1.5 difference between Cost Accounting Vs. Financial Accounting
1.6 identify the role of cost accountant
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
A CCP is an experienced practitioner with advanced knowledge and technical expertise to apply the broad principles and best practices of Total Cost Management (TCM) in the planning, execution and management of any organizational project or program. CCPs also demonstrate the ability to research and communicate aspects of TCM principles and practices to all levels of project or program stakeholders, both internally and externally.
This presentation has been uploaded by Public Relations Cell, IIM Rohtak to help the B-school aspirants crack their interview by gaining basic knowledge on Finance.
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Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdf
Financial management unit 1 Foundations of finance
1. BA 5203 FINANCIAL MANAGEMENT
UNIT 1: FOUNDATIONS OF FINANCE
Prepared and presented,
N. Ganesha Pandian
2. CONTENT – UNIT 1 FOUNDATION OF FINANCE
Introduction to finance
Financial management – nature, scope and functions of
finance
organization of financial functions
Objectives of financial management
Major financial decisions
Time value of money
Features and valuation of shares and bonds
Concept of risk and return
Single asset and a portfolio
MSMMBA-FinancialmanagmentGanesha
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2
3. INTRODUCTION
Finance life blood of the organization
Meaning of financial management:
- Management of flow of funds within the
organization
- Effective utilization for the attainment of
organizational objectives.
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4. DEFINITIONS OF FINANCIAL MANAGEMENT
According to Solomon: “Financial management is
concerned with the efficient use of an important
economic resource namely, capital funds.”
J.F Bradley : “ Financial management is the area of
the business management devoted to the judicious
use of capital in order to enable a business firm to
move in the direction of reaching its goal.”
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5. SCOPE OF FINANCIAL MANAGEMENT
1. Traditional approach – raising funds for corporates
(outside view)
2. Modern approach – optimum allocation inside the
organization (inside view)
5
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6. OBJECTIVES OF FINANCIAL MANAGEMENT
Basic objectives - 1. Profit maximization 2. wealth
maximization
Profit maximization – criticisms (ambiguity, time
value of money and risk factors
Wealth maximization – maximizing the net present
worth means maximizing the market price of shares
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Contd…
7. OTHER OBJECTIVES
Return maximization
Provide support for decision making
Manage risks
Use resource effectively, efficiently and
economically
Provide a supportive control environment
Comply with authorities and safeguard assets
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8. ROLE OF FINANCE MANAGER
Forecasting financial requirements
Financing decisions
Investment decisions – long term and short term
Dividend decisions
Deciding overall objectives
Supply of funds to all parts of organization
Evaluating financial performance
Financial negotiation
Stock exchange and share prices updates 8
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9. LIQUIDITY VS. PROFITABILITY
Liquidity – ability of the firm to pay its debt off
Profitability – ability to make profit from the
investment
Both are contradictory to one another
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10. CONCEPT OF RISK AND RETURN
Risk – variability of the expected return from the
investment made
Return – gain or profit expected from the investment
Risk associated return is given by:
Return = risk free return + risk premium
Risk – return trade off = optimization of risk and return
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11. FINANCIAL MANAGEMENT AND OTHER
FUNCTIONAL AREAS
Financial management and production management
Financial management and marketing management
Financial management and personnel management
Financial management and material management
Financial management and accounting
Financial management and statistics
Financial management and economics
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12. SIGNIFICANCE OF FINANCIAL MANAGEMENT
Effective and optimum utilization of funds
Performance of organization finance
Co-ordination with other departments
Support decision making – minimizing the risk of profit
plan
Also helps in profit planning, capital spending,
measuring cost and account receivable and so on…
12
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13. CONCEPT OF TIME VALUE OF MONEY
A rupee worth today is more than a rupee available
at future date
Risk return trade off:
Higher the risk then higher the return, lower
the risk then lower the return
Time value of money – the value of time derived from
the use of money over the time as a result of
investment and re- investment 13
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14. REASONS FOR TIME VALUE OF MONEY
Risk
Preference of present consumption
Inflation
Investment opportunity
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15. METHODS FOR TIME VALUE OF MONEY
CALCULATION
Calculation of equivalent values from different
points of time is converted into values at particular
point of time (present or future)
2 techniques :
1. Compounding
2. Discounting
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16. LIST OF COMPOUNDING TECHNIQUES
These techniques will ascertain the future value of the
present money
Compounding of interest over ‘n’ years
Multiple compounding periods
Effective rate of interest
Doubling period
Compound value of a series of payments
Compound value of an annuity 16
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17. LIST OF DISCOUNTING TECHNIQUES
Present value of lump sum
Present value of series of cash flows
Present value of annuity
Present value of annuity due
Present value of perpetuity
Present value of growing perpetuity
Present value of growing annuity
Sinking fund 17
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18. RISK AND RETURN OF SINGLE ASSET
For single asset:
Rate of return = Annual income + (ending price – beginning price)
Beginning price
For example: price at beginning : $ 60.00
Price at end : $ 69.00
Dividend paid : $ 2.40
Rate of return = 2.4 + (69-60) / 60 = 0.19 = 19%
18
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Contd…
19. Formula may be refined as,
Rate of return = Annual income + End price – begin price
begin price begin price
Now rate of return = [2.4/60]+[(69-60)/60] = 0.4+0.15
= 0.19 = 19 %
19
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20. CALCULATION OF EXPECTED RATE OF RETURN
Economic
condition
Probability
Pi
Rate of return
Ri
Boom 0.3 16
Normal 0.5 11
Recession 0.2 6
20
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Expected rate of return E(R) = ∑ Pi Ri
Economic
condition
Probability
Pi
Rate of
return Ri
Pi Ri
Boom 0.3 16 4.8
Normal 0.5 11 5.5
Recession 0.2 6 1.2
Contd…
21. Expected rate of return E(R) = 11.5%
Calculation of standard deviation of return:
= root of [ ∑ Pi (Ri – E(R))^2 ]
21
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Econo
mic
conditi
on
Proba
bility
Pi
Rate
of
return
Ri
Pi Ri Ri –
E(R)
Ri –
E(R)^2
Pi(Ri –
E(R)^2
)
Boom 0.3 16 4.8 4.5 20.25 6.075
Normal 0.5 11 5.5 -0.5 0.25 0.125
Reces
sion
0.2 6 1.2 -5.5 30.25 6.050
Contd…
23. PORTFOLIO OF ASSETS
Portfolio means the combination of more than one
assets
Formula is E(Rp)= x1 E(R1) + x2 E(R2)
E(Rp) – expected rate of return of portfolio
X1 – Proportion of asset1 in portfolio
E(R1) – expected rate of return of asset1
X2 – proportion of asset2 in portfolio
E(R2) – expected rate of return of asset2 23
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24. EXAMPLE FOR PORTFOLIO OF ASSETS
Assume $1, 00,000 invested in two assets gold and
shares. Here 60% in gold and 40% in shares
24
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Market condition
and probability
Gold (Expected
rate of return)
Shares
(Expected rate
of return)
Good 10% 5%
Bad 2% 1%
Contd…
26. DIVERSIFICATION OF RISK IN PORTFOLIO
0%
2%
4%
6%
8%
10%
12%
Good Bad
Gold
Shares
Portfolio
26
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If 100% in gold expected rate is 8.4%
If 100% in shares expected rate is 4.2%
If portfolio of gold and shares is 6.72%
27. FEATURES AND VALUATION OF EQUITY
SHARES AND BONDS
Objective to maximize the market value of the firm’s
equity shares
So we should know the value of bonds and shares
Value of firm is the total sum of value of bonds and
shares
Basic discounted cash flow valuation model applied
to bonds and equity shares valuation.
27
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28. FEATURES OF EQUITY SHARES
1. They are permanent in nature
2. Equity shareholders are the actual owners of the company
and they bear the highest risk.
3. Equity shares are transferable, i.e. ownership of equity
shares can be transferred with or without consideration to
other person.
4. Dividend payable to equity shareholders is an appropriation
of profit.
5. Equity shareholders do not get fixed rate of dividend.
6. Equity shareholders have the right to control the affairs of
the company.
7. The liability of equity shareholders is limited to the extent of
their investment. 28
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29. FEATURES OF BONDS
Interest rate or coupon rate payable to bond
holders
Bond holders get equal amount of payment in every
installment
Bond holders don’t have control over the affairs of
company
Debt instrument issued by government or any
business firm.
They hold liability to the extent they purchased the
bonds
It is not permanent and ends in certain maturity
period
29
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30. BASIC VALUATION MODEL
Value of asset = present value of cash flows expected from
the investment
Vo = c1 / (1+k)^1 + c2 / (1+k)^2 + c3 / (1+k)^3 + ….Cn/ (1+k)^n
Vo = value of asset at that time
Cn = cash flow
n = life of asset
PVIF = present value interest factor = 1 / (1+k)^t
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31. EXAMPLE PROBLEM
An investor invested in a asset expected a cash
flow as below: required rate of return is 16%
Vo = PVIF(16,1) C1+ PVIF (16,2) C2 + PVIF (16,3)
C3
= (20*0.86) + (30*0.74) + (220*0.64)
= 180.55 31
MSMMBA-FinancialmanagmentGanesha
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Year Cash
flow
1 $20
2 $30
3 $220
32. BOND VALUATION
Par value : face value at which bonds issued
Rs.100 or Rs. 1000
Coupon rate or interest rate : rate at which the bond
holders get paid
Maturity period : corporate bonds 3- 10yrs ;
government bonds 20-25yrs
Formula, V = ∑ I PVIFA (Kd , n) + F PVIF (Kd,n)
V= value of bond; I= interest paid annually; F= Principal amount; n=
maturity period
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33. EXAMPLE PROBLEM
A person invested in bond par value = $100; required
rate of return = 13%; coupon rate = 12%; maturity
period = 8yrs
V = 12* PVIFA (14%,8) + 100 PVIF (14%,8)
= (12* 4.63) + (100* 0.35)
= 90.77
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34. Yield to maturity:
The rate of return which an investors earns from the
bond, if holds the bond for maturity period.
It is also called as required rate of return
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35. EQUITY VALUATION: DIVIDEND CAPITALIZATION
APPROACH
1. Single period valuation model
2. Multi period valuation model
Other approaches:
1. Earning capitalization approach
2. Book value approach
3. Liquidation approach
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