Engineering Economics & Finance

BTech-Semester I
IIT(ISM) Dhanbad

Shashank Bansal
Assistant Professor
Department of Management Studies
IIT(ISM) Dhanbad
Financial Management
LEARNING OBJECTIVES
 To understand the basics and fundamentals of
financial management
 To understand the process of financial decision-
making using financial statements
 To familiarize the student with the concept of cost
and time value of money in business decision
making
 To make student conversant with the selection of
the possible profitable capital projects through
capital budgeting methods
By the end of this course
 Able to understand the basics and fundamentals
of financial management
 Able to understand how corporations make
financial decisions and how such financial
decisions add value to the corporation
 Able to appreciate the usefulness of financial
information for decision making
 Equipped with tools to make financial decisions in
the firms
Text Books
 Financial Management- I M Pandey, Vikas
Publishing
 Finance Sense - Prasanna Chandra, Tata Mc
Graw Hill (CFM-TMH Professional Series in
Finance)
Grading Criteria
Evaluation 50 Marks
Components
Unit 1– 3
Mid-Sem Exam 16 Marks
End-Sem Exam 24 Marks
Attendence 10 Marks
The distribution of 10 marks for attendance will be as
follows:
75% attendance – 0
>75% and up to 80% - 2
>80% and up to 85% - 4
>85% and up to 90% - 6
>90% and up to 95% - 8
>95% and up to 100% - 10
Forms of Business Organization
 Three major forms of business
organization are
 Sole Proprietorship
 Partnership
 General
 Limited
 Corporation
 Public Limited Company
Sources of Funds

• Equity represents the ownership interest and risk capital staked by

the owners
• Debt is an amount of money borrowed by one party from another
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 Equity and Borrowed Funds
 Equity/Shares represent ownership rights of their
holders. Shareholders are owners of the
company.
 Debts: represent liability of the firm towards
outsiders. Lenders are not owners of the
company.
 Bonds or a debenture is a certificate acknowledging
the amount of money lent by a bondholder to the
company. It states the amount, the rate of interest
and the maturity of the bond or debenture.

Dr. Shashank Bansal, IIT(ISM) Dhanbad

9 (shashank@iitism.ac.in) 23-01-2020
Debt Versus Equity
• Fixed Claim
• High Priority on Cash Flow

Debt •
•
•
Tax Deduction
Fixed Maturity
No Management Control

• Residual Claim
• Lowest Priority on Cash Flow
Equity •
•
No Tax Deduction
Infinite Life
• Management Control

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Shares Versus Preference Shares
 Equity Shares are also known as ordinary
shares
 Do not have fixed rate of dividend.
 There is no legal obligation to pay dividends to
equity shareholders.
 Preference Shares have preference for dividend
payment over ordinary shareholders.
 They get fixed rate of dividends.
 They also have preference of repayment at the time
of liquidation
Reliance Industry
 Market Price – 1210.60 INR
 Share Outstanding- 6,265.84 Cr.
 Debt- 118,098.00 Cr.

* As on 29 July 2019, Source: Money Control

Financial Management
 All business activities involve acquisition and use of
funds
 Finance function makes money available to meet the
costs of production and marketing operations
 Financial policies are devised to fit production and
marketing decisions of a firm in practice

 Financial Management answers

 What long-term investments should the firm take on?
 Where will we get the long-term financing to pay for the
investment?
 How will we manage the everyday financial activities of
the firm?
 Real And Financial Assets
 Real Assets: Can be Tangible or Intangible
 Tangible real assets are physical assets that
include plant, machinery, office, factory, furniture
and building.
 Intangible real assets include technical know-how,
technological collaborations, patents and
copyrights.
 Financial Assets are also called securities, are
financial papers or instruments such as shares
and bonds or debentures.

Dr. Shashank Bansal, IIT(ISM) Dhanbad

14 (shashank@iitism.ac.in) 23-01-2020
 Financial Management Decisions
• Long-term asset-mix or
investment decision or capital
Long-term budgeting decisions.
financial • Capital-mix or financing decision
decisions or capital structure decision
• Profit allocation or dividend
decision

Short-term • Short-term asset-mix or liquidity

financial decision or working capital
decisions management.

Dr. Shashank Bansal, IIT(ISM) Dhanbad

15 (shashank@iitism.ac.in) 23-01-2020
Financial Management Decisions
 Capital budgeting – process of planning and
managing a firm’s investments in fixed assets. The
key concerns are the size, timing and riskiness of
future cash flows.
 Capital structure – mix of debt (borrowing) and equity
(ownership interest) used by a firm. What are the
least expensive sources of funds? Is there an optimal
mix of debt and equity? When and where should the
firm raise funds?
 Working capital management – managing short-term
assets and liabilities. How much inventory should the
firm carry? What credit policy is best? Where will we
get our short-term loans?
What should be the goal of a corporation?
Goal of Financial Management
• What should be the goal of a corporation?
 Maximize profit?
 Minimize costs?
 Maximize market share?
 Maximize the current value of the company’s
stock?

From a stockholder (owner) perspective, the goal

of buying the stock is to gain financially. Thus,
the goal of financial management in a
corporation is to maximize the current value per
share of the existing stock.
Overview of Financial Management

19
Importance of Financial Management
References
 Financial Management- I M Pandey, Vikas
Publishing
 Finance Sense - Prasanna Chandra, Tata Mc
Graw Hill (CFM-TMH Professional Series in
Finance)