FINANCIAL MANAGEMENT

1. UNIT-2
FINANCIAL MANAGEMENT

2. INDIAN CAPITAL MARKET
◦ The Indian capital market is the market for long term loanable funds as
distinct from money market which deals in short-term funds
◦ It refers to the facilities and institutional arrangements for borrowing and
lending 'term funds', medium term and long term funds.
INDIAN STOCK MARKET
◦ It is a place where shares of pubic listed companies are traded. The primary
market is where companies float shares to the general public in an initial
public offering (IPO) to raise capital.
NEW ISSUES MARKET
◦ New Issue refers to a security that is issued, registered, and sold in a
market for the first time.
◦ It doesn't necessarily refer to the newly issued stocks, although the initial
public offerings are one of the most commonly known new issues.
◦ Both debt and equity are the types of securities which can be newly issued.

3. LONG TERM FINANCE
Long-term finance can be defined as any financial instrument with
maturity exceeding one year (such as bank loans, bonds, leasing and other
forms of debt finance), and public and private equity instruments.
SOURCES OF LONG TERM FINANCE
◦ Shares
◦ Retained earnings
◦ Debentures
◦ Public deposits
◦ Loan from financial institutions
◦ Lease financing
◦ Venture capital financing
◦ Hire purchase financing
◦ Debt securitization
◦ International financing

4. FACTORS DETERMINING LONG TERM FINANCIAL REQUIREMENTS
◦ Nature of business
◦ Nature of goods purchased
◦ Technology used
SHARES
Shares represent equity ownership in a corporation or financial asset, owned by
investors who exchange capital in return for these units
TYPES OF SHARES
◦ Preference shares
◦ Equity shares

5. DEBENTURES
A debenture is a type of bond or other debt instrument that is
unsecured by collateral.
FEATURES OF DEBENTURES
◦ Debentures constitute the loan capital of the firm.
◦ Debenture holders are creditors of the firm.
◦ Interest on debentures is paid at a fixed rate on a periodical basis such
as six monthly, yearly, etc.
◦ Debentures carry no voting rights except under special circumstances.
◦ Debenture holders can take legal action against the firm, for any
default in the matter of payment of interest or repayment of capital.
◦ Debenture holders can even apply for winding up of the firm if it is in
their interest to do so.

6. TYPES OF DEBENTURES
◦ Redeemable debentures
◦ Irredeemable debentures
◦ Convertible debentures
◦ Non-convertible debentures
◦ Simple debentures
◦ Secured debentures
◦ Bearer debentures
◦ Registered debentures
MERITS
◦ Cost of debentures is lower than shares as the
interest is tax-deductible.
◦ Debenture financing does not result in dilution
of control.
◦ In a period of rising prices, debenture issue is
advantageous.
DEMERITS
◦ Debenture interest and capital repayment are
obligatory payments.
◦ The protective covenants associated with a
debenture issue may be restrictive.
◦ Debenture financing enhances the financial risk
associated with the firm.

7. DIFFERENCE BETWEEN SHARES AND DEBENTURES
TERM LOAN
A term loan is a loan from a bank for a specific amount that has a
specified repayment schedule and a fixed or floating interest
rate.
BASIS SHARES DEBENTURES
Shares Shareholders are the owners of the firm Debentureholders are the creditors of the firm
Nature od ROI Shareholders get dividend but not it's not fixed Interest is paid at a fixed rate
Rights They have the right to vote Do not have the right to vote
Security No security is required to issue shares Generally debentures are secured
Order of payment Paid back after repaying the loan of debentures Have the priority of repayment over shareholders

8. LEASE
A legal agreement that allows you to use a
building or land for a fixed period of time in
return for rent.
ADVANTAGES OF LEASING
◦ Saving of capital
◦ Flexibility and convenience
◦ Planning cash flows
◦ Improvement in liquidity
TYPES OF LEASES
◦ Financial lease
◦ Operating lease
◦ Sale and lease back
◦ Leveraged leasing
◦ Direct leasing

9. HIRE PURCHASE
A way of buying goods. You do not pay the full price immediately but make regular small
payments (instalments) until the full amount is paid.
VENTURE CAPITAL FINANCING
Venture capital (VC) is a form of private equity and a type of financing that investors provide to
startup companies and small businesses that are believed to have long-term growth potential.
METHODS OF VENTURE CAPITAL FINANCING
◦ Equity financing
◦ Conditional loan
◦ Income note
◦ Participating debenture

10. PRIVATE EQUITY
Private equity describes investment partnerships that buy and manage
companies before selling them. Private equity firms operate these investment
funds on behalf of institutional and accredited investors.
PUBLIC DEPOSITS
Public Deposits refer to the unsecured deposits or money invited by
companies from the public mainly to finance their short or long-term working
capital needs.
INTERNATIONAL FINANCING
International finance is the study of monetary interactions that transpire
between two or more countries. International finance focuses on areas such as
foreign direct investment and currency exchange rates. Increased
globalization has magnified the importance of international finance.

11. INTRODUCTION TO CAPITAL
STRUCTURE
Capital structure refers to the specific mix of
debt and equity used to finance a company's
assets and operations. From a corporate
perspective, equity represents a more expensive,
permanent source of capital with greater
financial flexibility.
DETERMINANTS OF CAPITAL
STRUCTURE
◦ Trading on equity
◦ Stability on sales
◦ Exercise control
◦ Cost of capital
◦ Statutory requirements
◦ Capital market conditions
◦ Corporate taxations
◦ Government policies
◦ Flexibilities
◦ Timing
◦ Size of the firm
◦ Purpose of financing
◦ Period of finance
◦ Maneuverability
◦ Floatation cost
◦ Requirement of investors
◦ Provision for future growth

12. PROVISIONS AND COMPUTATION OF NET INCOME APPROACH
Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling,
general and administrative expenses, operating expenses, depreciation, interest, taxes, and other
expenses
THE NI APPROACH IS BASED ON THE FOLLOWING ASSUMPTIONS
◦ There are no corporate taxes
◦ The cost of debt (Kd ) is less than cost of equity (Ke)
◦ The use of debt content does not change the risk perception of investors. As the result both the
Kd and Ke remains constant.

13. PROVISIONS AND COMPUTATIONS OF NET OPERATING INCOME APPROACH
Net operating income measures an income-producing property's profitability before adding in
any costs from financing or taxes. To calculate NOI, subtract all operating expenses incurred on a
property from all revenue generated on the property.
THE NOI APPROACH IS BASED ON THE FOLLOWING ASSUMPTIONS
◦ The overall cost of capital remains constant for all degreeof debt-equity mix.
◦ The market capitalizes the value of firm as a whole.
◦ The use of less costly debt funds increases the risk of shareholders.
◦ There are no corporate taxes.
◦ The cost of debt is constant.

14. THANK YOU