tal Managennent * Notuse of Rance: Tb ts the process of acquiring ond ultliztag the Funds of business, | Boona of | Director s| poe ee Managing Divectow T woduc To! | Personne Financial Mos kebing Phector | | Divector | | Dixector Breccar | demure Control lev Aude ai Credit Planing Inventory | Menogement ond Manogement | Budgeting z Rekisement = | et Benefits ~~ control PerPormonce Accounting evaluation ¥ Treasurer + A person appotnted to administer or A Be compory & business. go x controller: An §ndividual whe has yesponsibility manage the Finoncial assets and Ifabilities of a accounting activities. A Fos all* Overview of Anancia) Management : [ ee | Faancial Management teri Sei Sei y HS Reena Maximisation of share value | {ood | Finaanctal Decisions ee 1 ae ioe, se Investment) | Liqutd?by Financtag Dividend Decisions | | Monoggment| | Dectsions | | Dect sions se _ Returns} jhe Bs aft * Financial Management ; Te means planning , orprizirg divecttag amd controller the Anoncial octiviies sudy oS Procurement ond ubflizobion of Funds. & Maxim sokion of Shove Value : Te Implies Phot the Ulfnote measure of & Compory's Success 7s the extent bo which TE enriches the Show eholders. ¥ Investment Decisions ; Tt yelates bo the Decision mode by the Investors os the bop level manogement with yespect to the amount of Funds to be deployed tn the investment oppor tunitves.* Liquidity Management + Tk veers to the Services yout bank Ptovide to fis Gov povote customers thereby Allowsing Hhem to optimize Interest on theiy Current Accounts «Thereby you can manage the datly liquidiky tr tnety bustness. * Financing Dectsions : It 7s concerned with sal'stag Rands Fron which long Eexm Sources 1e., Hrrough Shoreholders Funds ov borrowed Runds. Shoreholders Rands fnclude shave copttal, Surplus and yetoined earings Borrowed Funds fnclude debentures, long term loans ond public deposits. % Dividend Decision: Tb yelates Lo hows much of the Compony's met prott Ts to be distyibuted bo the shovelholdeys ond how much of 7k Should be tetained tn tre business for meeting the Ynvestment tequivements, #* Prot Maximisation : It ts the ptocess companies undesge to ensuve best cut puke and price levels tn odex fo moxtmize its vetuin. Teteal Revenue - Total Cost of production* Short term Business Rrance Ex aah) Prom sory 2) skort tevm loan 3) Cosh Credit 4) Treasury Bills 5) Over dof t * Bonk OveraloFt ; >All banking instituBions eve aware that businesses cb Mot alusays get money From sales Stroight aucay > Due fb the aliPRevence in its proceeds ond its costs the ergarfisation can offen Face problems. > Fox Small Ares the interest rote o7 an over adyoFE Can be quite high . Also, the bustness js not perenitted to exceed thdy¥ oveychoFt simit beyend a point. this 1s a Source f short term business Pnance lent for a SpeciRe period of Here bo a business fo a fou goods that Hrey have vweceived . >This grants the business the Mme lo fe able to deol sith they Cosh Flows move eFAdentiy. % Cosporote crectit Covd + > This ts the Shovk beven Sousce of businessrr m Finance thot is vey Similoy to bode credit Some ting is beoght using a CrediE cCowd, the business "Mon 3s entitled to A cextoia Period of time to ithey Pay the RII amount oF A Posbial amount * Present value —s Futuse value = Gm peoending Present value <— Fubure Value = Dis coun Bing * Fubste Value (FY) : Ev SPV Clee * Present value (Pv) PN a= a eee G+Ry)™ Exom ple :-O Py = 1,00,000 R = 6% pet annum Compound ommally T = 3 Yeous Fy =? 2 S EV= Jo0000 x (140-06) 2 = {,00,000 X Cl-o6) = 1,90,0c0 X 1,44) = 119,000 @® Yous bank Promises to give you Rs. 20,000 oF the end of | Yeaw. Assume vote of interest 7%. What fs ite worth wight Moo. Pv = 20,000 * an Cit 0.08)! 1 = B0C0O KX Fe anwe : (1.08)! = 18,516,5) Py =* Future value of Annufty ! eo Aonuity + Te is a@ Reed Payment (or veceipt) each yeor Fox & Specified oummber of yeous. EVA Cc) m Ee n [ ag Swi > The berm sittin the brackets f= the Com Poond value Factor for an annuity of Loh ch we Shalt yeFey aS CVFA 2 where, n= Time Ge Ame tel 4 = Rate of ‘ Tnterest Example :- Uthat is the amoont onder annuity if Rs. looco {5 Patd annually fer F yeoss at 12% Pes onnunm Compouncley onnually oh. A = \o,vco ed ae XS Wey. [+ O12) = 4 Fy = revoee [ AE y | O.12= 2 Noes (| 2 eda vs : ©. = 1,200 (lo.0 8) = too, 840 oo 40,* Present Value of an annuity : > The computation of the present value of an annuity Can be written in the Follasing genera) Formule . soa oes Vy, aa pre ( Way ey * A 5 PNAaa Ox | ie ag APG ( (14k 7) >The present value Factors of aN annutty P SAI BV Alaa where, M = Time E 5 = Rote of intexest. > In Ms. Excel use pmt RancHon per (Rate , npes , Pv, FY, type) where, Mper > Time Pmt —> Annuity. TR an Investor wonts be Know what Example : 500 Yeceived at the end of each of next Ss 1s wosth tocky ot 6% discount tate, Rs. Ss yer = _60O x ( (a Soa ee aeeeoy l = re - —_— $333.33 @ oy = 8,332. 32 ( t= °.75)) =, Zee 3s (9.253) = 2,!06, 53,es ~- Features : > claim on Tacome > clin on Assets > Right to Contso)\ >. Voting Rights > VNenited Hobility “Types sf Reben tines ; > Convertable Pebentwes T. Fully me Posty > Non- Convertable Debentures > Redeemable Debentures > Re- Redeemable Debentures. Money Mosket Instroments Maske or ie Coa piter! BSE Meney Mesket Luce Mor ket Y vy loro, Sherk 2) Geog £ lyeoy Equity ~ or eel Promisory Pre Pewence Shove bexmn loan Debentures Cash Credit Bond Treosusy Bills lore, beim joan over clvot-T— x M ket Instyuments : Financial instromerts uth Short tes maturity epke | yeor , Used as tools for Talsing capttal by the issuer axe known as Meney mowkeE Tnstr ements * Featuves of mm ¢ {. High Viquidity a. Ss Secuse TAvestment Fixed Returns * “Types of Money morket Instroments . Th eosuxy Bills > Issued by the RBI on behale of fhe centra) govesmment Roy TaIstag money. ? Whey hove Shoxt berm moatutibies with highest peo one yee. > Issued jn 8 difPevent Motus ey Periods wohich ase “q) days 1S2 days , | yeor T- Bis, p> Ts stedct clistoemias feble eeeel by PAR, Q. Commerscia) Papess : => lowge Companies one businesses issues Promissory motes f>, vollse ‘Capttal te meet Shot evn fusiness needs , known as Commercia| paper.S. Cereificates oF Deposit : > lesge Sam of money > Melbiple of ) lakh = : Extesnal commerxcia| Bovrosi ngs Cece) “Tutor we ve ¥ Gost of Debbi: > Debt tssued at Pox where) INT = Interest kgi= t= 2n7 & = Iesue price 6. > Debt Issued at discount or premium = Cost of Debt Bye Se ee Ba wohese | k, = = SN paw pa tI (14k) (4 ka)" E = Time [Tox > Tax adjustment APker = fax cork of alebk = k, (IT) Exomple: A Company has (0% perpetual Debt of Rs. 1,0°,000, he tax vate 1s 35%. Determine the Cost of Copttal before ond aoftes tox assuming the debt Ts issued at HAL Pay Ti AE discount! Bk AL Powis Sede i ‘ = 1,90, 000 kg ce AOee' x 100 ii) AE Peermivon Bes haRee 1,00,000 INT = 10% = 10% = lov. of 1,909,090 = 10,000Ti) AP ker Tax = lov (t- 9-36) = 10%, %.0.85 = 0,066 » li) Befove Tax at Discount price kg =7= to82°_ x 100 40,000 = 1-179 APter Tax = kat 5) =] aCe 0-3 = WW x 0.65 = oto At Psemiue = ( ka = 1982 S000 R is oa tOCE \,10,000 APker Tox = 4.04%. (\~ 0.35) = 4.09% Co.6s) er = SAY, % Ldighted Average Sst oF Gpitol (wacc) ka K ky = ka (1 - Tex) x Preposbion of Debt ko = co + ke X Propostion of equtty + kp x K : oe of cr eae +k x preferens of “Wetotndd ,* Specific Gost = Amount Lidight 6 Equity Copttol 15% [600,000 Caer PreF. copttal 12% oqod0 O.03 Debentures SA 240000 OWS Retained eascings 12%, 6009900 O.u2 U (6 x o.4s) + Cis x oF 32) 4 (12x 0.08) + (12 x0.12) " \r 2-38 4 3 TONG cee ee IO.08 % * Cost of preRyence Cagttal Equotion wequites the Plowing free Porameters to estimote ao Pam's cost Lshere, The ¥isk- Ree tote (Rg) The morket +fsk Preesinn (Rin Rp) “The beta of the Pim's Shove CP) Exarnple + Seppese fin the year 2002 the visk Fie wte is 6 Percent, the moxket isk Premiaro TS "tend beta eE Lond T 154. The Cost of equtty fox L&T is: Ke Re + (Bn-Pe) B, Shose 4s Se Rp BY (Re Re) = 97. = 0.064 (1.54) (0.04) B = 1.64 FOG + 1386 Re. Sate, = O1ABE X loo = Apprort ov.tage cost tage weld Coe Se ¥ Sowces cost Equity Capital 15% 1600900 0.32 G Pe-Capital 127. 4oop0e 0.08 0.467. Debentures ey Qyooro Ou 2.02%, Retoiined earning 12% Gpopeo. Besa 14a, Saeoe SO ' q.22% kK. = 6i(1- 0.3) x 0.48 = b6y (0.4) X 0.48 = 2.016 ee Project Evaluation Techniques I> | iF “Frodi ona | 1 Modern, ov x Non-alis counted @sh Flow Discount Cash Flao 2. Pay back period ee Nev 3. IRR er S Accounkimo, Rate of Retura CARR) = * Net present Vv): The Formula for the Net Present Value + eel = Ef (itk)t where , c = Flows = IntHal Investment7 Exarnple + Assume thot Pigject x costs Rs. 2600 mow and is K*Ppected fo generate year-end cosh Inflows of Rs. Joo, Rs. goo , RS. Foo, RS. 600 and Rs/s00 In Yeors | through 5. The opportunity Costs of Captta) may be assumed to be 10 pes cent, el NPv = 990 4 800 4 700 4 600 + 500 i Gr Gy GP air - 2500 = BIB.1S GEIS + 525.92 + 4o4.80 + 310.46 - 2500 = 27928.51 - 2500 = 225.51 +1 Project can be accepted, Acceptance Rule > Accept the Project when NPV Is postive NPV >o0 > Reject the Project When NPV fs Negative NPV Moy accept the Project when NPV fs Zero NPV=0 The NPv method can be used to select blu mutually exclusive projects j the one with the higher NPV Shovld be Selected, * Tntemal Rate of Rebun (ree)! The Internal Rote of Return (ERR) 7s the vate that equates the favestment outlay Ustth the present Value of cash InPlow yeceived after one Period. This also Smpltes Ehak the Yate of teburn 7s the discount yote which makes NPv =o.% IRR caleulotion fy Non- uate Cash loos fs: NPV at lower vate 5 IRR = Lowes Rate + t SES ee ee (cng veh = lo (Nev at lower rote ~ NPV at Higher vate) yobs} Example : Calculate NPV, IRR Yea | PV @107.] Pv @ 20” coos Sere Progect x Project ¥ ° t I ~ 200 - 200 ‘ 0.41 08> 3s 218 2 | 083 0.69 32) 1 fee 75 05s a0 0 4 0.68 O4e #5 0.62 oul 20 + 10% Nev = 2S go ee eae 8 _ , 22 = 200 G1) (iy Gye Cyt) = 31g! + 6611 + 64,61 + 51.82 + 12.41 - 200 12 is = 200 Ga > Galt 5.4 4°42 4 [2 — 286 ae (13)* = 191-6 + 6.9 + = 144-32 - 200 = -2.684S — + 20 (1-2) (12)5 v2.00 + 55.55 4+ 52.08 + 36.16 + .03 ~ 200 pipy = 3&inxa8Ox Bo (2) (13)? * Gajs = 24.16 F 180.48 - 200 =95 son EER fey Project X * 2s on aes 4 \6-76 @ 207 NPY x —> (-14.35) y > (-3-21) Py (ee) iGCON generate Cash inPlow oF RS. 40,000 , Rs. 30,000 Sol cash outlay fF o project 4s Rs.190,000 nd RS. 20,000 In year | through Ly. Assume oP discount, The PV of cash Inflows ent vate nt aiscount yoke Is 1 (Find NPV ond are) P00 4 BECO 4 80900 4, 20,009 (tay* (ty Gay" 1,006,060 365.65 + 24,793.38 + BF,565.F4 + 13 660.26 | 00,000 profttobility Index Ts more tran | Hotis Oclepte J PL 7a roPitokslity Index Is equal to | that moy or may occept PA profitability Index 1s dess than | than i 9s Pr <'t 28% IRR = 15.92%* Profect Evaluatton Techniques 1, “Traditional os Non- Discounted Cash Flow 2- Fag Back Pevied 5. Accounting Rote of Retian (ARR) * Foyback >The muenber of yes vequived be cover the origtnal Cash outlay Invested in a Prxject- P Generates. Constant annua) cash InFlecs Fagbock = Inittol Tovestment 2 Co Annus) Cosh Trew oe Example + Outlay oF Rs. 50,000 Cash inFlow of Rs. 12,500 for F yeors Sl =. Pep elses: (2,500 = b Veous # Acceptonce Rule : — see Accept > Col PBP < Stondad PBP Reject + Col PBP > Standosd PBP Considered + Col PRP = Standoad PBP * Accountirg Rote f Retusm (ARQ): Trey ose boo types < ii Average Rate of Return Qa. Accounting Rote of Rebun~> TE 1s cleo: knsvonsas gereinety erin agen Geel e gy b S known as average Yate & xetusn (ARR) > : “4 EBITDA: Earning Before Trterest Tax , PePreciation and Amont zation * © Accounting Rate of Retan = AYSI092 ormial EAT ot PAT x00 Otigininal Tnvestment (cx) where Original Tavestenent = Original Tmvestrnent + Addittoral NWC + Tnstallotfon choges + “Tsonsportation. * > Average Rate F Reta = Average onnual EAT oS Average Tovestment (AT) where, Average Trvestment = (Original Investment — Scop) Ip ot Addi onal Nuc + Soop value Exomple : The wosking xesolt of two machines ove given Below : Mochine x Mechine ¥ cost 45,000 45,000 Soles per yeor 1,00,000 0,000 Tota| Cost per yeor 36,000 30,000 (excluding deprectotion) Expected life 2 Yeous geass She Mestre = 190,000 2 Verage Rake of Return = 24g 100 = 1.23 * loo = 123%Moctine Y -B9,990_ y 100 Avevage Rate of Return = 45,000 = 906 xX acc) 7% acne & whom = 106 Actus! Sa gee : ' Sales (Revenue) 1,900,999 Cost -~ 36,000 64,000 Depreciotion — 22,500 (| yeos) S,000 - (48,000 = 9) +or9o = 13h X 100 22,500 = |[.55 X leo = ASS %Robleny : The project yequives an Anitial Investment of Rs. 20,000 ond the annual cash inFlows fos S yeors Ts Rs. 6,000 , Rs. 3000 » RS. 5,000 , RS, 4,000 and Rs. 4,900 vespectively. Find the Pay back Period, Trial Jnvestrreni Selution; Cash InPloos} cumulelive Cash taPlos Pending {Al this yeors 6000 6000 14 o00 3000 Iq 000 6,000 Sooo 19,200 Leto & 000 23,000 esse oo 27,000 eS » Syrs + tose — % 12 4ooo A Company Is Consiclering expanding Tes Pioduction, TE can ge aithey fy on automateN eee Costing 2,24 ,000 with an esttmated life of 5 JENS OF AN Oxdinory machine £0,000 having an estimated |1Pe of B yeows. The annual soles cosing Ond costs ave esimaked as Follows: Aubomotic Machine Osdincny Mactine Sales 1,50,000 159,000 Costs: erio|; Materials 50,000 50,000 b our lol 12,200 60,000 ble Over head Yorlable Over s 24,200, 20,000 Calculate the poybock Period and advice the management. > Automatic Mockine Is acceptedl as tne PRP Ts less,Tattial Trvestrent life = 5 yeors Coste = $6,000 De prectation dae Se) Soles = 1,S0,000 150,000 4 _ _224oOo SEE tanon St, 4OO “Tox a eee Addling Depreciation + Tax ‘44,800 9600 54,490 Orclincsy Machine cnitial Investment = 60,000 Fe = Byers Costs = 1,30,000 Depreciation = Sales = 1,350,000 1,50,000 -1,30,000 "gE 12,500 Tou = 6250 Adding Depreciation + Tax = 4,500 6,250 60,000 a 13,450 ee * 109 = 4.386 K 100 sou 13, F50