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FINANCIAL MANAGEMENT
INTRODUCTION
UNIT-I
MEANING OF FINANCIAL MANAGEMENT
• Profit Maximisation
• Wealth Maximisation
• The time value of money (TVM) is the concept that money available at the
present time is worth more than the identical sum in the future due to its
potential earning capacity.
• This core principle of finance holds that, provided money can earn interest,
any amount of money is worth more the sooner it is received.
• TVM is also sometimes referred to as present discounted value.
• Huge investments
• Long Term
• Irreversible
• Long-Term Effect
• The NPV is the sum of the present values of all relevant cash flows
discounted at the opportunity cost of capital (or WACC). This decision rule
for this technique is:
• Accept if the net present value is positive, reject if negative
• The payback period is the length of time it takes for a project to pay back
its initial capital investment. It may be shown in either years or months e.g.
2.5 years or 2 year 6 months. The decision rule for this technique is:
• Accept if it meets a predetermined figure.
• Choose the project that pays back the fastest.
• The internal rate of return is the discount rate that gives a net present value
of 0. It is the annual rate of return earned by the project. The decision rule
for this technique is:
• Accept if the internal rate of return is greater than the opportunity cost of
capital, reject if less.
COST OF CAPITAL
UNIT-III
COST OF CAPITAL
According to Solomon Ezra, the cost of capital is the minimum required rate of
earnings of the cut off rate for capital expenditure.
According to James C. Vanhorne, the cost of capital represents a cut off rate
for the allocation of capital investment of projects. It is the rate of return on a
project that will have unchanged the market price of the stock.
Cost of capital may be classified into the following types on the basis of nature
and usage:
• Explicit and Implicit Cost.
• Average and Marginal Cost.
• Historical and Future Cost.
• Specific and Combined Cost.
• Traditional Approach
• Net Income (NI) Approach
• Net Operating Income (NOI) Approach
• Modigliani and Miller Approach
• Operating leverage
• Financial leverage
• Combined Leverage
• Raw Material
• Work in Progress
• Consumables
• Finished Goods
• Spares
Accounts Receivable (AR) is the proceeds or payment which the company will
receive from its customers who have purchased its goods & services on credit.
Usually the credit period is short ranging from few days to months or in some
cases maybe a year.
• In truth, every business financing option has its good and bad sides.
Accounts receivable financing is no exception:
• No Need for Collateral - It is a type of unsecured business
financing option that does not require any collateral in form of assets and
guarantors.
• Retain Ownership of Your Business - This type of financing does not
require you to give out part of your business ownership so as to acquire
finances