BA5203-FI

NANCI
ALMANAGEMENT

UNI
T–I

Meani
ngofFi
nanci
alManagement/I
ntr
oduct
ion

Fi
nanci
alManagementmeansplanni
ng,organizi
ng,di
rect
ingandcontr
oll
i
ngthe
fi
nanci
alact
ivi
ti
essuchaspr
ocurementandut il
i
zat
ionoffundsoftheent
erpr
ise.I
t
meansapplyi
nggeneral
managementpri
nciplestofi
nanci
alresour
cesoftheenter
pri
se.

Ev
olut
ionoff
inanci
almanagement

Fi
nancialmanagementemer gedasadist
inctfi
eldofstudyattheturnofthi
scentur
y.I
ts
evolut
ionmaybedividedintothr
eebr
oadphases( thoughthedemar cati
ngli
nes
betweenthesephasesaresomewhatarbit
rary
):thetradi
ti
onalphase,thetr
ansi
ti
onal
phase,andthemoder nphase.

Thetradi
ti
onal
phasel
ast
edf
oraboutf
ourdecades.Thef
oll
owi
ngwer
eit
simpor
tant
feat
ures:

Tr
adi
ti
onalAppr
oach

Tradit
ionall
y,f
inanceit
sel
finanyorganizationaimedt oachi
eveopt
imaluseofthe
l
imitedfinanci
alresour
ces.Thescopeoff inanceismost l
yconfi
nedtot
heprocurement
offundsbybusi nesshousestoaddressfinancialneeds.

Earli
er,
financeasaf uncti
onremainedfocusedonf undingactiv
iti
esandinv
olved
extensi
vedecisionmaki ngar
oundf i
nanci
alinstr
ument s,i
nvestmenthousesand
practi
ces.Thisperi
od( t
hemid-1950s)isref
erredtoascor porat
ionfi
nance.

Asthedemandf orfundscont i
nuedtoincr
easerapi
dly,
episodiceventsincl
udi
ng
l
iquidat
ion,merger,acqui
sit
ionandconsolidat
ionhavebecomeani ntegr
alpar
tofthe
fi
nancef unct
ion.Thescope, however
,doesnotconcernwithaspect srel
ati
ngtothe
all
ocati
onoff unds.Theemphasi sisonthreeC’s–compliance,costandcontrol
.

Tradi
ti
onalf
inancei
gnoredthesigni
fi
canceofwor
kingcapi
tal
managementandt
he
needforanint
ernal
financi
alsy
stem.

Tr
ansi
ti
onalphase

Thetransi
tionalphasebeginsaroundtheearl
yforti
esandconti
nuest hroughtheearl
y
fi
ft
ies.Thoughthenat urepffi
nancial
mgmtdur ingthi
sphasewassi milartothatoft
he
tr
aditi
onalphase, gr
eateremphasiswasplacedont hedaytodayproblem facedbythe
fi
nancemanager sintheareaoffundsanal
ysis,
planning,
andcontr
ol.

Moder
nPhase
Themoder nphasebegininmid50sandhaswi tnessedanaccel
erat
edpaceof
devel
opmentwi t
htheinfusi
onofideasf
rom economi ct
heor
iesandappl
icat
ionsof
quant
itat
ivemethodsofanalysi
s.

Nat
ureofFi
nanci
alManagement
:

Natureoffi
nanci
almanagementcoul
dbespot
li
ght
edwi
thr
efer
encet
othef
oll
owi
ng
aspectsofthi
sdi
scipl
ine:

(i
)Financi
almanagementi
saspeciali
zedbranchofgeneralmanagement
,int
hepr esent
-
day -
ti
mes.Longback,i
ntr
adi
tional
times,t
hef i
nancefunct
ionwascoupl
ed,ei
therwith
producti
onorwit
hmarketi
ng;
wi t
houtbei
ngassignedasepar at
estat
us.

(i
i)Financial
managementi sgrowi
ngasapr of
ession.Youngeducat edpersons,
aspiri
ngf oracareerinmanagement,
undergospecial
izedcoursesinFinancial
Management ,offer
edbyuniv
ersi
ti
es,managementinstit
utesetc.
;andtakeupt he
professionoffinancial
management.

(i
ii
)Despiteasepar
at estat
usfi
nancialmanagement ,
isint
ermi ngledwit
hot heraspects
ofmanagement .Tosomeext ent,
financialmanagementisther esponsi
bil
it
yofev ery
functi
onalmanager.Forexample,t
hepr oducti
onmanagerpr oposingtheinstal
lat
ionof
anewpl antt
obeoper at
edwit
hmoder ntechnol
ogy;i
salsoinvol v
edinaf i
nancial
decisi
on.

Likewise,t
heAdvert
isi
ngManagert hinki
ng,intermsoflaunchinganaggressive
adv er
ti
singprogr
amme, i
stoo,consideri
ngaf i
nancialdeci
sion;andsoonf orother
functi
onalmanagers.Thi
sinter
mi ngli
ngnatureoffi
nancialmanagementcal l
sfor
effort
sinproduci
ngacoordinatedfinanci
alsystem fort
hewhol eenter
pri
se.

(i
v)Financi
almanagementi
smulti
-di
sci
pli
naryinappr
oach.Itdependsonot
her
di
scipli
nes,l
ikeEconomi
cs,
Accounti
ngetc.
,forabett
erprocurementandut
il
isat
ionof
fi
nances.

Forexample,macro-economicgui
desfinancial
managementastobanki ngandfinanci
al
i
nsti
tuti
ons,capit
almarket,monet
aryandf i
scalpoli
ciest
oenabl
ethefinancemanager
deci
deaboutt hebestsourcesoff
inances,undertheeconomi
ccondit
ions,theeconomy
i
spassingthrough.

Micro-economicspointsouttothefinancemanagertechniquesforprofi
tmaximisati
on,
wit
ht hel i
mit
edfinancesatthedisposaloft
heenterpri
se.Accounting,agai
n,pr
ovides
datatot hefi
nancemanagerf orbett
erandimprovedfinancialdeci
sionmakinginfutur
e.

(v)Thefinancemanagerisof
tencall
edtheCont rol
ler
;andthefi
nancial
management
functi
onisgivennameofcontrol
ler
shipfunct
ion;inasmuchast hebasicgui
del
inef
or
theformulati
onandimplementat
ionofplans-
throughouttheent
erpr
ise-comef
rom t
his
quarter
.
Thefinancemanager ,veryoften,i
sahi ghl
yresponsiblememberoft heTop
ManagementTeam.Heper f
ormsat r
ini
tyofrol
es-t
hatofal i
neoffi
cerov ert
heFinance
Department;afuncti
onal expertcommandi ngsubordinat
esthroughouttheenterpr
isein
mattersrequi
ri
ngf i
nancialdiscipl
i
neandast affadviser,
suggesti
ngt hebestfi
nancial
pl
ans, pol
ici
esandpr ocedurest otheTopManagement .

Inanycase,
however,
thescopeofauthorityofthefi
nancemanageri
sdefi
nedbyt
he
TopManagement;i
nv iewoftherol
edesiredofhim-dependi
ngonhisfi
nanci
al
exper
ti
seandthesystem oforgani
zat
ionalfuncti
oni
ng.

(vi
)Despiteahueandcr yaboutdecentral
i
sat i
onofauthori
ty;fi
nanceisamattertobe
foundsti
llcentr
ali
sed,eveninent er
pri
seswhi charesocalledhighl
ydecent
ral
ised.The
reasonforauthori
tybeingcentrali
sed,i
nfinancialmatt
ersissimple;
aseveryTom, Di
ck
andHar r
ymanagercannotbeal lowedtopl aywithfi
nances,thewayhe/sheli
kes.
Financeisboth-
acr uci
alandlimitedasset-
ofanyent er
pri
se.

(v
ii)Fi
nancial
managementi snotsi
mpl yabasicbusinessfunct
ional
ongwi
th
product
ionandmar ket
ing;
itismoresigni
ficant
ly,
thebackboneofcommerceand
i
ndustry.I
tturnst
hesandofdr eamsintothegoldofreali
ty.

Nopr oducti
on,purchasesormarketi
ngarepossi
blewi
thoutbei
ngdulysuppor
tedby
requi
sitefi
nances.Hence,Fi
nancial
Managementcommandsahi gherst
atusv
is-
a-v
is
allot
herfuncti
onal ar
easofgeneralmanagement
.

Maj
orScopeofFi
nanci
alManagement/Maj
orf
inanci
aldeci
sions

Someofthemaj orscopeoffi
nanci
almanagementareasfol
lows:1.Invest
ment
Deci
sion2.Fi
nancingDeci
sion3.Di
videndDeci
sion4.Wor
kingCapitalDeci
sion.

1.I
nvest
mentDeci
sion:

Theinvest
mentdeci si
oni nv
olv
estheev al
uat
ionofrisk,
measurementofcostofcapi
tal
andestimationofexpectedbenef
itsfr
om apr oj
ect
.Capital
budgeti
ngandli
quidi
tyar
e
thetwomaj orcomponent sofi
nvestmentdecisi
on.Capit
albudget
ingi
sconcernedwith
theall
ocat
ionofcapi t
alandcommi tmentoffundsinpermanentasset
swhichwould
yiel
dearni
ngsi nfut
ure.

Capit
albudgetingal
soinvol
vesdeci
sionswit
hrespectt
or epl
acementandr enovat
ionof
oldassets.Thefi
nancemanagermustmai nt
ainanappropri
atebalancebetweenfixed
andcurrentassetsi
nordert
omaxi mi
seprofi
tabi
li
tyandtomai nt
aindesir
edliqui
dityi
n
thefi
rm.

Capit
albudgeti
ngi
sav er
yimpor
tantdeci
sionasitaf f
ectsthel
ong-t
erm successand
growthofafir
m.Atthesameti
mei tisaverydi
ff
icultdecisi
onbecausei
tinvolvest
he
esti
mati
onofcostsandbenef
it
swhi char
euncertainandunknown.
2.Fi
nanci
ngDeci
sion:

Whilethei nvestmentdecisioninvol
vesdecisionwithrespecttocomposi t
ionormixof
assets,fi
nancingdeci si
onisconcernedwi t
ht hefi
nancingmi xorfinanci
alstr
uctur
eof
thefi
rm.Ther aisi
ngoff undsrequir
esdecisionsregardi
ngt hemethodsandsour cesof
fi
nance, rel
ativeproport
ionandchoi cebet
weenal ternat
ivesources,ti
meoff l
oatat
ionof
securit
ies,etc.Inordertomeeti t
sinvest
mentneeds, afi
rm canraisefundsfrom
vari
oussour ces.

Thefinancemanagermustdev el
opthebestf
inancemixoroptimum capi
talst
ruct
ure
fort
heent erpri
sesoast omaximisethel
ong-ter
m marketpri
ceofthecompany ’
s
shar
es.Apr operbalancebet
weendebtandequit
yisrequi
redsothatther
eturnto
equi
tyshar eholder
si shi
ghandthei
rri
skisl
ow.

Useofdebtorf inancialleverageef
fectsbotht
hereturnandri
sktotheequit
y
sharehol
ders.Themar ketv al
uepershareismaxi
mi sedwhenriskandret
urnar
e
properl
ymat ched.Thef inancedepartmenthasal
sot odeci
detheappropri
atet
imet
o
rai
sethefundsandt hemet hodofi
ssuingsecur
it
ies.

3.Di
vi
dendDeci
sion:

I
nor dertoachievethewealthmaximisati
onobj ect
ive,anappropri
atedivi
dendpol
icy
mustbedev eloped.Oneaspectofdividendpolicyi
st odecidewhethertodist
ri
buteal
l
theprofi
tsi
nt heform ofdiv
idendsortodistr
ibuteapar toftheprof
itsandret
aint
he
balance.Whil
edecidingtheoptimum divi
dendpay outrati
o(proport
ionofnetprof
itst
o
bepaidouttoshar ehol
ders).

Thefi
nancemanagershoul dconsi
dertheinvest
mentopport
uni
ti
esavai
l
ablet ot
hefi
rm,
pl
ansforexpansi
onandgr owth,et
c.Decisi
onsmustalsobemadewithrespectto
di
vi
dendstabil
it
y,f
orm ofdivi
dends,i
.e.
,cashdivi
dendsorst
ockdi
vi
dends,etc.

4.Wor
kingCapi
talDeci
sion:

Workingcapi t
al deci
sioni srelatedtotheinvestmenti ncur r
entasset sandcur r
ent
l
iabi
li
ties.Currentasset sincludecash, r
eceivables, i
nvent or
y, short
-term securi
ti
es,et
c.
Curr
entl i
abil
iti
esconsi stofcr edit
ors,bil
l
spay able, outstandingexpenses, bank
over
draf t
,etc.Currentasset saret hoseassetswhi char econv erti
bleintoacashwi thi
na
year
.Si mil
arly,curr
entliabil
it
iesar ethoseli
abili
ties,whi charel i
kelytomat urefor
paymentwi thinanaccount i
ngy ear

SCOPEOFFI
NANCI
ALMANAGEMENT

Fi
nanci
almanagementcov
erswi
dear
eawi
thmul
ti
dimensi
onal
appr
oaches.

1.Fi
nanci
alManagementandEconomi
cs
Economi c concept
sl i
ke micro and macroeconomi cs ar
e dir
ectl
yappl i
ed wi
tht he
fi
nanci al management appr oaches. I
nv est
ment deci si
ons, micro and macr o
environmentalfact
orsarecloselyassoci
atedwi t
ht hefuncti
onsoffinanci
almanager.
Financialmanagemental sousest heeconomi cequationsli
kemoneyv al
uediscount
factor,economicorderquanti
tyetc.Fi
nancialeconomicsisoneoft heemer gi
ngarea,
whichpr ovi
desimmenseoppor tuni
ti
estofi
nance, andeconomicalar
eas.

2.Fi
nanci
alManagementandAccount
ing

Accountingrecor
dsi ncludest hefinanciali
nformati
onoft hebusinessconcern.Hence,
wecaneasi lyunderstandt herelati
onship betweenthef i
nancialmanagementand
accounti
ng.Intheoldenper iods,bothfinanci
almanagementandaccount i
ngaretreat
ed
asasamedi scipl
ineandt henithasbeenmer gedasManagementAccount i
ngbecause
thi
spar tisverymuchhel pfult
of i
nancemanagert otakedecisions.Butnowaday ’
s
fi
nancialmanagementandaccount i
ngdi sci
pli
neareseparateandi nt
errel
ated.

3.Fi
nanci
alManagementorMat
hemat
ics

Modern approaches of t he f inancial management appl ied lar

ge number of
mathemati
cal and stati
stical tool s and techniques. They are also called as
econometr
ics.Economicorderquant it
y,di
scountf actor
,ti
mev al
ueofmoney ,
present
val
ue ofmoney ,costofcapi tal,capitalstruct
uret heori
es,divi
dend theori
es,r
atio
anal
ysisandwor ki
ngcapitalanaly sisareusedasmat hemati
calandst at
ist
icaltools
andtechni
quesinthefi
eldoff i
nanci almanagement.

4.Fi
nanci
alManagementandPr
oduct
ionManagement

Product i
onmanagementi stheoper ati
onalpartoft hebusinessconcern,whichhelpsto
multiplethemoneyi ntoprofit
.Pr ofi
toft heconcer ndependsupont heproducti
on
performance.Pr oduct
ionperformanceneedsf inance,becausepr oducti
ondepartment
requiresraw mat er
ial
,machinery,wages,oper ati
ngexpenseset c.Theseexpendi tur
es
are decided and estimat
ed byt he fi
nancialdepar t
mentand t he fi
nance manager
all
ocat estheappropri
atef
inancet oproducti
ondepar tment.Thefinanci
almanagermust
be awar e ofthe operat
ionalpr ocess and f i
nance required foreach process of
product i
onacti
viti
es.

5.Fi
nanci
alManagementandMar
ket
ing

Producedgoodsar esoldinthemarketwithi
nnovati
veandmoder napproaches.Forthis,
the market
ing depart
mentneeds f i
nance t
o meett hei
rr equi
rement
s.The financial
managerorf i
nancedepar tmenti
sr esponsi
blet
oal l
ocatetheadequatefinancet othe
marketi
ngdepar t
ment .Hence,mar keti
ngandfinancialmanagementar ei nt
errel
ated
anddependsoneachot her.

6.Fi
nanci
alManagementandHumanResour
ce
Financi
almanagementi sal
sorelat
edwi t
hhumanresourcedepartment,whichprov i
des
manpowert oallthefuncti
onalareasoft hemanagement.Financi
almanagershoul d
careful
lyevaluat
et herequi
rementofmanpowert oeachdepar tmentandal l
ocat ethe
fi
nancet ot
hehumanr esourcedepart
mentaswages,sal
ary,r
emuner at
ion,commi ssion,
bonus,pensionandot hermonetarybenefi
tstot
hehumanr esourcedepart
ment.Hence,
fi
nancialmanagementi sdir
ectl
yrelat
edwithhumanresour
cemanagement .

SCOPEOFFI
NANCEFUNCTI
ON

Themai nobject
iveoffinancialmanagementistoarr
angesuffi
cientfi
nanceformeeti
ng
short
-t
erm andlong-ter
m needs.Wi tht
hesethingsi
nmi nd,
aFinancialManagerwil
l
havetoconcentrateont hefoll
owingareasoffi
nancefunct
ion.

 
1.Est
imat
ingFi
nanci
alRequi
rement
s:

Thef i
rsttaskofaf i
nancial manageri stoestimateshort-
term andlong-ter
m
fi
nancialrequirementsofhisbusi nessf orthispur pose,hewill
prepareaf i
nancialplan
forpresentaswel lasforfuture.Theamountr equiredforpurchasingfi
xedasset sas
wellasneedsoff undsforwor ki
ngcapi t
al willhavetobeascer t
ained.Theesti
mat ions
shouldbebasedonsoundf inancialprinciplessot hatneit
herthereareinadequatenor
excessfundswi t
htheconcer n.Thei nadequacyoff undswi l
ladversel
yaffecttheday -
todaywor ki
ngoft heconcernwher easexcessf undsmayt emptamanagementt o
i
ndulgeinext ravagantspendingorspecul ativeactivi
ti
es.

 
2.Deci
dingCapi
talSt
ruct
ure:

Thecapi talstruct
urereferstot heki ndandpr opor ti
onofdi ff
erentsecur it
iesf or
rai
singf unds.Af terdecidi
ngaboutt hequant um off undsr equi r
editshouldbedeci ded
whicht y peofsecur it
iesshouldber aised.I tmaybewi set of i
nancefixedasset st hrough
l
ong- term debt s.Ev enhereifgest at
ionper i
odi slonger ,thenshar ecapitalmaybemost
sui
tabl e.Long- termf undsshoul dbeempl oyedt ofinancewor kingcapitalalso, i
fnot
whollyt henpar tially
.Entir
elydependi nguponov erdraftsandcashcr editformeet ing
workingcapi talneedsmaynotbesui table.Adeci sionaboutv ari
oussour cesf orfunds
shouldbel inkedt ot hecostofr ai
singf unds.I fcostofr aisingf undsisveryhi ght hen
suchsour cesmaynotbeusef ul f
orlong.Adeci si
onaboutt hekindofsecur iti
est obe
empl oy edandt hepr oporti
oninwhi cht heseshoul dbeusedi sani mportantdeci sion
whichi nf l
uencest heshort-t
erm andl ong- t
ermf i
nancial planningofanent erpri
se.

3.
Sel
ect
ingaSour
ceofFi
nance:

Af
terprepari
ngacapitalstruct
ure,anappropr
iat
esour ceoffinanceisselected.
Vari
oussourcesf r
om whichfinancemayber ai
sed,i
nclude:sharecapit
al,debentures,
fi
nancial
inst
it
utions,commer ci
albanks,publi
cdeposit
s, et
c.Iff
inancesar eneededf or
shortper
iodsthenbanks,publicdepositsandfi
nanciali
nsti
tuti
onsmaybeappr opr
iate;
ontheotherhand, i
flong-
ter
mf inancesarerequi
redthenshar ecapit
alanddebent ures
maybeusef ul
.Iftheconcerndoesnotwantt oti
edownasset sassecur it
iesthenpubl i
c
deposi
tsmaybesui t
ablesource.I
fmanagementdoesnotwantt odi
luteownership
thendebent
uresshouldbeissuedinpref
erencetoshar
es.Theneed,purpose,
object
andcostinv
olvedmaybet hefactor
sinfl
uencingt
heselect
ionofasuit
ablesourceof
fi
nanci
ng.

4.
Sel
ect
ingapat
ter
nofi
nvest
ment
:

Whenf undshav ebeenpr ocuredt henadeci sionabouti nv estmentpat t

ernisto
betaken.Thesel ecti
onofani nvestmentpat t
ernisr el
at edt otheuseoff unds.A
decisionwillhavet obet akenast owhichasset sar etobepur chased?Thef undswill
havet obespentf i
rstonf i
xedassetsandt henanappr opr iat
epor t
ionwillberetai
ned
forwor ki
ngcapi tal
.Eveni nvari
ouscat egor iesofasset s, adeci sionaboutt hetypeof
fi
xedorot herasset swillbeessent i
al.Whi leselecti
ngapl antandmachi nery,even
dif
ferentcategor i
esofthem maybeav ailable.Thedeci si on-maki ngtechniquessuchas
CapitalBudget i
ng,Oppor tuni
tyCostAnal y sisetc.maybeappl iedi nmaki ngdecisi
ons
aboutcapital expendit
ures. Whil
espendi ngorv ar
iousasset s,thepr i
nciples.Onemay
notliketoinvestonapr ojectwhichmayber i
skyev ent hought heremaybemor eprofi
ts.

5.
ProperCashManagement
:

Cashmanagementi sal soani mpor tanttaskoff inancemanager .Hehast o

assessv ariouscashneedsatdi ff
er entti
mesandt henmakear rangement sfor
arr
angingcash.Cashmay ber equiredt o(a)purchaser awmat erials,(
b)makepay ment s
tocreditors,(c)meetwagebi l
ls;(
d)meetday -
to-dayexpenses.Theusual sourcesof
cashmaybe: (a)cashsal es,(b)collecti
onofdebt s,(c)shor t
-term ar r
angement swi t
h
bankset c.Thecashmanagementshoul dbesucht hatnei t
hert her eisashortageofi t
andnori tisidleAnshor tageofcashwi lldamaget hecr edi
twor thinessoftheent erpri
se.
Theidlecashwi ththebusi nesswi l
l meant hatitisnotpr operl
yused.I twil
lbebet t
erif
CashFl owSt at ementi sregul arl
ypr eparedsot hatonei sablet of i
ndoutv ari
ous
sourcesandappl icat
ions.Ifcashi sspentonav oidableexpensest hensuchspendi ng
maybecur t
ailed.Apr operi deaonsour cesofcashi nflowmayal soenablet oassess
theutil
i
t yofv arioussour ces.Somesour cesmaynotbepr ovidingt hatmuchcashwhi ch
weshoul dhav et hought.All t
hisinformat i
onwi llhelpinef f
ici
entmanagementofcash.

6.
Impl
ement
ingFi
nanci
alCont
rol
s:

Anefficientsystem off i
nancialmanagementnecessi tatestheuseofv arious
controldevi
ces.Fi nancialcontrol
dev i
cesgenerallyusedare,
: (
a)Ret urnoninv estment
,
(b)BudgetaryCont r
ol,(
c)Br eakEvenAnal ysi
s,(d)CostControl,(
e)Rat i
oAnal ysis(f
)
CostandI nt
er nalAudit.Returnoni nvestmentisthebestcont r
oldev i
cetoev aluatethe
performanceofv ari
ousf i
nancialpoli
cies.Thehighert hi
spercentagebettermaybet he
fi
nancialperf
or mance.Theuseofv ariouscontr
ol techni
quesbyt hef i
nancemanager
will
helphimi nev aluati
ngt heperformancei nvari
ousar easandt akecorrect
ive
measur eswhenev erneeded.  

7.
ProperUseofSur
pluses:
 Theut i
li
zationofpr ofi
tsorsur plusesal soani mpor tantfactorinfi
nancial
management .Ajudicioususeofsur plusesi sessent ialforexpansi onanddi ver
sif
icati
on
plansandal soinpr otecti
ngthei nt
erest sshar eholders.Thepl oughi ngbackofpr ofi
tsis
thebestpol i
cyoff urtherfi
nancingbuti tclasheswi ththei nterestsofshareholders.A
balanceshoul dbest ruckinusingf undsf orpay ingdiv i
dendandr etaini
ngear ni
ngsf or
fi
nancingexpansi onpl ans,et
c.Themar ketv al
ueofshar eswi llal
sobei nfl
uencedbyt he
declarationofdiv i
dendandexpect edpr of i
tabili
tyinfuture.Af inancemanagershoul d
considert heinfl
uenceofv ari
ousf actor,suchas: 9a)t r
endsofear ningofthe
enterprises,(b)expect edearni
ngsi nf uture,(c)mar ketv al
ueofshar es,(
d)needf or
fundsf orfinancingexpansi on,etc.Ajudi ciouspol i
cyf ordistri
butingsurpluseswillbe
essential f
ormai ntainingpropergrowt hoft heunit

Funct
ionsofFi
nanci
alManagement

1.Esti
mat ionofcapi t
al r
equirements: Afi
nancemanagerhast omakeest imati
on
withregardst ocapitalrequir
ement softhecompany .Thiswi lldependupon
expectedcost sandpr of i
tsandfutureprogrammesandpol iciesofaconcern.
Esti
mat ionshav etobemadei nanadequat emannerwhi chi ncreasesearni
ng
capacityofent erpr
ise.
2.Determinat i
onofcapi t
al composition:Oncet heestimationhav ebeenmade, the
capit
alst r
ucturehav etobedeci ded.Thisinvolvesshor t-term andl ong-t
erm
debtequi t
yanal ysi
s.Thiswi l
ldependupont hepr oporti
onofequi tycapit
ala
companyi spossessingandaddi t
ionalfundswhi chhav et ober ai
sedfrom
outsi
depar t
ies.
3.Choiceofsour cesoffunds: Foradditi
onalfundst obepr ocur ed,acompanyhas
manychoi ceslike-
a.I ssueofshar esanddebent ures
b.Loanst obet akenf rom banksandf inancialinsti
tuti
ons
c.Publ i
cdeposi t
stobedr awnl i
keinform ofbonds.

Choiceoff
actorwil
ldependonr
elat
ivemer
it
sanddemer
it
sofeachsour
ceand
per
iodoffi
nancing.

4.Investmentoff unds:Thef inancemanagerhast odeci detoall

ocat efundsi nto
profit
ablev enturessot hatt herei ssafet
yoni nvestmentandr egularreturnsis
possible.
5.Disposalofsur pl
us:Thenetpr ofit
sdecisionhavet obemadebyt hefinance
manager .Thi scanbedonei nt woway s:
a.Di videnddecl arati
on-I tincludesident
ify
ingt her at
eofdi vi
dendsand
otherbenef itsl
ikebonus.
b.Ret ai nedprofit
s-Thev olumehast obedeci dedwhi chwi l
l dependupon
expansi onal,i
nnov ational ,
diversi
fi
cati
onpl ansoft hecompany .
6.Managementofcash: Financemanagerhast omakedeci sionswi thregardst o
cashmanagement .Cashi sr equiredformanypur posesl i
kepay mentofwages
andsal ar
ies, paymentofel ect rici
tyandwat erbil
ls,pay menttocr edit
or s,
meet ing
currentli
abilit
ies,maintainanceofenoughst ock,pur chaseofr awmat eri
als,et
c.
 7.Financi
alcont
rol
s:Thefi
nancemanagerhasnotonl yt
oplan,procureanduti
l
ize
thefundsbuthealsohastoexer
cisecontr
oloverfi
nances.Thi
scanbedone
throughmanytechni
quesli
kerat
ioanaly
sis,f
inanci
alf
orecasti
ng,costandprof
it
control
,et
c.

Or
gani
zat
ionofFi
nanceFunct
ioni
nFi
nanci
alManagement

Asampl eorgani
zat
ionchartemphasizi
ngthefinancef
unction.Thefi
nancefunct
ioni
s
usual
lyheadedbyav i
cepresidentoffi orchi
nance, eff
inancialof
fi
cer(CFO)
,who
repor
tstothepresi
dent
.

Insomecor porat
ionst heCFOmayal sobeamemberoft heboar dofdi r
ector
s.I
n
addit
iontooverseeingt heaccount ing,tr
easury,t
ax,andauditfunctions,t
oday’
sCFO
oft
enhasr esponsibil
it
yf orst r
ategicplanni
ng,moni t
ori
ngandt radingforei
gncurrenci
es,
managingtheriskfrom v ol
atil
einterestrat
es,andmoni t
ori
ngpr oductionandinventor
y
l
evels.CFOsalsomustbeabl etocommuni cat
eef f
ecti
vel
ywi t
ht heinvestment
communi t
yconcer ningt hefinancialperf
ormanceoft hecompany .

ThePr
act
iceofFi
nanci
alManagement

Dur i
ngt he1980sand1990s, interestint heet hicaldi
mensi onsofbusinesspr actice
exploded.Fr ont-pagestori
esoft hest ockt radingscandal sinvolvi
ngtheuseofi nsider
i
nf ormat i
ont hatledtothedownf allofDenni sLev i
neandI vanBoesky ,theTreasur y
bondt radingscandal atSal
omonBr othersthatsev er
elydamagedSal omon’sr eputation
andr esultedini t
stopmanager sbei ngf orcedt or esi
gn,andt hebil
li
onsofdol larsof
quest i
onablel oansmadebysav ingsandl oanex ecut
ivesthatcausedt hecollapseof
muchoft hesav i
ngsandloani ndustryhav ef ocusedat tent
ionont heet hi
calpractices
foll
owedbybusi nessandfi
nanci almanager s.Webst er’sdefinesethi
csas“ t
he
discipl
inedeal ingwithwhatisgoodorbad, rightorwr ong,orwi thmor aldut
yand
obligati
on.”aJohnJ.Caseydef inesethicsasf oll
ows:

“Atit
sbest,busi
nessethi
csisexcell
enceinmanagementappli
edwithfai
rnessand
dispat
ch.I
tinvol
veshard-headedthought
,notasenti
mentalr
eact
ion.I
talsoinvolv
es
arti
cul
ate,
effect
ivecommunicati
ontoallpar
ti
es.
..
.”bCaseyi
denti
fi
esanumberof
techni
questhatmanagerscankeepi nmindwhenaddressi
ngtheethi
caldimensionsof
abusinessprobl
em.

 Clarif
ytheparamet er
softheproblem.
 I
nv olvetheri
ghtteam ofpar
ti
cipantsatt heoutset.
 Collectall
thefactsbeari
ngont heproblem.
 Arti
culatetheharm andbenefi
tthatmayr esul
tfrom pr
oposedact
ions.
 Wei ghtheconsequencesofalternat
ives.
 Seekequi tyf
orthosewhomaybeaf fected.

Ot
heract
iongui
del
i
nest
hathav
ebeensuggest
edf
ormanager
sincl
udet
o
  Ensur
ethatper
sonal
int
erest
sdonotconf
li
ctwi
thbusi
nessdeci
sionsbei
ng
made.
 Respectt
heconfi
dent
ial
i
tyofinf
ormati
onentr
ustedt
oy ou.
 Makedecisi
onsbasedonrat
ional
,obj
ecti
vebusi
nessanaly
sisr
athert
hanon
i
nappropri
atefactor
s,suchasrace,
sex,
orr
eli
gion.
 Actfai
rl
yindealingwit
hcustomerswhil
epr
otecti
ngthel
egi
ti
mat
eint
erest
sof
thebusi
ness.c

Ethi
calconsiderat
ionsimpactal
l ki
ndsofbusi
nessandf i
nancial
management
deci
sions.Somef inanci
aldeci
sionswit
himportantethi
caldi
mensions,suchasthel
oan
administ
rati
onpoliciesappar
entinmanyfail
edsav i
ngsandloaninst
it
utions,
command
nati
onalatt
ention.

Howev er,f
inancialmanager sencounterday-todaydeci sionst hathav eimpor tantet hi
cal
dimensi ons.Forexampl e,asanewbankl oanof f
icer,shouldy our ecommendappr oval
ofal oant oal ongti
mef ri
end, ev
ent houghshedoesnotqui t
emeett henor mal l
oan
standar dsoft hebank?Asanaccountexecut ivef orabr okeragef irm,shoul dy ou
recommendt oy ourcl
ient
st hesecur i
ti
esoffirmst hathav epoorenv i
ronment al
managementr ecordsorthatdeal insuchproduct sasal cohol andt obacco?Shoul dyou
tel
l y
ourf ather-i
nlawthaty ourfir
mi sli
kelytobecomeacandi datef orat akeov erbefore
thisispubliclyannounced?Asadi visi
onmanagerbei ngev al
uat edinpar tonar eturn-
onasset scalculati
on,shouldy ouleaseassetst okeept hem outoft heassetbasef or
evaluationpur posesandt herebyenhancey ourappar entper formance?

Shouldyourf
irm aggressi
velyuseall
owableaccounti
ngpracti
cestomaska
fundamental
l
ydet er
iorati
nglevelofper
for
mance?Shoul dyourfi
rm mov
eitsplantf
rom
theNort
heasttotheSout heastinanatt
empttobr eaktheuni
onandsavelaborcosts?

Thisbri
efsampl i
ngoft heareasofbusi nessandf inancial -
managementdeci si
on
makingt hatpossessi mportantet hi
cal dimensionspr ovidesaf eelf
orthebr eadthof
ethi
calissuesf acingfi
nancialmanager s.Inmostcases, theanswerst othesequest ions
arenotclear-cut.Actualdecisionmaki ngi sverycompl exandi nvol
vesmanyt r
ade-offs
amongpar t
ieswi thcompet i
ngi nter
ests.Howev er
, expl
icitl
yrecognizi
ngthecost sand
benefi
tsassoci atedwitheachoft hesedeci si
onsandmaki ngthedecisioninan
atmospher eofbal ancedobject i
vit
yandf airnesscanhel pf i
nancialmanagersav oid
apparentorr ealbreachesoft heirethi
cal t
rust.
Thechieffi
nanci
al off
iceroft
endistr
ibutesthefi
nancial
managementresponsibi
li
ti
es
bet
weent hecontroll
erandthet r
easurer
.Thecont r
oll
ernormal
lyhasr
esponsibil
i
tyfor
al
laccounti
ng-r
elatedactivi
ti
es.Theseincludesuchfuncti
onsas

 Fi
nanci
alAccount
ingThi
sfunct
ioni
nvol
vest
hepr
epar
ati
onoft
hef
inanci
al
stat
ement sforthef i
rm, suchast hebal ancesheet ,i
ncomest atement ,andt he
stat
ementofcashf lows.
 CostAccount i
ngThi sdepar t
mentof tenhasr esponsi
bili
tyforpr eparingt he
fi
rm’soper ati
ngbudget sandmoni tori
ngt heper for
manceoft hedepar tment s
anddi vi
sionswi thi
nt hefirm.
 TaxesThi suni tpreparest herepor tsthatt hecompanymustf il
ewi tht hev arious
government( l
ocal,stat
e, andf ederal)agenci es.
 DataPr ocessingGi venitsr esponsi bi
liti
esi nv ol
vingcorporateaccount ingand
payrollacti
vit
ies,thecont roll
ermayal sohav emanagementr esponsi bilit
yf orthe
company ’
sdat a-processingoper ati
ons.
 Thet r
easur erisnormal l
yconcer nedwi t
ht heacqui sit
ion,custody ,and
expendi t
ureoff unds.Thesedut i
esof tenincl ude
 CashandMar ketableSecur i
ti
esManagementThi sgroupmoni torsthef irm’s
short-termf i
nancesf orecast i
ngi tscashneeds, obtai
ningf undsf rom banker s
andot hersour ceswhenneeded, andinv estinganyexcessf undsi nshor t
-term
i
nterest-earningsecur i
ties.
 CapitalBudget ingAnal ysisThi sdepar tmenti sresponsibl
ef oranal yzingcapi tal
 expendi t
urest hati s, t
hepurchaseofl ong- t
erm asset s,suchasnewf acili
ties
andequi pment .
 Financi alPlanni ngThi sdepar t
menti sr esponsi bleforanal yzingt healt
ernat iv
e
sour cesofl ong- termf unds,suchast hei ssuanceofbondsorcommonst ock,
thatt hef i
rm wi llneedt omaintainandexpandi t
soper ations.
 Credi tAnal ysisMostcompani eshav eadepar tmentt hatisr esponsiblefor
det erminingt heamountofcr editthatthef i
rm wi l
lextendt oeachofi t
s
cust omer s.Alt hought hisgr
oupi sr esponsi bleforper formingf inanci
al analysis,
it
maysomet i
mesbel ocatedint hemar ket ingareaoft hef ir
m becauseofi t
scl ose
relationshipt osal es.
 Invest orRelat ionsManyl ar
gecompani eshav eauni tresponsi bleforwor king
withi nstit
utional inv estors(
forexampl e, mutual funds),bondr ati
ngagenci es,
stockhol ders, andt hegener al fi
nancial communi t
y.
 Pensi onFundManagementThet reasur ermayal sohav er esponsi bi
l
ityfort he
i
nv est mentofempl oyeepensi onf undcont r
ibutions.Thei nvest mentanal ysisand
por tf
ol i
omanagementf uncti
onsmaybeper formedei therwi thinthefir
m or
throughout sidei nv estmentadv i
sors.

Itshouldbeemphasi zedthatt hespeci

fi
cf unct
ionsoft hecontroll
erandtreasurer
showni nFigureareil
lustr
ativ
eonl yandthattheactual funct
ionsperfor
medv aryfr
om
companyt ocompany .Forexampl e,
insomecompani es, t
hetreasurermayhav e
responsibil
it
yfortaxmat t
ers.Also,t
heboar dofdir
ector softhecompanymayest abl
ish
af i
nancecommi tt
ee,consi
stingofanumberofdi r
ectorsandof fi
cersofthef i
rm with
substantialf
inanci
alexpert
ise, t
omaker ecommendat ionsonbr oadf i
nancialpoli
cy
i
ssues.
Obj
ect
ivesofFi
nanci
alManagement

Thefi
nanci
al managementisgener
all
yconcernedwi
thprocur
ement,
all
ocat
ionand
cont
roloff
inanci
alresour
cesofaconcern.Theobj
ect
ivescanbe-

1.Toensur eregularandadequat esuppl yoffundst otheconcern.

2.Toensur eadequat er
et urnstot heshar eholderswhichwill
dependupont he
earni
ngcapaci t
y ,
marketpr iceoft heshar e,expectati
onsoftheshareholders?
3.Toensur eoptimum fundsut i
l
ization.Oncet hefundsareprocured,
theyshould
beutil
izedinmaxi mum possi blewayatl eastcost .
4.Toensur esafetyoninv estment ,i
.e,fundsshoul dbeinvest
edi nsafeventuresso
thatadequaterateofr eturncanbeachi eved.
5.Toplanasoundcapi tal st
ructure-
Ther eshoul dbesoundandf ai
rcomposi t
ionof
capit
al sot
hatabal ancei smai ntainedbet weendebtandequi tycapit
al.

Fol
lowi
ngisabr
iefaccountofeachoneoft
heabov
eobj
ect
ivesoff
inanci
al
management
:

(
1)Basi
cObj
ect
ives:

(
i)Pr
ofi
t-
Maxi
misat
ion:

Si
ncet i
mei mmemor i
al,t
heprimaryobjecti
veoffinanci
almanagementhasbeenhel dto
beprofit
-maximisati
on.Thatistosay,thatfi
nancialmanagementoughttotake
fi
nancialdeci
sionsandi mpl
ementt hem inawaysoast oleadtheent
erpr
isealongli
nes
ofprofi
tmaxi misat
ion.Thesupportfortheseobjecti
vescouldbederi
vedfrom the
phil
osophy,that‘pr
ofi
tisatestofeconomi ceffi
ciency’
.

Though, t
her
ecouldbeli
tt
lecontr
oversyoverpr of
itmaxi
misati
on,asthebasi
c
object
iveoffi
nanci
almanagement–y et,i
nt hemoderntimes,sev
eralaut
hori
ti
eson
fi
nancialmanagementcr
it
ici
sethisobject
ives,onthefol
lowi
nggrounds:

(
i)Pr
ofi
tisavagueconcept
,int
hat
;iti
snotcl
earwhet
herpr
ofi
tmeans–shor
t-
runor
l
ong-
runprof
it
s.Or

–Pr
ofi
tbef
oret
axorpr
ofi
tsaf
tert
axor

–Rat
eofpr
ofi
tsort
heamountofpr
ofi
ts.

(i
i
)Thepr ofitmaxi misati
onobjecti
veignores,whatf
inancialexper
tscallt
hetimev al
ue
ofmoney ’.Toi l
l
ustrate,
thisconcept,l
etusassumet hattwof i
nancial
coursesofaction
provi
deequal benefi
ts(i
.e.prof
it
s)ov eracert
ainper
iodoft i
me.Howev er
,one
al
ternat
ivegi v
esmor eprofi
tsinearl
ieryears;
whilet
heot heronegivesmor eprof
it
sin
l
ateryears.

Basedonpr
ofi
tmaxi
mizat
ioncr
it
eri
on,
bot
hal
ter
nat
ivesar
eequal
l
ywel
l
.Howev
er,
the
fi
rstal
ternat
ivei.
e.theonewhichgivesmor
eprofi
tsi
nearl
i
ery
ear
sisbet
ter
;assome
partoftheprofi
tsrecei
vedear
liercoul
dber
einv
estedal
so.

Modernfi
nancialexpert
scallt
hisphi
l
osophy ,‘
theearl
i
erthebet
terpri
nci
ple’
.The
secondal
ter
nativewhichgivesmoreprofi
tsonlyinlat
eryear
sisinf
eri
or;
astheti
me-
val
ueofprof
itsismor eint
hecaseoft hefi
rstalt
ernat
ive.

(
ii
i)Thepr ofi
tmaximizati
onobject
iveignoresthequalityofbenefi
ts(i
.e.profi
ts)
.The
f
actorimpl i
cither
e,i
stheriskel
ementassoci atedwithprofi
ts.Quali
tyofbenef i
ts
(
profi
ts)isthemostwhenr i
skassociatedwiththeiroccurr
enceistheleast.Accordi
ng
t
omoder nfinanci
alexper
ts,l
essprofi
twi t
hlessriskaresuperiort
omor eprofi
tswit
h
morerisk.

(i
v)Profi
t-
maximisati
onobject
iveisl
op-
sided.Thisobject
iveconsidersorratherover
-
emphasizesonl
yont heint
erestsofowners.Int
erest
sofot herparti
esli
ke,workers,
consumers,t
heGov ernmentandthesocietyasawhol eareignored,underthi
sconcept
ofprofi
t-
maximisati
on.

(
ii
)Weal
th-
Maxi
misat
ion:

Di
scardingtheprofi
t-
maximisat
ionobject
ive;
therealbasi
cobjecti
veoffi
nanci
al
management ,now-a-
days,
isconsider
edtobeweal thmaximisat
ion.Weal
th
maxi
mi sati
onisalsoknownasv al
ue-maximisat
ionorthenetpresentwort
h
maxi
mi sati
on.

Si
ncewealt
hofownersi
sreflect
edi
nthemar ket
-val
ueofshares;weal
thmaxi
misat
ion
meansthemaxi
misat
ionofthemarketpri
ceofshares.Accor
dingl
y,weal
th
maxi
misati
oni
smeasured,bythemarketval
ueofshares.

Accordi
ngt owealt
hmaxi misat
ionobject
ive,
financi
almanagementmustsel ectthose
deci
sions,whichcreat
emostweal thfort
heowner s.I
ftwoormor efi
nancial
cour sesof
acti
onaremut ual
lyexclusi
ve(i
.e.onl
yonecanbeunder takenatati
me);thent hat
deci
sion-whichcr
eatesmostweal th,
mustbesel ect
ed.

Theweal
thar
isi
ngf
rom af
inanci
alcour
seofact
ioncoul
dbest
atedasf
oll
ows:

Wealt
h=Grosspresentwort
hofafi
nanci
alcour
seofacti
onminusamountofcapi
tal
i
nvest
edwhichi
sr equi
redt
oachi
evethebenef
it
si.
e.cashfl
ows.

Expl
anat
ion:

Thegrosspresentwort
hofaf i
nancialcourseofacti
onisequaltothecapital
izedval
ue
oftheflowofexpect
edf ut
urebenef
its(i
.e.cashfl
ows);whicharediscountedatarat
e–
ref
lect
ingboth-t
imevalueofmoneyandt hei
rqual
it
y(i.
e.theri
skassociatedwi t
h
benefi
ts).
Mathemati
cal
ly,
theweal
thar
isi
ngf
rom af
inanci
alcour
seofact
ioncoul
dbe
cal
culat
edasfol
lows:

Wher
e,

W =Weal
th,
ari
singf
rom af
inanci
alcour
seofact
ion.

A1,
A2,
An=St
ream ofcashf
lowsexpect
edt
ocomef
rom t
hef
inanci
alcour
seofact
ion,

K=Appr opr
iat
ediscountrate,ref
lect
ingti
mevalueofmoneyandqual
i
tyofbenef
it
s,
associ
atedwit
hthefinancialcourseofacti
on.

andC=i
nit
ial
capi
tal
out
layt
opur
suet
hatf
inanci
alcour
seofact
ion.

Thewealt
hmaximisat
ionobj
ect
ivei
sheldtobesuper
iort
othepr
ofi
tmaxi
misat
ion
obj
ect
ive,
becauseofthef
oll
owi
ngreasons:

(i
)Iti
sbasedontheconceptofcashf
lows; whichismoredef i
nit
ethant heconceptof
profi
ts.Mor
eover
,managementismoreinterestedini
mmedi atecashflowsthanthe
profi
tsalar
gepartofwhi
chmightbehiddeni ncredi
tsal
es-sti
llt
ober eali
zed.

(i
i)Throughdi
scount
ingt
hecashf
lowsari
singfr
om afi
nanci
alcour
seofact
ionovera
peri
odoft i
meatanappropr
iat
edi
scountr
ate;t
hewealt
hmaximisati
onappr
oach
considersbot
h-t
heti
mev al
ueofmoneyandthequal
it
yofbenefi
ts.

(i
ii
)Weal
thmaxi
misat
ionobj
ect
ivei
sconsi
stentwi
tht
hel
ongt
erm pr
ofi
tabi
l
ityoft
he
company
.

(
2)Oper
ati
onalObj
ect
ives:

(
i)Ti
mel
yAv
ail
abi
li
tyofRequi
sit
eFi
nances:

Av er
yimportantoperat
ionalobjecti
veoffi
nanci
almanagementistoensuret
hat
requi
sit
efundsaremadeav ai
labletoallt
hedepart
ments,sect
ionsoruni
tsoft
he
enter
pri
seatt heneededtime;sot hatt
heoperat
ional
li
feoftheenter
pri
segoes
smoothly.

(
ii
)MostEf
fect
iveUt
il
izat
ionofFi
nances:

Throughoutt
heenterpr
ise,thefi
nancesmustbeut
il
izedmosteff
ecti
vel
y.Thi
sisy
et,
anotheri
mportantoper
ationalobj
ecti
veoft
hefi
nancial
,management.

Toensur
etheat
tai
nmentoft
hisobj
ect
ive,
thef
inanci
almanagementmust
:
–Formul
ateplansforthemosteff
ecti
veuti
li
sat
ionoff
unds,
amongchannel
sof
i
nvest
ment,whichcreatemostweal
thfort
hecompany.

–Exerci
seandenforce‘
fi
nanci
aldi
scipl
i
ne’toprev
entwast
eful
expendi
tur
e,byany
depar
tment
,orbranchorsect
ionoftheent
erpri
se.

(
ii
i)Saf
etyofI
nvest
ment
:

Thefinancialmanagementmustpr imar i
lyl
ooktothesafetyofinv
estmenti.
e.t
he
channelsofinvestmentmi
ghtbr i
nginl essretur
ns;buti
nvestmentmustbesafe.Loss
ofinvest
ment ,i
nanyoneline,mightleadt ocapi
taldepl
eti
on;andult
imatel
ytel
lupon
thefi
nancialhealt
hoftheenterpr
ise.

(
iv)Gr
owt
hoft
heEnt
erpr
ise:

Thefinancialmanagementmustplanfort
helong-
ter
m stabi
l
ityandgrowthofthe
enter
prise.Theli
mi t
edfi
nancesoftheent
erpr
isemustbesout i
l
izedt
hatnotonlyshort
runbenef i
tsareavail
abl
e;butt
heenter
pri
segrowssl
owandst eady,i
nthelongrunalso.

(
3)Soci
alObj
ect
ives:

(
i)Ti
mel
yPay
mentofI
nter
est
:

Thef i
nanci
almanagementmustseetoi
tt hati
nterestonbonds,debent
uresorother
l
oansoft hecompanyispai
dinti
me.Thiswi l
lnotonlykeepthecredi
tor
ssati
sfi
edwith
thecompanyaddingtoit
sgoodwil
l;
butalsopreventanyuntowardconsequencesofthe
non-paymentofi
nter
est,
int
ime.

(
ii
)Pay
mentofReasonabl
eDi
vi
dends:

Animpor
tantsoci
alobj
ect
iveoff
inanci
almanagementisthatshar
eholder
si.
e.t
he
equi
tymembersofthecompanymustgetatleastsomeregulardi
vi
dends.

Thi
sobj
ect
ivei
simpor
tantf
ort
wor
easons:–

–I
thel
pst
hecompanymai
ntai
nit
scompet
it
ivei
mage,
int
hemar
ket
.

–Themember sonwhosef
undsthecompanyisrunni
ngpr
ofi
tabl
eoper
ati
onsmustbe
dul
ycompensated,
asamatt
erofnat
ural
just
ice.

(
ii
i)Ti
mel
yPay
mentofWages:

Thefinanci
almanagementmustmakeapr ovi
sionf
oratimel
ypaymentofwagesto
workers.Thi
sisnecessaryt
okeepthelaborfor
cesati
sfi
edandmoti
vated.Furt
her
,if
wagesar epai
dont i
me; t
helegal
consequencesofnon-
paymentofwages,undert
he
‘PaymentofWagesAct ’,
neednotfr
ightenmanagement.
(
iv)Fai
r-
Set
tl
ementwi
thSuppl
ier
s:

Thefinanci
almanagementmustmakeitapointt
osettl
eaccountswithsuppli
ersand
fel
l
ow-businessmenintime,
inaf
airway;ot
herwiset
hecommer cial
reputat
ionofthe
enter
prisewil
lgetaset
back.

(
v)Ti
mel
yPay
mentofTaxes:

Ani mport
antobj
ecti
veoffi
nanci
almanagementwouldbet omaketi
mel
ypaymentof
taxestotheGovernment–soastoavoi
dlegalconsequences;
andal
sof
ulf
il
li
tssoci
al
obli
gati
onstowardstheSt
ate.

(
vi)Mai
ntai
ningRel
ati
onswi
thFi
nanci
ers:

Thef i
nanci
almanagementmustdev elopandmai nt
ainfr
iendl
yrel
ati
onswithfi
nanci
ers
i
.e.banks,fi
nanci
ali
nsti
tuti
onsandv ar
ioussegmentsofthemoneymar ketandcapi
tal
mar ket
.Whengoodr el
ati
onsar emaint
ainedwithfi
nanci
ers;t
heymightcometothe
rescueoftheenter
pri
se,insit
uati
onsoffinanci
alcr
isi
s.

(
4)Resear
chObj
ect
ives:

Thesuccessfulatt
ainmentofvari
ousobject
ivesbythef
inanci
almanagementr equi
res
i
ttofoll
owar esearchapproach.I
tmustresearchint
onewandbettersourcesof
fi
nances;andalsointonewandbet t
erchannelsfort
hei
nvestmentoffi
nances.

Thi
sresear
chobj
ect
iveoff
inanci
almanagementr
equi
resi
tto:

–Col
l
ectf
inanci
aldat
aaboutt
hepr
ogr
essofi
tscompet
it
ivecount
erpar
ts.

–Makeast udyofmoneymarketandcapi
talmar
ketoperat
ions,
thr
oughast
udyof
l
atestf
inancialmagazi
nesandotherl
i
ter
atur
eonfinanci
almanagement
.

Timev al
ueofmoney( TVM)i stheideathatmoneyt hatisavai
labl
eatt hepresentti
me
i
swor thmorethanthesameamounti nt hefutur
e,duet oit
spotent
ialearni
ngcapacity
.
Thiscorepri
ncipl
eoffinanceholdsthatprovidedmoneycanear ninter
est,anyamount
ofmoneyi sworthmor ethesooneriti
sreceived.Oneoft hemostfundament al
conceptsinf
inancei
st hatmoneyhasat imev al
ueattachedtoit
.Insimplerterms, 
i
t
wouldbesafetosayt hatadoll
arwaswor thmor eyester
daythantodayandadol lar
todayi
swor t
hmor ethanadol l
artomor r
ow.

Thischapt erisapr acti

calapproachtot heti
mev alueofmoney .
  
Wef ul
lyunderst
and
thattoday'stechnol ogyprovi
desmul ti
plecal
culatorsandappl
icati
onst ohelpyouder
ive
bothpr esentvalueandf ut
urevalueofmoney .I
fyoudonott akethet i
met o
compr ehend howt hesecalcul
ati
onsar ederi
ved,youmaymakecr it
ical
 fi
nanci
al
decisi
onsusi ng inaccuratedata(becauseyoumaynotbeabl etorecognizewhethert
he
answer
sar
ecor
rectori
ncor
rect
).
 Ther
ear
efi
ve(
5)v
ari
abl
est
haty
ouneedt
oknow:

1.Presentv alue( PV)-Thi sisy ourcur r

entstart
ingamount .
 Itist hemoneyy ou
hav einyourhandatt hepresentt ime,yourini
tiali
nvestmentf ory ourfut
ur e. 
2.Futur evalue( FV)-Thi sisyourendi ngamountatapoi ntintimei nthefuture.It
shoul dbewor thmor ethant hepr esentval
ue, provi
deditisear ninginter
estand
growi ngov ertime.
3.Thenumberofper iods( N)-Thi sistheti
mel i
nef oryouri
nv estment( ordebt s)
.It
i
susual lymeasur edi nyears,butitcouldbeanyscal eoft imesuchasquar terl
y,
mont hly,orev endai l
y.
4.Int
er estrate( I
)-Thi sisthegr owthr at
eofy ourmoneyov erthel i
feti
meoft he
i
nv estment .Itisstatedinaper centageval
ue, suchas8%or. 08.
5.Pay mentamount( PMT)-Thesear easeri
esofequal ,evenly-spacedcashf l
ows.

Val
uat
ionofbondsandshar
es

Theval
uat
ionofanyasset
,real
financei
sequi
val
entt
othecur
rentv
alueofcashf
lows
est
imat
edfrom i
t.

Bond:

Abondi sdefinedasal ong- t

erm debttoolthatpay sthebondhol deraspeci fi
edamount
ofperi
odicinterestov eraspecifiedperiodoft i
me.I nfinancialarea,abondi san
i
nstrumentofobl igat ionoft hebondissuert othehol ders.Iti
sadebtsecur i
ty,under
whichtheissuerowest heholdersadebtand, dependingont hetermsoft hebond, is
obli
gedtopayt hem i nterestand/ortorecompenset hepr incipalatalaterdate, call
ed
thematuri
tydat e.Int erestisgenerall
ypay ableatfixedintervalssuchassemi -annual ,
annual,
andmont hly .Somet i
mes, t
hebondi snegot i
able,i
.e.theowner shipoft he
i
nstrumentcanber elocat edinthesecondar ymar ket.Thismeanst hatoncet het ransfer
agentsatthebankmedal lionst
ampt hebond, iti
shighlyliquidont hesecondmar ket.

Itcanbeestabli
shedthatBondssignif
yloansext
endedbyi nv
est
orstocompani
es
and/orthegovernment.Bondsareissuedbythedebtor,
andacqui
redbythel
ender
.The
l
egal cont
ractunder
lyi
ngtheloaniscall
edabondi ndent
ure.

Normally,bondsar eissuedbypubl i
cest abli
shment s,
creditinsti
tuti
ons, compani esand
supranati
onal instit
utionsinthemaj ormar kets.Simplepr ocessf orissuingbondsi s
thr
oughcount ersigning.Whenabondi ssuei sunder writ
ten,oneormor esecurit
ies
fi
rmsorbanks, formingasy ndicate,buyt hewhol eissueofbondsf rom theissuerand
re-
sellt
hem t oi nvestors.Thesecur i
tyf i
rmt akest heriskofbei ngunabl etosellont he
i
ssuet oendi nv estors.Pri
mar yissuancei sor ganisedbybookr unner swhoar ranget he
bondissue, hav edirectcontactwi t
hdeposi torsandactasconsul tantst othebond
i
ssuerintermsoft imingandpr iceoft hebondi ssue.Thebookr unneri sli
stedfir
st
amongal lunder wri
tersparti
cipati
ngi nthei ssuancei nthetombst oneadscommonl y
usedtoannouncebondst ot
hepubl ic.Thebook- runners'wil
lingnesst ounderwr i
temust
bediscussedpr iortoanydeci si
onont het ermsoft hebondi ssueast her emaybe
l
i
mit
eddemandf
ort
hebonds.

Onthecont
rar
y,governmentbondsaregener al
lyissuedinanauct i
on.Insomecases
bothmembersofthepubli
candbanksmaybi df orbonds.I
not hercases,onl
ymarket
makersmaybidforbonds.Theoveral
lrateofreturnonthebonddependsonbot hthe
ter
msofthebondandt hepri
cepaid.Thet er
msoft hebond,suchast hecoupon,
are
fi
xedi
nadvanceandthepr i
ceisdeter
mi nedbythemar ket.

KeyFeat
uresofBonds:

1.Thepar( orf aceormat uri

ty)valuei stheamountr epaid(excludingi nter
est )by
theborrowert othel ender(bondhol der)attheendoft hebond' slife.
2.Thecouponr atedeci desthe“ i
nt erest”pay ment s.Totalannual amount=coupon
ratexparv alue.
3.Abond' smat urit
yi si t
sr emainingl if
e,whi chdr opsov ertime.Or iginalmat uri
tyis
i
tsmat urit
ywheni tisissued.Thef irm promi sest orepayt heparv alueattheend
ofthebond’ smat ur ity.
4.Asi nki
ngf undi nv olvespr i
ncipler epay ment s(buy i
ngbonds)pr iort otheissue's
mat uri
ty.
5.Exchangeabl ebondscanbeconv ertedintoapr e-
specifi
ednumberofshar esof
stock.Char acteristically,t
hesear eshar esoft heissuer '
scommonst ock.
6.Thecal lprov i
sionper mi t
sthei ssuert obuyt hebonds( r
epayt hel oan)priorto
mat uri
tyfort hecal lpr i
ce.Callingmaynotbeal lowedi nthef i
rstf ewy ears.

Bondv
aluat
ion:

Valuati
onofabondneedsanest imateofpredictabl
ecashf lowsandar equiredrateof
ret
ur nspecif
iedbyt heinvestorf
orwhom t hebondi sbeingv al
ued.Ifi
tisbeingv alued
forthemar ket,themar ketsexpect edrat
eofr eturni
st obedeterminedorestimat ed.
Thebond’ sfairvalueist hepresentvalueofthepr omisedfuturecouponandpr incipal
pay ments.Atthet imeofi ssue,t
hecouponr at eissetsuchthatthefairval
ueoft he
bondsi sverycloset oitsparv al
ue.Afterwar
ds, asmar ketcondit
ionschange, t
hef air
valuemaydi fferfrom theparv alue.

Atthetimeofi ssueoft hebond, t

hei nterestrateandot hercondi ti
onsoft hebond
wouldhavebeeni mpact edbynumer ousf actors,suchascur r
entmar ketinterestr at
es,
thelengt
hoft het er
m andt hecreditwor thi
nessoft heissuer .Thesef actorsarel i
kelyto
changewithtime, sot hemarketpriceofabondwi l
ldi
ver geaf t
eritisissued.The
marketpri
ceisexpr essedasaper centageofnomi nal
v alue.Bondsar enotnecessar i
ly
i
ssuedatpar( 100%off acevalue,correspondi ngt oapr iceof100) ,butbondpr iceswi l
l
mov etowardsparast heyapproachmat uri
ty(ifthemar ketexpect st hemat ur
it
y
paymenttobemadei nf ul
landont ime)ast hisist hepricet heissuerwi l
l paytoredeem
thebond.Thisi ster
medas" Pullt
oPar ".Atot hertimes, pri
cescanbeabov epar( bond
i
spr i
cedatgreat erthan100),whichi scal l
edt radingatapr emium, orbel owpar( bond
i
spr i
cedatlesst han100) ,whi
chi scalledt radingatadi scount .
Themar ketpr i
ceofabondi sthepr esentvalueofal lexpectedf uturei
nterestand
pri
ncipal pay ment softhebonddi scount edatt hebond' sy i
eldtomat urit
y,orrateof
ret
urn.Thatr el
at i
onshipisthedef i
nitionofther edempt iony i
eldont hebond, whichi s
expectedt obecl osetot hecurrentmar ketinterestrateforot herbondswi thsimilar
characteristi
cs.They ieldandpr iceofabondar einverselyrelatedsot hatwhenmar ket
i
nterestr atesrise,bondpr i
cesf allandv i
cev ersa.Themar ketpr iceofabondmaybe
cit
edincl udingt heaccumul atedint erestsincet helastcoupondat e.Thepr i
ceincluding
accruedi nterestisknownast he" f
ul l
"or"dir
typr i
ce".Thepr iceexcl udingaccrued
i
nterestisknownast he" fl
at"or" cl
eanpr i
ce".

Theinterestrat
edivi
dedbythecur rentpri
ceofthebondi stermedascurrentyi
eld.Thi
s
i
sthenomi nalyi
eldmul
tipl
i
edbyt heparv alueanddivi
dedbyt hepri
ce.Thereareother
yi
eldmeasur esthatexi
stsuchast hey i
eldtofi
rstcal
l,
yiel
dt oworst
,yi
eldtofi
rstpar
cal
l,yi
eldtoput,cashfl
owy i
eldandy i
eldtomaturi
ty.

Thel i
nkbet weeny i
eldandt ermt omat uri
tyforot her wiseident i
cal bondsi scal l
eda
yieldcur ve.They i
eldcur veisagr aphplotti
ngt hi
sr elationship.Bondmar kets,dissimil
ar
tost ockorshar emar ket s,somet imesdonothav eacent rali
zedexchangeort radi
ng
sy stem.Reasonabl y,i
ndev elopedbondmar ketssuchast heU. S.,JapanandWest ern
Eur ope,bondst radeindecent rali
zed,dealer-
basedov er-t
he-count ermar kets.Insucha
mar ket,
mar ketli
quidityisof f
er edbydealersandot hermar ketcont ributorscommi tti
ng
ri
skcapi t
al totradingact ivi
ty.Inthebondmar ket
, whenani nv estorbuy sorsel lsabond,
thecount erpartytothet radei salmostal way sabankorsecur it
iesf i
rm whi chactasa
deal er.I
nsomecases, whenadeal erbuysabondf rom ani nv estor,thedeal ercarri
es
thebond" i
ni nventory
", i
.e.holdsi tforhi
sownaccount .Thedeal eristhensubj ectt o
ri
sksofpr i
cef l
uctuation.Inot hercases, t
hedeal eri nstantlyresel l
sthebondt oanother
i
nv estor
.

Bondmar ket scanal sodiver

gef rom stockmarket si nrespectthatinsomemar kets,
i
nv estorssomet i
mesdonotpaybr okeragecommi ssionstodealerswithwhom t heybuy
orsell bonds.Rat her,thedeal
ersearni ncomet hrought hespread,ordiff
erence,
betweent hepricesatwhi chthedeal erbuysabondf rom oneinvestorthe"bid"price
andt hepr iceatwhi chheorshesel lsthesamebondt oanotherinvestorthe" ask"or
"offer
"pr i
ce.Thebi d/ off
erspreadsignifi
esthet otaltransacti
oncostassoci atedwi th
transferri
ngabondf rom oneinvest
ort oanother.

Shar
e:

I
nf inancial
mar ket
s,ashareisdescr i
bedasauni tofaccountf ordif
ferentinvest
ments.
I
ti salsoexplai
nedast hestockofacompany ,butisal
sousedf orcoll
ectiv
e
i
nv estmentssuchasmut ualf
unds,limit
edpartnershi
ps,andr ealestat
ei nvestment
trusts.Thephrase'share'
isdel
ineatedbysection2(46)oftheCompani esAct1956as
"sharemeansashar einthesharecapitalofacompanyi ncludesstockexceptwher ea
disti
nctionbetweenstockandshar eisexpressedorimplied".

Compani
esi
ssueshar
eswhi
char
eaccessi
blef
orsal
etoi
ncr
easeshar
ecapi
tal
.The
ownerofshar esi nthecompanyi sashar eholder( orstockholder)ofthecorporati
on.A
shareisanindivisibl
eunitofcapi tal,
expressi
ngt heowner shipaffi
li
ationbetweent he
companyandt heshar eholder.Thedenomi natedv al
ueofashar eisitsfacevalue,and
thetotal
ofthef acev alueofi ssuedsharesrepr esentthecapi tal
ofacompany ,which
maynotr ef
lectt hemar ketval ueofthoseshar es.Ther evenuegener atedfr
om t he
ownershipofshar esisadi vidend.Thepr ocessofpur chasingandsel l
ingsharesof t
en
i
nv ol
vesgoingt hroughast ockbr okerasami ddl eman.

Shar
eval
uat
ion:

Sharesvaluati
onisdoneaccor di
ngt onumerouspr i
nci
plesindiff
erentmarkets,
buta
basi
cstandar disthatashareisworthpri
ceatwhi chat r
ansacti
onwoul dbeexpected
tooccurtoselltheshares.Theli
quidit
yofmar ket
sisamaj orconsiderat
ionasto
whetherashar eisabletobesoldatanygi v
ent i
me.Anact ualsaletr
ansacti
onof
shar
esbet weenbuy erandsell
erisusuall
yconsideredtoprovi
det hebestpri
maf aci
e
marketindicat
orast othe"t
ruevalue"ofsharesatthatspeci
fi
ct i
me.

Sharesar eof tenpr omisedassecurit

yf orraisi
ngloans.Whenonecompanyacqui res
majorityoft heshar esofanothercompany ,i
tisrequir
edtov aluesuchshares.The
survi
vor sofdeceasedper sonwhogetsomeshar esofcompanymadebywi l
l.When
sharesar ehel dbyt heassociatesmutuallyinacompanyanddi ssol
uti
ontakesplace,it
i
simpor tanttov aluethesharesforproperdi st
ri
butionofpartnershi
ppropert
yamong
thepar t
ner s.Sharesofpr i
vat
ecompani esar enotli
stedont hestockexchange.Ifsuch
sharesar eappr aisablebytheshareholdersorifsuchshar esar etobesold,t
hev al
ueof
suchshar eswi l
lhav etobedetermined.Whenshar esarereceivedasagi f
t,t
o
determinet heGi ftTax&Weal t
hTax, t
hev alueofsuchshar eswi l
lhavetobe
ascertained.

Val
uesofshar
es:

1.FaceVal ue: ACompanymaydi vi

deitscapitalintoshar esof@10or@50or
@100et c.Company ’
sshar ecapitalispresentedasperFaceVal ueofShar es.
FaceVal ueofShar e=Shar eCapi t
al /TotalNoofShar e.Thi sFaceVal ueis
pri
nt edont hesharecer t
ifi
cate.Shar emaybei ssuedatl ess(ordiscount )or
mor e( orpremi um)off acev alue.
2.BookVal ue: Bookv aluei sthev al
ueofanassetaccor dingt oitsbal ancesheet
accountbal ance.Forasset s,thevalueisbasedont heor igi
nalcostoft heasset
l
essanydev al
uati
on, amor tizati
onori mpairmentcost smadeagai nsttheasset.
3.CostVal ue:Costv aluei srepresentedaspr iceonwhi cht heshar esar e
purchasedwi t
hpur chaseexpensessuchasbr oker age, commi ssion.
4.Mar ketVal ue:Thisv aluesi ssignifi
edaspr iceonwhi cht hesharesar epurchased
orsol d.Thisv aluemaybemor eorlessorequal t
hanf acev alue.
5.Capit al
isedVal ue:

    Capi
tal
isedValueofprofi
t
Capi
tal
isedVal
ueofshar
e = -
--
--
--
--
--
---
--
--
--
--
--
--
--
--
--
--
--
-
     Tot
alno.ofshar
es
6.FairValue:Thisvalueisthepri
ceofashar ewhichagreedinanopenand
unrestr
ictedmar ketbetweenwell
-i
nformedandwi ll
ingpart
iesdeal
ingatarm’s
l
engt hwhoar efullyinf
ormedandarenotunderanycompul siont
otransact
.
7.YieldValue:ThisvalueofashareisalsocalledCapi
tali
sedvalueofEarni
ng
Capacity.Normal rateofret
urni
nthei ndustr
yandactualorexpect
edr at
eof
returnofthefir
m ar etakeni
ntoconsiderat
iontofi
ndouty i
eldval
ueofashar e.

Needf
orVal
uat
ion:(Feat
ures)

1.Whent woormor ecompani esmer ge

2.Whenabsor ptionofacompanyt akespl ace.
3.Whensomeshar eholder
sdonotgi vet heirappr
ov alforreconstructionofthe
company ,
thereshar esarevaluedfort hepurposeofacqui sit
ion.
4.Whenshar esar eheldbytheassoci atesjoint
lyi
nacompanyanddi ssolut
ion
takesplace, i
tbecomesessent i
altov aluetheshar esforproperdi stri
buti
onof
partner
shippr opertyamongt hepar tners.
5.Whenal oani sadv ancedonthesecur ityofshares.
6.Whenshar esofonet ypeareconvertedi ntosharesofanot hertype.
7.Whensomecompanyi stakenoverbyt hegovernment ,compensat i
oni spai
dto
thesharehol dersofsuchcompanyandi nsuchcircumst ances,valuationof
sharesismade.
8.Whenapor t
ionofshar esistobegi venbyamemberofpr opr i
etarycompanyt o
anothermember ,f
airpri
ceoftheseshar eshastobemadebyanaudi toror
accountant .

Met
hodsofv
aluat
ion:

1.NetAsset sValue( NAV)Met hod:Thismet hodiscal

ledi ntr
insicvaluemet hodor
breakupv aluemet hod( Naseem Ahmed, 2007) .I
taimstof indoutt hepossibleval
ueof
sharei natt hetimeofl iquidati
onoft hecompany .I
tstar
tswi thcalculati
onofmar ket
valueoft hecompany .Thenamountpayof ftodebenturehol ders,prefer
ence
sharehol ders,cr
edi torsandot herli
abili
ti
esar ededuct
edf rom ther eali
zedamountof
asset s.Ther emai ningamounti savail
ablef orequit
yshar eholders.Underthismethod,
thenetv alueofasset soft hecompanyar edi vi
dedbythenumberofshar estoarri
veat
thev alueofeachshar e.Fort hedet erminationofnetvalueofasset s,iti
snecessaryt
o
estimat et heworthoft heasset sandl iabil
iti
es.Thegoodwi l
laswel lasnon-tradi
ng
asset sshoul dalsobei ncludedi ntotalasset s.Thefol
lowingpoi ntsshouldbe
consider edwhi l
ev al
uingofshar esaccor dingt othi
smet hod:

 Goodwil
lmustbeproper
lyv
alued
 Thefi
cti
ti
ousasset
ssuchasprel
imi
nar
yexpenses,
discountoni
ssueofshar
es
anddebent
ures,
accumul
atedl
osseset
c.shoul
dbeel
i
minat
ed.
 Thefixedassetsshoul
dbet akenatt hei
rreal
izabl
eval
ue.
 Pr
ovisionforbaddebts,depreci
ationetc.mustbeconsi
dered.
 Al
lunr ecor
dedassetsandliabil
i
ties(i
fany)shouldbeconsi
dered.
  Fl
oati
ngassetsshoul
dbet akenatmarketval
ue.
 Theexter
nall
i
abil
it
iessuchassundrycredi
tor
s,bi
ll
spay
abl
e,l
oan,
debent
ures
etc.shoul
dbededuct
edf
rom t
hev
alueofasset
sfort
hedet
ermi
nat
ionofnet
value.

Thenetv al
ueofasset
s,det
erminedsohastobedi
videdbynumberofequi
tysharesfor
fi
ndingouttheval
ueofshare.Thust
heval
uepersharecanbedet
erminedbyusingthe
fol
lowingfor
mula:

Val
uePerShar
e=(
NetAsset
s-Pr
efer
enceShar
eCapi
tal
)/NumberOfEqui
tyShar
es

Netassetmet hodi susefuli

ncaseofamal gamat ion, merger,acquisiti
on, oranyot her
form ofli
quidationofacompany .Thismet hoddet er
mi nesther i
ghtsofv ari
oust ypesof
sharesinanef fici
entmanner .Sincealltheasset sandl iabi
li
ti
esar ev aluespr operl
y
i
ncludingambi guousandi ntangibles,
thismet hodcr eatesnopr obl
em f orv al
uationof
prefer
enceorequi tyshare.Howev eri
tisdiff
iculttomakepr operv aluationofgoodwi ll
andest i
matenetr eal
isati
onv alueofv ari
ousot herasset softhecompany .Such
esti
mat esarel i
kelytobei nf
luencedbyper sonal factorsofvaluers.Thi smet hodi s
suit
ableincaseofcompani esl i
kelytobel i
quidatedi nnearfut ureorf uture
maintainabl
epr ofitscannotbeest i
mat edproperlyorwher evaluati
onofshar esbyt hi
s
methodi srequiredst at
utori
ly(Naseem Ahmed, 2007) .

2.Yi
eld-
Basi
sMethod:Yiel
distheeffecti
verateofret
urnoninv
est mentswhichis
i
nvest
edbytheinvest
ors.I
tisalwaysexpressedintermsofpercentage.Si
ncethe
val
uati
onofshar
esismadeont hebasisofYield,
iti
stermedasYield-Basi
sMethod.

Yi
eldmaybecal
cul
atedasunder
:

    Normalprofi
t    
Yi
eld = -
--
--
--
--
---
--
--
--
--
--
--
--
--
--
--
--
--
- X 100
    Capi
talEmployed    
UnderYield-Basismethod,valuati
onofshar esismadeon;
I.Pr
ofitBasis:Underthismethod,profitshouldbedeter
minedonthebasi
sofpast
averageprofit;
subsequentl
y,capital
i
zedv al
ueofprofi
tist
obedetermi
nedonthebasi
s
ofnormal rateofretur
n,and,thesame( capi
tali
zedval
ueofprof
it
)isdi
vi
dedbythe
numberofshar esinordert
of indoutthev al
ueofeachshare.
Foll
owingpr ocedureisadopted:

    Profi
t    
Capi
tal
isedv
alueofpr
ofi
t = -
--
--
--
--
--
--
---
--
--
--
--
--- X 100
    Normalrat
eofr etur
n    

    Capi
tal
isedv
alueofpr
ofi
t
Val
ueofeachequi
tyshar
e =  
    Numberofshares
    Profit    
= --
--
--
--
--
--
--
--
--
--
--
--
---
---
---
--
-- X 100
Or
, Val
ueofeachequi
tyshar
e  Nor malrateofreturn XNumberof    
equit
yshares
I
I.Divi
dendBasi
s:I
nthist
ypeofval
uat
ion,
shar
esareval
uedonthebasi
sofexpect
ed
div
idendandnormalr
ateofr
etur
n.Theval
uepershar
eiscal
cul
atedt
hroughf
oll
owing
for
mul a:

Expect
edr
ateofdi
vi
dend=(
prof
itav
ail
abl
efordi
vi
dend/
pai
dupequi
tyshar
ecapi
tal
)X
100

Val
uepershar
e=(
Expect
edr
ateofdi
vi
dend/
nor
mal
rat
eofr
etur
n)X100

Valuat
ionofshar
esmaybemadeeit
her(a)onthebasi
soft
otal
amountofdi
vi
dend,
or
(b)onthebasi
sofper
cent
ageorr
ateofdivi
dend

3.EarningCapacit
y(Capit
ali
sati
on)Met hod:Inthisvaluationpr
ocedure,t
hev al
ueper
shareiscalcul
atedonthebasisofdi sposabl
epr ofi
toft hecompany.Thedisposabl
e
profi
tisfoundoutbydeductingreservesandt axesfrom netprofi
t(Naseem Ahmed,
2007).Thef ol
l
owingstepsareappliedforthedet er
mi nati
onofvaluepershareunder
earni
ngcapaci t
y:

Step1:Tofi
ndoutt
heprofitavai
lablefordi
vi
dend
Step2:Tofi
ndoutt
hecapitali
zedv al
ue
Capit
ali
zedVal
ue=(Prof
itavail
ableforequi
tydi
vi
dend/
Nor
mal
rat
eofr
etur
n)X100
St
ep3: Tofi
ndoutv
aluepershar e

Valuepershare=Capi t
ali
zedValue/NumberofShares
Inthi
smet hod,pr
ofitavai
labl
eforequi
tysharehol
ders,
ascalcul
atedunder
capit
ali
zat
ionmet hod,arecapit
ali
zedonthebasisofnormalrat
eofr et
urn.Thent
he
val
ueofequi t
yshareisascertai
nedbydivi
dingthecapit
ali
zedprofi
tbynumberofequi
ty
shareasshownunder( Naseem Ahmed,2007):

Appr
aisal
ofEar
ningCapaci
ty:
Thi
smet
hodi
ssui
tedonl
ywhenmai
ntai
nabl
epr
ofi
tand
nor malr
ateofret
urn(NRR)canbeascertai
nedclear
ly.Iti
spossi
blewhenmarket
i
nf ormat
ioniseasi
lyavai
l
able.However
,whilecal
cul
atingNRR,ri
skfact
orsmustbe
takenint
oconsiderat
ion(Naseem Ahmed,2007).

4.Average( FairValue)Met hod:Inordertoov er

comet heinadequacyofanysi ngl
e
methodofv aluati
onofshar es,FairValueMet hodofsharesi sconsider
edast hemost
appropriateprocess.Itissimplyanav erageofintri
nsi
cv alueandy i
eldvalueorear ni
ng
capacitymet hod.Forv al
uingshar esofinvestmentcompani esforwealtht axpurposes,
Fai
rVal ueMet hodofsharesi srecognizedbygov er
nment .Iti
swell sui
tedt o
manuf acturi
ngandot hercompani es.Thefairval
uecanbecal cul
atedbyf oll
owing
for
mul a( Naseem Ahmed, 2007):

Tosummar i
ze,bondsandt heiralt
ernat
ivessuchasl oannotes, debent ur
esandl oan
stock, areIOUsi ssuedbygov ernmentsandcompani esinordert oincreasefinance.
Theyar eoftencalledfixedincomeorf i
xedi nter
estsecuri
ti
es,todifferenti
atethem fr
om
equiti
es, inthattheyof tenmakeknownr et urnsfort
heinvestors(thebondhol der
s)at
regularinterval
s.Thesei nt
erestpay ments,paidasbondcoupons, aref i
xed,unli
ke
divi
dendspai donequi ties,whichcanbev ariabl
e.Mostcorporatebondsar e
redeemabl eafteraspeci fi
edper i
odoft i
me.Val uati
onofshar einvolvestheuseof
fi
nanci alandaccount ingdat a.Itdependsonv al
uer’
sjudgementexper i
enceand
knowl edge.

Fi
nanci
alConcept
s:TheRi
sk/
Ret
urnTr
adeof
f

Riskandr et
urnareopposingconcept sinthefinancialworl
d,andt hetradeoffbetween
them couldbethoughtofast he“abil
it
y-to-
sleep-at
-nightt
est.”Dependinguponf act
ors
l
ikeyourage, i
ncome,andi nvestmentgoals,youmaybewi l
l
ingtot akesigni
ficant
fi
nancialri
sksinyourinv
est ments,oryoumaypr ef
ert okeept hi
ngsmuchsaf er.It
’s
cruci
althataninvest
ordeci dehowmuchr isktotakeonwhi lestil
lremaining
comfortablewit
hhisorheri nvestments.
Forinvestor
s,thebasi cdefi
nit
ionof“risk”i
sthechancet hataninv
estment’
sactual
returnwil
lbedifferentfr
om whatwasexpect ed.Onecanmeasur eriski
nstati
sti
csby
standarddeviati
on.Becauseofr isk,
youhav ethepossi bi
l
ityofl
osi
ngaportion(orev
en
all
)ofapot enti
al i
nvestment.“Retur
n,”ontheot herhand,i
sthegainsorl
ossesone
bringsinasar esultofaninvestment.

Gener all
yspeaking,atlowl evelsofr i
sk,pot
ent i
alreturnstendt obel owaswel l.High
l
ev el
sofr iskaretypi
cal l
yassoci atedwi thhighpot entialr
etur
ns.Ar iskyinvestment
meanst hatyou’
remor el i
kelytol oseev eryt
hing;but, ontheot herhand,theamounty ou
couldbr i
nginishigher .Thetradeof fbet
weenr i
skandr et
urn,then,i
st hebalance
betweent helowestpossi bleriskandt hehighestpossi bl
ereturn.Wecanseeav isual
representati
onoft hi
sassoci ationi nthechar tbelow, inwhichahi gherstandard
dev i
ationmeansahi gherlevelofr isk,aswel lasahi gherpotent i
alr
et ur
n. 

It
’scr
ucialtokeepi nmindthathigherr
iskdoesNOTequal gr
eaterretur
n.The
ri
sk/r
eturntradeoffonl
yindi
catesthathigherr
isklevel
sareassociatedwiththe
possi
bil
ityofhigherret
urns,butnothi
ngisguaranteed.Att
hesamet ime,hi
gherri
sk
alsomeanshi gherpotent
iall
ossesonani nvestment.

Onthesaf esideofthespectr
um, t
her i
sk-f
reer ateofreturnisrepr
esentedbyt her
eturn
onU.S.Gov ernmentSecur
iti
es,asthei
rchanceofdef aultisessent
ial
lyzero.Thus,
ifthe
ri
sk-
freerateis6%atanygi v
ent i
me, f
orinstance, t
hismeanst hatinv
estorscanearn6%
peryearont hei
rasset
s,essenti
all
ywithoutriskinganything.

Whi l
ea6%r eturnmi ghtsoundgood, itpalescompar edtor eturnsofmanypopul ar
i
nv estmentv ehicles.Ifindexfundsav er
ageabout12%pery earoverthelongr un, why
woul dsomeonepr efertoinvestinU. S.Gov er
nmentSecur i
ti
es?Oneexpl anationisthat
i
ndexf unds, whi lesaf ecompar edtomosti nvestmentvehicles,aresti
llassoci at
edwi t
h
somel ev elofr i
sk.Ani ndexfundwhi chrepresentstheent i
remar ketcarriesrisk,and
thus,ther et
ur nf oranygi venindexf undmaybe- 5%foroney ear,
25%f ort hefoll
owi ng
year,etc.Ther i
skt ot heinvestor,parti
cularl
yonashor tertimescal e,i
shigher ,asis
volati
li
ty.Compar i
ngi ndexfundst ogov ernmentsecur i
ties,wecal ltheaddi t
ionreturn
theriskpr emi um, whi chinourexampl eis6%( 12%-6%).
Oneofthebi ggestdeci
sionsforanyi
nvest
orisselect
ingtheappropr
iat
elev
elofri
sk.
Risktol
erancediff
ersdependingonanindi
vidual
investor
’scur
rentci
rcumst
ancesand
futur
egoals,andotherfactor
saswell.

Ty
pesofr
isk

Fi
rstl
et'
srev
iset
hesi
mpl
emeani
ngoft
wowor
ds,
viz.
,ty
pesandr
isk.

I
ngener
alandi
ncont
extoft
hisf
inancear
ti
cle,

1.Typesmeandiff
erentclassesorvari
ousforms/kindsofsomethi
ngorsomeone.
2.Riski
mpliest
heextendt owhichanychosenacti
onoraninacti
onthatmayl
ead
toalossorsomeunwant edoutcome.Thenotionimpli
esthatachoi
cemayhave
aninfl
uenceontheoutcomet hatexi
stsorhasexi
sted.

However,i
nfi
nanci
almanagement,r
iskrel
atestoanymat er
iall
ossatt
achedtothe
pr
ojectt
hatmayaffectt
heproduct
ivi
ty,
tenure,
legal
issues,
etc.oft
heproject
.

I
nfi
nance,
dif
fer
entt
ypesofr
iskcanbecl
assi
fi
edundert
womai
ngr
oups,
viz.
,

1.Syst
emati
cri
sk.
2.Unsyst
emati
cri
sk.

Themeani
ngofsy
stemat
icandunsy
stemat
icr
iski
nfi
nance:

1.Syst
emati
cri
skisuncont
rol
l
ablebyanor
gani
zat
ionandmacroi
nnature.
2.Unsyst
emati
cri
skiscont
rol
labl
ebyanor
gani
zat
ionandmicr
oinnat
ure.

A.Sy
stemat
icRi
sk
Systemat
icr
iski
sduetotheinfl
uenceofext
ernalf
act
orsonanorgani
zat
ion.Such
fact
orsar
enormall
yuncont
roll
ablefr
om anorgani
zat
ion'
spoi
ntofvi
ew.

Iti
samacr oi
nnat ur
easitaf
fect
salargenumberofor
ganizat
ionsoperat
ingundera
simil
arst
ream orsamedomain.I
tcannotbepl
annedbytheorgani
zati
on.

Thet
ypesofsy
stemat
icr
iskar
edepi
ctedandl
i
stedbel
ow.

1.I
nterestr
ater
isk,
2.Marketri
skand
3.Purchasi
ngpowerori
nfl
ati
onar
yri
sk.

Nowl
et'
sdi
scusseachr
iskcl
assi
fi
edundert
hisgr
oup.

1.I
nter
estr
ater
isk

I
nterest
-r
ater
iskar
isesduetovari
abi
l
ityi
ntheint
erestrat
esfrom t
imetoti
me.I
t
part
icul
arl
yaf
fect
sdebtsecuri
ti
esastheycar
rythefixedrat
eofint
erest
.

Thet
ypesofi
nter
est
-r
ater
iskar
edepi
ctedandl
i
stedbel
ow.
 1.Pri
ceri
skand
2.Rei
nvest
mentrat
eri
sk.

Themeani
ngofpr
iceandr
einv
est
mentr
ater
iski
sasf
oll
ows:

1.Pri
cer i
skarisesduetot
hepossi bi
l
itythatthepri
ceoft heshares,
commodi t
y,
i
nvestment,etc.maydecli
neorfalli
nt hefutur
e.
2.Rei
nv estmentrat
er i
skr
esultsf
rom factthatthei
nterestordivi
dendearnedfr
om
aninvestmentcan'tber
einvest
edwi ththesamer at
eofr etur
nasi twasacqui
ri
ng
ear
lier.

2.Mar
ketr
isk

Marketri
skisassoci
atedwi t
hconsistentf
luct
uati
onsseeni
nt hetradingpri
ceofany
par
ticul
arshar
esorsecur i
ti
es.Thatis,i
tar
isesduetori
seorfalli
nt hetradi
ngpr
iceof
l
ist
edsharesorsecuri
tiesinthestockmarket.

Thet
ypesofmar
ketr
iskar
edepi
ctedandl
i
stedbel
ow.

1.Absoluterisk,
2.Rel
ativer i
sk,
3.Dir
ectional r
isk,
4.Non-directi
onalri
sk,
5.Basisriskand
6.Volati
l
ityrisk.

Themeani
ngofdi
ff
erentt
ypesofmar
ketr
iski
sasf
oll
ows:

1.Absoluteriski swi t
houtanycont ent.Fore.g.,
ifacoi ni
st ossed,ther
eisfif
ty
percentagechanceofget tingaheadandv i
ce-versa.
2.Relati
veriski stheassessmentorev al
uati
onofr iskatdi f
fer
entlevel
sof
businessf unctions.Fore.g.ar el
ati
ve-r
iskfrom af orei
gnexchangef luct
uati
on
maybehi gheri fthemaximum sal esaccount edbyanor ganizat
ionareofex por
t
sal
es.
3.Dir
ectional r
isksar ethoser i
skswher ethelossar isesfrom anexposuretothe
parti
cularasset sofamar ket .Fore.
g.ani nvestorholdingsomeshar es
 exper i
enceal osswhent hemar ketpriceofthoseshar esfallsdown.
4.Non- Directionalr
iskariseswher ethemet hodoft r
adingisnotconsi stentl
y
fol
lowedbyt hetrader.Fore. g.thedeal erwil
lbuyandsel ltheshar e
simul t
aneousl ytomi ti
gat ether i
sk
5.Basisr i
ski sduet othepossi bil
i
t yoflossar i
singfrom i
mper f
ectl
ymat chedr i
sks.
Fore. g.ther i
skswhi char einof fsett
ingpositionsintwor elatedbutnon-identi
cal
mar kets.
6.Volat i
li
tyriskisofachangei nthepr i
ceofsecur i
ti
esasar esultofchangesint he
vol ati
lit
yofar i
sk-f
actor.Fore. g.itappliestothepor t
fol
iosofder ivati
ve
i
nstrument s,wher ethevol at
ili
tyofitsunder l
yingisamaj ori nfl
uenceofpr i
ces.

3.Pur
chasi
ngpowerori
nfl
ati
onar
yri
sk

Purchasingpowerriskisalsoknownasi nf
lat
ionri
sk.I
tisso,
sinceitemanat
es
(or
igi
nates)from t
hef actthati
taf
fectsapurchasi
ngpoweradv er
sely
.Iti
snotdesi
rabl
e
toi
nv estinsecur
it
iesdur i
nganinf
lati
onaryperi
od.

Thet
ypesofpowerori
nfl
ati
onar
yri
skar
edepi
ctedandl
i
stedbel
ow.

1.Demandinfl
ati
onriskand
2.Costi
nfl
ati
onrisk.

Themeani
ngofdemandandcosti
nfl
ati
onr
iski
sasf
oll
ows:

1.Demandi nf l
ati
onr i
skari
sesduet oincreaseinpr i
ce,whichresultf
rom anexcess
ofdemandov ersupply.I
toccurswhensuppl yfail
stocopewi ththedemandand
hencecannotexpandany more.Inotherwor ds,demandi nfl
ationoccur
swhen
producti
onf actorsareundermaximum ut il
izati
on.
2.Costinfl
ationriskari
sesduetosust ainedincreaseinthepricesofgoodsand
servi
ces.Itisactuall
ycausedbyhi gherproductioncost.Ahighcostof
producti
oni nfl
atesthefi
nalpr
iceoff i
nishedgoodsconsumedbypeopl e.

B.Unsy
stemat
icRi
sk

Unsy
stemat i
criski
sduetothei
nfl
uenceofi
nternalf
actor
sprevai
li
ngwithinan
or
ganizat
ion.Suchfact
orsar
enormall
ycont
roll
ablefr
om anorgani
zat
ion'spoi
ntof
v
iew.

I
tisami croinnat
ureasitaf
fectsonl
yapar
ti
cul
aror
gani
zat
ion.Itcanbeplanned,
so
thatnecessar
yacti
onscanbet akenbyt
heor
gani
zat
iont
omi t
igate(r
educetheeff
ect
of)theri
sk.

Thet
ypesofunsy
stemat
icr
iskar
edepi
ctedandl
i
stedbel
ow.

1.Busi
nessorli
quidi
tyri
sk,
2.Fi
nanci
alorcredi
tri
skand
3.Oper
ati
onalri
sk.

Nowl
et'
sdi
scusseachr
iskcl
assi
fi
edundert
hisgr
oup.

1.Busi
nessorl
iqui
dit
yri
sk

Businessri
ski
salsoknownasli
quidi
tyri
sk.I
tisso,
sincei
temanates(ori
ginat
es)from
thesaleandpur
chaseofsecur
it
iesaf
fectedbybusi
nesscycl
es,
technologi
calchanges,
etc.

Thet
ypesofbusi
nessorl
i
qui
dit
yri
skar
edepi
ctedandl
i
stedbel
ow.
 1.Assetl
iquidi
tyr
iskand
2.Fundi
ngliqui
dit
yrisk.

Themeani
ngofassetandf
undi
ngl
i
qui
dit
yri
ski
sasf
oll
ows:

1.Assetli
qui dit
yriskisduet olossesarisi
ngfrom ani
nabil
it
yt osell
orpledge
assetsat, ornear ,
theircarr
yingval
uewhenneeded.Fore. g.assetssol
data
l
esserv aluethant heirbookv al
ue.
2.Fundingliquidit
yr i
skexi st
sfornothav i
nganaccesstothesuf f
ici
ent-
fundsto
makeapay mentont i
me.Fore. g.whencommi tment
smadet ocustomersare
notfulf
il
ledasdi scussedintheSLA( servi
celev
elagreements).

2.Fi
nanci
alorcr
edi
tri
sk

Financi
alr
iski
sal soknownascr editr
isk.I
tari
sesduetochangeint
hecapi
tal
st r
uct
ure
oftheorgani
zation.Thecapit
al str
ucturemainl
ycomprisesofthr
eeway
sbywhi ch
fundsaresourcedf ort
heprojects.Theseareasfoll
ows:

1.Ownedfunds.Fore.g.sharecapit
al.
2.Bor
rowedfunds.Fore.g.loanfunds.
3.Ret
ainedear
nings.Fore.g.reser
veandsur
plus.

Thet
ypesoff
inanci
alorcr
edi
tri
skar
edepi
ctedandl
i
stedbel
ow.

1.Exchanger
ater
isk,
 2.Recov eryr
ateri
sk,
3.Crediteventri
sk,
4.Non-Di r
ecti
onalr
isk,
5.Sovereignri
skand
6.Sett
lementr i
sk.

Themeani
ngoft
ypesoff
inanci
alorcr
edi
tri
ski
sasf
oll
ows:

1.Exchanger ater iski salsocal ledasexposur eraterisk.Itisaf orm off inanci al

ri
skt hatar isesf rom apot entialchangeseeni ntheexchanger ateofone
count ry'scur rencyi nrelationtoanot hercount ry'
scur r
encyandv i
ce-v ersa.For
e.g.inv estorsorbusi nessesf acei teitherwhent heyhav easset soroper ations
acrossnat ional bor ders,oriftheyhav eloansorbor rowingsi naf oreigncur rency.
2.Recov eryrat eriski sanof tennegl ectedaspectofacr edit-r
iskanal ysis.The
recov eryrat eisnor mallyneededt obeev al
uated.Fore. g.theexpect edr ecov er
y
rateoft hefundst ender ed( gi
v en)asal oant othecust omer sbybanks, non-
banki ngf i
nanci al compani es(NBFC) ,
etc.
3.Sov ereignr iskisassoci atedwi ththegov er
nment .Here, agov ernmenti sunabl e
tomeeti t
sl oanobl i
gations, r
enegi ng(tobreakapr omi se)onl oansi tguar antees,
etc.
4.Settlementr iskexi stswhencount erpartydoesnotdel iverasecur i
tyori tsv alue
i
ncashaspert heagr eementoft radeorbusi ness.

3.Oper
ati
onalr
isk

Operat
ional
risksaret
hebusinessprocessri
sksfai
l
ingduetohumaner
rors.Thi
sri
sk
wil
lchangefrom i
ndust
rytoi
ndustry
.Itoccursduetobr
eakdownsi
ntheinter
nal
pr
ocedures,peopl
e,pol
ici
esandsystems.

Thet
ypesofoper
ati
onal
riskar
edepi
ctedandl
i
stedbel
ow.

Themeani
ngoft
ypesofoper
ati
onal
riski
sasf
oll
ows:

1.Modelri
skisinvol
vedi
nusi
ngvari
ousmodelst
ov al
uefinanci
alsecur
it
ies.I
tis
duetoprobabil
i
tyofl
ossr
esul
ti
ngfrom t
heweaknessesinthefi
nanci
al-model
usedinassessi
ngandmanagi
ngar i
sk.
 2.Peopleri
skar i
seswhenpeopl edonotf oll
owt heor ganizati
on’spr ocedures,
pract
icesand/orr ul
es.Thati s,t
heydev i
atef r
om t hei
rexpect edbehav iour.
3.Legalri
skariseswhenpar tiesar enotlawf ul
lycompet entt oenteranagr eement
amongt hemselves.Furthermor e,t
hisrelatest otheregulatory-r
isk,wherea
tr
ansacti
oncoul dconfli
ctwi thagov ernmentpol i
cyorpar ti
cularlegisl
ati
on( l
aw)
mightbeamendedi nthef uturewithretrospectiveeffect.
4.Poli
ti
calri
skoccur sduet ochangesi ngov er
nmentpol i
cies.Suchchangesmay
haveanunf avourabl
eimpactonani nvestor.Itisespeciall
ypr evalenti
nt hethi
rd-
worldcountri
es.

Fol
l
owi
ngt
hreest
atement
shi
ghl
i
ghtt
hegi
stoft
hisar
ti
cleonr
isk:
 1.Everyor ganizationmustpr operl
ygr oupthet y
pesofriskundertwomai nbroad
categor i
esv iz.,
a.Sy stemat i
cr i
skand
b.Unsy stemat icrisk.
2.Systemat icr i
ski suncont roll
able,andt heorgani
zati
onhast osufferf
rom the
same.Howev er,anor ganizati
oncanr educeitsi
mpact ,
toacertainextent,
by
proper l
yplanni ngt her i
skat t
achedt ot heproj
ect.
3.Unsy stemat icriskiscont roll
able,andt heorgani
zati
onshalltr
ytomi ti
gatet he
adver seconsequencesoft hesamebypr operandpromptplanning.

Sot
hesear
esomebasi
cty
pesofr
iskseeni
nthedomai
noff
inance

Ri
skandRet
urnonSi
ngl
eAsset

Thetypi
calobjectofinv est
menti st
omakecur rentincomef rom investmentsi nthe
for
m ofdivi
dendsandi nter
estincome.Theinvestment sshouldearnr easonableand
expect
edrateofr etur
noni nvestments.Cert
aininvestmentslikebankdeposi ts,publi
c
deposi
ts,
debent ures,bondsetc.wil
lcarryafi
xedrat eofreturnpayableperiodicall
y.

I
ncaseofi nvestment
sinshar esofcompani
es,theperi
odicalpay
ment sinthefor
m of
di
videndsarenotassured,butitmayensur
ehigherret
urnsthanfixedincome
i
nvestments.Butthei
nv est
ment si
nequit
ysharesofcompaniescar r
yhigherri
skthan
fi
xedincomei nst
ruments.

Anotherf
orm ofretur
nisi
ntheform ofcapit
alappreciat
ion.Thiselementofret
urni
s
thedif
fer
encebetweenthepurchasepri
ceandt hepriceatwhicht heassetcanbesol
d,
i
tcanbeacapi t
al gai
norcapi
tall
ossarisi
ngduet ochangei nthepr i
ceofthe
i
nvestment.

Ther
ateofr
etur
nofapar
ti
cul
ari
nvest
menti
scal
cul
atedasf
oll
ows:

AnnualRat
eofRet
urn:

Theannualr
ateofr
etur
nofapar
ti
cul
ari
nvest
mentcanbecal
cul
atedasf
oll
ows:

Wher
e,R=Annual
rat
eofr
etur
nofashar
e

D1=Di
vi
dendpai
datt
heendoft
hey
ear

P0=Mar
ketpr
iceofshar
eatt
hebegi
nni
ngoft
hey
ear

P1=Mar
ketpr
iceofshar
eatt
heendoft
hey
ear
Theaboveformulai
susedforcalcul
ati
onofannualret
urnofani
nvestmentinshar
es.I
n
theabovefor
mula,D1/
P0r
epresentsdiv
idendyi
eldand(P1–P0)/
P0represent
scapi
tal
gainorl
oss.

Pr
obl
em 1:

Mr.Rav ihaspurchased100shar
esofRs.10eachofRadheshy am Ltd.i
n2013atRs.
78
pershare.Thecompanyhasdecl ar
edadivi
dend@ 40%fort hey ear2015-
16.The
mar ketpri
ceofshareasat1-4-
2015wasRs.104andon31- 3-2016wasRs. 128.
Calculat
et heannualret
urnont
heinvest
mentfort
heyear2015- 16.

Sol
uti
on:

Di
vi
dendr
ecei
vedf
or2015-
16=Rs.
10x40/
100=Rs.
4

Cal
cul
ati
onofAnnualRat
eofRet
urnonI
nvest
mentf
ort
heYear2015-
16:
 

Whati
sPor
tfol
ioManagement

Portf
oli
omanagementi stheartandscienceofmaki ngdeci sionsaboutinvest
mentmi x
andpolicy,
matchi
nginvestmentstoobjecti
ves,assetallocati
onf ori
ndi
vidualsand
i
nstit
uti
ons,andbal
ancingri
skagainstperformance.Por tf
oliomanagementi sallabout
deter
miningstr
engt
hs,weaknesses,opportunit
iesandt hreatsinthechoiceofdebtv s.
equit
y,domesti
cvs.i
nternat
ional
,growthvs.saf et
y,andmanyot hertr
ade-offs
encounter
edintheat
temptt omaximizereturnatagi venappet it
eforri
sk.

Por
tfol
ioRet
urn:

Theexpectedr etur
nofapor t
foli
orepresentsweightedav
erageoft
heexpect
edret
urns
onthesecurit
iescompr i
singthatportf
oli
owi t
hwei ght
sbeingt
hepropor
ti
onoft
otal
fundsi
nvestedi neachsecuri
ty(thetotalofweight
smustbe100).

Thef
oll
owi
ngf
ormul
acanbeusedt
odet
ermi
neexpect
edr
etur
nofapor
tfol
io: