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ule 1:
± Activities  inancial
± Risk & Return trae- 
± aluati n etc
± Inian inancial System -
arkets instituti ns &
instruments - Regulat ry ramew rk
± Basic Techniques  inancial
‡ Time value 
‡ aluati n  Securities
‡ P rt li Analysis AP
& Opti ns.

ule 2
± S urces  inance
± L ng Term S urces ( Shares B ns Term
L ans etc)
± W rking apital s urces
iscellane us t pics

ule 3
± W rking apital
± Operating ycle
± A/R
± ash
± Determinants  W rking apital etc.

ule 4
± Investment Decisi ns
± apital Bugeting
‡ Basics ash l ws ari us techniques ( NP
IRR ARR etc)
± Risk & Sensitivity analysis Decisi n Tree
±  st  apital

ule 5
± apital Structure & Divien ecisi ns
± Leverages
± apital Structure Thé ries ( NI NOI
± Planning the apital Structure
± EBIT-EPS ROI-ROE analysis

ule 6
± Divien The ries (Walter G r n
± Divien p licies in practice
± Diviens B nus shares etc.
ule 7
± Special T pics: Leasing Internati nal
inance etc

‡ The advantages and disadvantages of
organizing a business as a corporation.
‡ Meaning, Scope and objectives of Financial
Management and Financial Goals.
‡ The role of the financial manager in a
‡ Principal-agent problems, agency costs and
information asymmetries.

What is a c rp rati n?

iorporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits

Limited Liability
iorporations iorporate tax on profits +
Personal tax on dividends


‡ inancial
anagement is c ncerne
with the eicient use  an imp rtant
res urce namely capital un.
‡ It eals with the pr curement 
uns an their eective utilizati n.

‡ inancial
anagement is c ncerne with the
management ecisi n i.e. planning raising (acquisiti n)
c ntr lling an aministrating the uns( Sh rt & L ng
Term) use in the business.
‡ S inancial management is c ncerne with 4 types 
ecisi n :
± Investment  inance
± Raising  inance
± W rking apital Decisi n
± Divien Decisi n
#$ % 
aintenance  Liqui Assets.
‡ Pr it
aximizati n.
aximizati n  wealth.
‡ air returns t the shareh lers.
‡ Builing up reserves  r gr wth an expansi n.
‡ Ensuring maximum perati nal eiciency by
eicient & eective utilizati n  inances.
‡ Ensuring inancial iscipline in the rganizati n.
‡  nversi n an expansi n  the am unt 
investment  capital thr ugh pr per inancial
p licy an pr gram.


‡ Financial Management as an academic
discipline has under gone significant
changes over years as regards its scope and
‡ There are basically 2 approaches to describe
the Scope of Finance:
± Traditional Approach
± Modern Approach

& '    
‡ Arrangement of funds from different
financial institutions.
‡ Procurement of funds through selling of
shares and debentures.
‡ Looking after legal and accounting
relationship between the funds and its

‡ Determination of necessary amount of finance
for investment i.e. sources of supply of finance
or the iapital Mix.
‡ Amount of Investment to be made in various
classes of assets, i.e. Planning for investment or
Long term Asset Mix.
‡ Dividend Policy or Profit Allocation.
‡ Liquidity or Short Term Asset Mix Decision.
‡ Profit maximization (profit after tax)
‡ Maximizing Earnings per Share
‡ Shareholder¶s Wealth Maximization

|   () 

Maximizing the Rupee Income of Firm

± Resources are efficiently utilized
± Appropriate measure of firm performance
± Serves interest of society also

‡ Ignores timing and risk of the expected
‡ Market value is not a function of EPS. Hence
maximizing EPS will not result in highest
price for company's shares
‡ Maximizing EPS implies that the firm should
make no dividend payment so long as funds
can be invested at positive rate of return²
such a policy may not always work
  '    () 
‡ Maximizes the net present value of a course
of action to shareholders.
‡ Accounts for the timing and risk of the
expected benefits.
‡ Benefits are measured in terms of cash
‡ Fundamental objective²maximize the
market value of the firm¶s shares.
‡ A finance manager is a person who is
responsible in a significant way to carry out
the finance function.
‡ The Finance manager¶s concern is to,
± Determine the total amount of funds to be
employed by a firm.
± Allocate this funds efficiently to various assets.
± Obtain the best mix of financing.

Who is The Financial Manager?

ihief Financial Officer

Treasurer iomptroller
Pr visi n  inance Planning &  ntr l
Invest r relati nship. Rep rting & Interpretati n
Sh rt term inancing Tax Aministrati n
Banking & ust y G vernment Rep rting
reit an  llecti n Pr tecti n  Assets
Investment Ec n mic Appraisal
Insurance Internal Auiting
apital Bugeting ash
anagement etc«« inancial &
anagement Acc unting

Role of The Financial Manager
(2) (1)

Firm's Financial Financial

operations manager markets

(3) (4b)

(1) iash raised from investors

(2) iash invested in firm
(3) iash generated by operations
(4a) iash reinvested
(4b) iash returned to investors
‡ Financial Planning & Structure
± Raising of Funds
± Allocation of Funds
± Profit Planning
± Investment Planning
± Management iontrol
± Policy Maker
± Treasury Operation
‡ Understanding iapital Markets
‡ Investor iommunication
‡ Foreign Exchange etc«.

+ ,   & ',
‡ Risk and expected return move in tandem;
the greater the risk, the greater the expected
‡ Financial decisions of the firm are guided by
the risk-return trae- .
‡ The return and risk relationship:
Return = Risk-free rate + Risk premium
‡ Risk-free rate is a compensation for time and
risk premium for risk.
‡ + +  & '

iapital Return Market

Structure Value
Maximization Of
Financial Finance Dividend The
Management Decisions Decisions
Share Value Risk Firm

    - !!!
‡ The financial system comprises a variety of
intermediaries, markets and instruments which are
foster savings and channels them to their most
efficient use.
‡ The system consists of individuals, intermediaries
markets and users of savings.
‡ Economic activity and growth are greatly
facilitated by the existence of a financial
developed in terms of the efficiency of the market
in mobilizing savings and allocating them among
competing users.












‡ Provides the payment system for the exchange of
goods and services.
‡ Enables the pooling of funds for undertaking large
scale enterprises.
‡ Provides a mechanism for spatial and temporal
transfer of resources.
‡ Provides a way for managing risk and uncertainties.
‡ Generates information, helps in decision making.
‡ Helps in dealing with the incentive problem.

‡ Regulation of currency
‡ Banking functions
‡ iustody of cash reserves
‡ iredit control
‡ Administer national, fiscal and monetary
‡ Supply and demand of funds
‡ Maintaining liquidity
‡ Any asset which is tangible or intangible
whose possession has a value in exchange.
± Tangible assets- the value of which depends on
its physical properties.
± Intangible assets- a claim to some future

‡ It is a market for the creation and
exchange of financial assets. Any
person who buys and sells financial
assets will participate in financial
markets in one way or the other.

‡ Facilitates price discovery- interaction
between buyers and sellers and establish the
prices of the financial assets.
‡ Provide liquidity ± investors can readily sell
their financial assets. In absence of this
characteristic the motivation of the investors
would have greatly reduced.
‡ Reduce cost of transferring- in terms of
search and information costs.









#   *  

 &' (‰(  





‡ Interest rates - rate of return promised by

borrower to the lender. It depends upon unit
of account, maturity period, default risk.
‡ iapital markets ± in case of equity markets
it is a major factor.

+      - 
‡ Interest rates represent promised returns on
debt instruments
‡ Return on equity comes from cash dividend
and capital gains.
r = [iash dividend + {Ending price ± Beginning
price}] / Beginning price

‡ Expected productivity of capital
‡ Degree of uncertainty characterising the
productivity of capital
‡ Time preference of people
‡ Degree of risk aversion


‡ Forces of demand and supply to determine

the market price or the rate of interest
± Supply for loanable funds and determination of
interest rate
± Demand for securities and determination of

‡ Govt. determines the interest rates in some
cases. This is done to-
± Facilitate govt. borrowing
± Preferential lending rates
± Mobilise substantial savings

& ' 
‡ Interest rates have been increasing mainly
due to lack of funds and inflation
‡ Short term rates are lower than long term
‡ Term finance is lower than working capital

‡ They provide services and products that
customers may not be able to get more
efficiently by themselves.
‡ The important products and services are
savings account, mortgages, insurance,
credit rating etc.

+       ' 

‡ Diversification
‡ Low transaction cost
‡ Economies of scale
‡ ionfidentiality
‡ Signaling

+  -   
± ilearing system for banks
± Implements credit and monetary policies
± Banker¶s bank
± Regulates foreign exchange transactions
± Moderates exchange value of rupee
± Integrates unorganised sector with the organised sector
± Banks in rural areas
± Allocation of credit
± Promotes DFIs
± Regulates stock exchanges and other securities
± Register and regulate capital market
± Regulate working of mutual funds
± Promotes self regulatory orgs. and invester
± Prohibits unfair trade practices, insider trading

‡ Finance ratios= Total finance claims
National income
‡ Financial interrelations ratio =
Total financial claims
Net physical capital formation
‡ New issue ratio = Primary issue
Net physical capital formation

‡ Intermediation ratio =
issues of financial institutions
total financial issues in the economy



ë   ë 





& ' .
‡ The SLR applicable to commercial banks is being
‡ Market determined interest rates are increasing.
‡ Financial institutions have now rely more on
capital markets.
‡ Prudential regulations and supervisions are being
emphasized in financial markets and financial
‡ IFS is getting gradually integrated with the WFS.
‡ Financial innovation is getting momentum etc«