FUNDAMENTALS OF FINANCIAL

MANAGEMENT
(Theory and Practicals)

Dr.Debasish Biswas
M.Com, MBA, M.Phil, DLL, PGDHM, GDCA, Ph.D
Assistant Professor
Department of Business Administration
Vidyasagar University, WB

Himalaya Publishing Company

First Edition, 2014

Mumbai
 In Memory of My Father
Whose Blessings are My Fountain of Spirit and
Inspiration

ii
 Syllabus of Different University

Jawaharlal Nehru Technological University

Syllabus of MBA – 1st Year
Financial Management
Unit-I

The Finance Function: Objective, Profit or Wealth Maximization and EPS Maximization, An
overview of Managerial finance functions, Time value of money: Present value, Future value of
money and the Basic valuation models.

Unit-II

Investment Decisions: Nature of capital budgeting decisions, techniques of capital budgeting: Pay
back method, Average rate of return and Time-Adjusted methods: IRR and NPV, Profitability index
and Excess present value index, Advanced problems and cases in capital budgeting.

Unit – III

Cost of Capital: Concept and measurement of cost of capital, Debt vs. Equity, Cost of equity,
Preference shares, Equity capital and Retained earnings, Weighted average cost of capital and
Marginal cost of capital. Importance of cost of capital in capital budgeting decisions.

Unit – IV

Capital Structure Decisions: Capital structure vs. Financial structure, Capitalization, Financial
leverage, Operating leverage and Composite leverage. EBIT-EPS Analysis, Indifference
Point/Break even analysis of financial leverage, Capital structure theories: The Modigliani Miller
Theory –A critical appraisal.

Unit – V

Dividend Decisions: Dividend and value of the firm , Relevance of dividend, the MM hypothesis,
Factors determining Dividend Policy, Dividend and valuation of the firm, the basic models,

iii
Declaration and payment of dividend, Bonus shares, Rights issue, Share-splits, Walter Model and
Gordon Model.

Unit – VI

Working Capital Management: Components of working capital, Gross vs. Net working capital,
Determinants of working capital needs, the Operating cycle approach, Planning of working capital,
Financing of working capital through Bank finance and Trade Credit.

Unit – VII

Management of Current Assets: Management of cash, Basic strategies for cash management,
Cash budget, Cash management techniques/processes, Marketable securities: characteristics,
selection criterion, Marketable security alternatives, Management of receivables, Management of
inventory, Credit policies.

Unit – VIII

Case Study: Compulsory. Relevant cases have to be discussed in each unit.

Anna University
Syllabus of MBA - 1st Semester
Financial Management

1. Foundations of Finance: Financial management – An overview, Time value of money,

Introduction to the concept of risk and return of a single asset and of a portfolio, Valuation of bonds
and shares option valuation.

2. Investment Decisions: Capital Budgeting: Principles and techniques, Nature of capital

budgeting, Identifying relevant cash flows, Evaluation techniques, Payback, Accounting Rate of
Return, Net Present Value, Internal Rate of Return, Profitability Index, Comparison of DCF
techniques, Project selection under capital rationing, Inflation and capital budgeting, Concept and
measurement of cost of capital, Specific costs and overall cost of capital.

iv
3. Financing and Dividend Decision: Financial and operating leverage, Capital structure, Cost of
capital and revaluation, Designing capital structure, Dividend policy, Aspects of dividend policy,
Practical consideration, Forms of dividend policy, Practical considerations, Forms of dividends,
Share splits.

4. Working Capital Management: Principles of working capital, Concepts, Need, Determinants,

Issues and estimation of working capital, Accounts Receivables Management and factoring,
Inventory management, Cash management, Working capital finance, Trade credit, Bank finance and
Commercial paper.

5. Long Term Sources of Finance: Indian capital and stock market, New issues market, Long term
finance: Shares, debentures and term loans, Lease, Hire purchase, Project financing, Venture capital
financing.
Shivaji University
Syllabus of MBA – 2nd Semester
Financial Management

1. Nature and Scope of Financial Management: Objectives of financial management, Finance

functions, Structure of finance department, Emerging role of the finance manager in India.

2. Techniques of Financial Statement Analysis: Trend analysis, Common size statements, Ratio
analysis: Classification of ratios – Liquidity ratios, Leverage ratios, Activity ratios, Profitability
ratios (preparation of statements using ratios should be avoided).

3. Working Capital Management : Nature and need of working capital, Determinants of working
capital, Estimation of working capital, Financing working capital.

4. Sources of Finance: Sources of long term & short term finance.

5. Financing Decisions: Cost of capital, Cost of different sources of finance, Weighted average
cost of capital, Concept of optimal capital structure.

6. Capital Budgeting : Nature and significance, Techniques of capital budgeting – Pay Back
Method, Accounting Rate of Return, Net Present Value and Profitability Index – simple problems.
v
7. Management of Profits: Dividend policy (theories of dividend policy are excluded),
Determinants of dividend policy, Bonus shares and Stock splits.

Pune University
M.Com. Part I
Financial Management
Unit I

Introduction to Financial Management: Role of Finance Manager, Interface of finance function

with other functional areas, Challenges and opportunities of financial management.

Unit II

Long term Investment Decisions: Capital budgeting-Cost of capital. Margers, Acquistions, Lease
finance, Hire purchase, Cash budgets, Zero base budgeting.

Unit III

Management of Working Capital: Nature of working capital, Analysis and need for working
capital, Accounting and financial ratios, Funds flow analysis, Financial planning, Credit policy and
Price policy.

Unit IV

Management of Profit: Retention of earnings, Depreciation considerations, Dividend Policy, Issue

of bonus shares, Market value of shares, Reserves, Implications of undercapitalization and over
capitalization.

Unit V

Financial Management of Business Expansion: Combinations, Acquisitions, Projected Profit and

Loss account statement, Balance Sheet, Cash flow statements.

vi
Unit VI

Financial Management of Sick Units: Rehabilitation: Role of B.I.E.R.

Unit VII

Modern Concepts and Techniques in Financial Management: Foreign Exchange Markets etc,
Introduction to securitisation and Stock exchange, SEBI regulation.
Pune University
Syllabus of MBA
Financial Management

1. Concept of Finance: Corporate finance, Finance functions and other functions, Structures of the
financial system.

2. Financial Management: Meaning and objectives, Scope and functions of financial management,
Financial planning and forecasting.

3. Capitalization: Under and over capitalization, Capital structures, Computation of cost of capital,
Trading on equity, Leverages, Type and Significance.

4. Capital Budgeting: Nature and significance, Time value of money, Discounting and
Compounding, Methods of evaluating capital expenditure proposals.

5. Financial statements of corporate organizations, Introduction to Schedule - VI, Provisions of

Companies Act, 1956.

6. Analysis and interpretation of financial statements using the techniques of ratio analysis and
Fund flow analysis.

7. Working Capital Management: Nature of working capital management, Need for working
capital, Operating cycle, Estimation of working capital requirement, Management of cash and
receivables, Cash budget.

vii
8. Management of Profits: Dividend policy, Procedural and legal formalities involved in the
payment of dividend, Bonus Shares.

West Bengal University of Technology

Syllabus of MBA – 2nd Semester
Financial Management

1. Introduction: Introduction to financial management, Goals of the firm, Financial environments.

2. Time Value of Money: Simple and Compound interest rates, Amortization, Computing more
that once a year, Annuity factor.

3. Valuation of Securities: Bond valuation, preferred stock valuation, Common stock valuation,
Concept of yield and YTM.

4. Working Capital Management : Overview, Working capital issues, Financing current assets
(Short Term and Long Term - Mix), Combining liability structures and Current asset decisions,
Estimation of working capital.

5. Cash Management: Motives for holding cash, Speeding up cash receipts, Slowing down cash
Payouts, Electronic commerce, Outsourcing, Cash balances to maintain and Factoring.

6. Accounts Receivable Management: Credit & Collection policies, Analyzing the credit
applicant, Credit references, Selecting optimum credit period.

7. Capital Budgeting : The Capital budgeting concept & process: An overview, Generating
investment project proposals, Estimating project, after tax incremental operating cash flows, Capital
budgeting techniques, Project evaluation and Selection, Alternative methods, Potential difficulties,
Project monitoring, Progress reviews and Post - completion audits, Problem of project risk, Total
project risk, Capital rationing , Decision tree.

8. Cost of Capital: Concept, Computation of specific cost of capital for Equity - Preference – Debt,
Weighted Average Cost of Capital and Factors affecting cost of capital.

viii
9. Operating & Financial Leverage: Operating leverage, Financial leverage, Total leverage,
Indifference analysis in leverage study.

10. Capital Structure Determination: Concept of capital structure, Legal requirements, Factor
affecting capital structure, Theories of capital structure like NI approach, NOI approach, Traditional
approach, MM approach.

11. Dividend Policy : Passive versus Active dividend policy, Factors influencing dividend policy,
Dividend stability, Stock dividends and Stock splits, Dividend theories like Gordon’s model,
Walter’s model, MM approach and Residual approach, Legal consideration of paying dividends.

ix
 CONTENTS
Preface

Acknowledgements

1. INTRODUCTION OF FM
1.1: Concept of Financial Management
1.2: Objectives of Financial Management
1.3: Importance of Financial Management
1.4: Scope of Financial Management
1.5: Functions of Financial Management
1.6: Financial Management vs. Financial Accounting

2. TIME VALUE OF MONEY

2.1: Concept of Time Value of Money

2.2: Importance of Time Value of Money
2.3: Methods of Time Value of Money
2.4: Numerical Problems

3. CAPITAL BUDGETING

3.1: Concept of Capital Budgeting

3.2: Features of Capital Budgeting
3.3: Importance of Capital Budgeting
3.4: Significance of Capital Budgeting
3.5: Types of Capital Budgeting Decision
3.6: Capital Budgeting Process
3.7: Methods of Capital Budgeting
3.8: NPV vs IRR
3.9: Capital Rationing
3.10: Numerical Problems
4. WORKING CAPITAL MANAGEMENT

4.1: Concept of Working Capital

x
4.2: Types of Working Capital
4.3: Components of Working Capital
4.4: Importance of Working Capital
4.5: Factors Determining Working Capital
4.6: Approaches of Working Capital
4.7: Working Capital Cycle
4.8: Computation of Working Capital
4.9: Numerical Problems

5. LEVERAGE

5.1: Concept of Leverage

5.2: Types of Leverage
5.3: Degree of Operating Leverage
5.4: Degree of Financial Leverage
5.5: Degree of Combined Leverage
5.6: EBIT-EPS Approach
5.7: Numerical Problems

6. COST OF CAPITAL

6.1: Concept of Cost of Capital

6.2: Types of Cost of Capital
6.3: Significance of Cost of Capital
6.4: Computation of Cost of Capital
6.5: Numerical Problems

7. CAPITAL STRUCTURE

7.1: Concept of Capital Structure

7.2: Importance of Capital Structure
7.3: Factors Determining Capital Structure
7.4: Theories of Capital Structure
7.5: Numerical Problems

xi
8. DIVIDEND POLICY

8.1: Concept of Dividend Policy

8.2: Types of Dividend Policy
8.3: Forms of Dividend
8.4: Factors Affecting Dividend Policy
8.5: Stable Dividend Policy
8.6: Walter’s Model
8.7: Gordon’s Model
8.8: MM Model
8.9: Numerical Problems

9. CASH MANAGEMENT

9.1: Meaning of Cash

9.2: Motives for Holding Cash
9.3: Meaning of Cash Management
9.4: Objectives of Cash Management
9.5: Models of Cash Management
9.6: Float Management
9.7: Cash Budget
9.8: Importance of Cash Budget
9.9: Methods of Cash Budget
9.10: Numerical Problems

10. RECEIVABLES MANAGEMENT

10.1: Concept of Receivables Management

10.2: Meaning of Receivables
10.3: Factors Influencing the Size of Receivables
10.4: Forecasting the Receivables
10.5: Numerical Problems

11. INVENTORY MANAGEMENT

11.1: Concept of Inventory

xii
11.2: Why Keep Inventory?

11.3: Inventory Control

11.4: Inventory Management
11.5: Importance of Inventory Management
11.6: Economic Order Quantity
11.7: Numerical Problems

Bibliography

Question Papers

Glossary

Abbreviations

xiii
 PREFACE

I feel great pleasure in placing the first edition of this book before my esteemed
readers. It is the outcome of a great deal of encouragement from my colleagues and
request from students.

This book is appropriate for commerce and management students at graduate and
post graduate level of different Indian Universities.

My sincere and deliberate efforts have been devoted to give the book comprehensive
form.All chapters have been discussed in a very simple and lucid language so as to
make the subject easily understandable to my beloved students. I have also
incorporated relevant numerical problems at the end of each chapter.

I am grateful to the esteemed teachers who always provided me with their valuable
suggestions from time to time. I am thankful to my students who always shown a
keen interest in my publication. I offer my heartfelt congratulations to Himalaya
Publishing Company for quick publication of the book.

I welcome suggestions from esteemed teachers and my students for enrichment and
improvement of the book in the future.

This book provides detailed information about the finance and finance related area
with simple language and the concepts are explained with easy examples. This book
is also prepared based on the B.Com, BBA, BBM, M.Com and MBA syllabus of
various universities for the benefits of the students.

Dr.D.Biswas
Midnapore

xiv
 ACKNOWLEDGEMENTS

First of all, I would like to express my sincere gratitude to Dr.K.C Paul, Professor of
Commerce and Management, Vidyasagar University, who has been my motivator
since the beginning of my write up. He provided me with many helpful suggestions,
important advice and constant encouragement during the course of this work.

I am also grateful to Prof.Dr.Debabrata Mitra, Department of Commerce, North

Bengal University for his valuable suggestions.

A special note of appreciation is due to Prof. Debasish Sur, professor of Commerce,

University of Burdwan and Dr.Susanta Mitra, Associate Professor of Commerce,
Khandra College, West Bengal for their valuable contributions towards enhancing the
standard of the book.

I also thank to Dr. Abhijit Pakira and Mr.Sudin Bag for extending their help in
conducting the task. I am also indebted to all of my beloved students and colleagues
for their whole hearted co-operation for this book.

I owe a deep gratitude to the authorities of Vidyasagar University, different librarians

and all those who inspired and helped me in this work. I must thank Mr. Subhasish
Khan for preparing a neat typed copy of the book.

Finally, my sincere thanks to my publisher, Himalaya Publishing Company Private

Limited, for their untiring effort and support in bringing out this book.

The responsibility for errors remains me alone.

Dr.D.Biswas

xv