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FINANCIAL
MANAGEMENT
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Meaning and Definition
of Finance
Economics
Accounting
Production
Marketing
Quantitative Methods
Costing
Law
Taxation
Treasury Management
Banking
Insurance
International Finance
Information Technology
Patel Mahendra Sigma Institute Of
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Objective & Scope of Financial
Management
Objective of Financial Management
Scope of Financial Management
Role of Financial Management
Functions
Patel Mahendra Sigma Institute Of
Management Studies
Objective & Scope of Financial
Management
Objective of Financial
Management
Functions
Patel Mahendra Sigma Institute Of
Management Studies
Objective & Scope of Financial
Management
Objective of Financial
Management
Functions
Patel Mahendra Sigma Institute Of
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Objective & Scope of Financial
Management
Objective of Financial
Management
Liquidity
Raising funds
Profitability
Cost control
Pricing
Management
Functions
Patel Mahendra Sigma Institute Of
Management Studies
Objective & Scope of Financial
Management
Objective of Financial
Management
Functions
Investment decisions
Capital Budgeting
Financing decisions
Cost of Capital
Capital Structure
Decisions Leverages
Dividend decisions
Dividend Policy
Retained - Earnings
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Functional areas of financial
management
Financial Analysis
C V P Analysis
Capital Budgeting
Working Capital
Dividend Policies
Corporate taxation
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Emerging Role of Finance
Manager
1. Investment Decisions for obtaining
maximum profitability
2. Financing decisions through a
balanced capital structure
3. Dividend decisions, issue of Bonus
Shares and retention of profits
4. Best utilization of fixed assets.
5. Efficient working capital
management
6. Taking the cost of capital, risk,
return and control aspects
7. Tax administration and tax planning.
8. cost-volume-profit analysis (CVP
Analysis).
9. Cost control.
10. Stock Market Analyze the trends in
the stock market and their impact
on the price of Companys share and
share buy-back.
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Sources of Finance
Long Term Source
Equity Share Capital
Preference Share Capital
Debentures
Lease and Hire Purchase
Term Loans
Short Term Source
International Sources
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Sources of Finance
Trade Credit
Accrued Expenses
Commercial Papers
Bank Credit
Overdraft
Cash Credit
Letter of Credit
International Sources
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Sources of Finance
Long Term Source
Short Term Source
International Sources
Depository Receipts (DR)
Foreign Currency Convertible Bonds
(FCCBs)
External Commercial Borrowings (ECB)
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Concept of time value of
money
The price of 10 grams of gold in 1970
was Rs. 430. The price of the same is
Rs. 9000 in 2006. If we deposit Rs.
1000 in a savings bank account, @ 4%
return, we would get Rs. 1020 at the
end of six months.
A= P0 (1+ r)^n
A = the end value after adding the
interest
P0 = the original investment
r = rate of interest per annum
n= the number of years
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Compound Interest and future
values
Interest compounding at
intervals more than once a year
SHORT CUT
1
]
= CVFA
n n, i
F A
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Example
Suppose that a firm deposits Rs 5,000 at
the end of each year for four years at 6 per
cent rate of interest. How much would this
annuity accumulate at the end of the fourth
year?
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Patel Mahendra
Example
Suppose that a firm deposits Rs 5,000 at
the end of each year for four years at 6 per
cent rate of interest. How much would this
annuity accumulate at the end of the fourth
year? We first find CVFA which is 4.3746. If
we multiply 4.375 by Rs 5,000, we obtain a
compound value of Rs 21,875:
4 4, 0.06
5,000(CVFA ) 5,000 4.3746 Rs 21,873 F
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Sinking Fund
Sinking fund is a fund, which is created
out of fixed payments each period to
accumulate to a future sum after a
specified period. For example, companies
generally create sinking funds to retire
bonds (debentures) on maturity.
The factor used to calculate the annuity for
a given future sum is called the sinking
fund factor (SFF).
=
(1 ) 1
n
n
i
AF
i
1
1
+
]
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Patel Mahendra
Present Value
Present value of a future cash flow (inflow
or outflow) is the amount of current cash
that is of equivalent value to the decision-
maker.
Discounting is the process of determining
present value of a series of future cash
flows.
The interest rate used for discounting cash
flows is also called the discount rate.
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Present Value of a Single Cash
Flow
The following general formula can be employed
to calculate the present value of a lump sum to
be received after some future periods:
The term in parentheses is the discount factor
or present value factor (PVF), and it is always
less than 1.0 for positive i, indicating that a future
amount has a smaller present value.
(1 )
(1 )
n
n
n
n
F
P F i
i
1
+
]
+
,
PVF
n ni
PV F
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Example
Suppose that an investor wants to find out
the present value of Rs 50,000 to be
received after 15 years. Her interest rate is
9 per cent.
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Example
Suppose that an investor wants to find out
the present value of Rs 50,000 to be
received after 15 years. Her interest rate is
9 per cent. First, we will find out the
present value factor, which is 0.275.
Multiplying 0.275 by Rs 50,000, we obtain
Rs 13,750 as the present value:
15, 0.09
PV = 50,000 PVF = 50,000 0.275 = Rs 13,750
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Present Value of an Annuity
The computation of the present value of
an annuity can be written in the following
general form:
The term within parentheses is the
present value factor of an annuity of
Re 1, which we would call PVFA, and it is
a sum of single-payment present value
factors.
( )
1 1
1
n
P A
i
i i
1
1
+
1
]
= PVAF
n, i
P A
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Capital Recovery and Loan
Amortisation
Capital recovery is the annuity of an
investment made today for a specified period
of time at a given rate of interest. Capital
recovery factor helps in the preparation of a
loan amortisation (loan repayment)
schedule.
The reciprocal of the present value annuity
factor is called the capital recovery factor
(CRF).
,
1
=
PVAF
ni
A P
1
1
]
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Patel Mahendra
Present Value of an Uneven
Periodic Sum
Investments made by of a firm do not
frequently yield constant periodic cash
flows (annuity). In most instances the
firm receives a stream of uneven cash
flows. Thus the present value factors
for an annuity cannot be used. The
procedure is to calculate the present
value of each cash flow and aggregate
all present values.
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Present Value of Perpetuity
Perpetuity is an annuity that
occurs indefinitely. Perpetuities are
not very common in financial
decision-making:
Perpetuity
Present value of a perpetuity
Interest rate
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Present Value of Growing
Annuities
The present value of a constantly
growing annuity is given below:
Present value of a constantly
growing perpetuity is given by a
simple formula as follows:
1
= 1
1
n
A g
P
i g i
1
+
_
1
+
,
1
]
=
A
P
i g
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Value of an Annuity Due
Annuity due is a series of fixed
receipts or payments starting at the
beginning of each period for a
specified number of periods.
Future Value of an Annuity Due
Present Value of an Annuity Due
,
= CVFA (1 )
n n i
F A i +
= P VFA (1 + )
n , i
P A i
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Multi-Period
Compounding
If compounding is done more than
once a year, the actual annualised
rate of interest would be higher than
the nominal interest rate and it is
called the effective interest rate.
= EIR 1 1
n m
i
m
1
+
1
]
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