Business Finance I

Modular Learning Material

GREAT LEARNING

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
 Key Takeaway Notes

Business Finance refers to the set of activities concerned with planning, raising,
controlling and administering the funds that are required in the business.
A larger portion of the work related to business finance deals with borrowing from
banks, formulating cash budgets, handling cash receipts and disbursements.
Payback analysis is typically used when firms have only a limited amount of funds to
invest in a business project and consequently, need to know how fast they can get back
their initial investment.
Net present value is a capital budgeting technique used to calculate the cash flows
based on the predefined discount rates.
Working capital is a capital of a business that is used in its day-to-day operations.
Working capital is calculated using the equation;
Working capital = Current assets – Current liabilities.

Academic Vocabulary

Time value of money

Time value of money refers to the money in hand worth more the money to be received in the
future.

Compounding

Conversion of the present value of money into the future value of money

Discounting

Conversion of the future value of money into the present value of money.

Accounts Receivable

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Accounts Receivable popularly termed as AR indicates the credit sales of a business, which
have not yet been collected from its customers.

Credit management

The Credit Management function integrates all of a company’s doings intended at confirming
that customers pay their invoices within the definite payment terms and conditions.

Did you know?

Rule 72: Whenever you plan to invest in the market, the first question you ask (or should
be asking) is that the time required to double the investment. Rule 72 helps you to find
the answer to this question. You can simply check the prevailing interest rate to
understand the return on investment and the time required to double the investment.
For example, suppose you are investing Rs 10, 00,000 at the rate of 8%. So 72/6 = 9 i.e.
it will take 9 years for your investment to double.
The New York Stock Exchange(NYSE) is the largest in the world with an equity market
capitalization of more than 26.6 trillion U.S. dollars as of July 2021
The Infosys (INFY) IPO bidding was undersubscribed by the prospective investors. They
were sceptical of the performance of INFY in markets. The Infosys IPO that was released
in June 1993 was priced at Rs 93 experienced less demand resulted in an under
subscription. However, Morgan Stanley bail out the company by accepting 13% of the
equity.
Apple Incorporation's market capitalisation is higher than the market capitalisation of
entire BSE 500 companies.
Berkshire Hathaway is the costliest stock in the world. One share of this company costs
you approximately Rs 2,16,00,000 which is unaffordable to many individual investors.

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
 What’s Trending ?

Capital market players are exploring ways to use Artificial Intelligence to automate
bond pricing and risk management for better pricing and liquidity management.
Blockchain is another technology trying to make its way into the finance industry. The
decentralised system of blockchain technology can strengthen the flow of information
enhancing transparency in capital markets.
Quantamental investing is gaining traction in capital markets. This approach borrows
substantially from mathematical and statistical modelling to offer useful investment
insights. Black Rock(US-based) recently combined these methods to extract the value
of big data in quantitative methods and the professional experiences and wisdom of
investment managers who uses a fundamental approach. This hybrid concept is called
Quantamental investing.
Deregulation of financial markets is a new trend across the world. The world is started
to witness the internationalisation of monetary and capital market aspects. For
example, European countries and the USA offer free financial markets to investors. This
has been greatly helping capital to move freely resulting in more competitive, well-
structured and less costly financial services reaching the different corners of the world.

Terminal Questions

What does risk mean in finance?

How does risk affect an investment return?
What is the need for capital budgeting?
What are the objectives of cash management?

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
 3D Thinking

The Net Present Value is one of the most popular capital budgeting techniques used by the
corporate world. NPV rule of thumb is that NPV is more than or equal to zero- accept the
project, if the NPV is less than zero reject the project. However, in many instances, companies
reject the potential projects even when the NPV>0. What is the rationale behind those
decisions? Why do you think the NPV method would not be a dependable tool to understand
the worth of a project? Explain with a suitable example.
Hint: Approach the question from the basic reasons for capital budgeting, who is responsible
for capital budgeting in a business organisation and why do they do it?

Book References

McLaney, E. J. (2017). Business finance: Theory and practice. Pearson.

Chandra, P. (2020). Fundamentals of Financial Management (10th ed.). Tata McGraw-
Hill Education.
Khan, M. Y., & Jain, P. K. (2018). Financial management: Text, problems and cases
(18th ed.). McGraw Hill Education.
Pandey, I. M. (2021). Financial management (12th ed.). Vikas Publishing House Pvt Ltd.

Web References

Understanding risk & return. Mutual Funds Investment, India: (n.d.). Retrieved
November 9, 2021, from https://www.bnpparibasmf.in/learn-invest/understanding-
risk-return.

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
 J., A., & P. (2018). The importance of financial information in the decision-making
process in a company’s family structure. Cya, 63(2), 1-23.
doi:10.3389/fdata.2019.00013.s001

******Happy Learning******

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited