FINANCIAL

MANAGEMENT
Module I Introduction
• A Framework for Financial Decision-Making- Financial
Environment, Introduction to Financial Markets and Financial
Instruments Changing Role of Finance Managers, Objectives of
the firm, Time Value of Money and Risk- Return Analysis

Module II Financing Decision

• Leverage Analysis (EBIT-EPS analysis) and Computation of Cost
of Capital (WACC &WMCC), Capital Structure Theories- Net
Income Approach, Net operating Income Approach, Traditional
approach & Modigliani Miller Model, Trade off Models, pecking
order theory. Factors determining the optimum capital Structure.
Module III Investing Decisions – Capital Budgeting and Working Capital Management
Capital Budgeting - Estimation of Cash Flows, Criteria for Capital Budgeting Decisions
Pay back, ARR, Discounted Payback NPV, IRR, PI, Issues Involved in Capital Budgeting,
Risk analysis in Capital Budgeting – An Introduction
Working Capital Management - Factors Influencing Working Capital Policy, Operating
Cycle Analysis, Management of Inventory, Management of Receivables, Management of
Cash and Marketable Securities, Financing of Working Capital.

Module IV Dividend Decision

Introduction, Factors determining dividend policy, and types of dividend. Theories of
Dividend Decisions- MM Hypothesis, Walter Model, Gordon Model. Forms of Dividends-
cash dividend, Bonus shares, stock split. Dividend policies in practice.

Module V Valuations Concepts

ROI, Economic Value Added, Market Value Added, Shareholders Value Creation.
 CHAPTER 1
INTRODUCTION
 BUSINESS FINANCE

Business finance
deals primarily
Business finance with Business Finance
studies, analyses raising ,administeri Deals with the
and examines ng and allocation capital input
wide aspects of funds by function for the
related to the privately owned economics of the
acquisition of business units acquisition of
funds for business operating in the money capital for
and allocates non financial the conduct of a
those funds. fields of an firm’s operations.
Industry.
 • Finance is one of the major elements,
which activates the overall growth of the
economy is much broader than the
procurement or supply of funds.

Types of Finance function

FINANCE • Design Function.
FUNCTION • Supply Function.
• Production Function.
• Distribution Function.
• Personnel Function.
ORGANIZATION
STRUCTURE OF
FINANCE
DEPARTMENT
 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.

“Financial management is the activity concerned with planning,

MEANING OF raising, controlling and administering of funds used in the

business.” Guthman and dougal

FINANCIAL “Financial management is that area of business management

MANAGEMENT devoted to a judicious use of capital and a careful selection of
the source of capital in order to enable a spending unit to move
in the direction of reaching the goals.” J.F. Brandley

“Financial management is the operational activity of a business

that is responsible for obtaining and effectively utilizing the funds
necessary for efficient operations.”- Massie
 Profit maximization

wealth maximization

Proper estimation of total financial requirements

OBJECTIVE Proper mobilization

OF Proper utilization of finance

FINANCIAL Maintaining proper cash flow

MANAGEME Survival of company

NT Creating reserves

Proper coordination

Create goodwill

Prepare capital structure

Reduce operating risks

 SCOPE OF FINANCIAL MANAGEMENT

Investment Financing Dividend Working Capital

Decision Decision Decision Decision

Preparation of Estimation of Evaluating the

Miscellaneous
Annual Financial Financial Impact of New
Functions
Statements Performance Financing
FUNCTIONS OF
FINANCIAL
MANAGEMENT
 FINANCIAL DECISION

• The financing decision is yet another crucial decision made by the financial manager
relating to the financing-mix of an organization. It is concerned with the borrowing
and allocation of funds required for the investment decisions.

• Types of Financial Decisions

• Investment Decision
• Financing Decision
• Dividend Decision
 FINANCIAL MANAGER
• Financial manager is the executive who manages the
financial matters of a business.
• Financial managers have the responsibility of overseeing
the finances of major companies, agencies and
everything in between. Along with their teams, they
coordinate accounting and produce financial reports,
cash-flow statements and profit projections.
ROLE OF A FINANCIAL MANAGER
1. Estimating the Amount of Capital Required

2. Determining Capital Structure

3. Choice of Sources of Funds

4. Procurement of Funds

5. Utilization of Funds

6. Disposal of Profits or Surplus

7. Management of Cash

8. Financial Control
STRUCTURE OF INDIAN FINANCIAL SYSTEM

•
FINANCIAL PLANNING
• Financial planning is the process of estimating the capital required and
determining there competition. It is the process of framing financial policies in
relation to procurement, investment and administration of funds of an enterprise.
Importance of Financial Planning
• Adequate funds have to be ensured.
• Financial planning helps in ensuring a reasonable balance between outflow and
inflow of funds so that stability is maintained.
• Financial planning ensures that the suppliers of funds are easily investing in
companies which exercise financial planning.
• Financial planning helps in making growth and expansion programmes which helps
in long-run survival of the company.
• Financial planning reduces uncertainties with regards to changing market trends
which can be faced easily through enough funds.
• Financial planning helps in reducing the uncertainties which can be a hindrance to
growth of the company. This helps in ensuring stability an d profitability in concern.
 (1) Determining
(2) Developing
Your Current
Financial Goals
Financial Situation

FINANCIAL
PLANNING (3) Identifying
PROCESS
(4) Evaluating
Alternative
Alternatives
Courses Of Action

(5) Creating And

(6) Revaluating
Implementing A
And Revising The
Financial Action
Plan.
Plan, And
 Simplicity Based on Clear-
cut Objectives
PRINCIPLES OF
SOUND
FINANCIAL Less Dependence
on Outside Sources
Flexibility

PLANNING
Solvency and Cost
Liquidity

Profitability
FACTORS INFLUENCING A SOUND FINANCIAL
PLAN
• Spending behavior
• Financial potential
• Savings and investments
• Provision for emergencies
• A financial planner or advisor
• Responsibilities
• Financial goals
• Changing culture
• Economy
• Solvency and liquidity
FINANCIAL SYSTEM
• The financial system of an economy provides the way to collect money from the people
who have it and distribute it to those who can use it best. So, the efficient allocation of
economic resources is achieved by a financial system that distributes money to those
people and for those purposes that will yield the best returns.

• The financial system is composed of the products and services provided by financial
institutions, which includes banks, insurance companies, pension funds, organized
exchanges, and the many other companies that serve to facilitate economic
transactions. Virtually all economic transactions are effected by one or more of these
financial institutions. They create financial instruments, such as stocks and bonds, pay
interest on deposits, lend money to creditworthy borrowers, and create and maintain
the payment systems of modern economies.
 COMPONENTS OF FINANCIAL SYSTEM
[Link] Institutions
• It ensures smooth working of the financial system by making investors and borrowers meet. They
mobilize the savings of investors either directly or indirectly via financial markets by making use of
different financial instruments as well as in the process using the services of numerous financial
services providers. They could be categorized into Regulatory, Intermediaries, Non-intermediaries
and Others. They offer services to organizations looking for advises on different problems
including restructuring to diversification strategies. They offer complete series of services to the
organizations who want to raise funds from the markets and take care of financial assets, for
example deposits, securities, loans, etc.
[Link] Markets
• A Financial Market can be defined as the market in which financial assets are created or transferred.
As against a real transaction that involves exchange of money for real goods or services, a financial
transaction involves creation or transfer of a financial asset. Financial Assets or Financial
Instruments represent a claim to the payment of a sum of money sometime in the future and /or
periodic payment in the form of interest or dividend.
3. Financial Instruments

• This is an important component of financial system. The products which are traded in a financial market are financial
assets, securities or other types of financial instruments. There are a wide range of securities in the markets since the
needs of investors and credit seekers are different. They indicate a claim on the settlement of principal down the road
or payment of a regular amount by means of interest or dividend. Equity shares, debentures, bonds, etc. are some
examples.

4. Financial Services

• It consists of services provided by Asset Management and Liability Management Companies. They help to get the
required funds and also make sure that they are efficiently invested. They assist to determine the financing
combination and extend their professional services up to the stage of servicing of lenders. They help with borrowing,
selling and purchasing securities, lending and investing, making and allowing payments and settlements and taking
care of risk exposures in financial markets. These range from the leasing companies, mutual fund houses, merchant
bankers, portfolio managers, bill discounting and acceptance houses. The financial services sector offers a number of
professional services like credit rating, venture capital financing, mutual funds, merchant banking, depository services,
book building, etc. Financial institutions and financial markets help in the working of the financial system by means of
financial instruments. To be able to carry out the jobs given, they need several services of financial nature. Therefore,
financial services are considered as the 4th major component of the financial system.
TIME VALUE OF MONEY
• 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.

• There is no reason for any rational person to delay taking an amount owed to him or her.
More than financial principles, this is basic instinct. The money you have in hand at the
moment is worth more than the same amount you ‘may’ get in future. One reason for this
is inflation and another is possible earning capacity. The fundamental code of finance
maintains that, given money can generate interest, the value of a certain sum is more if
you receive it sooner. This is why it is called as the present value.
• Time preference of money, also known as the time value of money, is a
fundamental concept in finance that recognizes the idea that a sum of money
available today is considered more valuable than the same amount of money in
the future. The principle is based on the premise that individuals prefer to receive a
certain amount of money sooner rather than later due to the opportunity to invest
or earn a return on that money over time.

Components of the Time preference of Money:

[Link] Value:
• Future value refers to the value of money at a specified future point in time, taking into
account compound interest or investment returns. Future value calculations help assess
the potential growth of an investment.
[Link] Value:
• Present value is the current worth of a sum of money to be received or paid in the future,
discounted at a specific interest rate. It is a way of determining the current value of future
cash flows.
3. Discounting:
• Discounting is the process of adjusting the future value of money to its present value. It
involves applying a discount rate to account for the time value of money. The discount
rate reflects the opportunity cost of not having the money available today.

4. Opportunity Cost:
• Opportunity cost represents the potential benefits foregone by choosing one investment
or course of action over another. Time preference recognizes that having money today
provides the opportunity to invest or earn a return, thus incurring an opportunity cost on
funds deferred to the future.

5. Compounding:
• Compounding refers to the process by which an investment earns interest not only on its
initial principal but also on the accumulated interest from previous periods.
Compounding is a key factor in understanding the growth of investments over time.

6. Risk and Uncertainty:

• Time preference is influenced by the inherent risk and uncertainty associated with future
cash flows. Individuals may prefer the certainty of money today over the uncertainty of
receiving the same amount in the future.
PROS OF TIME VALUE OF MONEY

• Informed Decision-Making:

• Comparative Analysis:

• Accurate Valuation:

• Risk Management:

• Optimal Resource Allocation:

• Financial Planning:
CONS OF TIME VALUE OF MONEY
• Simplifying Assumptions

• Subjectivity

• Assumption of Rationality

• Neglect of External Factors

• Overemphasis on Short-Term Gains

• Difficulty in Predicting Future Variables

DISCOUNTING OR PRESENT VALUE METHOD
COMPOUNDING OR FUTURE VALUE METHOD
DOUBLING PERIOD
 RISK AND RETU RN OPTIMIZATION
• Risk and Return optimization is a fundamental concept in finance that guides investors
in constructing portfolios that maximize expected returns for a given level of risk or
minimize risk for a given level of expected return. This optimization lies at the heart of
modern portfolio theory (MPT), introduced by Harry Markowitz in the 1950s. The theory
has since become a cornerstone of investment management, changing how investors
approach portfolio construction.
 PRACTICAL APPLICATION IN INVESTMENT
STRATEGIES
[Link] Allocation:

• Determining the optimal mix of asset classes (e.g., stocks, bonds, real estate) is a fundamental
application of risk and return optimization, guiding investors in achieving desired investment
objectives.

[Link] Management:

• Optimization techniques are used to assess and manage the risk exposure of portfolios, ensuring that
it aligns with investors’ risk tolerance and investment horizon.

[Link]-Advisors:

• Many automated investment platforms use algorithms based on MPT to construct and manage
investment portfolios, offering an accessible way for individuals to apply risk and return optimization.
CHALLENGES IN RISK AND RETURN OPTIMIZATION
[Link] Error:

• The process relies heavily on historical data to estimate future returns, variances, and correlations.
These estimates can be prone to significant errors, potentially leading to suboptimal portfolio choices.

[Link] Conditions:

• Financial markets are dynamic, and their conditions change over time. Assumptions based on
historical data may not hold in the future, requiring continuous adjustment of the portfolio.

[Link] Emotions:

• Investors’ decisions are often influenced by emotions, leading to deviations from optimal portfolio
choices. Behavioral biases can result in overreaction to short-term market movements and
underestimation of long-term trends.
METHODOLOGIES FOR RISK AND RETURN OPTIMIZATION
[Link]-Variance Optimization (MVO):
• This method uses the mean (expected return) and variance (risk) of assets to
identify the set of optimal portfolios that lie on the efficient frontier. By plotting
different combinations of assets, investors can select a portfolio that aligns with their
risk tolerance.
[Link] Carlo Simulation:
• This technique uses computer algorithms to generate multiple scenarios for future
returns based on a set of assumptions. It helps in assessing the impact of risk and
uncertainty on investment outcomes, allowing investors to evaluate the probability of
achieving their investment goals.
[Link] Models:
• These models explain returns and risks of securities in terms of their exposure to
certain risk factors, such as market risk, interest rate risk, or specific sectors. Factor
models can help in constructing portfolios that are optimized for exposure to desired
risk factors.