UNIT 1 Wealth Maximization

FOUNDATIONS OF FINANCE Limitations

1.FINANCIAL MANAGEMENT • Incorrect Assumptions

• Speculations
SCOPE
• Varied Objectives
• Estimating Financial Requirement • Justice To All Social Groups
• Deciding Capital Structure
2. Organization
• Selecting A Source Of Finance
• Selecting A Pattern Of Investment Functions
• Proper Cash Management
• Director
• Proper Uses Of Surpluses
1.Finance Manager
• Implementation Financial Controls
A. Cash Management.
Functions /major financial decisions B. Credit Management
C. Financial Planning
• Investment Decisions D. Security Floatation
• Financing Decisions
• Dividend Policy Decisions 2. Capital Management
• Liquidity Decisions 3. Accounts Manager
Objectives A. Financial Accounting
B. Tax Management
Profit Maximization C. Internal Audit
Advantage 3. Time Value Of Money
• Measure The Financial Stability Need
• Optimum Utilization Of Funds
• Risk And Uncertainty
• Promotes Socio-Economic Welfare
• Preference For Consumption
• Retained Earning
• Investment Opportunities
• Increase Competitiveness
• Inflationary Economy
• Decision Making
• Desire For Controls Risk
Disadvantage Systematic Risk

• Ambiguity • Market Risk

• Timing Of Benefits • Interest Risk
• Quality Of Benefits • Purchasing Risk
• Impact Of Social Welfare
Unsystematic Risk
• Ignores Financing And Dividend Aspects
• Change In Organization Structure • Business Risk
a. Internal Business Risk
b. External Business Risk
• Financial Risk
Measurement of risk • Attached rights
• Return on shares
• Range
• Transfer of shares
• Variance and standard deviation
• Benefit of right issues
Return • Benefit of bouns shares
• Irredeemable
Components
• Capital appreciation
• Current return
Valuation
• Capital return
• Total return • Discounted cash-flow
• Balance sheet valuation
Types
• Dividend capitalization model
• Realized return • Pricing earning ratio
• Expected return • Intrinsic value approach
• Other comparative valuation ratio
Measurement
Bonds
Traditional method
Features
• Bonds
• Stock of share • Par value
• Coupon rate
Modern method
• Maturity date
• Holding period yield • Call provision
• Return and statistical method
Types
a. Central tendency
b. Measure of dispersion • Premium bond
• Convertible bonds
Shares and bonds
• Discount bonds
Preference shares • Mortgage bonds
• High yield bonds
Features
• Fixed income bonds
• Accumulation of dividends • Government bonds
• Call option for the company • Corporate bonds
• Convertibility • Municipal bonds
• Redeemability
Financial manager
• Participating preference shares
• Voting power ROLES
Equity shares • Raising funds of company finance
• Taking maximum benefits from leverage
Features
• International financial decision
• Owned capital • Investment decisions
• Nominal value • Risk management
• Distinctive number
UNIT 2
INVESTMENT DECISIONS
Capital Budgeting
Principles
• Decision are based on cashflow not
accounting
• Cashflow timing
• Uses of opportunity
• Adjustment of taxes in the cashflows
• Ignores of financing costs
Process/ Techniques
• Investment screening and selection
• Capital budget proposal
• Budgeting approval and authorization
• Project tracking
• Post-completion audit
Importance
• Long term effects
• Risk and uncertainty
• Large funds
• Corporate image
Evaluation Techniques
• Non-discounting cash flow
a. Payback period
b. Accounting rate of return
• Discounted cash flow
a. Internal rate of return
b. Profitability index
Cost of capital
Types
• Future cost vs historical cost
• Specific cost vs composite cost
• Average cost vs marginal cost
• Implicit cost vs explicit cost
Factors affecting
• General economic conditions
• Market conditions
• Company’s operation and financing
decisions
• Amount of financing
Unit 3
Financial decision
Capital structure
Determination
• Financial leverage
• Operating leverage
• EBIT/EPS Analysis
• Cost of capital
• Growth and stability of sales
• Nature and size of industry
• Flexibility
• Flotation cost
• Growth rate
• Market conditions
importance
• To reduce the overall risk of the
company
• to adjust according to business
environment
• idea generation of new sources of fund
Theories
• relevance of capital structure
a. net income approach
b. traditional approach
• irrelevance capital structure
a. net operating income approach
b. Modigliani-miller approach
Leverage
Types
• Financial leverage
• Operating leverage
• Combined leverage
Difference
In book- 139
Dividend decision
Types
• On the basis of types of shares
a. Equity dividend
b. Preference dividend
• On the basis of mode of payment
a. Cash dividend
b. Stock dividend
c. Scrip dividend
d. Bond dividend
e. Property dividend
f. Composite dividend
• On the basis of time of payment
a. Interim dividend
b. Regular dividend
c. Special dividend
Issues
• Information signalling
• Clientele effect
• Cost of capital
• Objectives realization
• Shareholders members
• Usage of corporate earnings
Classification of dividend policy
• Regular dividend policy
• Stable dividend policy
• Irregular dividend policy
• No dividend policy
Theories
Relevance theory
• Walter’s model
• Gordon’s model
Irrelevance theory
• Mm model
• Traditional
Dividend policy
Factors
• Legal bounding
• Size of the earning
• Investment opportunities and
shareholders preference
• Liquidity position
• Company intention towards control
• State of capital market and access to it
• Contractual restrictions
• Profit rate and stability of earnings
• Inflation
UNIT 4
WORKING CAPITAL MANAGEMENT
Concepts
• Gross working capital
• Net working capital
Components
• Current asset
• Current liabilities
Operating and cash conversation
• Cash
• Raw materials
• Work-in-progress
• Finished goods
 • Account receivable b. indirect material

Need

• Replenishment of inventory • work-in-progress

• Provision for operating expenses • consumables
• Credit sales facility • finished goods
• Provision of a safety margin • stores and spares

Types of working capital purpose

• On the basis of concept • avoiding loss of sales

a. Gross working capital • gaining quality discounts
b. Net working capital • reducing order costs
• on the basis of time • achieving efficient production runs
a. permanent or fixed working capital • reducing risk of production shortages
i. regular working capital
ii. reserve working capital types
b. temporary or variable working • movement inventory
capital • buffer inventories
i. seasonal working capital • anticipation inventories
ii. special working capital • decoupling inventories
Determinants • cycle inventories
• independent inventories
• nature of business • dependent inventories
• nature of demand
• production policy management techniques
• credit policy • economic order quality
• dividend policy • recorder levels
• working capital cycle • ABC analysis
• manufacturing cycle • VED analysis
• business period • Just in time
• price level changes • Inventory turnover
issues • Inventory control of spares and slow
moving items
• components
• time Cash management
• investment Factors
• critically
• Credit position of the firm
inventory • Status of firm receivables
nature • Status of firm inventory account
• Nature of business enterprise
• raw material • Management attitude towards risk
a. direct material • Amount of sales in relation to assets
 • Cash inflows and cash outflows • secured premium
• Cost of cash balance • derivatives

Techniques/process constituents

• Cash management planning • primary market

• cash management control • secondary market
a. accelerating cash inflows
types of new issues
b. controlling cash outflows
• determining the optimum cash balance • public issues
• investing surplus cash • rights issues
• private issues
• preferential allotment
UNIT 5
Long-term finance
Indian capital market
• shares
Features • debentures
• term loan
• link between savers and investment
opportunities • lease finance
• providers long term investment • venture capital investing
• utilizes intermediaries types of loan
• determinant of capital formation
• government rules and regulations • on the basis of time
• no entry barriers a. short-term loan
b. Medium-term loan
• absence of transaction cost
c. Long-term loan
• no tax difference
• On the basis of security
• liquidity
a. Secured loan
• variety of instruments
b. Unsecured loan
functions
Types of lease
• allocation function
• Service lease
• liquidity function
• Financial lease
• other functions
• Sales and lease back
a. indicative function
• Direct lease
b. transfer function
a. Bipartite lease
c. merger function
b. Tripartite lease
instrument • Single investor lease
• Leveraged lease
• equity shares
• Domestic lease
• preference share
• International lease
• sweat equity
a. Import lease
• debenture
b. Cross-border lease
• warrants
Hire purchase

Types

• Consumer instalment credit

• Industrial and commercial credit