Block – 1

1. Overviews & Introduction of Finance_1

2. Financial Management-Functions & Objectives_2
3. Financial decision making_3
4. Role of Finance manager_4
5. Time value of money_part_1-5
6. Time value of money_part_2-6
7. Time value of money-7
aditional material :- NO

Block -2

1. Cost of Capital
2. Cost of Capital (Share Capital)
3. Cost of Capital (long term Debt)
4. Weighted Average Cost of Capital (illustration)
5. Financial and Operating Leverage
6. Leverage and Indifference Points
7. Leverage (illustration)
8. Operating Leverage (illustration)
additional material :- NO

Block – 3

1. Capital Structure
2. Capital Structure- THEORIES
3. Optimum Capital Structure
4. Capital Structure-Illustrations
5. EBIT-EPS analysis-(Capital Structure) Illustrations Part-1
6. EBIT-EPS analysis-(Capital Structure) Illustrations Part-2
additional material :- NO
Block – 4

1. Capital Budgeting
2. Capital Budgeting Techniques
3. Risk Analysis in Capital Budgeting
Additional materials :- NO

Block -5

1. Working Capital Management

2. Operating Cycle Method
3. Financing of working Capital
4. Management of Inventories
5. Dividend Policy Decisions
6. MM hypothesis- illustration
7. Walter & Gordan Model- illustration
8. Dividend Decision- Miscellaneous Illustration
9. Factors Affecting Dividend Policy
10.CASH MANAGEMENT
additonal material :- NO
block -1
Finance is about the bottom line of business activities.
Every business is a process of acquiring and disposing assets:
–Real assets (tangible and intangible).
–Financial assets.

Objectives of Financial Management:

1. Wealth Maximization: The one of the most important objective of financial

managers is to maximize the value of shares of their shareholders.

2. Profit Maximization

3. Focus on stakeholders: Stakeholders are those entities who have invested in

shares and the interest of those people that a firm can’t ignore.

4. Estimation of capital requirement

5. Arranging of required funds

6. Optimum utilization of funds

7. Management of cash position or balance

8. Coordination with other functions or department

Functions of financial management:

1. Estimation of Capital Requirement: Estimation depends upon expected costs,

profits, future programs and policies of a firm. Estimation must be adequate, as it
can increase the earning capacity of the firm.

2. Determination of Capital Composition: It is based on long term-short term debt

equity analysis. This will depend upon the proportion of equity capital a company
is processing and additional funds which have to be raised from outside parties.
3.Choice of sources of funds: Choice of funds depend upon the relative merits and
demerits of each resource. Various sources of funds are:

 Issue of shares and debentures

 Loans to be taken from banks and financial institutions
 Public deposits to be drawn, like in the form of bonds

4. Investment of Funds: Financial Manager has to decide to allocate funds into

profitable ventures so that there is safety on investment and regular returns are
possible.

5. Disposal of surplus: It refers to the decisions on the net profits made about the
dividend declaration and retained earnings.

6. Management of cash: The Financial manager has to make decisions with regards
to cash management. It is required for many purposes like payment of wages and
salaries, bills, creditors, maintenance of stock, raw materials, etc.

7. Financial Control: Financial Manager not only has to plan, procure and utilize
funds but he also has to exercise control over finances. This can be done through
many techniques like ratio analysis, financial forecasting, cost and profit control,
etc.

Time Value of Money - TVM

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.
block -2

Cost of capital
Cost of capital is the required return necessary to make a capital budgeting project,
such as building a new factory, worthwhile. Cost of capital includes the cost of
debt and the cost of equity, and is used by companies internally to judge whether a
capital project is worth the expenditure of resources, and by investors who use it to
determine whether an investment is worth the risk compared to the return.

Weighted average cost of capital wacc

WACC is the arithmetic average (mean) capital cost that weights the contribution
of each capital source by the proportion of total funding it provides. "Weighted
average cost of capital" usually appears as an annual percentage.

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.

Leverage results from using borrowed capital as a funding source when investing
to expand the firm's asset base and generate returns on risk capital. Leverage is an
investment strategy of using borrowed money — specifically, the use of various
financial instruments or borrowed capital — to increase the potential return of an
investment. Leverage can also refer to the amount of debt a firm uses to finance
assets. When one refers to a company, property or investment as "highly
leveraged," it means that item has more debt than equity.

two types of lever-ages:

1. Operating leverage

2. Financial leverage.

1. Operating leverage:

Operating leverage is concerned with the investment activities of the firm. It relates
to the incurrence of fixed operating costs in the firm’s income stream. The
operating cost of a firm is classified into three types: Fixed cost, variable cost and
semi-variable or semi-fixed cost.

2. Financial leverage:

Financial leverage is mainly related to the mix of debt and equity in the capital
structure of a firm. It exists due to the existence of fixed financial charges that do
not depend on the operating profits of the firm.
block -3

Capital structure
The capital structure is how a firm finances its overall operations and growth by
using different sources of funds. Debt comes in the form of bond issues or long-
term notes payable, while equity is classified as common stock, preferred stock or
retained earnings. Short-term debt such as working capital requirements is also
considered to be part of the capital structure.

The important theories of capital structure are given below:

1. Net Income Approach:

According to this approach, a firm can minimize the weighted average, cost of
capital and increase the value of the firm as well as market price of equity shares
by using debt financing to the maximum possible extent. The theory propounds
that a company can increase its value and reduces the overall cost of capital by
increasing the proportion of debt in its capital structure. This approach is based
upon the following assumptions:

(i) The cost of debt is less than the cost of equity

(ii) There are no taxes.

(iii) The risk perception of investors is not changed by the use of debt.

2. Net Operating Income Approach:

This theory as suggested by Durand is another extreme of the effect of leverage on

the value of the firm. According to this approach, change in the capital structure of
a company does not affect the market value of the firm and the overall cost of
capital remains constant irrespective of the method of financing.
3. The Traditional Approach:

The traditional approach, also known as Intermediate approach, is a compromise

between the two extremes of net income approach and net operating income
approach.

According to this theory, the value of the firm can be increased initially or the cost
of capital can be decreased by using more debt as the debt is a cheaper source of
funds than equity. Thus, optimum capital structure can be reached by a proper
debt-equity mix.

4. Modigliani and Miller Approach:

M & M hypothesis is identical with the Net Operating Income approach it taxes are
ignored. However, when corporate taxes are assumed to exist, their hypothesis is
similar to the Net Income Approach.

(a) In the absence of taxes:

The theory proves that the cost of capital is not affected by changes in the capital
structure or says that the debt-equity mix is irrelevant in the determination of the
total value of a firm.

(b) When the corporate taxes are assumed to exist:

Modigliani and Miller, in their article of 1963 have recognized that the value of the
firm will increase or the cost of capital will decrease with the use of debt on
account of deductibility of interest charges for tax purpose.

EBIT-EPS Analysis:

The EBIT-EBT analysis is the method that studies the leverage, i.e. comparing
alternative methods of financing at different levels of EBIT. Simply put, EBIT-
EPS analysis examines the effect of financial leverage on the EPS with varying
levels of EBIT or under alternative financial plans.
block -4

Capital budgeting

Capital budgeting is a method of analyzing and comparing substantial future

investments and expenditures to determine which ones are most worthwhile.

Capital budgeting is a process used by companies for evaluating and ranking

potential expenditures or investments that are significant in amount. The large
expenditures could include the purchase of new equipment, rebuilding existing
equipment, purchasing delivery vehicles, constructing additions to buildings, etc.
The large amounts spent for these types of projects are known as capital
expenditures.

Capital budgeting consists of various techniques used by managers such as:

1. Payback Period
2. Discounted Payback Period
3. Net Present Value
4. Accounting Rate of Return
5. Internal Rate of Return
6. Profitability Index

 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.

Risk analysis
Risk analysis gives management better information about the possible outcomes
that may occur so that management can use their judgment and experience to
accept an investment or reject it. Since risk analysis is costly, it should be used
relatively in costly and important projects. Risk and uncertainty are quite
inherent in capital budgeting decisions. This is so because investment decisions
and capital budgeting are actions of today which bear fruits in future which is
unforeseen. Future is uncertain and involves risk.
block -5

Working capital management

Working capital management (WCM) is defined as the management of short-term

liabilities and short-term assets. The process is used continuously to operate and
generate cash flow to meet the need for short-term obligations and daily
operational expenses.

Working Capital = {Estimated Cost of Goods Sold * (Operating Cycle/ 365)}

+Desired Cash and Bank Balance

Operating Cycle

An Operating Cycle (OC) refers to the days required for a business to receive
inventory, sell the inventory, and collect cash from the sale of the inventory. The
cycle plays a major role in determining the efficiency of a business.

The formula is as follows:

Operating Cycle = Inventory Period + Accounts Receivable Period

where Inventory Period is the amount of time inventory sits in storage and
Accounts Receivable Period is the time it takes to collect cash from the sale of the
inventory.

Using the Operating Cycle formula above:

 The Inventory Period is calculated as follows:

Inventory Period = 365 / Inventory Turnover

Where the formula for Inventory Turnover is:

Inventory Turnover = Cost of Goods Sold / Average Inventory

 The Accounts Receivable Period is calculated as follows:

Accounts Receivable Period = 365 / Receivables Turnover

Where the formula for Receivables Turnover is:

Receivables Turnover = Credit Sales / Average Accounts Receivable

Inventory management

Inventory management is a very important function that determines the health of

the supply chain as well as the impacts the financial health of the balance sheet.
Inventory is always dynamic. Inventory management requires constant and careful
evaluation of external and internal factors and control through planning and
review. Most of the organizations have a separate department or job function called
inventory planners who continuously monitor, control and review inventory and
interface with production, procurement and finance departments.

Cash Management

The Cash Management is concerned with the collection, disbursement and the
management of cash in such a way that firm’s liquidity is maintained. In other
words, it is concerned with managing the cash flows within and outside the firm
and making decisions with respect to the investment of surplus cash or raising the
cash from outside for financing the deficit.