FINANCIAL MANAGEMENT

By:
SHUBHANGI SHRIWATRI | ROHIT JAIN | ADITI SINGH
DEEPAK VERMA | NITISHA PANDEY | PIYUSH BANSAL
 Leverage

 Leverage is an investment strategy of using borrowed

capital to increase the potential return on an investment
 Investors use leverage to finance their assets.
 A strategic way for companies to meet short term
financing needs for acquisitions or buyouts.
 The most popular financial leverage ratios are debt to
assets and debt to equity which can determine company’s
position.
  a

Types of Leverage

Financial Combined
Operating Leverage
Leverage Leverage
 Operating Leverage

 The firms investing operations are addressed by using this

leverage.
 It measures the firm’s ability to use fixed cost assets to magnify
operating profits.
 Operating Leverage= Contribution/EBIT
 {Contribution = sales- variable cost}
 {EBIT= contribution- fixed costs}
 Degree of operating leverage= % change in EBIT / % change in
sales
 Financial Leverage

 It is the firm’s ability to use fixed costs funds to magnify the

return to equity shareholders.
 It helps the financial manager to design an optimum capital
structure.
 A high financial leverage indicates existence oh high financial
fixed costs and high financial risk
 Financial Leverage= EBIT/EBT
 Degree of financial leverage= % change in EPS/ % change in EBIT
Combined leverage
Combined leverage represents a company’s total risk related to
operating leverage, financial leverage, and the net effect on the EPS.
• Combined leverage = Contribution/EBT
• Combined Leverage = Operating leverage * Financial leverage

• DEGREE OF COMBINED LEVERAGE(DCL) –

It measures the percentage change in earnings per share due to
percentage change in sales.
• DCL= % change in EPS/ % change in sales
• A company has sales of rupees 10,000, variable cost is 60% of sales,
fixed cost is rupees 2000 and 10% debentures of rupees 10,000.
Calculate –
• Operating leverage?
• Financial leverage?
• Combined leverage?
Lease Financing
A lease is a contract under which the
owner of an asset gives the exclusive
right to use the asset to the lessee,
usually for a specified period in return
for the payment of rent.

Lessor - The owner of the asset.

Lessee – The user of the asset.

Lease Capital – The periodic payment

made by the lessee.
 Types of Lease

Operating Finance Sales and

Lease Lease Lease back
Operating lease is A lease is In this company
commonly used considered as sells its assets to
for assets with Financial lease if another party and
shorter useful life. the lessor then leases them
Assets Like intended to back from the
Vehicle, recover his capital buyer.
Machinery, plus required rate
Equipment. of return on fund
during the period
of lease.
 Hire Purchase
• Hire purchase is used to buy expensive
items that a person cannot afford to pay
right: e.g. a car
• A down payment is usually paid and the
balance is paid over several months
(monthly installments)
• Here possession of goods is transferred
immediately, but payment is made in
installments
• Ownership is transferred after all the
installments have been paid
 Hire Purchase (HP) is an arrangement commonly used for purchasing
expensive goods. Here’s how it works:

Protection for Vendor: Initial Down Payment:

The buyer makes an initial down
Hire purchase plans offer more protection
payment (also known as a deposit) when
to the vendor than other sales or leasing
entering into a hire purchase agreement.
methods for unsecured items. If the buyer
This down payment is typically a
fails to keep up with repayments, the
percentage of the total price of the item.
items can be repossessed more easily.

Ownership Transfer: Installment Payments:

Unlike some installment plans, where
ownership rights transfer immediately upon
signing the contract, in hire purchase
agreements, ownership is not officially
transferred to the buyer until all payments
have been made. Until then, the seller
retains ownership.
After the down payment, the buyer pays the
remaining balance
and interest in installments over a specified
period. These installments cover both the
principal amount and the interest
 Difference between Hire Purchase and Lease Purchase

Hire Purchase Leasing

The deal in which one party can use the
asset of the other party for the payment of
Meaning
equal monthly installments is known as
Hire Purchasing.
Leasing is an agreement where one party
buys the asset and allows the other party to
use it by paying consideration over a
specified period is known as Leasing.

Down
Required Not required
Payment

Principal plus interest Cost of using the asset

Installments

Asset type Car, trucks, etc Land, building, machinery

Ownership of the asset is transferred Transfer of ownership depends on the

Ownership
to the hire purchaser on the payment type of lease.
of the last installment
 Business Valuation
A business valuation, also known as a company valuation, is the
process of determining the economic value of a business. During
the valuation process, all areas of a business are analyzed to
determine its worth and the worth of its departments or units.

The valuation of a business is the process of determining

the current worth of a business, using objective measures, and
evaluating all aspects of the business. Valuation is also important
for tax reporting. The Internal Revenue Service (IRS) requires
that a business is valued based on its fair market value.
 1. Market Capitalization
Methods of Market capitalization is the simplest method of
business valuation. It is calculated by
Valuation multiplying the company’s share price by its
total number of shares outstanding.

For example, as of March 13 2024, Kalyan

Jewellers Share is traded at 390.10 rupees with
a total number of shares outstanding of 100.7
crores,
the company could then be valued at 390.10 x
100.7 = 39,312 crores.
 2. Times Revenue Method
Methods of Under the times revenue business valuation
method, a stream of revenues generated over
Valuation a certain period of time is applied to a
multiplier which depends on the industry and
economic environment.

For example, a
tech company
may be valued at
3x revenue,
while a service
firm may be
valued at 0.5x
revenue.

Methods of
Valuation
Formula of the Earnings
Multiplier Earnings Multiplier or
P/E Ratio = Price Per Share/
Earnings Per Share
3. Earnings Multiplier
Instead of the times revenue method, the
earnings multiplier may be used to get a more
accurate picture of the real value of a company, since
a company’s profits are a more reliable indicator of its
financial success than sales revenue is. The earnings
multiplier adjusts future profits against cash flow that
could be invested at the current interest rate over the
same period of time. In other words, it adjusts the
current P/E ratio to account for current interest rates.
Discounted Liquidation
Cash Flow
Book
Value Value
Method
THANK YOU