‭UNIT 1‬

‭ hat is Finance?‬
W
‭FINANCE is the art & science of managing money”.‬
‭► The field of FINANCE refers to the concepts of time, money and risk and how they are‬
‭interrelated.‬
‭“Financial management is about planning income and expenditure, and making decisions‬
‭that will enable you to survive financially”.‬
‭► “Financial Management is concerned with that managerial decision that result in the‬
‭acquisition & financing of long term & short term credits for firm”.‬
‭▪ “Financial management is concerned with the acquisition, financing and management of‬
‭assets with some overall goal in mind”‬
‭- J C Van Horne‬

‭ reas of finance‬
A
‭Financial services‬
‭✔ concerned with the design & delivery of advice & financial product‬
‭✔ to individuals, businesses & govt.‬
‭✔ within the areas of banking & related institutions, personal financial planning, investments,‬
‭real estate, insurance…‬
‭Financial management ✔ concerned with the duties of the financial manager in the business firm‬

‭ hy do you need FM ?‬
W
‭IT REPRESENTS THE BRIDGE BETWEEN REAL ASSETS AND FINANCIAL ASSETS.‬
‭► FM refers to that part of managerial activity concerned with‬
‭► Procurement and‬
‭► Utilization of funds for business purposes.‬
‭► It involves the application of general management principles to financial operations‬
‭► Estimation of wc requirements‬
‭► Formulation of capital structure‬
‭► Management of earnings‬

‭ bjective of FM‬
O
‭PROFIT MAXIMIZATION‬
‭► WEALTH MAXIMIZATION‬
‭► Logical managerial justification‬
‭► Time value of money‬
‭► Risk & uncertainty of future earnings‬
‭► Dividend vs market price of shares‬

‭PROFIT MAXIMIZATION‬
‭ Actions that increase profits/EPS should be undertaken‬
►
‭► The investment, financing and dividend policy decisions of a firm should be oriented to‬
‭the maximization of profits/EPS.‬
‭► PROFITABILITY‬

‭ bjections‬
O
‭􀀀 It does not specify the time of expected returns‬
‭􀀀 It does not take into consideration the uncertainity of future earnings‬
‭􀀀 It does not consider the effect of dividend policy on the market price of shares‬
‭􀀀 It does not consider the interest of consumers, workers and the society‬
‭􀀀 It does not differentiate between short term and long term profits‬

‭ EALTH MAXIMIZATION‬
W
‭Aims at maximum market price /share‬
‭► Market price represents the real value of the company‬
‭► MP serves as an indicator of company progress.‬
‭► MP considers the timing of earnings, dividend policy‬
‭► Based on the concept of cash flows generated rather than accounting profit.‬
‭► Considers both the quantity and quality dimensions of benefits‬

S‭ ome limitations still...‬

‭✔ Business is confronted with a more demanding Socio economic environment which is omitted‬
‭✔ Financial management should take into consideration the firm’s legal obligation to the govt,‬
‭employees etc.‬

‭ IMS OF FM‬
A
‭1. Increase in profits‬
‭2. Reduction in cost‬
‭3. Sources of funds‬
‭4. Minimize risks‬
‭5. Long run value‬

I‭ t has two approaches :‬

‭1 Traditional‬
‭2. Modern‬
‭TRADITIONAL APPROACH‬
‭CORPORATION FINANCE‬
‭► Procurement of funds‬
‭► Institutional arrangement – financial institutions‬
‭► Financial instruments – capital markets‬
‭ Legal and accounting relationships‬
►
‭- Emphasis on raising the funds only‬
‭- Concentrates mainly on financial administration of the joint stock companies‬
‭- Represents the episodic view of the finance function‬
‭- Emphasis on long term financial requirements‬

‭ ODERN APPROACH‬
M
‭► Financial management – broad sense‬
‭► Business Finance‬
‭► The finance function – acquisition of funds and their allocations/ utilization‬
‭► What is the total volume of funds an enterprise should commit?‬
‭► What specific assets should an enterprise acquire?‬
‭► How should the funds required be financed?‬

‭TYPES OF FINANCIAL DECISIONS‬

‭1.‬ ‭Financial decision‬
‭2.‬ ‭Dividend decision‬
‭3.‬ ‭Investment decision‬

‭ INANCING DECISION‬
F
‭► HOW SHOULD THE REQUIRED FINANCING BE RAISED?‬
‭– Where do firms raise/acquire the funds for value-creating investments?‬
‭– What mix of owner’s money (equity) or borrowed money(debt) should the firm use?‬
‭– Also called Capital Structure‬
‭► Capital structure – How should we pay for our assets? – Should we use debt or equity?‬

I‭ NVESTMENT DECISION‬
‭► WHAT INVESTMENT SHOULD THE FIRM MAKE?‬
‭► Capital budgeting – What long-term investments or projects should the business take on?‬
‭► Working capital management – How do the business manage the day-to-day finances of the‬
‭firm‬

‭ IVIDEND DECISION‬
D
‭HOW CAN THE FINANCIAL DECISIONS HELP TO ADD VALUE TO‬
‭THE FIRM?‬
‭✔ How much of a firm’s funds should be reinvested in the business and how much should be‬
‭returned to the owners?‬
‭✔ Includes Dividend –pay out ratio‬
‭✔ Proportion of how much to be paid to share holders and how much to be kept as retained‬
‭Earnings.‬
‭ OLE OF FINANCIAL MANAGER‬
R
‭► ASSESSING--- THE CURRENT BUSINESS‬
‭► ASSESSING--- FUTURE FINANCIAL NEEDS‬
‭► ASSESSING--- FUTURE INVESTMENT‬
‭► DEVELOPING -- LONG TERM FINANCIAL STRATEGIES‬
‭ Financial structure‬
►
‭► Foreign exchange management‬
‭► Investor communication‬
‭► Management control‬
‭► Investment planning‬

‭Indian Financial System‬

‭➢‬ ‭Financial assets‬
‭► Financial intermediaries‬
‭► Financial markets‬
‭► Financial rate of return‬

‭ INANCIAL ASSETS‬
F
‭► Money- issued by RBI and the Ministry of finance, Govt.. of India ( paper currency and‬
‭coins) and by Commercial banks as demand deposits‬
‭► Debt- issued by Govt and its agencies‬
‭a) by term loans from Financial Institutions,‬
‭b) Working Capital advances from Commercial Banks‬
‭c) issue of debentures‬
‭► Stock is issued by business organizations‬

‭ INANCIAL INTERMEDIARIES‬
F
‭RBI‬
‭► Commercial banks--- provide working capital advances to industry‬
‭► Term lending FI- IDBI, IFCI, ICICI, SFC, STATE INDUSTRIAL DEVELOPMENT‬
‭CORPORATIONS‬
‭► Agricultural financing institutions- NABARD‬
‭► Insurance companies- LIC, GIC‬
‭► Other public sector FI- post office savings bank‬

‭ INANCIAL MARKETS‬
F
‭► RBI‬
‭► Commercial banks--- provide working capital advances to industry‬
‭► Term lending FI- IDBI, IFCI, ICICI, SFC, STATE INDUSTRIAL DEVELOPMENT‬
‭CORPORATIONS‬
‭► Agricultural financing institutions- NABARD‬
‭► Insurance companies- LIC, GIC‬
‭► Other public sector FI- post office savings bank‬
‭► Money market‬
‭► Capital market- corporate securities and gilt-edged securities‬
‭ Securities issued by the central govt , state govt, semi govt authorities autonomous institutions‬
►
‭and public sector enterprises are referred to as GILT EDGED SECURITIES.‬

‭ INANCIAL PLANNING‬
F
‭• Whilst making profit is the mark of corporation success , money is the energizer which makes it‬
‭possible.‬
‭• Financial planning is the process of determining the‬
‭– Objectives‬
‭– Policies‬
‭– Procedures‬
‭– and program to deal with the financial activities of an organization. Concerned with economic‬
‭procurement and profitable use of funds‬

‭UNIT 2‬
‭ ools for financial analysis‬
T
‭• Comparative Statement/ Inter- period comparison statement/ Intra- firm comparison‬
‭• Common Size Statement‬
‭• Trend analysis‬
‭• Ratio Analysis‬
‭• Cash flow statement‬
‭• Fund flow statement‬
‭• Break - Even Point analysis‬

‭ omparative Statement/ Inter- period comparison statement/ Intra- firm comparison‬

C
‭• Comparative statements or comparative financial statements are statements of financial‬
‭position of a business at different periods. These statements help in determining the‬
‭profitability of the business by comparing financial data from two or more accounting‬
‭periods.‬
‭• The data from two or more periods are updated side by side, which is why it is also known‬
‭as Horizontal Analysis.‬
‭• The advantage of such an analysis is that it helps investors to identify the trends of business,‬
‭check a company’s progress and also compare it with that of its competitors.‬
‭• The financial data will be considered to be comparative only when the same set of accounting‬
‭principles are being used for preparing the statements.‬

‭ ypes of Comparative Statements‬

T
‭• There are two types of comparative statements which are as follows‬
‭􀀀 1. Comparative income statement/ Comparative profit and loss statement‬
‭􀀀 2. Comparative balance sheet‬
‭ omparative Income Statement‬
C
‭• It provide the progress made by the business over a period of a few years.‬
‭• This statement also helps in ascertaining the changes that occur in each line item of the income‬
‭statement over different periods.‬
‭• The comparative income statement not only shows the operational efficiency of the business‬
‭but also helps in comparing the results with the competitors, over different time periods.‬
‭• This is possible by comparing the operational data spanning multiple periods of accounting.‬

‭ teps in preparing a comparative income statement‬

S
‭• Specify absolute figures of all the items related to the accounting period under consideration.‬
‭• Determine the absolute change that has occurred in the items of the income statement. It‬
‭can be achieved by finding the difference between previous year values with the current year‬
‭values.‬
‭• Calculate the percentage change in the items present in the current statement with respect to‬
‭previous year statements.‬
‭ omparative Balance Sheet‬
C
‭• Comparative balance sheet analyses the assets and liabilities of business for the current‬
‭year and also compares the increase or decrease in them in relative as well as absolute‬
‭parameters.‬
‭• A comparative balance sheet not only provides the state of assets and liabilities in different‬
t‭ime periods, but it also provides the changes that have taken place in individual assets and‬
‭liabilities over different accounting periods.‬
‭• The following points should be studied when analysing a comparative balance sheet‬
‭• 1. The present financial and liquidity position (study working capital)‬
‭• 2. The financial position of the business in the long term‬
‭• 3. The profitability of the business‬

‭ ommon Size Financial Statements‬

C
‭The statements in which amounts of the various items of financial statements are converted into‬
‭percentages to a common base.‬
‭• Types of Common Size Statements:‬
‭• 1. Common Size Balance Sheet; and‬
‭• 2. Common Size Statement of Profit and Loss.‬
‭COMMON SIZE B/S‬

‭ REND ANALYSIS‬
T
‭The TPA is an important tool of historical analysis.‬
‭• It can be of immense help in making a comparative analysis over a series of years.‬
‭• The TPA provides brevity and easy readability to several financial statements as the‬
‭percent- ages figures disclose more than the absolute figures‬

‭ recautions must be taken while using the TPA‬

P
‭• There should not be a significant and material change in accounting policies over the‬
‭years. This consistency is necessary to ensure meaningful comparability.‬
‭• (ii) Proper care must be taken while selecting the base year. It must be a normal and a‬
‭representative year. Generally the initial year is taken as base year, but intervening year‬
‭can also be taken as the base year, if the initial year is not found to be normal year.‬
‭• (iii) The trend percentages should be analyzed vis-a-vis the absolute figure to avoid any‬
‭misleading conclusions.‬
‭• iv) If possible, the figures for different years should be adjusted for variations in price level‬
‭also.‬
‭• For ex- ample, increase in Net Sales by 30% (from 100 in 2017 to 130 in 2020) over 3‬
‭years might have resulted primarily because of increase in selling price and not because‬
‭of increase in volume. often, it may be difficult to interpret the increase or decrease in any‬
‭item (in absolute terms or in percentages) as a desirable change or an undesirable‬
‭change.‬
 ‭UNIT 4‬
‭ APITAL BUDGETING‬
C
‭Capital Budgeting is the process by which the firm decides which long-term investments to make‬
‭􀀀 Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash‬
‭flows over several years.‬

‭ ature of Investment Decisions‬

N
‭The investment decisions of a firm are generally known as the‬
‭capital budgeting, or capital expenditure decisions.‬
‭􀀀 The firm’s investment decisions would generally include expansion, acquisition,‬
‭modernisation and replacement of the long-term assets. Sale of a division or business‬
‭(divestment) is also as an investment decision.‬
‭􀀀 Decisions like the change in the methods of sales distribution, or an advertisement campaign‬
‭or a research and development programme have long-term implications for the firm’s‬
‭expenditures and benefits, and therefore, they should also be evaluated as investment decisions.‬

‭ eatures of Investment Decisions‬

F
‭􀀀 The exchange of current funds for future benefits.‬
‭􀀀 The funds are invested in long-term assets.‬
‭􀀀 The future benefits will occur to the firm over a series of years.‬

I‭ mportance‬
‭􀀀 Growth‬
‭􀀀 Risk‬
‭􀀀 Funding‬
‭􀀀 Irreversibility‬
‭􀀀 Complexity‬

‭ ypes of decisions or Capital expenditure‬

T
‭􀀀 Classification - 1‬
‭􀀀 Expansion of existing business‬
‭􀀀 Expansion of new business‬
‭􀀀 Replacement and modernisation‬
‭Yet another useful way to classify investments is as follows:‬
‭􀀀 Mutually exclusive investments 􀀀 Independent investments 􀀀 Contingent investments‬

‭ rocess of CE‬
P
‭1. Project Generation (Identification of investment proposals)‬
‭2. Project Evaluation (Screening the proposals, Evaluation of various proposals using evaluation‬
‭criteria)‬
3‭ . Project Selection‬
‭4. Project Execution‬
‭5. Follow up‬

‭Evaluation criteria‬
‭1. Non-discounted Cash Flow Criteria‬
‭􀀀 Also known as Traditional method‬
‭􀀀 Unsophisticated method‬
‭􀀀 Time value of money not considered.‬
‭2. Discounted Cash Flow (DCF) Criteria‬
‭􀀀 Also known as Time adjusted method‬
‭􀀀 Time value of money considered‬

1‭ . Non-discounted Cash Flow Criteria‬

‭􀀀 Payback Period (PB)‬
‭􀀀 Discounted payback period (DPB)‬
‭􀀀 Accounting Rate of Return (ARR)‬
‭2. Discounted Cash Flow (DCF) Criteria‬
‭􀀀 Net Present Value (NPV)‬
‭􀀀 Internal Rate of Return (IRR)‬
‭􀀀 Profitability Index (PI)‬
‭ Advantages ❖ It is simple to understand and easy to calculate ❖ It gives importance on‬
􀀀
‭liquidity‬
‭❖ It acts as an yardstick in comparing the profitability of two Projects‬
‭❖ It helps to understand the period required to recover the original investment, thus helping to‬
‭know the risk associated with the investment‬

‭ Disadvantages ❖ It ignores the time value of money‬

􀀀
‭❖ It fails to consider the post payback profit‬
‭❖ It over emphasis liquidity and ignores the life of an asset‬
‭❖ It doesn't consider the cost of capital‬

‭IMPROVEMENTS IN TRADITIONAL PAY BACK‬

‭ iscounted Pay back period‬

D
‭􀀀 It recognises the time value of money (money available at the present time is worth more than‬
‭the same amount in the future)‬
‭􀀀 Using Present value table‬
‭􀀀 The discounted payback period is the number of periods taken in recovering the investment‬
‭outlay on the present value basis.‬
‭􀀀 The discounted payback period still fails to consider the cash flows occurring after the‬
‭payback period.‬
‭2. Pay Back profitability‬
‭􀀀 Also known as Post Payback profitability method‬
‭􀀀 Post pay back profitability Index =‬
‭Post Pay Back profit *100‬
‭Initial Investment‬
‭Post pay back profit= Total earnings beyond PBP + Scrap value‬

3‭ . Pay- Back reciprocal‬

‭􀀀 Pay –Back reciprocal =‬
‭1‬
‭Pay-back period‬

‭ CCEPTANCE RULE‬
A
‭􀀀 The project would be accepted if its payback period is less than the maximum or standard‬
‭payback period set by management.‬
‭􀀀 As a ranking method, it gives highest ranking to the project, which has the shortest payback‬
‭period and lowest ranking to the project with highest payback period.‬

‭ VALUATION of ARR‬
E
‭􀀀 The ARR method may claim some merits‬
‭􀀀 Simplicity – Simple to calculate and easy to understand‬
‭􀀀 It considers savings over the entire life of the project‬
‭􀀀 Emphasis on profitability and not on liquidity‬

‭ he ARR method may claim some demerits‬

T
‭✔ It ignores time value of money‬
‭✔ Average earnings is calculated considering the life period but investment is acsertained with‬
‭out reference to the life period‬
‭✔ It makes use of accounting profit and not cash flows‬

‭ VALUATION OF PI METHOD‬
E
‭􀀀 Time value:It recognises the time value of money.‬
‭􀀀 Value maximization: It is consistent with the shareholder value maximization principle. A‬
‭project with PI greater than one will have positive NPV and if accepted, it will increase‬
‭shareholders’ wealth.‬
‭􀀀 Relative profitability:In the PI method, since the present value of cash inflows is divided by‬
‭the initial cash outflow, it is a relative measure of a project’s profitability.‬
‭􀀀 Like NPV method, PI criterion also requires calculation of cash flows and estimate of the‬
‭discount rate. In practice, estimation of cash flows and discount rate pose problems.‬

‭*REFER PPT FROM SLIDE 35*‬