Concept diary

Financial Management-2
2021-22

Teaching faculties
Prof. Rajneesh Ranjan Jha
Prof. Naseem Ahmed
Prof. Y Ramakrishna
Prof. Abhishek Sinha
Prof. DS Prasad
Prof. Jyothi C
Prof. Sudesh NS
Prof. Joy Chakraborty
Prof. Kameshwar Rao
Prof. Bhanu Sireesha
Prof. Koya Raghnadh
Prof. Nityanand Tripathi
Prof. Satish Kumar
Having completed the semester, the students are expected to understand at least the following
concepts, know their relevance and applicability:

Sources of Long-Term Finance

1. Equity and its forms (authorized, issued, subscribed, paid-up)
2. Different values of equity (book value, market value, face value)
3. IPO
4. Rights issue process and its impact on shareholders’ wealth
5. Private placement
6. Bought-out deals
7. Preference capital and its types
8. Debenture capital
9. Term loans
10. Lease (operating and financial lease)
11. Hire-purchase
12. Venture capital
13. Private equity
 Leverages
14. Definition of leverage
15. Measures of leverage
16. Degree of operating leverage (DOL)
17. Relation between quantity produced and DOL
18. Operating breakeven point and consequences
19. DOL and business planning
20. Degree of financial leverage (DFL)
21. Relation between debt level and DFL
22. Financial breakeven point and consequences
23. DFL and financial planning
24. Financial leverage and risk
25. Degree of total leverage (DTL)
26. Relation between quantity produced and DTL
27. Overall breakeven point and consequences
 Capital structure and firm value
28. Meaning of capital structure
29. Theories of capital structure
30. Net income theory
31. Net operating income theory
32. Modigliani and Miller theory (M&M)
33. Homemade leverage (Personal arbitrage) in M&M theory
34. Traditional theory
35. M&M theory under corporate taxes
36. Debt and agency cost
37. Debt and financial distress cost
38. Trade-off theory
39. Pecking order theory
40. Factors affecting the capital structure
 Capital Structure Policy
41. Trading on equity
42. EBIT-EPS analysis
43. Financial breakeven point
44. Indifference point
45. Computing EPS at different EBITs
46. Graphical and algebraic approach
47. Role of tax in breakeven analysis
48. Debt advantage
49. Equity advantage
50. Determinants of capital structure
51. Target capital structure
52. Business, financial and market risk
53. ROE-ROI analysis
54. Computing ROE from ROI
55. Computing ROI from ROE
 Overview of Working Capital Management
56. Concept of working capital
57. Gross working capital
58. Net working capital
59. Zero working capital
60. Negative working capital
61. Working capital gap
62. Liquidity vs profitability
63. Conservative approach
64. Aggressive approach
65. Matching approach
66. Temporary current assets
67. Permanent current assets
68. Gross operating cycle
69. Raw material storage period
70. Work-in-progress period
71. Finished goods storage period
72. Average collection period
73. Average payment period
74. Net operating cycle
75. Application of the operating cycle
76. Factors affecting working capital
 Inventory Management
77. Role of inventory in working capital management
78. Liquidity lags
a. Creation lag
b. Storage lag
c. Sale lag
79. The purpose of inventories
80. Types of inventory
81. Costs associated with inventory
82. Material costs
83. Ordering costs
84. Carrying costs
85. Cost of funds tied up with inventory
86. Cost of running out of goods
87. Economic order quantity (EOQ)
88. Inflation and EOQ
89. Modified EOQ to include varying unit prices
90. Reorder point subsystem
91. Safety stock
92. Stock cost and carrying cost
93. The ABC system of inventory management
 Receivables Management
94. Purpose of receivables
95. Cost of maintaining receivables
a. Additional fund requirement for the company
b. Administrative costs
c. Collection costs
d. Defaulting costs
96. Credit standards
97. Credit period
98. Cash discount
99. Collection program
100. Receivables Exchange of India Ltd (RXIL
101. Trade Receivables Discounting System (TreDS)
 Financial Statement Analysis
102. Ratio analysis
103. Liquidity ratios
104. Current ratio
105. Quick ratio (Acid-test ratio)
106. Cash ratio
107. Limitations of current and quick ratios
108. Activity or turnover ratios
109. Accounts receivable turnover ratio
110. Average collection period
111. Inventory turnover ratio
112. Fixed assets turnover ratio
113. Profitability or efficiency ratio
114. Profit in relation to sales
115. Gross profit margin
116. Operating profit margin
117. Net profit margin
118. Profit in relation to assets
119. Earning power
120. Return on assets
121. Return on equity
122. Return on capital employed
123. Earnings ratios
124. EPS
125. P/E ratio
126. Capitalization rate
127. Dividend payout ratio
128. Earnings yield
129. Dividend yield
130. Leverage ratios
131. Debt equity ratio
132. Debt assets ratio
133. Coverage ratios
134. Interest coverage ratio
135. Fixed charges coverage ratio
136. Debt service coverage ratio
137. Comparative analysis
138. Cross-sectional analysis
139. Time-series analysis
140. Year-to-year change
141. Index analysis
142. Common size analysis
143. Du Pont analysis
144. Limitations of financial statement analysis
 Dividend policies and theories
145. Traditional position
146. Walter model
147. Gordon’s model
148. Bird in the hand argument
149. Modigliani and Miller theory of irrelevance
150. Firm growth and payout ratio
151. Share repurchase
152. Bonus issue
153. Stock split
154. Tax clienteles
155. Determinants of dividends
 Cash management
156. Motives for holding cash
157. Playing the float
158. Optimal cash balance
159. Baumol model
160. Miller and Orr model
161. Preparing the cash budget
 Financing current assets
162. Trade credit
163. Cost of trade credit
164. Bank credit
165. Cash credit and overdraft
166. Bill discounting
167. Letter of credit
168. Letter of undertaking
169. Letter of comfort
170. Hypothecation
171. Pledge
172. Lien
 Problems
1. Understanding the impact of rights issue on shareholders’ wealth
2. Computing the degree of operating leverage and business planning
3. Computing the degree of financial leverage and financial planning
4. Estimating the operating and financial breakeven points
5. Understanding and computing the indifference point
6. Calculation of ROE from ROI
7. Understanding the impact of debt on firm cost of capital and firm value
8. Understanding the arbitrage process in M&M theory
9. Understanding the tax advantage of debt
10. Understanding the direct and indirect costs of bankruptcy
11. Arriving at the optimal capital structure using the costs and benefits of debt
12. Understanding the concept of zero working capital
13. Finding the cash conversion cycle or net operating cycle of the firm
14. Differentiating the conservative and aggressive working capital policy
15. Estimating the working capital requirements
16. Impact of lead time on inventory management
17. Deciding upon the optimal level of inventory using ordering and carrying costs
18. Impact of cash discount on EOQ
19. Arriving at the optimum level of safety stock given carrying and ordering costs
20. Understanding the impact of credit period on firm’s net profits
21. Understanding the impact of credit standards on firm’s net profits
22. Understanding the impact of cash discount on firm’s net profits
23. Studying the TREDs
24. Commenting on the financial health of the firm using ratio analysis
25. Distinguish between the leverage and coverage ratio
26. Computing various profitability, activity, leverage and liquidity ratios
27. Performing the Du Pont analysis
28. Analyze the performance of a firm using comparative and time-series analysis
29. Deciding upon the optimum dividend policy of the firm
30. Understanding the impact of ROE and cost of equity on firm’s dividend policy
31. Understand the relation between dividend policy and firm value
32. Analyzing the process of bonus issue and its impact on shareholders’ wealth
33. Understand the share repurchase mechanism
34. Studying the stock split and reverse stock split process
35. Computing the optimum level of cash balance in the firm
36. Preparing the cash budget
37. Understanding various sources to finance the current assets of the firm