Course Title: Financial

Management
 Objectives of the Course
• After completing the course, students will be able
to understand:
1. The concept of financial management
2. financial analysis and plan
3. The concept of time value of money
4. Different investment decisions
5. The concept of asset evaluation and the cost of
capital
6. The concept of long-term financing
 Chapter I: An Overview of FM

Financial management(FM) is
concerned with the creation,
maintenance and maximization of
economic value or wealth through
the application of accounting
theories and concepts in
management decision making.
 Assumptions to Study FM
1. The context of corporate form of business
organizations
Basic characteristics
Separate legal existence
Limited liability
Split ownership from management
self-perpetuating entity
Double taxation
Existence of secondary capital markets
 CONT’D

• Initially, the corporation raises capital

in the financial markets by selling
securities
• Secondly, the corporation then invests
this in return generating assets-new
2. Existence of projects.
well-developed • Thirdly, the cash flow from those assets
capital markets is either reinvested in the corporation,
given back to the investors, paid to
government in the form of taxes.
 CONT’D
3. Basic principles of financial management
The risk –return trade-off

The time value of money

Cash –Not profits –is a king

The curse of competitive markets

Efficient capital markets

The Agency problem and Ethical behavior

Taxes bias business decision

 Areas of Finance

Money and Financial

capital Investments managemen
markets t
 The Central Role of Capital
• Sources of capital for new firm
funds secured from the owners of the firm
Loan form creditors
• An existing firm may finance itself by retaining
part of its earnings (plough- back of profit or
reinvestment) in addition to the two sources
indicated.
 Functions of Financial Manager

It describes the
1. The financing management of the sources
function of capital

2. The Concentrates on the type,

investing size and percentage
function composition of capital uses
 Goal of the Firm

Share holders’ wealth maximization

Considers the timing and uncertainty of returns

Profit maximization
Doesn’t consider the timing and uncertainty of returns
 Example (Uncertainty of returns)
   

Profit figures

 
Project I Project II

Optimistic outcome $10,000 $20,000

Expected outcome 10,000 10,000
Pessimistic Out come 10,000 0
Example (Timing of Returns)

 
Profit figures
 
Project I Project II
Year 1 $ 10,000 $0
Year 2 0 10,000
 
 CONT’D
• Multiply the dividend per share paid during
the period by the number of shares owned.
• Multiply the change in shares price during
the period by the number of shares owned.
• Add the dividends and the change in the
The change in market value computed in steps 1 and 2 to
shareholder’s wealth of obtain the change in the shareholder’s
business firms may be wealth during the period
calculated as follows:
 EXAMPLE
2015 2016
Share Price $100 $120
Dividend $10
No of Shares 100,000
Calculate the change in shareholder’s wealth of
business firms
The Objectives of Financial Management

Determining the
Size and Growth
Rate

Determining Determining the

Assets Composition of
Composition Liabilities and
(Portfolio) Equity
Historical Background of FM

Finance becomes a separate area of study around

1900 for the first time

Up to 1900, finance was considered as a part of

applied economics

As a result of mergers and consolidations , finance was

emerged as distinct functional area of business management
 CONT’D
The stock market crash of
1929 and the subsequent
economic depression was
another reason for the
development of FM.

The field of computer

science, operations
research and others have
also major influence
Chapter 2-Financial Analysis and Planning

Financial analysis is the process of selection,

evaluation and interpretation of financial data,
along with other pertinent information, to assist
investment and other financial decisions

Financial analysis and its application in business can

be viewed from different perspectives
 The Basic Financial Ratios

Financial analysts use ratios

as one tool in identifying
areas of strengths and
weaknesses in the company.

The financial ratios are

judged to be high, or low, or
acceptable when they are
compared with standards
Standard ratios

Industry
standards

Historical Management
standards plans
 Types of Financial Ratios
1. Liquidity Ratios
Liquidity ratios measure the ability of business
firm to pay its current liabilities and current
portion of long-term debts as they mature
1.1. Current Ratio =

1.2. Quick Ratio =

 2. Activity Ratios:

• Activity ratios measure the degree of

efficiency with which the company utilizes its
resources.
2.1. Total assets turnover =

2.2. Inventory turnover=

 2. Activity Ratios:

2.3.Average Collection =
Period

Daily Credit Sales=

 3. Debt Management or Leverage Ratios
• These ratios measure the extent to which a
company finances itself with debt as opposed
to equity financing
3.1. Debt-asset ratio =

3.2. Debt - equity ratio =

3.3. Long-term debt - equity ratio =

 3. Debt Management or Leverage Ratios

3.4.Interest coverage
ratio =

3.5. Fixed charge

coverage ratio =
 4. Profitability Ratios
4.1. Gross profit margin= Gross profit
Net sales
4.2. Operating profit margin = Operating Income
Net sales
4.3. Return on Investment (ROI)=Net income
Total assets
 5. Market ratio
5.1. Earnings per Earnings after tax (net income) – Preferred dividend
share (EPS) = Number of common shares out standing

5.2. Price-to-earnings = Current market price per share

ratio EPS

5.3. Dividend per share = Total dividends on common share

Number of common shares outstanding
 Discussion point
• What are the advantages and limitations of
financial ratios ?
End of Part 2