Corporte Finance Financial Management - : CMA Ramesh Rajagopalan

CORPORTE FINANCE
FINANCIAL MANAGEMENT -
INTRODUCTION
CMA Ramesh Rajagopalan
MBA Department
FINANCIAL MANAGEMENT
Unit-1- 1st Video

Department of Management Studies-MBA
Introduction
Introduction
Definition
Objectives
Meaning
 Finance is called “The science of money”
 Finance is the process of conversion of accumulated funds to productive use
 There are three main types of finance: (1) Personal, (2) Corporate, and

(3) Public/Government.
 Introduction: For any business, it is important that the finance it procures is

invested in a manner that the returns from the investment are higher than the
cost of finance. In a nutshell, financial management –
• Endeavors to reduce the cost of finance

• Ensures sufficient availability of funds
• Deals with the financial activities like the procurement and utilization of
funds in terms of:
• Planning
• Organizing and
• Controlling
FINANCIAL MANAGEMENET
Meaning
Meaning:
and Definitions
Financial management is managerial activity which is concerned with the planning and
controlling of the firm’s financial resources.
Definitions:
 “Financial Management is an area of financial decision making, harmonizing individual

motives and enterprise goals.” - Weston and Brigham
 “Financial management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operations.”- Joseph
Massie
 “Financial management is concerned with the efficient use of an important economic

resource, namely capital funds” - Solomon Ezra & J. John Pringle
 Howard and Upton define financial management “as an application of general managerial
principles to the area of financial decision-making”.
 Weston and Brighem define financial management “as an area of financial decision
making, harmonizing individual motives and enterprise goal”.
Objectives
Objectives: Financial Management’s objective is to maximize the value of firm and maximize shareholders
wealth. This prime objective of Financial Management is reflected in the EPS (Earning per Share) and the Market
Price of its Shares.
Main Objectives
1. Profit Maximization
2. Wealth Maximization
Other Objectives
3. Proper Estimation of Finance requirement
4. Proper Mobilization of Finance
5. Proper Utilization of Finance
6. Maintaining proper Cash Flow
7. Survival of Company
8. Creating Reserves
9. Proper Coordination
10. Creating Goodwill
11. Increase Efficiency
12. Financial Discipline
13. Reduce Cost of Capital
14. Reduce Operating Risk
15. Prepare Capital Structure
Objectives
Profit = Total Revenue – Total Cost
Revenue = Sale activities (Goods & Services)
Cost = Economic value of resources utilized for producing Goods / rendering
Services
1. Profit Maximization: Main aim of any kind of economic activity is earning

profit. Any business concern is also functioning mainly for the purpose of
earning profit. Profit is the measuring techniques to understand the business
efficiency of the concern.
The finance manager tries to earn maximum profits for the company in the
short-term and the long-term. He cannot guarantee profits in the long term
because of business uncertainties. However, a company can earn maximum
profits even in the long-term, if:
• The Finance manager takes proper financial decisions
• He uses the finance of the company properly
Profit Maximization: Increase Sales / Reduce Cost / Increase Sales and reduce
Cost
Objectives
2. Wealth Maximization:
• Wealth maximization (shareholders’ value maximization) is also a main objective of financial
management.
• Earn maximum wealth for the shareholders
• Maximum dividend to the shareholders
• Increase the market value of the shares
• Market value of the shares is directly related to the performance of the company
3. Proper estimation of total financial requirements:

• Proper estimation of total financial requirements is a very important objective of financial
management.
• How much finance is required to start and run the company
• Fixed capital and working capital requirements of the company
• Estimation will lead to shortage or surplus of finance
• Factors like technology used by company, number of employees employed, scale of operations,
legal requirements etc., will have impact
4. Proper mobilization
• Mobilization (sourcing) of finance is an important objective of financial management.
• After estimating the financial requirements, the finance manager must decide about the
sources of finance.
• Source of Finance can be shares, debentures, bank loans, etc.
• Proper balance between owned (Equity) finance and borrowed (Debt) finance
• Must borrow money at a low rate of interest (E.g. Debt Capital, Working Capital)
Objectives
5. Proper utilization of Finance:
• Proper utilization of finance is an important objective of financial management.
• Optimum utilization of finance (E.g. Idle cash)
• Use the finance profitably
• Not waste the finance of the company
• Must not invest the company’s finance in unprofitable projects
• Must not block the company’s finance in inventories (E.g. Raw materials, Consumables,
Finished Goods etc.)
6. Maintaining Proper Cash Flow:

• Maintaining proper cash flow is a short-term objective of financial management.
• Cash flow is important to pay the day-to-day expenses such as purchase of raw materials,
payment of wages and salaries, rent, electricity bills, etc.
• Good cash flow can take advantage of many opportunities like getting cash discounts on
purchases, large-scale purchasing, giving credit to customers, etc.
• Healthy cash flow improves the chances of survival and success of the company.
7. Survival of Company:
• Survival is the most important objective
• Company must survive in a competitive business world
• Finance manager must be very careful while making financial decisions
• One wrong decision can make the company sick, and it can close down
Objectives
8. Creating Reserves:
• One of the objectives of financial management is to create reserves.
• Company must not distribute the full profit as a dividend to the shareholders.
• It must keep a part of it profit as reserves.
• Reserves can be used for future growth and expansion. It can also be used to face
contingencies in the future.
9. Proper Coordination:
• Financial management must try to have proper coordination between the finance and other
departments of the company. (E.g. Production, HR, Purchase, Sales, Quality etc.)
10. Create Goodwill:

• Financial management must try to create goodwill for the company
• It must improve the image and reputation of the company (E.g. Quality product/service, CSR
activities, Carbon footprint etc.)
• Goodwill helps the company to survive in the short-term and succeed in the long-term. It also
helps the company during bad times
11. Increase Efficiency:

• Increase the efficiency of all the departments of the company
• Proper distribution of finance to all the departments will increase the efficiency of the entire
company
Objectives
12. Financial Discipline:
• Financial management also tries to create a financial discipline
• Financial discipline means:-
• To invest finance only in productive areas. This will bring high returns (profits) to the
company.
• To avoid wastage and misuse of finance.
13. Reduce Cost of Capital:

• Tries to reduce the cost of capital. That is, it tries to borrow money at a low rate of interest
• Planning the capital structure (Equity vs Debt) in such a way that the cost of capital it
minimized
14. Reduce Operating Risks:

• Tries to reduce the operating risks
• There are many risks and uncertainties in a business. (E.g. Product obsolescence, Availability
of Raw materials, Skilled manpower etc.)
• Avoid high-risk projects.
• Adequate insurance (E.g. Fire, Flood insurance, Employees Health Insurance etc.)
15. Prepare Capital Structure:

• Financial management also prepares the capital structure i.e. ratio of owned finance (Equity)
and borrowed finance (Debt).
• It brings a proper balance between the different sources of capital. This balance is necessary
for liquidity, economy, flexibility and stability
CORPORTE FINANCE
FINANCIAL MANAGEMENT – PROFIT

& WEALTH MAXIMIZATION
MBA Department
Unit-1 – 2nd Video

Financial Management
Profit and Wealth Maximization
Profit Maximization
Profit Maximization – Advantages vs
Disadvantages
Wealth Maximization
Wealth Maximization - Indicators
Profit Maximization and Wealth
Maximization – Differences
EVA
MVA
Shareholder’s Value Drivers
Profit Maximization:
What Is Profit Maximization?
Profit maximization refers to the sales level where profits are highest. You might
assume that the higher the sales level, the higher the profits - but that is not
always true!
The calculation for profit maximization is: the number of units where MR = MC.

Profit: The money left over once you pay all your expenses out of revenues
MR: This stands for marginal revenue, which means the per-unit selling price of
your item. It's often true that to sell more units you have to reduce the price, so
marginal revenue will reduce as the volume increases
MC: This stands for marginal cost, which means the per-unit cost of your item.
Per-unit costs will decrease to a certain point as you increase the number of units
produced at your plant; then, once you reach capacity, costs will increase as you
either open a new plant or outsource production to other companies.
Profit Maximization
 Profit Maximization is the traditional and primary objective of Financial

Management
 It represents the process or approach by which Profits and EPS is increased
Advantages Disadvantages
Economic Survival Haziness of the concept of Profit
Measurement Standard Ignore Time Value of Money
Social Welfare Ignores Risk
Economic Welfare Ignores Quality

Wealth Maximization
 Wealth Maximization = Maximization of Shareholders wealth
 A shareholders hold shares in the company/business and his wealth

will improve if the share price in the market increases which in turn is
a function of Net Worth
 Wealth = NPV of Financial decisions = PV of Future Cashflow - Cost
 Wealth maximization can also be measured using two other methods:
1. Economic Value Added (EVA)
2. Market Value Added (MVA)

Indicators of Shareholder’s Wealth Creation:
 Increase in market value of securities/shares
 Shareholders receive regular payment of dividends at higher rates
 Right issues of shares to the shareholders at low premium
 Shareholders receive Bonus shares after a gap of 3 – 4 years
 High book value of shares

Profit Maximization vs Wealth Maximization
Parameter Profit Maximization Wealth Maximization
Main objective is to achieve
Profit vs Market value Main objective is to earn
highest market value of
of common stock more profit common stock
Short term vs Long Emphasis on short term Emphasis on long term
term profit making wealth creation
Ignores Time Value of Considers time Value of
Time Value of Money
Money Money
Ignores Risk and Considers Risk and

Risk and Uncertainty
Uncertainty Uncertainty
Timing of Return Ignores timing of return Recognizes timing of return

1. Economic Value Added (EVA) - Invented by Stern Stewart & Co.,
Economic value added (EVA) is a measure of a company's financial

performance based on the residual wealth calculated by deducting its cost
of capital from its operating profit, adjusted for taxes on a cash basis. EVA
can also be referred to as economic profit, as it attempts to capture the
true economic profit of a company.
 Economic value added (EVA) measures the real profits generated by a

company.
 Essentially, it’s used to determine how profitable an organization has

become within a given period of time.
 Formula: EVA = NOPAT – (Capital Employed x WACC)

2. Market Value Added (MVA):
 Market value added is the difference between the current value of the company
on the market and the initial contributions made by its investors (Capital).
 Contrary to what many assume, MVA is not a performance indicator. Instead, it

is a metric used to measure wealth.
 Essentially, it is used to determine exactly how much value the firm has
accumulated over time.
 If a company has been performing well, it means that it has been retaining
earnings. The earnings boost the book value of the company’s stocks, encouraging
investors to increase the prices of their shares in anticipation of future earnings.
The whole process causes the company’s market value to soar.
 Formula: MVA = Market Value of Shares – Book Value of Shareholders’ Equity

(including Retained Earnings)
CORPORTE FINANCE
FINANCIAL MANAGEMENT – PROFIT

& WEALTH MAXIMIZATION
MBA Department
Unit-1 – 3rd Video

Finance Function and Organization
Finance Function
Why
Meaning
Classification
Importance
Financial Management - Functions
Finance Organization
Finance Function – Why?:
 Helps Establish a Business: Without money, you cannot get labor, land etc.
With the finance function, you can determine what is required to start your
business and plan for it.
 Helps Run a Business: To remain in business you must cater for the day to day
operating costs such as paying salaries, buying stationery, raw material etc.,
the finance function ensures you always have adequate funds to cater for this.
 To Expand, Modernize, Diversify: A business needs to grow / adopt otherwise it

may become redundant in no time. With the finance function, you can determine
and acquire the funds required to do so.
 Purchase Assets: You need money to purchase assets. This can be tangible
assets like furniture, buildings or intangible like trademarks, patents etc. to get this
you need finances.
Finance Function - Meaning:
• The Finance Function is a part of Financial Management
• Financial Management is the activity concerned with control and

planning of financial resources
• In a business, the finance function involves the acquiring and

utilization of funds necessary for efficient operations
• Finance is the lifeblood of a business without it things wouldn’t run

smoothly
• It is the source to run any organization, it provides the money, it

acquires the money
Finance - Classification:
• Long-Term Finance: This includes finance of investment 3 years or

more. Sources of long-term finance include owner capital, share
capital, long-term loans, debentures, internal funds and so on.
• Medium Term Finance: This is financing done between 1 to 3

years, this can be sourced from bank loans and financial
institutions.
• Short Term Finance: This is finance needed below one year. Funds

may be acquired from bank overdrafts, commercial paper,
advances from customers, trade credit etc.
Functions of financial management can be broadly classified into three major types:
Capital Budgeting
Investment decisions
Working Capital Management
Cost of Capital
Financial Management Financing decisions Capital Structure decision
Leverages
Dividend Policy
Dividend decisions
Retained Earnings
Profit Maximization vs Wealth Maximization
Parameter Profit Maximization Wealth Maximization
Main objective is to achieve
Profit vs Market value Main objective is to earn
highest market value of
of common stock more profit common stock
Short term vs Long Emphasis on short term Emphasis on long term
term profit making wealth creation
Ignores Time Value of Considers time Value of
Time Value of Money
Money Money
Ignores Risk and Considers Risk and

Risk and Uncertainty
Uncertainty Uncertainty
Timing of Return Ignores timing of return Recognizes timing of return

(a) Investment decisions:
 The investment decision is concerned with the selection of assets in which funds will be
invested by a firm
 Long term assets (fixed assets) and short term assets (current assets)
 Long term assets will yield a return over a period of time in future
 Short term assets are those assets which are easily convertible into cash within an
accounting period i.e. a year
 Long term investment decision is known as capital budgeting

 Returns from investment are expected in future
 Capital budgeting factors risk and uncertainty
 Short term investment decision is working capital management

 Degree of liquidity to be maintained
 Trade – off between liquidity (Risk) and profitability
 Sound management of current assets like cash, receivables and inventories etc.
(b) Financing decisions:
 Financing decision is concerned with capital – mix, financing – mix or

capital structure of a firm
 Capital structure refers to the proportion of debt capital and equity

share capital
 Financing – mix must be decided taking into account the cost of capital,
risk and return to the shareholders.
 Employment of debt capital implies a higher return to the share holders

and also the financial risk
 Maintaining a proper balance between debt capital and equity share

capital is necessary to balance risk and return (Refer Notes)
(c) Dividend decisions:
 Dividend policy decisions are concerned with the distribution of profits

of a firm to the shareholders (Dividend Payout Ratio – DPR)
 Decision will depend upon the preferences of the shareholder,

investment opportunities available within the firm and the
opportunities for future expansion of the firm.
 Dividend pay out ratio (DPR) is to be determined in the light of the

objectives of maximizing the market value of the share
 Dividend decisions must be analysed in relation to the financing

decisions (Retained Earnings vs Dividend payment)
 Retained Earnings can help (a) Future investment opportunity (b) Any
unforeseen contingencies
CFO
Sr. VP /
VP
Finance
Costing
Accounting Informatio
Treasur Accoun Taxatio Audit n
y ting Product n Governance Technolog
& y
Pricing
Service
Costing
Capital Working Cash & Foreign Indirect Risk System

Receivable Payable Internal
Expenditu Capital Investmen Exchang Payroll Asset Direct Taxatio Manage Manage
s s Audit
re Management t e n ment ment
CORPORTE FINANCE
FINANCIAL MANAGEMENT – ROLE OF FINANCE

MANAGER AND TIME VALUE OF MONEY-
INTRODUCTION

MBA Department
Unit-1 – 4TH Video

Finance Manger Role and Time Value of Money
Role of Finance Manager

Introduction
Areas of Decision making
Time Value of Money

Meaning
Concept
Future Value and Present Value
Role of a Financial Manager – Introduction
 The two essential aspects of finance function are:

 Procurement of funds and
 Effective utilization of these funds in the business
In respect of these two aspects, the role of the finance manager is described
below:
 Industrialization, technological innovations and inventions and a change in

economic and environment factors since the mid-1950s necessitated the efficient
and effective utilization of financial resources.
 The finance manager is, therefore, concerned with all financial activities of
planning, raising, allocating and controlling the funds in an efficient manner
 In addition, profit planning is another important function of the finance

manager. This can be done by decision making in respect of the following areas
(listed in next slide):
Role of a Financial Manager
1. Investment Decisions: Investment Decisions for obtaining maximum

profitability after taking the time value of the money into account
2. Financing decisions: Financing decisions through a balanced capital

structure of Debt-Equity ratio, Sources of finance, EBIT/EPS
computations – Refer Notes and Interest coverage ratio (ICR) – Refer
Notes etc.
3. Maximization of Market Value: Dividend decisions, Issue of Bonus

Shares and Retention of profits with objective of maximization of
market value of the equity share
4. Fixed Assets utilization: Best utilization of fixed assets (E.g. Land &
Building, P&M, Vehicles, Furniture, Equipment etc.)
Role of a Financial Manager
5. Working Capital Management: Efficient working capital management (E.g.

Inventory, debtors, cash marketable securities and current liabilities)
6. Governance: Taking the cost of capital, risk, return and control aspects into
account
7. Tax Compliance: Tax administration and tax planning (E.g. Tax planning, Paying
Tax, Filing returns)
8. Costing related Function: Pricing (17 different types), volume of output,

product-mix and cost-volume-profit analysis (CVP Analysis) – Refer Notes
9. Cost control: Cost Optimization without impacting Quality
10. Stock Market: Analyse the trends in the stock market and their impact on the
price of Company’s share and share buy-back
Time Value of Money – Meaning:
Put simply a Rupee today is worth more than a Rupee next year because money can
be invested today and earn interest. TVM relates to three basic parameters:
inflation, opportunity cost, and risk.
a. Inflation is reducing the purchasing power of money because it increases the

prices of goods and services. Therefore, over time the same amount of money
can purchase fewer goods and services.
b. Opportunity cost refers to the loss of investment opportunities and the benefit

associated with them due to the commitment of money to another investment
for a specific period of time.
c. Risk relates to the investment risk that investors undertake when putting their
money into investment assets.
Note: Refer Notes for simple TVM Example

TIME VALUE OF MONEY : Concept: We know that Rs. 100 in hand today is more
valuable than Rs. 100 receivable after a year. We will not part with Rs. 100 now if the same sum
is repaid after a year. But we might part with Rs. 100 now if we are assured that Rs. 110 will be
paid at the end of the first year. This “additional Compensation” required for parting Rs. 100
today, is called “interest” or “the time value of money”. It is expressed in terms of percentage
per annum.
Money should have time value for the following reasons:
(a) Money can be employed productively to generate real returns;

(b) In an inflationary period, a rupee today has higher purchasing power than a rupee in
the future;
(c) Due to uncertainties in the future, current consumption is preferred to future
consumption.
(d) The three determinants combined together can be expressed to determine the rate of
interest as follows :
Nominal or market interest rate = Real rate of interest or return (+) Expected rate of
inflation (+) Risk premiums to compensate for uncertainty.
Methods of Time Value of Money:
(1) Compounding: We find the Future Values (FV) of all the cash flows at the end of the
time period at a given rate of interest.
(2) Discounting: We determine the Time Value of Money at Time “O” by comparing the
initial outflow with the sum of the Present Values (PV) of the future inflows at a given
rate of interest
Time value of
Money
Compoundin Discounting
g (Future (Present
value) value)
Uneven
Multiple
Single Flows Annuity Single Flow Multiple Annuity Perpetuity
Flows
Flows
CORPORTE FINANCE
FINANCIAL MANAGEMENT – FUTURE VALUE OF SINGLE

CASH FLOW AND MULTIPLE COMPOINDING PERIOD

MBA Department

Future value of Single cashflow and Multiple Compounding period
Time Value of Money
Future value of Single Cash Flow

Meaning
Illustrations
Multiple Compounding period

Meaning
Illustrations
Future Value of Single Cash Flow - Meaning:
Future Value of a Single Flow is the process to determine the future value
of a lump sum amount invested at one point of time.
Formula:
FVn = PV (1+i)n
Where,
FVn = Future value of initial cash outflow after n years

PV = Initial cash outflow
i = Rate of Interest p.a.
n = Life of the Investment and
(1+i)n = Future Value of Interest Factor (FVIF)
Mr. X invests Rs. 1,000 for 3 years at 5% compounded Annually
Formula: FV = PV (1 + i)n
FV = 1,000 (1+0.05)3
= 1,000 (1.05)3
= 1,000 (1.1576)
= Rs. 1,157.63
Future Value of Single Cash Flow – Illustration- 2:
Abhishek has deposited Rs. 10,000 in a bank that offers 10% interest. Calculate the
Future value of Abhishek's investment after 2 years.
Solution: The formula for Future Value in Single cash flow is FVn = PV (1+i)n
Where,
PV = Present Value of the amount invested i.e. Rs.10,000

i% = Interest per year i.e. 10%
n = Number of years the amount is invested for i.e. 2
Hence, FV = 10,000 (1 + 0.1)2
= 10,000 (1.1)2
= 10,000 (1.21) = Rs. 12,100.00

Ram has deposited Rs. 15,500 in a bank that offers 12.5% interest. Calculate the
Future value of Ram’s investment after 3 years.
Solution: The formula for Future Value in Single cash flow is FVn = PV (1+i)n
Where,
PV = Present Value of the amount invested i.e. Rs.15,500

i% = Interest per year i.e. 12.5%
n = Number of years the amount is invested for i.e. 3
Hence, FV = 15,500 (1 + 0.125)3
= 15,500 (1.125)3
= 15,500 (1.423828) = Rs. 22,069.34

The fixed deposit scheme of Punjab National Bank offers the following
interest rates:
Period of Deposit Rate Per Annum

1 year and above 6.0%
An amount of Rs. 15,000 invested today for 3 years will be compounded to:
FVn = PV (1+i)n
= PV × FVIF (6,3)
= PV x (1 + 0.06)3
= PV × (1.06)3
= 15,000 (1.191) = Rs. 17,865
Multiple Compounding Period Technique: Interest is compounded when
the amount earned on an initial deposit (Initial Principal) becomes part of
the principal at the end of the first compounding period. The term principal
refers to the amount of money on which interest is received.
Example
Calculate the future value (FV) of an

investment of Rs. 500 for a period of 3 years
that pays an interest rate of 6%
compounded semi-annually.
FV = 500 * [1 + (0.06 / 2 )] ^ ( 2 * 3 )
= 500 * [1 + 0.03] ^ (6)
= 500 * [1.03] ^ (6)
= 500 * [1.19405] = Rs. 597.03
Multiple Compounding Period Technique: - Illustration - 1
Mr. X invests Rs. 1,000 for 2 years at 6% compounded Semi Annually
FV = 1,000 [1+(0.06/2)]2 x 2
= 1,000 (1.03)4
= 1,000 x 1.1255 = Rs. 1,125.51

Multiple Compounding Period Technique: - Illustration - 2
Mr. X invests Rs. 1,000 for 2 years at 6% compounded Quarterly
FV = 1,000 [1+(0.06/4)]4x 2
= 1,000 (1 + 0.015)8
= 1,000 (1.015)8
= 1,000 x 1.12649 = Rs.1,126.49

Multiple Compounding Period Technique: - Illustration – 4
The fixed deposit scheme of Canara Bank offers the following interest rates:
Period of Deposit Rate Per Annum

46 days to 179 days 5.0
180 days < 1 year 5.5
Calculate the returns based on the 2 scenarios:

(a) What will be the FV of an amount of Rs. 15,000 invested today for 90 days?
(b) What will be the FV of an amount of Rs. 15,000 invested today for 180 days?
(a) Quarterly Compounding: FV = Rs.15,000 x [1 + (0.05 / 4) ] ^ (4 x 1) = Rs. 15,764
(b) Half yearly Compounding: FV = Rs.15,000 x [1 + (0.055 / 2) ] ^ (2 x 1) = Rs. 15,836
This shows TVM depends not only on interest rate and time horizon, but also on how many
times the compounding calculations are computed each year.
CORPORTE FINANCE
FINANCIAL MANAGEMENT – DOUBLING PERIOD AND

ANNUITY - INTRODUCTION

MBA Department

Doubling period and Annuity-Introduction
Time Value of Money
Doubling Period
Meaning
Method of calculating Doubling Period
Natural Log method
Illustration
Rule of Thumb method
Illustration
Annuity
Meaning
Future value of Annuity
Future value of Annuity Due
Doubling Period – Meaning: Doubling time is referred to the time period required to double the value or
size of investment, population, inflation etc and is calculated by dividing the Natural log (Scientific
calculator: Symbol “In”) of 2 by the product of number of compounding per year and the natural log of one
plus the rate of periodic return.
Formulae:
 Doubling Time = ln 2 / [n * ln (1 + r/n)] ------------> Discrete Compounding
Where,
In = Natural Log
In 2 = Natural Log value of 2 (i.e.0.69314718)
r = rate of annual return
n = no. of compounding period per year
 Doubling Time = In 2 / r (r% should be considered) ----------------------------------> Continuous

Compounding
 Rule of Thumb for calculating Doubling Period (Continuous Compounding):
1. Rule of 72: Formula: Doubling Period = 72 / Rate of Interest
2. Rule of 69: Formula: Doubling Period = [0.35 + (69 / Rate of Interest) ]

Doubling Time Calculation (Step by Step)
Step 1: Determine rate of annual return for the given investment. Annual rate of
interest is denoted by ‘r.’
Step 2: Determine frequency of compounding per year, i.e. 1, 2, 4, etc.,

corresponding to annual compounding, half-yearly, and quarterly, respectively. The
number of compounding periods per year is denoted by ‘n.’ (The step is not
required for continuous compounding)
Step 3: Rate of periodic return is calculated by dividing the rate of annual return by
the number of compounding periods per year. Rate of periodic return = r / n
Step 4: in case of discrete compounding, the formula in terms of years is calculated
by dividing the natural log of 2 by the product of no. of compounding period per
year and the natural log of one plus the rate of periodic return as Doubling time =
ln 2 / [n * ln (1 + r/n)]
Illustration: Considering rate of annual return of 10%, calculate the doubling time for the
following compounding period:
i. Daily, Monthly, Quarterly, Half Yearly, Annual
ii. Continuous
#1 – Daily Compounding #4 – Half Yearly Compounding
Since daily compounding, therefore n = 365 Since half yearly compounding, therefore n = 2
Doubling time = ln 2 / [n * ln (1 + r/n)] Doubling time = ln 2 / [n * ln (1 + r/n)]
= ln 2 / [365 * ln (1 + 10%/365) = ln 2 / [2 * ln (1 + 10%/2)
= 6.9324 years = 7.1033 years
#2 – Monthly Compounding
#5 – Annual Compounding
Since monthly compounding, therefore n = 12
Since annual compounding, therefore n = 1,
Doubling time = ln 2 / [n * ln (1 + r/n)]
Doubling time = ln 2 / [n * ln (1 + r/n)]
= ln 2 / [12 * ln (1 + 10%/12)
= ln 2 / [1 * ln (1 + 10%/1)
= 6.9603 years
= 7.2725 years
#3 – Quarterly Compounding #6 – Continuous Compounding

Since quarterly compounding, therefore n = 4 Since continuous compounding,
Doubling time = ln 2 / [n * ln (1 + r/n)] Doubling time = ln 2 / r
= ln 2 / [4 * ln (1 + 10%/4) = ln 2 / 10%
= 7.0178 years = 6.9315 years
Doubling Period – Rule 72 and 69: Illustrations:
Illustration-1: A deposits Rs.5,000 today at 6% rate of Illustration-2: B deposits Rs.7,500 today at 7.5%
interest, in how many years will this amount double rate of interest, in how many years will this
basis Rule 72 and Rule 69?? amount double basis Rule 72 and Rule 69?
1. Rule of 72 1. Rule of 72
72 / 6 = 12 Years 72 / 7.5 = 9.6 Years
[0.35 + (69/6)] = 0.35 + 11.50 = 11.85 Years [0.35 + (69/7.5)] = 0.35 + 9.20 = 9.55 Years
Illustration-3: C deposits Rs. 9,500 today at 9% rate Illustration-4: C deposits Rs. 11,500 today at
of interest, in how many years will this amount 9.5% rate of interest, in how many years will this
double basis Rule 72 and Rule 69? amount double basis Rule 72 and Rule 69?
72 / 9 = 8 Years 72 / 9.5 = 7.58 Years
[0.35 + (69/9)] = 0.35 + 7.67 = 8.02 Years [0.35 + (69/9.5)] = 0.35 + 7.263 = 7.61
Years
Annuity - Meaning: An annuity is a stream of equal annual cash flows. Annuities involve
calculations based upon the regular periodic contribution or receipt of a fixed sum of money.
There are two main types of annuities:
 Ordinary annuity: The future value of an ordinary annuity refers to the future returns of

periodic equal cash flows that occur at the end of each period. This future return comes
from the sum of compound interest of each cash flow of invested funds at the end of the
lifetime of such annuity. (E.g. of this would be companies paying dividends to shareholders)
 Annuity due: The second type of annuity is known as an annuity due. This is the type of
payment which requires the payment to be made at the beginning of the payment period.
The payment typically covers the balance owed for the remaining period following the
payment. (E.g. Recurring Deposit in bank)
Future Value of Annuity – Ordinary:
FV of an ordinary annuity formula: In the below formula, we need to have the future value of
an ordinary annuity table to find the FV interest factors of ordinary annuity.
FVA= PMT × FVIFA i, n
Where:
PMT = Periodic cash flow of annuity
FVIFA = FV interest factors of an ordinary annuity
i = Annual interest
n = Number of years
FVA = PMT × [((1+i)n -1) /i]

Where:
[((1+i)n -1) /i] = FVIFA (FV interest factors of an ordinary annuity).
Formula for calculating

Future Value of Annuity
when table information
(log table) is provided
Sn = CVIFA x A
Where:
Sn = Compound sum of an
Annuity
A = Value of Annuity
CVIFA = Compounded
Interest factor Annuity
Future Value of Annuity – Ordinary – Illustration-1:
Prasad is considering investing in an ordinary annuity of 5 years for INR 1,000 each.
This annuity has an annual compound interest of 8% and he wants to know how
much he would get at the end of year 5.
Calculate the FV of ordinary annuity for the above
We can calculate the FV of ordinary annuity in three different ways
First method is by looking at the future value of an ordinary annuity table and then
substitute the FV interest factors of an ordinary annuity into the formula.
FVA= PMT × FVIFA i, n

Where:
PMT = INR 1,000
FVIFA 8%, 5 Yrs = 5.867 (As per the future value of an ordinary annuity table)
Thus, FVA = INR 1,000 × 5.867 = INR 5,867

Future Value of Annuity – Ordinary – Illustration-1…Cont:
Second method uses the financial calculator.
FVA = PMT × [((1+i)n -1) /i]
Where:
PMT = INR 1,000
i = 8%
n = 5 years
Therefore, FVA = 1,000 × [((1+0.08)5 -1) /0.08] = INR 5,867
Third method, we can calculate the FV of an ordinary annuity by using Excel spreadsheet as
follows:
CORPORTE FINANCE
FINANCIAL MANAGEMENT – EFFECTIVE INTEREST

RATE, LOAB AMORTIZATION, PRESENT VALUE OF
SINGLE CASH FLOW

MBA Department

Effective Interest Rate, Loan Amortization, Present value of Single Cash Flow
Time Value of Money
Effective Interest Rate (EIR) or Annual Percentage Rate (APR)

Meaning
Illustrations
Loan Amortization
Meaning
Illustration
Present value of Single Cash Flow

Meaning
Illustration
Effective Interest Rate (EIR) or Annual Percentage Rate (APR) – Meaning: Effective Interest
Rate is the true interest rate that a company or an individual earns or pay over a given period
of time as a result of compounding. It could be an interest rate on investment, a loan or any
other financial product.
Effective interest rate is a crucial term in finance as it helps to compare varying financial
products that calculate interest on a compounding basis. These financial products can be lines
of credits, loans or investment instruments such as deposit certificates
How it’s Different from Nominal Interest?

The nominal interest rate is the rate that a financial product claims it gives. For example, if a
fixed deposit (FD) offers 8% interest, this 8% is the nominal interest rate. An effective rate may
differ from the nominal rate due to several factors. These factors are:
I. Number of times the compounding is done for that financial product.

II. Amount that an investor pays.
III. Actual interest that the investor pays or gets
IV. Additional Fees (Hidden charges like processing charges)
Formula: EIR / APR is calculated using the below formula
r = { 1 + (i/m) } m - 1
Where,
r = EIR / APR = Effective rate of Interest / Annual Percentage Rate
i = Nominal rate of Interest
m = Frequency of compounding /Discounting per year

Present Value of Single Cash Flow - Meaning:

 Present value of a single cash flow refers to how much a single cash flow in the future will
be worth today either received or paid.
 The present value is calculated by discounting the future cash flow for the given time
period at a specified discount rate
 Present Value is opposite of Compounding value.
Formula: PV = FV / ( 1 + i )n ………………… Annual
PV = FV / ( 1 + r/m )m*t --------- Compounding period (E.g. Semi

Annual, Quarterly, Monthly, Daily)
Where:
PV = Present value for the future sum to be received or spent
FV = Sum to be received or spent in future
i = Interest Rate
r = Annual Interest Rate; i = r/m
n or t = Number of Years
m = compounding period
Illustration-1:
Mr. X has been given an opportunity to receive Rs. 1,060 one year from now. He knows that he
can earn 6% interest on his investment. The question is what amount will he be prepared to
invest for this opportunity?
Formula: PV = FV / ( 1 + i )n
Solution:
FV = Rs.1,060
i = 6%
n=1
PV = FV / ( 1 + i )n
= 1,060 / ( 1 + 0.06 )1
= 1,060 / ( 1.06 )1
= 1,060 / 1.06
= 1,060 / 1.06
= Rs. 1,000
Illustration-2:
Designs Co. is opening a showcase office to display and sell its computer designed poster art.
Designs expect cash flows to be Rs.100,000, 6 years hence, if Designs uses 10 percent as its
discount rate, what is the present value of the future cash flow
Formula: PV = FV / ( 1 + i )n
Solution:
FV = Rs.100,000
i = 10%
n=6
PV = FV / ( 1 + i )n
= 100,000 / ( 1 + 0.1 )6
= 100,000 / ( 1.1 )6
= 100,000 / 1.77156
= 100,000 / 1.77156
= Rs. 56,447
CORPORTE FINANCE
FINANCIAL MANAGEMENT –LOAN AMORTIZATION

MBA Department

Loan Amortization
Time Value of Money

Loan Amortization
Illustrations
Loan Amortization
Loan Amortization Schedule – Illustration-1
Scenario: When Installment amount and rate of Interest is given.
Mr. X has taken a loan of Rs. 500,000 at 8% pa to be repaid in 5 years. The annual installment to paid
is Rs. 125,228.20. Using the above information calculate the share of interest amount and principal
amount from the installment amount paid every year till the end of 5 years.
Step - 1: Calculate the Interest amount by applying the interest rate on the outstanding loan amount
at the start of each period
Step - 2: Deduct the calculated interest amount from the annual installment amount to arrive at the
Principal amount of every period
Loan Amortization
Scenario: When Installment amount is not provided.
Mr. X has taken a loan of Rs. 10,00,000 at 9% pa to be repaid in 10 years. Calculate

the annual installment amount showing interest and principle element of the
installment amount. Using the information calculate the share of interest amount
and principal amount from the installment amount paid every year till the end of
10 years.
Variables:
P = Rs. 10,00,000
r = 9%
n = 10 years
Loan Amortization
Scenario: When Installment amount is not provided.
Step-1: Find the EMI amount (Repayment amount)
[ 0.09 (1.09)10 ]
A = 10,00,000 ------------------------- = Rs.155,819.97
[ (1.09)10 −1) ]
Step-2: Find the Interest amount for 1st month
Principle amount x Interest rate per month
Rs.10,00,000 x 0.09 = Rs. 90,000
Step-3: Find the Principle amount for 1st month
EMI – Interest for the month
Rs.155,819.97 – Rs, 90,000 = Rs.65,819.97

Loan Amortization
Scenario: When EMI Installment, Interest and Principle amount and Effective Interest Rate has to be
determined.
Mr. X has taken a loan of Rs. 15,00,000 at 9.5% pa to be repaid in 5 years. Calculate the annual
installment amount showing interest and principle element of the installment amount. Using
the information calculate the share of interest amount and principal amount from the
installment amount paid every year till the end of 5 years. Also calculate the Effective Interest
Rate.
Variables:
P = Rs. 15,00,000
r = 9.5% (Nominal Interest)
n = 5 years
Loan Amortization
Scenario: When Effective Interest Rate has to be

determined.
[ 0.095 (1.095)5 ]
A = 15,00,000 ------------------------- = Rs.390,654.66
[ (1.095)5 −1) ]
Step-2: Find the Interest amount for 1st month
Principle amount x Interest rate per month
Rs.15,00,000 x 0.095 = Rs. 142,500
Step-3: Find the Principle amount for 1st month
EMI – Interest for the month
Rs.390,654.66 – Rs.142,500 = Rs.248,154.66

Loan Amortization
Scenario: When EMI Installment, Interest and Principle amount and Effective Interest Rate has to be
determined.
Mr. X has taken a loan of Rs. 12,00,000 at 7.5% pa to be repaid in 6 years. Calculate the annual
installment amount showing interest and principle element of the installment amount. Using
the information calculate the share of interest amount and principal amount from the
installment amount paid every year till the end of 10 years. Also calculate the Effective
Interest Rate.
Variables:
P = Rs. 12,00,000
r = 7.5% (Nominal Interest)
n = 6 years
Loan Amortization
Scenario: When Effective Interest Rate has to be

determined.
[ 0.075 (1.075)6 ]
A = 12,00,000 ------------------------- = Rs.255,653.87
[ (1.075)6 −1) ]
Step-2: Find the Interest amount for 1st month Formula: EIR / APR i.e. r = { 1 + (i/m) } m - 1
Principle amount x Interest rate per month r = [ 1 + (0.075 / 6]6 - 1
Rs.12,00,000 x 0.075 = Rs. 90,000 r = [ 1 + 0.0125 ]6 - 1
Step-3: Find the Principle amount for 1st month r = [ 1.077383181 ] – 1
EMI – Interest for the month r = 0.07738318
Rs.255,653.87 – Rs.90,000 = Rs.165,653.87 r = 7.738%

THANK YOU

MBA Department
rameshrajagopalan@pes.edu

Corporte Finance Financial Management - : CMA Ramesh Rajagopalan

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corporte Finance Financial Management - : CMA Ramesh Rajagopalan

Uploaded by

Copyright:

Available Formats

CORPORTE FINANCE

Unit-1- 1st Video

CMA Ramesh Rajagopalan

 Finance is the process of conversion of accumulated funds to productive use

 There are three main types of finance: (1) Personal, (2) Corporate, and

 Introduction: For any business, it is important that the finance it procures is

• Endeavors to reduce the cost of finance

 “Financial Management is an area of financial decision making, harmonizing individual

 “Financial management is the operational activity of a business that is responsible for

 “Financial management is concerned with the efficient use of an important economic

1. Profit Maximization: Main aim of any kind of economic activity is earning

3. Proper estimation of total financial requirements:

6. Maintaining Proper Cash Flow:

10. Create Goodwill:

11. Increase Efficiency:

13. Reduce Cost of Capital:

14. Reduce Operating Risks:

15. Prepare Capital Structure:

FINANCIAL MANAGEMENT – PROFIT

Unit-1 – 2nd Video

CMA Ramesh Rajagopalan

 Profit Maximization is the traditional and primary objective of Financial

 It represents the process or approach by which Profits and EPS is increased

Economic Survival Haziness of the concept of Profit

Measurement Standard Ignore Time Value of Money

Social Welfare Ignores Risk

Economic Welfare Ignores Quality

 A shareholders hold shares in the company/business and his wealth

 Wealth = NPV of Financial decisions = PV of Future Cashflow - Cost

 Wealth maximization can also be measured using two other methods:

1. Economic Value Added (EVA)

2. Market Value Added (MVA)

 Increase in market value of securities/shares

 Shareholders receive regular payment of dividends at higher rates

 Right issues of shares to the shareholders at low premium

 Shareholders receive Bonus shares after a gap of 3 – 4 years

 High book value of shares

Ignores Risk and Considers Risk and

Timing of Return Ignores timing of return Recognizes timing of return

Economic value added (EVA) is a measure of a company's financial

 Economic value added (EVA) measures the real profits generated by a

 Essentially, it’s used to determine how profitable an organization has

 Formula: EVA = NOPAT – (Capital Employed x WACC)

 Contrary to what many assume, MVA is not a performance indicator. Instead, it

 Formula: MVA = Market Value of Shares – Book Value of Shareholders’ Equity

FINANCIAL MANAGEMENT – PROFIT

Unit-1 – 3rd Video

CMA Ramesh Rajagopalan

 To Expand, Modernize, Diversify: A business needs to grow / adopt otherwise it

• The Finance Function is a part of Financial Management

• Financial Management is the activity concerned with control and

• In a business, the finance function involves the acquiring and

• Finance is the lifeblood of a business without it things wouldn’t run

• It is the source to run any organization, it provides the money, it

• Long-Term Finance: This includes finance of investment 3 years or

• Medium Term Finance: This is financing done between 1 to 3

• Short Term Finance: This is finance needed below one year. Funds

Financial Management Financing decisions Capital Structure decision

Ignores Risk and Considers Risk and

Timing of Return Ignores timing of return Recognizes timing of return

 Long term investment decision is known as capital budgeting

 Short term investment decision is working capital management

 Financing decision is concerned with capital – mix, financing – mix or