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Semester 2: Financial Management
Introduction: Financial management - Definition and scope objectives of Financial Management Profit Maximization - wealth maximization - functions and role of finance manager. Sources of finance short term Bank Sources Long term Shares Debentures Preferred stock Debt Hire purchase, Leasing, Venture Capital Private equity- International Financial Management- Financial Planning- Behavioural Finance- Capital Market- Money Market- Micro Finance- Financial Information System.
Financial Management
Introduction to Financial Management
Financial management involves planning, organizing, directing, and controlling the financial activities of an organization. It encompasses the procurement and utilization of funds to achieve organizational objectives.
Definition and Scope
The definition of financial management can be viewed through various aspects including budgeting, forecasting, investment decision making, and risk management. Its scope extends to both short-term and long-term financial planning and analysis.
Objectives of Financial Management
The primary objectives include profit maximization, wealth maximization, ensuring liquidity, controlling costs, and managing financial risks effectively.
Profit Maximization vs Wealth Maximization
Profit maximization focuses on immediate financial gains, while wealth maximization aims at increasing the overall value of the business and ensuring long-term sustainability.
Functions of Finance Manager
Key functions include investment decisions, financing decisions, dividend decisions, risk management, and financial reporting. A finance manager plays a vital role in strategic planning and execution.
Sources of Finance
Short-term Sources
Includes bank overdrafts, trade credit, and short-term loans that are essential for managing day-to-day operations.
Long-term Sources
Encompasses shares, debentures, preferred stock, and long-term loans that provide capital for major investments.
Debt Financing
Refers to borrowing through loans and bond issuance, where the organization repays the borrowed amount with interest.
Hire Purchase and Leasing
Financial arrangements that allow businesses to use equipment or vehicles without immediate payment, spreading the cost over time.
Venture Capital and Private Equity
Sources of financing that provide capital to new ventures and startups in exchange for equity or convertible debt.
International Financial Management
Focuses on managing finances in a global market, dealing with foreign investments, currency risk, and multinational finance strategies.
Financial Planning
Involves forecasting future financial results and determining how to use the firm's financial resources to achieve business goals.
Behavioral Finance
Examines how psychological influences and cognitive biases affect the financial behaviors of individuals and institutions.
Capital Market
A marketplace for buying and selling equity and debt instruments, facilitating capital flows between investors and borrowers.
Money Market
A segment of the financial market where financial instruments with high liquidity and short-term maturities are traded.
Micro Finance
Financial services aimed at low-income individuals or those without access to traditional banking, fostering entrepreneurship.
Financial Information System
A structured system for collecting, storing, and analyzing financial data to support effective decision making.
Investing Decision - Capital Budgeting Process Techniques of Investment Appraisal Pay Back Period Accounting Rate of Return, Time Value of Money- DCF Techniques Net Present Value, Profitability Index and Internal Rate of Return- Problems - Risk analysis in Capital Budgeting- Introduction to Fintech Digital Currency - Cryptocurrency Financial Modeling Hurdle Rate.
Investing Decision - Capital Budgeting Process
Overview of Capital Budgeting
Capital budgeting is the process of planning and managing investments in long-term assets. It involves evaluating potential major projects or investments to determine their worth.
Techniques of Investment Appraisal
Several techniques are used to appraise investments, including payback period, accounting rate of return, and discounted cash flow methods.
Payback Period
The payback period is the time taken for an investment to generate an amount of income equal to the cost of the investment. It helps assess liquidity and risk.
Accounting Rate of Return
The accounting rate of return measures the expected annual profit from an investment as a percentage of the initial investment. It is useful for comparing profitability.
Time Value of Money
The concept of time value of money emphasizes that a dollar today is worth more than a dollar in the future due to its potential earning capacity.
Discounted Cash Flow Techniques
Discounted cash flow encompasses methods like net present value, profitability index, and internal rate of return, which consider the present value of future cash flows.
Net Present Value
Net present value calculates the difference between present cash inflows and outflows. A positive NPV indicates a profitable investment.
Profitability Index
The profitability index is the ratio of the present value of future cash flows to the initial investment. It helps in ranking projects.
Internal Rate of Return
Internal rate of return is the discount rate that makes the net present value of an investment zero. It represents the expected percentage yield on the investment.
Risk Analysis in Capital Budgeting
Risk analysis involves evaluating the uncertainties associated with investment projects. Common methods include sensitivity analysis and scenario analysis.
Introduction to Fintech and Digital Currency
Fintech refers to the integration of technology in financial services. Digital currencies and cryptocurrencies are emerging as new asset classes for investment.
Financial Modeling and Hurdle Rate
Financial modeling involves forecasting the financial performance of projects. The hurdle rate is the minimum acceptable return on an investment, used in decision-making.
Cost of Capital - Cost of specific sources of capital Cost of equity capital Cost of debt Cost of preference Cost of retained earnings - weighted average cost of capital. EBIT -EPS Analysis - Operating Leverage - Financial Leverage-problems.
Cost of Capital
Cost of Equity Capital
The cost of equity capital refers to the return that equity investors require on their investment in the firm. It can be calculated using models such as the Capital Asset Pricing Model (CAPM), which factors in the risk-free rate, the expected market return, and the beta of the stock.
Cost of Debt
The cost of debt is the effective rate that a company pays on its borrowed funds. It can be measured by the yield on existing debt or the rate at which the company could issue new debt. Interest payments are tax-deductible, which impacts the overall cost.
Cost of Preference Shares
The cost of preference shares is the dividend that the company pays to preference shareholders. It is generally fixed and can be considered as the return on preference capital without any tax adjustments.
Cost of Retained Earnings
The cost of retained earnings refers to the opportunity cost of equity capital retained in the business rather than paid out as dividends. It is often treated similarly to the cost of equity when calculating WACC.
Weighted Average Cost of Capital (WACC)
WACC is the average rate of return a company is expected to pay its security holders to finance its assets. It combines the cost of equity, cost of debt, and cost of preference shares, weighted by their respective proportions in the capital structure.
EBIT - EPS Analysis
The EBIT-EPS analysis evaluates the impact of financing decisions on a company's earnings per share. It helps determine the optimal capital structure by assessing how changes in debt affect earnings performance.
Operating Leverage
Operating leverage measures the proportion of fixed costs in a company's cost structure. High operating leverage means a small change in sales can lead to significant changes in operating income.
Financial Leverage
Financial leverage refers to the use of borrowed funds to increase the potential return on investment. While it can enhance returns, it also increases the risk of financial distress if the returns do not exceed the cost of debt.
Problems Related to Cost of Capital
Challenges in determining the cost of capital include estimating future cash flows, assessing risk, and the impact of market conditions. Additionally, choosing the appropriate model and gathering reliable data can complicate the analysis.
Capital structure - Factors influencing capital structure optimal capital structure - capital structure theories Net Income Approach Net Operating Income NOI Approach Modigliani - MillerMM Approach Traditional Approach Practical Problems. Dividend and Dividend policy Meaning, classification - sources available for dividends -Dividend policy general, determinants of dividend policy.
Financial Management
M.B.A.
Core
2
Periyar University
Financial Management
Capital structure
Factors influencing capital structure
Optimal capital structure
Capital structure theories
Practical Problems
Dividend and Dividend Policy
Dividend policy determinants
Working Capital Management - Definition and Components-advantages and disadvantages of database Data Warehousing and Data Mining Business Intelligence Artificial Intelligence Expert System Big Data Cyber Safety and Security- Cryptography RSA Model of Encryption Data Science - Block Chain Technology E-commerce and E-Business models
Working Capital Management
Definition
Working capital management involves managing the short-term assets and liabilities of a company to ensure its operational efficiency and financial stability. It is crucial for day-to-day operations and indicates a company's liquidity.
Components
Key components include current assets like cash, inventory, and receivables, and current liabilities such as payables and short-term debt. Efficient management maximizes the use of these components.
Advantages
Effective working capital management improves company liquidity, enhances operational efficiency, and strengthens relationships with suppliers and customers by ensuring timely payments and order fulfillment.
Disadvantages
Potential drawbacks include overextending credit to customers, leading to cash flow issues, and a focus on cash management may divert attention from long-term investment opportunities.
