FINANCIAL MANAGEMENT I LECTURE NOTE

CHAPTER ONE
1. OVERWIEW OF FINANCIAL MANAGEMENT
1.1 Meaning of Financial Management
Financial management is one major area of study under finance. It deals with decisions made by a
business firm that affect its finances. Financial management is sometimes called corporate finance,
business finance, and managerial finance.
Financial management can also be defined as a decision making process concerned with planning for
raising, and utilizing funds in a manner that achieves the goal of a firm.

There are many specified business functions performed by a business unit. These include marketing,
production, human resource management, and financial management. Financial management is one of
the important functions of a firm. It is a specified business function that deals with the management
of capital sources and uses of a firm.

Why Study Financial Management?

Many business decisions made by firms have financial implications. Accordingly, financial
management plays a significant role in the operation of the firm. People in all functional areas of a
firm need to understand the basics of financial management. Accountants, information systems
analysts, marketing personnel and people in operations, all need to be equipped with the basic
theories, concepts, techniques, and practices of managerial finance if they have to make their jobs
more efficient and achieve their goals. That is why the course Financial Management is offered to
students in the fields of accounting, management, business administration, and management
information’s systems.

If you develop the necessary training and skills in financial management, you have career
opportunities in a good deal of positions as a financial analyst, capital budgeting, project finance,
cash, and credit manager, financial manager, banker, financial consultant, and even as a general
manager. The author hopes you will appreciate the importance of financial management as you learn
it more.

1.2 DEFINITION OF FINANCE

The concept of finance includes capital, funds, money etc. But each word is having unique meaning.
Studying and understanding the concept of finance become an important part of the business concern.
Different scholars define finance in the following ways:
“Finance is the art and science of managing money”.
Finance as “the Science on study of the management of funds’ and the management of fund as
the system that includes the:
Circulation of money,
granting of credit,
making of investments, and
Provision of banking facilities.
1.3. FINANCE AS AN AREA OF STUDY
Finance is the study of how investors allocate their assets over time under conditions of certainty and
uncertainty. Finance is the application of economic principles and concepts to business decision
Rift Valley University Lecture Note Page 1
 FINANCIAL MANAGEMENT I LECTURE NOTE

making and problem solving. The field of finance broadly consists of three categories: Financial
Management, Investments and Financial Institutions.
I. Financial Management: This area is concerned with financial decision making within a business
entity. Financial Management is concerned with planning, directing, monitoring, organizing and
controlling monetary resources of an organization. Financial Management simply deals with
management of money matters. Financial management decisions include maintaining optimum
cash balance, extending credit, mergers and acquisitions, raising of funds and the instruments to be
used for raising funds and the instruments to be used for raising funds etc.
II. Investments: This area of finance focuses on the behavior of financial markets and pricing of
financial instruments. It is a study of security analysis, portfolio theory, market analysis, and
behavioral finance. The three main functions in the investments area are sales, analyzing individual
securities, and determining the optimal mix of securities for a given investor.

III. Financial Institutions: This area of finance deals with banks and other financial institutions that
specialize in bringing supplier of funds together with the users of funds. There are three categories
of financial institutions which act as an intermediary between savers and users of funds, viz.,
banks, developmental financial institution and capital markets.

1.4 IMPORTANCE OF FINANCIAL MANAGEMENT

We can’t neglect the importance of finance at any time at and at any situation. Some of the
importance of the financial management is as follows:
 Financial Planning
 Acquisition of Funds
 Proper Use of Funds
 Financial Decision
 Improve Profitability
 Increase the Value of the Firm
 Promoting Savings

1.5 FINANCIAL MANAGEMENT DECISION

The financial management decisions are:
1. Investment Decision
2. Financing Decision
3. Dividend Decision
4. Liquidity Decision

Investment Decision
The firm has scarce resources that must be allocated among competing uses. On the one hand the
funds may be used to create additional capacity which in turn generates additional revenue and profits
and on the other hand some investments results in lower costs. In financial management the returns,
from a proposed investment are compared to a minimum acceptable hurdle rate in order to accept or
reject a project. The hurdle rate is the minimum rate of return below which no investment proposal
would be accepted. In financial management we measure (estimate) the return on a proposed
investment and compare it to minimum acceptable hurdle rate in order to decide whether or not the
project is acceptable. The hurdle rate is a function of riskiness of the project, riskier the project higher
Rift Valley University Lecture Note Page 2
FINANCIAL MANAGEMENT I LECTURE NOTE

the hurdle rate. There is a broad argument that the correct hurdle rate is the opportunity cost of
capital. The opportunity cost of capital is the rate of return that an investor could earn by investing in
financial assets of equivalent risk.

Financing Decision
Another important area where financial management plays an important role is in deciding when,
where, from and how to acquire funds to meet the firm’s investment needs. These aspects of financial
management have acquired greater importance in recent times due to the multiple avenues from
which funds can be raised. The core issue in financing decision is to maintain the optimum capital
structure of the firm that is in other words, to have a right mix of debt and equity in the firm’s capital
structure. In case of pure equity firm (Zero debt firms) the shareholders returns should be equal to the
firm’s returns. The use of debt affects the risk and return of shareholders. In case, cost of debt is used
the firm’s rate of return the shareholder’s return is going to increase and vice versa. The change in
shareholders return caused by change in profit due to use of debt is called the financial leverage.
Dividend Decision
A dividend decision is the third major financial decision. The share price of a firm is a function of the
cash flows associated with the share. The share price at a given point of time is the present value of
future cash flows associated with the holding of share. These cash flows are dividends. The finance
manager has to decide what proportion of profits has to be distributed to the shareholders. The
proportion of profits distributed as dividends is called the dividend payout ratio and the retained
proportion of profits is known as retention ratio. The dividend policy must be designed in a way, that
it maximizes the market value of the firm’s share. The retention ratio depends upon a host of factors−
the main factor being the existence of investment opportunities. The investors would be indifferent to
dividends if the firm is able to earn a rate or return which is higher than the cost of the capital.
Dividends are generally paid in cash, but a firm may also issue bonus shares. Bonus share are shares
issued to the existing shareholders without any charge. As far as dividend decisions are concerned the
finance manager has to decide on the question of dividend stability, bonus shares, retention ratio and
cash dividend.

Liquidity Decision
A firm must be able to fulfill its financial commitments at all points of time. In order to ensure this
the firm should maintain sufficient amount of liquid assets. Liquidity decisions are concerned with
satisfying both long and short-term financial commitments. The finance manager should try to
synchronize the cash inflows with cash outflows. An investment in current assets affects the firm’s
profitability and liquidity. A conflict exists between profitability and liquidity while managing current
assets. In case, the firm has insufficient current assets it may default on its financial obligations. On
the other hand excess funds result in foregoing of alternative investment opportunities.

1.6 GOAL OF FINANCIAL MANAGEMENT

Typical goals of the financial management are:
a) Profit maximization
b) Wealth maximization

Rift Valley University Lecture Note Page 3

FINANCIAL MANAGEMENT I LECTURE NOTE

A) PROFIT MAXIMIZATION
Meaning of Profit Maximization
Profit maximization is a function of maximizing revenue and /or minimizing costs. If a firm is able to
maximize its revenues for a given level of costs or minimizing costs for a given level of revenues, it is
considered to be efficient.
Profit maximization focuses on the total amount of benefits of any courses of action. This decision
rule as applied to financial management implies that the functions of managerial finance should be
oriented to making of money. Under the profit maximization decision criteria, actions that increase
profit of a firm should be undertaken; and actions that decrease profit should be rejected. Similarly,
given alternative courses of actions, decisions would be made in favor of the one with the highest
expected profits.

Profit maximization, though widely professed, should not be used as a good goal of a firm in financial
management. This is because it fails to meet many of the characteristics of a good goal.

Limitations of Profit Maximization

1) Ambiguity. The term profit or income is vague and ambiguous concept. It is very illusive and
has no precise quonotation. Different people understand profit in different several ways. There
are many different economic and accounting definitions of profit, each open to its own set of
interpretations. Even in accounting profit might refer to short-term or long-term profit, total
profit or profit on a per share basis (earnings per share), and before or after text profit. Then,
the question or the problem would be which profit is to be maximized? Maximizing one may
lead to minimizing the other. Furthermore, problems related to inflation and international
currency transactions complicate the issue of profit maximization.
2) Cash flows. The profit a firm has reported does not represent the cash flows to the business.
Firms reporting a very high total profit or earnings per share might face difficulty of paying
cash dividends to stockholders. Sometimes, companies might even declare bankruptcy though
reporting a positive income
3) Timing of Benefits. The profit maximization criterion ignores the differences in the time
pattern of benefits received from investment proposals. This criterion does not consider the
distinction between returns (benefits) received in different time periods and treats all benefits
as equally valuable irrespective of the time pattern differences in benefits. In other words, the
profit maximization ignores the time value of money, i.e., money today is better than money
tomorrow. Also it does not consider the sooner, the better principle.
To understand this limitation better let us consider the following example.
Example Akaki Manufacturing Share Company wants to choose between two projects: project X and
project Y. both projects cost the same, are equally risky and are expected to provide the following
benefits over three years period.
BENEFITS (PROFITS)
YEAR PROJECT X PROJECT Y
1 Br. 25,000 Br. –0-
2 50,000 50,000
3 –0- 25,000
TOTAL Br. 75,000 Br. 75,000

Rift Valley University Lecture Note Page 4

FINANCIAL MANAGEMENT I LECTURE NOTE

The profit maximization criterion ranks both projects as being equal. However, project X provides
higher benefits in earlier years and project Y provides larger benefits in later years. The higher
benefits of project X in earlier years could be reinvested to earn even higher profits for later years.
Profit seeking organizations must consider the timing of cash flows and profits because money
received today has a higher value than money received tomorrow. Cash flows in early years are
valued more highly than equivalent cash flows in later years.
4. Quality of Benefits (Risk of Benefits). Profit maximization assumes that risk or uncertainty
of future benefits is of no concern to stockholders. Risk is defined as the probability that
actual benefit will differ from the expected benefit. Financial decision making involves a risk-
return trade-off. This means that in exchange for taking greater risk, the firm expects a higher
return. The higher the risk, the higher the expected return.

Example: Nyala Merchandising Private Limited Company must choose between two projects. Both
projects cost the same. Project A has a 50% chance that its cash flows would be actual over the next
three years. Project B, on the other hand, has a 90% probability that its cash flows for the next three
years would be realized.
BENEFITS
YEAR PROJECT A PROJECT B
1 Br. 60,000 Br. 45,000
2 65,000 50,000
3 95,000 85,000
TOTAL Br. 220,000 Br. 180,000
Under profit maximization, project A is more attractive because it adds more to Nyala than project B.
However, if we consider the risk of the two projects, the situation would be reversed.

Expected benefit of project A = Br. 220,000 x 50% = Br. 110,000

Expected benefit of project B = Br. 180,000 x 90% = Br. 162,000

In fact, risk can be measured in different ways, and different conclusions about the riskness of a
course of action can be reached depending on the measure used. In addition to the probability
distribution, illustrated above, risk can also be measured on the basis of the variation of cash flows.

The more certain the expected cash flow (return), the higher the quality of benefits (i.e., low risk to
investor). Conversely, the more uncertain or fluctuating the expected benefits, the lower the quality of
benefits (i.e., high risk to investors).

B) WEALTH MAXIMIZATION
Meaning of Wealth Maximization
Wealth maximization means maximization of the value of a firm. Hence wealth maximization is also
called value maximization or net present value (NPV) maximization.
To understand and appreciate the essence of wealth maximization, we need to consider the various
stakeholders in a given corporation. Stakeholders are all individuals or group of individuals who have
a direct or indirect interest in the firm. They include stockholders, debtors, managers, employees,
customers, governmental agencies and others. But among these, managers should give priority to

Rift Valley University Lecture Note Page 5

FINANCIAL MANAGEMENT I LECTURE NOTE

stockholders. In fact, the overriding premise of financial management is that a firm should be
managed to enhance the well-being or wealth of its existing common stockholders. Stockholders’
wellbeing depends on both current and expected dividend payments and market price of the firm’s
common stock.
Wealth maximization as a decision criterion is considered to be an ideal goal of a firm in financial
management. There are several reasons why wealth maximization decision criterion is superior to
other criteria.
 First, it has an exact measurement unlike profit maximization. It depends on cash flows
(inflows and outflows).
 Second, wealth maximization as a decision criterion considers the quality as well as the time
pattern of benefits.
 Third, it emphasizes on the long-term and sustainable maximization of a firm’s common
stock price in the financial market.
 Fourth, wealth maximization gives recognition to the interest of other stakeholders and to the
societal welfare on the long-term basis.
Technically, wealth maximization as a decision rule involves a comparison of value to cost. Thus, an
action that has a discounted value that exceeds its cost can be said to create value and such action
should be undertaken. Whereas an action with less discounted value than cost reduces wealth and,
therefore, should be rejected. The discounted value is a value which takes risk and timing of benefits
into account.
Limitations of Wealth Maximization
The limitations of wealth maximization refer to the potential side costs of wealth maximization if
adopted as a decision criterion.
1) If wealth maximization is taken as the sole decision rule, there is a possibility that the benefits
of the society at large might be forgone. Fortunately, however, this problem is not unique to
wealth maximization. Even if an alternative goal is used, still this problem continues to
persist.
2) When managers of a corporation are separate from owners, there is a potential for a conflict of
interest between them. This conflict of interest can lead to the maximization of manages’
interest instead of the welfare of stockholders.
3) When the goal of a firm is stated in terms of stockholders wealth, actions that increase the
wealth of stockholders could be taken as the expense of other stakeholders like debt holders.
4) Wealth maximization is normally reflected in the firm’s stock price. But if there are
inefficiencies in financial markets, wealth maximization decision rule may lead to
misallocation of scarce resources.
1.7 Conflict of goals between management and owners and agency problem
As you understand, in a corporate form of business organization owners (stockholders) do not run the
activities of the firm. Rather, the stockholders elect the board of directors, who in turn assign the
management on behalf of the owners. So, basically, managers are agents of the owners of the
corporation and they undertake all activities of the firm on behalf of these owners. Managers are
agents in a corporation to maximize the common stockholders’ well-being.

Rift Valley University Lecture Note Page 6

FINANCIAL MANAGEMENT I LECTURE NOTE

However, there is a conflict of goals between mangers and owners of a corporation and mangers may
act to maximize their interest instead of maximizing the wealth of owners. Managers are interested to
maximize their personal wealth, job security, life style and fringe benefits.
The natural conflict of interest between stockholders and managerial interest create agency problems.
Agency problems are the likelihood that mangers may place their personal goals a head of corporate
goals. Theoretically, agency problems are always there as long as mangers are agents of owners.

Corporations (owners) are aware of these agency problems and they incur some costs as a result of
agency. These costs are called agency cost and include:
a) Monitoring expenditures – are expenditures incurred by corporations to monitor or control
the activities of managers. A very good example of a monitoring expenditure is fees paid by
corporations to external auditors.
b) Bonding expenditures – are cost incurred to protect dishonesty of mangers and other
employees of a firm. Example: fidelity guarantee insurance premium.
c) Structuring expenditures – expenditures made to make managers fell sense of ownership to
the corporation. These include stock options, performance shares, cash bonus etc.
d) Opportunity costs – unlike the previous three, these costs are not explicit expenditures.
Opportunity costs are assumed by corporations due to hindrances of decisions by them as a
result of their organizational structure and hierarchy.
On top of the above costs assumed by corporations, there are also other ways to motivate managers to
act in the best interest of owners. These ways include making know managers that they would be
fired if they do not act to maximize shareholders wealth and that the corporation could be overtaken
by others if its value is very much lower than other firms.

1.8 FUNCTIONS OF FINANCIAL MANAGER

The main tasks and responsibilities of a financial manager are discussed below:
1. Financial Planning and Forecasting: Financial manager is also concerned with planning and
forecasting of production, sales and level of inventory. In addition to this, he has also to plan and
forecast the requirement of funds and the sources from which the funds are to be raised.
2. Financial Management: Fund management is the primary responsibility of the finance manager.
Fund management includes effective and efficient acquisition, allocation and utilization of funds.
The fund management includes the following:
Acquisition of funds: The finance manager has to ensure that adequate funds are available
from the right sources at the right cost at the right time. The finance manager will have to
decide the mode of raising fund, whether it is to be through the issue of securities or lending
from the bank.
Allocation of funds: Once funds are acquired the funds have to be allocated to various
projects and services as per the priority fixed by the Board of Directors.
Utilization of funds: The objective of business finance is to earn profiles, which on a very
large extent depend upon how effectively and efficiently allocated funds are utilized. Proper
utilization of funds is based on sound investment decisions, proper control and asset
management policies and efficient management of working capital.

Rift Valley University Lecture Note Page 7

FINANCIAL MANAGEMENT I LECTURE NOTE

3. Disposal of Profits: Finance manager has to decide the quantum of dividend which the company
wants to declare. The amount of dividend will depend upon mainly the future requirement of
funds for expansion and the prevailing tax policy.

4. Maximization of Shareholder’s Wealth: The objective of any business is to maximize and

create wealth for the investors, which is measured by the price of the share of the company. The
price of the share of any company is a function of its present and expected future earnings. The
finance managers should pursue policies which maximizes earnings.

5. Interpretation and Reporting: Interpretation of financial data requires skills. The finance
manager should analyze financial data and find out the reasons for variance from standards and
report the same to the management. He should also assess the likely financial impact of these
variances.
1.10 Financial Institutions
Financial institutions are financial intermediaries, which are specialized financial firms, that facilitate
the transfer of funds from savers to demanders of capital. They accept savings form customers and
lend this money to other customers or they invest it. In many instances, they pay savers interest on
deposited funds. In some cases, they impose service charges on customers for the services they
render. For example, many financial institutions impose service charges on current accounts.
The key participants in financial transactions of financial institutions are individuals, businesses, and
government. By accepting the savings from these parties, financial institutions transfer again to
individuals, business firms, and governments. Since financial institutions are generally large, they
gain economies of scale in the transfer of money between savers and demanders. By pooling risks,
they help individual savers to diversify their risk.

The major classes of financial institutions include commercial banks, savings and loan associations,
mutual savings banks, credit unions, pension funds and life insurance companies. Among these,
commercial banks are by far the most common financial institutions in many countries worldwide. In
Ethiopia too, commercial banks are the major institutions that handle the savings and borrowing
transactions of individuals, businesses, and governments.

1.10.1 Financial Instruments

Financial instruments are written and formal documents of transferring funds between and among
individuals, businesses, and governments. They include loans and borrowing contracts, promissory
notes, commercial papers, treasury bills, bonds, and stocks.
Under normal circumstances, two parties are involved in any financial instrument. For holders, who
have invested their money, financial instruments are financial assets. A financial asset gives the
holder the right to claim against the income and assets of its issuer. For the issuer, on the other hand,
financial instruments represent either liabilities or equity items. For instance, if you consider a bond,
it represents an investment (financial asset) for the holder, and a debt item for its issuer. Similarly, if
you consider a common stock, it represents an investment and equity item for the holder and issuer
respectively.

Rift Valley University Lecture Note Page 8

FINANCIAL MANAGEMENT I LECTURE NOTE

The issuer gives the financial asset to the purchaser (holder) in exchange for some valuable
consideration, usually in the form of cash or another financial asset.

1.10.2 Financial Markets

Financial markets are markets in which financial instruments are bought and sold by suppliers and
demanders of funds. They, unlike financial institutions, are places in which suppliers and demanders
of funds meet directly to transact business.
Functions of Financial Markets
Generally, financial markets play three important roles in functioning of corporate finance.
1. They assist the capital formation process. Financial markets serve as a way through which
firms can obtain the capital they need for their operations and investment.
2. Financial markets serve as resale markets for financial instruments. They create continuous
liquid markets where firms can obtain the capital they need from individuals and other
businesses easily.
3. They play a role in setting the prices of securities. The price of a financial instrument is
determined through the interaction of demand and supply of the security in the financial
markets.
Classification of Financial Markets
There are many types of financial markets and hence several ways to classify them. For our purpose,
here we shall consider the following two classifications.
1. Classification on the basis of maturity
This is based on the maturity dates of securities
i) Money Markets - are financial markets in which securities traded have maturities of one-
year or less. Examples of securities traded here include treasury bills, commercial papers,
short – term promissory notes and so on.
ii) Capital Markets - are financial markets in which securities of long-term funds are traded.
Major securities traded in capital markets include bonds, preferred and common stocks.
2. Classification on the basis of the nature of securities
This is based on whether the securities are new issues or have been outstanding in the market place.
i) Primary Markets - are financial marketers in which firms raise capital by issuing new
securities.
ii) Secondary Markets - are financial markets in which existing and already outstanding
securities are traded among investors. Here the issuing corporation does not raise new
finance.

Rift Valley University Lecture Note Page 9

 FINANCIAL MANAGEMENT I LECTURE NOTE

CHAPTER TWO
2. FINANCIAL STATEMENT ANALYSIS

2.1 FINANCIAL STATEMENTS

Financial statements are official documents of the firm, which explore the entire financial information
of the firm. Financial statements are the summary of the accounting process, which, provide useful
information to both internal and external parties. The main aim of the financial statement is to provide
information and understand the financial aspects of the firm. Hence, preparation of the financial
statement is important as much as the financial decisions.
The two basic financial statements prepared for the purposes of external reporting are balance sheet
and income statement.. A part from that, the business concern also prepares some of other statements,
which are very useful to the internal purpose such as: Statement of changes in owner’s equity,
Statement of changes in financial position.
I. Balance Sheet:
Balance sheet is one of the important financial statements which indicate the financial position of an
accounting entity at a particular, specified movement of time. It is valid only for a single day, the
very next day it will become obsolete. It contains the information about the resources, obligations of a
business entity and the owner’s interest at a specified point of time.. One can understand the strength
and weakness of the concern with the help of the position statement

II. Income statement:

It is a performance report recording the changes in income, expense, profit and losses as a result of
business operations during the year between two balance sheet dates.. The income statement is valid
for the whole year.

III. Statement of Changes in Owner’s Equity

It is also called as statement of retained earnings. This statement provides information about the
changes or position of owner’s equity in the company. How the retained earnings are employed in the
business concern. Nowadays, preparation of this statement is not popular and nobody is going to
prepare the separate statement of changes in owner’s equity.
IV. Statement of Changes in Financial Position
Income statement and balance sheet shows only about the position of the finance, hence it can’t
measure the actual position of the financial statement. Statement of changes in financial position
helps to understand the changes in financial position from one period to another period

2.2 FINANCIAL ANALYSIS MEANING AND IMPORTANCE

Financial statements analysis is the process of examining relationships among elements of the
company's financial statements and making comparisons with relevant information from the print of
view of all parties interested in the affairs of the business. Analysis and interpretation are closely
inter-linked and they are complementary to each other.. Analysis without interpretation is useless and
interpretation without analysis is impossible..

Rift Valley University Lecture Note Page 10

FINANCIAL MANAGEMENT I LECTURE NOTE

Financial statements analysis is a valuable tool used by investors, creditors, financial analysts,
owners, managers and others in their decision-making process.

2.2 TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is interpreted mainly to determine the financial and operational
performance of the business concern. A number of methods or techniques are used to analyze the
financial statement of the business. The following are the common methods or techniques, which are
widely used by the business.
1. Comparative Statement Analysis
2. Trend Analysis
3. Common Size Analysis
4. Fund Flow & Cash Flow Statement
5. Ratio Analysis
Comparative Statement Analysis
Comparative statements are prepared to provide time perspective to the consideration of various
elements of operations and financial position of the business embodied in the statement. Here, the
figures for two or more periods are placed side by side to facilitate comparison. In addition to
absolute figures the ratios constructed from the financial statements are also presented in the form of
comparative statements. Both, balance sheet and income statement are presented in the form of
comparative statements

Trend Analysis (Horizontal Analysis)

It is used to evaluate the trend in the accounts over the accounting periods. It is usually shown on a
comparative financial statement.
In a horizontal analysis it is essential to show both the amount of the change and the percentage of the
change because either one alone might be misleading.

The calculation of trend percentages involves the calculation of percentage relationship that each item
bears to the same item in the base year. Any year may be taken as base year. Usually, the first year
will be taken as the base year. Each item of the base year is taken as 100 and on that basis the
percentage for each of the item of each of the years is calculated..
To illustrate horizontal financial analysis, let’s take sample financial statements of Biftu Company.
Its condensed balance sheets for 2011 and 2012 showing birr and percentage changes are presented
below.

Rift Valley University Lecture Note Page 11

FINANCIAL MANAGEMENT I LECTURE NOTE

Exhibit 2-1 Horizontal Analysis of Balance Sheet

Biftu Company
Condensed Balance sheet
December 31 (in millions)

Increase (Decrease)
during 2012
Assets 2012 2011 Amount Percent
Current assets Br. 1,528.6 Br. 1,428.8 Br. 99.8 7.0%
Plant assets (net) 2,932.9 2,784.8 148.1 5.3
Other assets 588.5 201.0 387.5 192.8
Total assets Br. 5,050.0 Br. 4,414.6 Br. 635.4 14.4%
Liabilities stock holder’s equity
Current Liability Br. 2,199.0 Br. 1,265.4 Br. 933.6 73.8%
Long-term Liabilities 1,568.6 1,558.3 10.3 0.7
Total Liabilities 3,767.6 2,823.7 943.9 33.4
Stockholders’ equity
Common stock 201.8 183.0 18.8 10.3
Retained earnings & other 3,984.0 3,769.1 214.9 5.7
Treasury stock (cost) (2,903.4) (2,361.2) 542.2 23.0
Total stockholders’ equity 1,282.4 1,590.9 (308.5) (19.4)
Total Liabilities and Stockholders’ Br. 5,050.0 Br.4, 414.6 Br. 635.4 14.4%
equity

The comparative balance sheet above shows that a number of changes occurred in Biftu’s financial
position from 2011 to 2012.
In the assets section, current assets increased by Br. 99.8 million, or 7.0% (Br. 99.8  Br. 1,428.8),
 plant assets (net of depreciation) increased by Br. 148.1, or 5.3%, and other assets increased by
192.8% (Br. 3875  Br. 201)
 In the liabilities section, current liabilities increased by Br. 933.6, or 73.8%, while long-term
liabilities increased by Br. 10.3, or 0.7%.
 In the stockholders’ equity section, we find that retained earnings increased by Br. 214.9, or
5.7%.

This horizontal analysis suggests that the company expanded its asset base during 2012 and
financed this expansion primarily by retaining income in the business and incurring short-term debts.
In addition, the company reduced its stockholders’ equity by 19.4% by buying treasury stock.

Presented in exhibit 2.2 is a comparative income statement of Biftu Company for 2011 and 2012 in a
condensed format. Horizontal analysis of the income statement shows these changes:

Rift Valley University Lecture Note Page 12

FINANCIAL MANAGEMENT I LECTURE NOTE

Exhibit 2-2 Horizontal Analysis of Income Statement (in Millions)

Biftu Company
Condensed Income statement
For the year ended December 31
Increase (Decrease) during
2012
2012 2011 Amount Percent
Net Sales Br.6,676.6 Br.7,003.7 Br.(327.1) (4.7%)
Cost of goods sold 3,122.9 3,177.7 (54.8) (1.7)
Gross Profit 3,553.7 3,826.0 (272.3) (7.1)
Selling & administrative expenses 2,458.7 2,566.7 (108.0) (4.2)
Nonrecurring charges 136.1 421.8 (285.7) (67.7)
Income from operations 958.9 837.5 121.4 14.5
Interest expense 65.6 62.6 3.0 4.8
Other income (expense), net (33.4) 21.1 (54.5) NA*
Income before income taxes 859.9 796.0 63.9 8.0
Income tax expense 328.9 305.7 23.2 7.6
Net income Br. 531.0 Br. 490.3 Br. 40.7 8.3

* NA = Not Available
 Net sales decreased by Br. 327.1, or 4.7% (Br. 327.1 Br. 7003.7).
 Cost of goods sold increased by Br. 54.8, or 1.7% (Br. 54.8  Br. 3,177.7).
 Selling and administrative expenses decreased by Br. 108.0, or 4.2% (Br. 108.0  Br. 2,566.7).
 Overall, gross profit decreased by 7.1% and net income increased by 8.3%.
 The increase in net income can be attributed nearly to the 67.7% decrease from 2011 to 2012
in the nonrecurring charges.
The measurement of changes in percentages from period to period is relatively straightforward and
quite useful. However, complications can result in making the computations. If an item has no value
in a base year or preceding year and a value in the next year, no percentage change can be computed.
And if a negative amount appears in the base or preceding period and a positive amount exists the
following year, or vice versa, no percentage change can be computed. For example, no percentage
could be calculated for the “other income (expense)” category in Biftu’s condensed income statement.
Common Size Analysis (Vertical Analysis)
 It is analysis of financial statements where a significant item in a financial statement is used as
a base value and all other items are compared against it. For example, in balance sheet
analysis, all balance sheet items might be expressed as percentages of total assets. In income
statement analysis, all income statement items might be expressed as percentages of net sales..
 Vertical financial statement analysis is a technique of evaluating and analyzing financial
statement data that expresses each item in a financial statement as a percent of the base
Rift Valley University Lecture Note Page 13
FINANCIAL MANAGEMENT I LECTURE NOTE

amount. For example, on a balance sheet, we might say that current assets are 22% of total
assets (total assets being the base amount). Or in an income statement, we might say that
selling expenses are 16% of net sales (net sales being the base amount).
Exhibit 2.3 presents a vertical analysis of the comparative balance sheet of Biftu Company for
2011 and 2012
 The base for the asset items is total asset, and
 The base for the liability and stockholders' equity items is total liabilities and stockholders'
equity.
 In addition to showing the relative size of each category on the balance sheet, vertical analysis
may show the %age change in the individual asset, liability and stockholders' equity items.
Exhibit 2-3 Vertical Analysis of Balance Sheet (in Millions)
Biftu Company
Condensed Balance sheet
December 31
2012 2011
Assets Amount Percent Amount Percent
Current assets Br.1,528.6 30.3% Br. 1,428.8 32.4
Plant Assets (net) 2,932.9 58.0 2,784.8 63.0
Other assets 588.5 11.7 201.0 4. 6
Total assets Br. 5,050.0 100.0% Br. 4,414.6 100.0%
Liabilities & Stockholders' equity
Current liabilities Br. 2,199.0 43.5% Br. 1,265.4 28.7
Long-term liabilities 1,568.6 31.1 1,558.3 35.3
Total Liabilities 3,767.6 74.6 2,823.7 64.0

Stockholders' equity:
Common stock 201.8 4.0 183.0 4.1
Retained earnings & other 3,984. 78.9 3,769.1 85.4
Treasury stock cost) (2,903.4) (57.5) (2,361.2) (53.5)
Total stockholders' equity Br. 1,282.4 25.4 Br. 1,590.9 36.0
Total liabilities & Stockholders'
equity Br 5,050.0 100.0% Br. 4,414.6 100.0%

 In this case, even though current assets increased by Br. 99.8 million from 2011 to 2012, they
decreased from 32.4% to 30.3% of total assets.
 Plant assets (net) decreased from 63.1% to 58.1% of total assets. Also, even though retained
earnings increased by Br. 214.9 million from 2011 to 2012, they decreased from 85.4% to
78.9% of total liabilities and stockholders' equity. This indicates that there is a shift to a
higher percentage of debt financing. This is because current liabilities increase by Br. 933.6
million, going from 53.3% to 57.5% of total liabilities and stockholders' equity. Thus, the
company shifted toward a heavier reliance on debt financing both by using more short-term
debt and by reducing the amount of outstanding equity.

Rift Valley University Lecture Note Page 14

FINANCIAL MANAGEMENT I LECTURE NOTE

Exhibit 2-4 Vertical Analysis of an Income Statement (in Millions)

ABC Company
Condensed Income Statement
For the years Ended December 31
2012 2011
Amount Percent Amount Percent
Net Sale Br. 6,676.6 100.0% Br. 7,003.7 100.0%
Cost of goods sold 3,122.9 46.8 3,177.7 45.4
Gross Profit 3,553.7 53.2 3,826.0 54.6
Selling & administrative Expenses 2,458.7 36.8 2,566.7 36.6
Non-recurring charges 136.1 2.0 421.8 6.0
Income from operations 958.9 14.4 837.5 12.0
Interest expense 65.6 1.0 62.6 0.9
Other income (expense), net (33.4) 0.5 21.1 0.3
Income before income taxes 859.9 12.9 796.0 11.4
Income tax expense 328.9 4.9 305.7 4.4
Net Income Br. 531.0 8.0% Br. 490.3 7.0%

The vertical analysis of the comparative income statements for Biftu Company, shown in Exhibit 2.4
reveals that;
 cost of goods sold as a percentage of net sales increased by 1.4% (from 45.4% to 46.8%) and
 Selling and administrative expenses increased by 0.2% (from 36.6% to 36.8%). Despite these
negative changes, net income as a percentage of net sales increased from 7.0% to 8.0%.
The vertical analysis is, therefore, used to gain insight into the relative importance or magnitude
of various items in the financial statements. Again an associated benefit of vertical analysis is that
it enables you to compare companies of different sizes, because each item in the financial
statements is expressed in relation to a certain item of the financial statements, regardless of the
absolute amounts of the items.

Fund flow and Cash flow Analysis

The changes that have taken place in the financial position of a firm between two dates of balance
sheets can be ascertained by preparing the fund flow statement which contains the sources and uses of
financial resources. This is a valuable aid to finance manager, creditors and owners in evaluating the
uses of funds by a firm and in determining how these uses are financed. This statement also helps to
assess the growth of the firm and its resulting financial needs to decide the best way to finance those
needs..
Cash flow statement summaries the causes of changes in cash position between two dates of two
balance sheets. It indicates the sources and uses of cash. This statement is similar to statement
prepared on working capital basis, except that it focuses attention on cash instead of working capital
RATIO ANALYSIS
Ratio analysis is the process of determining and interpreting numerical relationship based on financial
statements. It is the technique of interpretation of financial statements with the help of accounting
ratios derived from the Balance Sheet and Income Statement.
Rift Valley University Lecture Note Page 15
FINANCIAL MANAGEMENT I LECTURE NOTE

 Ratio shows the mathematical relationship between two figures, which have meaningful relation
with each other
 Financial ratio analysis is the most common form of financial statements analysis
 Financial ratio:
Is used as an index for evaluating the financial performance of the business.
Compare items on a single financial statement or examine the relationships between items
on two financial statements
Generally hold no meaning unless they are compared against something else, like past
performance, another company/competitor or industry average
Are also used by bankers, investors, and business analysts to assess various attributes of a
company's financial strength or operating results.
A purposeful ratio analysis helps in identifying problems such as the following and in finding out
suitable course of action.
1) Whether the financial condition of the firm is basically sound,
2) Whether the capital structure of the firm is appropriate,
3) Whether the profitability of the enterprise is satisfactory,
4) Whether the credit policy of the firm is sound, and
5) Whether the firm is credit worthy.
Objectives of Ratio Analysis
 To standardize financial information for comparisons
 To evaluate current operations
 To compare current performance with past performance
 To compare performance against other firms or industry standards
 To study the efficiency of operations
 To study the risk of operations
 To find out the ability of the firm to meet its debts (liquidity).
 To help investors in evaluating sustainability of returns on their investment
Advantages of Ratios Analysis:
Ratio analysis is an important and age-old technique of financial analysis. The following are some of
the advantages / Benefits of ratio analysis:
1. Simplifies financial statements: Ratios tell the whole story of changes in the financial condition
of the business
2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight
the factors associated with successful and unsuccessful firm. They also reveal strong firms and
weak firms, overvalued and undervalued firms.
3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic
functions of forecasting. Planning, co-ordination, control and communications.
4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the
performance of different divisions of the firm. The ratios are helpful in deciding about their
efficiency or otherwise in the past and likely performance in the future.
5. Help in investment decisions: It helps in investment decisions in the case of investors and lending
decisions in the case of bankers etc

Rift Valley University Lecture Note Page 16

FINANCIAL MANAGEMENT I LECTURE NOTE

Limitations of Ratios Analysis:

The ratios analysis is one of the most powerful tools of financial management. Though ratios are
simple to calculate and easy to understand, they suffer from serious limitations.

1. Limitations of financial statements: Ratios are based only on the information which has been
recorded in the financial statements. Financial statements themselves are subject to several
limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-
financial changes though important for the business are not relevant by the financial statements.
Financial statements are affected to a very great extent by accounting conventions and concepts.
Personal judgment plays a great part in determining the figures for financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the business only
when they are compared with past results of the business. However, such a comparison only
provide glimpse of the past performance and forecasts for future may not prove correct since
several other factors like market conditions, management policies, etc. may affect the future
operations.
3. Ratios alone are not adequate: Ratios are only indicators; they cannot be taken as final regarding
good or bad financial position of the business. Other things have also to be seen.
4. Problems of price level changes: A change in price level can affect the validity of ratios
calculated for different time periods. In such a case the ratio analysis may not clearly indicate the
trend in solvency and profitability of the company. The financial statements, therefore, be adjusted
keeping in view the price level changes if a meaningful comparison is to be made through
accounting ratios.
5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no
well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ratios difficult
6. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a
better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst
than help him in making any good decision.
7. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to
be interpreted and different people may interpret the same ratio in different way.
8. Incomparable: Not only industries differ in their nature, but also the firms of the similar business
widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult
and misleading
At the outset it should be noted that ratio analysis is not an end in itself but a means to the answering
of specific questions which the users of the financial statements have in relation to the financial
condition and results of operations of the firm.
 Ratios are meaningless, if detached form their source.
 Ratios, as they are, are not of much significance. They become useful only when they are
compared with some standards.
 No ratio analysis can be meaningful unless the questions sought to be answered are clearly
formulated.

Rift Valley University Lecture Note Page 17

FINANCIAL MANAGEMENT I LECTURE NOTE

Classification of Ratio
 Classification from the point of view of financial management is as follows:
A. Liquidity Ratio
B. Activity Ratio
C. Solvency Ratio
D. Profitability Ratio
E. Market value ratios
A. Measures of Liquidity (Liquidity Ratios)
Liquidity is the ability of a firm to meet its current or short-term obligations when they become due.
Every firm should maintain adequate liquidity. Liquidity is also known as short-term solvency of the
firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of the
firm. A firm’s liquidity should neither be too low nor too high but should be adequate. Low liquidity
implies the firm’s inability to meet its obligations. This will result in bad credit rating, loss of the
creditors’ confidence or even technical insolvency ultimately resulting in the closure of the firm. A
very high liquidity position is also bad; it means the firm’s current assets are too large in proportion
to maturity obligations. It is obvious that idle assets earn nothing to the firm; and in situations of high
liquidity, the firm’s funds will be unnecessarily tied up in current assets, which, if released, can be
used to generate profits to the firm. Therefore, every firm should strike a balance between liquidity
and lack of liquidity.
Therefore, it is necessary for the firm to strike a proper balance between high liquidity and lack of
liquidity
Higher the liquidity ratios, higher will be the liquidity position.
Higher the liquidity ratios, higher will be the amount of Working Capital (WC).
Working capital means excess of Current Assets (CA) over Current Liabilities (CL).
The most commonly used liquidity ratios are the following::
1) Current Ratio
It is the relationship between current assets and current liabilities. Current ratio measures the
ability of the firm to meet its short-term obligations with its current assets.
 It is the most commonly used measure of short-term solvency
 is also called ‘working capital ratio’ because it is related to the working capital of the firm.
 It is determined by dividing current assets by current liabilities.
 In principal we would like to see the CR > 1 because it suggests that the CA to be liquidated
this year is sufficient to cover the CL that will come due this year.
 If the CR < 1, then the CA will be unable to service the maturing obligations as measured by
CL.
 The higher the ratio, the more liquid the firm is
 However, if the ratio is too high, the firm may have an excessive investment in current assets
 It may also indicate an underutilization of short-term credit..
 A low current ratio indicates that the firm is having difficulty in meeting short-term
commitments and the liquidity position of the firm is not safe

Current Ratio =

Rift Valley University Lecture Note Page 18

FINANCIAL MANAGEMENT I LECTURE NOTE

As an example, the current ratio for Biftu Co. can be computed from Exhibit 2.1 for year 2012 as:
Current Ratio= = implying that for each Birr of
current liability the Company owes others, it has only seventy cents of current assets available..
Interpretation of Current Ratio
Acceptable current ratio values vary from industry to industry
As a conventional rule, current ratio of 2:1 is considered satisfactory for merchandising firms.
However, the arbitrary ratio of 2:1 should not be, blindly, followed.
Firms with less than 2:1 ratio may become meeting the liabilities without difficulties, though
firms with a ratio of more than 2:1 may have difficulty to meet their obligation
High ratio indicates under trading and over capitalization and vice-versa for low ratio.
Current ratio is a test of quantity, not test of quality. It is essential to verify the composition and
quality of assets before, finally, taking a decision about the adequacy of the ratio.

2) Quick Ratio (Acid Test Ratio)

 Quick Ratio uses all current assets except inventory for measuring the liquidity of the firm.
 The ratio measures the firm’s ability to meet current liabilities from its most liquid assets.
 Inventory is the least liquid of the current assets and may not be easily converted into cash.
 Quick ratio is used as a complementary ratio to the current ratio.
 Quick ratio is more rigorous test of liquidity than the current ratio because it eliminates
inventories and prepaid expenses.
 Usually high quick ratios indicate the firm’s ability to meet its current liabilities in time.
 On the other hand a low liquidity ratio represents that the firm's liquidity position is not good.
 As a convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory.

Quick Ratio =
For Biftu Company, assuming that inventories and prepayments respectively are Br. 600 and Br. 250
(in millions), the quick ratio for the year 2012 can be shown as::
Quick Ratio = = . This
shows that for each Birr of current liability the Company owes, there are only thirty cents in fast
converting assets to settle the obligations. Both measures of liquidity reveal that Biftu Company is
not in good posture in terms of liquidity.
Interpretation of Quick Ratio
 Quick ratio of 1:1 is generally considered satisfactory.
 However, firms with the ratio of more than 1:1 need not be liquid and those having less than
the standard need not, necessarily, be illiquid.
 It depends more on the composition of liquid assets.
 Debtors, normally, constitute a major part in liquid assets. If debtors are slow paying, doubtful
and long outstanding, they may not be totally liquid.
 A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity position if all the debtors
cannot be realized.

Rift Valley University Lecture Note Page 19

FINANCIAL MANAGEMENT I LECTURE NOTE

 In the same manner, a low liquid ratio does not necessarily mean a bad liquidity position as
inventories are not absolutely non-liquid.
 Hence, a firm having a high liquidity ratio may not have a satisfactory liquidity position if it
has slow-paying debtors.
 On the other hand, a firm having a low liquid ratio may have a good liquidity position if it has
fast moving inventories
3) Cash Ratio interpretation
 Cash Ratio is an indicator of company's short-term liquidity. It measures the ability to use its
cash and cash equivalents to pay its current financial obligations.
 Cash ratio measures the immediate amount of cash available to satisfy short-term liabilities. A
cash ratio of 0.5:1 or higher is preferred.
 Cash ratio is the most conservative look at a company's liquidity since is taking in the
consideration only the cash and cash equivalents.
 Cash ratio is used by creditors when deciding how much credit, if any, they would be willing
to extend to the company.
Cash Ratio =
For Biftu Company, assuming that cash and marketable securities respectively are Br. 100 and Br.
150 (in millions), the quick ratio for the year 2012 can be shown as::
Cash Ratio = =
This shows that for each Birr of current liability the Company owes, there are only eleven cents in
absolute assets to settle its obligations
B. ACTIVITY RATIO(Asset Utilization Ratios)
These ratios are also called measures of Efficiency ratios. They show the intensity with which the
firm uses its assets in generating sales. These ratios indicate whether the firm’s investments in current
and long-term assets are too small or too large. If investment is too large, it could be that the funds
tied up in that asset should be used for more productive purposes.
The following are the most important asset utilization ratios::
1) Inventory Turnover Ratio (ITOR)
It is a relationship between the cost of goods sold and average inventory. Inventory turnover ratio:
 Measures the velocity of conversion of stock into sales
 Indicates the number of times stock has been turned into sales
 Is expressed in number of times
 Evaluates the efficiency with which a firm is able to manage its inventory.
 Indicates whether investment in stock is within proper limit or not
 Can be judged only after comparing it with some standard figure such as industry average or
the Company’s past values for this figure
Inventory Turnover =

Assuming the inventory value of Br. 600 (in millions) as in the quick ratio, Biftu Company’s
inventory turnover for 2012 is computed as:
Inventory Turnover = = .

Rift Valley University Lecture Note Page 20

FINANCIAL MANAGEMENT I LECTURE NOTE

A low inventory turnover ratio:

 Is a signal of inefficiency, either poor sales or excess inventory
 May indicate poor liquidity, possible overstocking, and obsolescence,
 May also reflect a planned inventory buildup
 Indicates efficient management of inventory
 Signifies more profit
 Implies a large investment in inventories relative to the amount needed to service sales
A high inventory turnover ratio:
 Implies either strong sales or ineffective buying
 Indicates an inefficient management of inventory
 May be due to under-investment in inventories
 May indicate better liquidity, but it can also indicate a shortage inventory levels, which may
lead to a loss in business.
 Implies over-investment in inventories, dull business, poor quality of goods, stock
accumulation, accumulation of obsolete and slow moving goods and low profits as compared
to total investment
 Implies that the purchasing function is tightly managed
 Inventory level must be relative to sales that are not excessive but sufficient to meet
customers’ needs
The following issues can impact the amount of inventory turnover:
 Seasonal build. Inventory may be built up in advance of a seasonal selling reason.
 Obsolescence. Some portion of the inventory may be out-of-date and so cannot be sold.

 Cost accounting. The costing method used, combined with changes in prices paid for
inventory, can result in significant swings in the reported amount of inventory.

 Flow method used. A "pull" system that only manufactures on demand requires much less
inventory than a "push" system that manufactures based on estimated demand.

2) Receivables Turnover Ratio (RTOR)

Accounts receivable represents the indirect interest free loans that the company is providing to its
customer. Therefore, it is very important to know how "costly" these loans are for the company.
Accounts Receivable Turnover Ratio is one of the efficiency ratios and measures the number of times
receivables are collected, on average, during the fiscal year.

Receivables turnover ratio:

 Measures Company’s efficiency in collecting its sales on credit and collection policies.
 Takes in to consideration ONLY the net credit sales.
 Will be affected and may lose its significance if the cash sales are included.
 It is best to use average accounts receivable to avoid seasonality effects.
Receivables Turnover = .

For Biftu Company, this ratio for 2012 would be times

Rift Valley University Lecture Note Page 21

FINANCIAL MANAGEMENT I LECTURE NOTE

A high receivables turnover ratio:

 Implies either that the company operates on a cash basis or that its extension of credit and
collection of accounts receivable are efficient.
 Indicate reflects a short lapse of time between sales and the collection of cash,
 Indicate efficiency in the management of receivables and liquidity
 indicates a combination of conservative credit policy and aggressive collections department

A low receivables turnover ratio:

 Indicate longer collection period
 Indicate poor receivables collection procedures and credit policies
 Implies high risk of uncollectibility
 Is an indication of greater collection expenses
 May be caused by a loose or nonexistent credit policy, or an inadequate collections function
If the ratio is going up, either collection efforts may be improving, sales may be raising or
receivables are being reduced.

Receivables Turnover =
3) Average Collection Period (Days Sales Outstanding)
Average Collection Period represents the average number of days it takes the company to convert
receivables into cash. The DSO represents the average length of time that the firm must wait after
making a sale before receiving cash.
Average Collection Period:
 measures the quality of debtors
 can also be evaluated by comparison with the terms on which the firm sells
 should be the same or lower than the company's credit terms
 Should not exceed credit terms by more than 10-15 days
 Use average accounts receivable to avoid seasonality effects
 Is computed by dividing the receivables turnover ratio into 365 days
Short Collection period:
 Implies prompt payment by debtors.
 Reduces the chances of bad debts..
Longer Collection period:
 Implies too liberal and inefficient credit collection performance.
 It is difficult to provide a standard collection period of debtors
If the trend in average collection period over the past few years has been rising, but the credit
policy has not been changed, this would be strong evidence that steps should be taken to speed up
the collection of accounts receivable.

Average Collection Period =

Average Credit Sales per Day =

Rift Valley University Lecture Note Page 22

FINANCIAL MANAGEMENT I LECTURE NOTE

For Biftu Company, the average collection period, assuming accounts receivable of Br. 259 and credit
sales of Br. 600 (both in millions), can be computed as:
Average Collection Period = = days

4) Fixed Assets Turnover

It indicates how intensively the fixed assets of the firm are being used.
Fixed Assets Turnover = . The value of this ratio for Biftu Company for the year

2012 is times
 If fixed assets have changed significantly during the year, an average fixed asset level for the
year, like inventory, should be used.
 A low ratio implies excessive investment in plant and equipment relative to the value of
output being produced. In such a case, the firm might be better off to liquidate some of the
fixed assets and invest the proceeds productively.
5) Total Assets Turnover
 Total Assets Turnover helps measure the efficiency with which firms use their assets.
 It reflects how well the company’s assets are being used to generate sales

Total Assets Turnover = . For Biftu Company, this ratio for the year 2012 stands as

times
 A low ratio indicates excessive investment in assets. Generally firms prefer to support a high
level of sales with a small amount of assets, which indicates efficient utilization of assets.
 High total assets turnover ratio may indicate that the firm is using old, fully depreciated assets
that may be inefficient.
C. LEVERAGE RATIOS OR CAPITAL STRUCTURE RATIOS
These ratios are also known as ‘long term solvency ratios’ or ‘capital gearing ratios.’ Long-term
creditors are more concerned with the firm’s long-term financial position than with others. They
judge the financial soundness of the firm in terms of its ability to pay interest regularly as well as
make repayment of the principal either in one lump sum or in installments. These ratios:
 Indicate the ability of the company to survive over a long period of time
 Indicate the ability of the organization to repay the loan and interest..
 Indicate the extent to which the firm has used debt in financing its assets.
The most commonly calculated leverage ratios include:
1. Debt to total asset ratio (Debt Ratio)
2. Debt equity ratio.
3. Times Interest Earned Ratio (TIER)
4. Fixed Charges Coverage Ratio (FCCR)
1. Debt to total asset ratio (Debt Ratio)

Rift Valley University Lecture Note Page 23

FINANCIAL MANAGEMENT I LECTURE NOTE

The debt ratio indicates the percentages of a firm’s total assets that are financed with borrowed funds.
Debt Ratio =

For Biftu Company, the debt ratio for the year 2012 appears as or 75%.
 Creditors usually prefer a low debt ratio since it implies a greater protection of their position.
 A higher debt ratio generally means that the firm must pay a higher interest rate on its
borrowing; beyond some point, the firm will not be able to borrow at all.
2. Debt-Equity Ratio
 Debt to Equity is the ratio of total debt to total equity
 Ii is one of the measures of the long-term solvency of a firm.
 It measures the relative claims of creditors and owners against the assets of the firm
 It compares the funds provided by creditors to the funds provided by shareholders.
 It measures the soundness of the long term financial policies of the company
 As more debt is used, the Debt to Equity Ratio will increase.
 The use of debt can help improve earnings since deduct interest expense on the tax return
 For the analysis of capital structure of a firm debt-equity ratio is important
NB:
NB: The outsiders’ funds include all debts / liabilities to outsiders, whether long term or short term
or whether in the form of debentures, bonds, mortgages or bills. The shareholders funds consist of
equity share capital, preference share capital, capital reserves, revenue reserves, and reserves
representing accumulated profits and surpluses like reserves for contingencies, sinking funds, etc
Debt-Equity Ratio = .

For Biftu Company, this ratio for 2012 is .

Interpretation of Debt-Equity ratio
 Long-term creditors generally prefer to see a modest debt-equity ratio.
 A high debt equity ratio implies that a higher proportion of long-term financing is from debt.
 A low ratio means the firm has paid for its assets mainly with equity money
 The D-E ratio indicates the margin of safety to the creditors.
 A very high D-E ratio is unfavorable to the firm and creates inflexibility in operations.
 During periods of low profits a highly debt financed company will be under great pressure; it
cannot earn enough profits even to pay the interest charges.
 An ideal D-E ratio is 1:1
 In periods of prosperity and high economic activity, a large proportion of the debt may be
used while the reverse should be done during periods of adversity.

3. Times Interest Earned Ratio (TIER)

The TIER measures the ability of the firm to service its debt. In other words, it measures the ability to
pay interest out of its earnings. It shows how many times the interest payments are covered by funds
that are normally available to pay interest expense.
Rift Valley University Lecture Note Page 24
FINANCIAL MANAGEMENT I LECTURE NOTE

TIER = .

For Biftu Company, the TIER will be times for 2012.

The creditors may not like a low ratio on the ground that the company uses more debt or doesn’t
generate sufficient income to cover the interest expense. The higher the ratio, the stronger is the
interest paying ability of the firm. If it is too high, stockholders may feel that the firm is not taking
advantage of the benefits provided by financial leverage, i.e. the firm doesn’t use enough debt to
finance its operations..
4. Fixed Charges Coverage Ratio (FCCR)
Like the TIER, the FCCR is a measure of the ability of the firm to pay its fixed financing costs. It
indicates how much income is available to pay for all the firm’s fixed charges..
FCCR =

FCCR =
The FCCR is similar to the TIER. A higher ratio will indicate that the company is able to pay the
fixed charges and will satisfy the creditors.
D. MEASURES OF PROFITABILITY (PROFITABILITY RATIOS)
Profitability Ratios indicate the success of the firm in earning a net return on sales, total assets, and
invested capital and also show the combined effects of liquidity, asset management and debt
management on operating results.
There are different users interested in knowing the profits of the firm..
 The management of the firm regards profits as an indication of efficiency
 Owners take it as a measure of the worth of their investment in the business.
 To the creditors profits are a measure of the margin of safety.
 Employees look at profits as a source of fringe benefits.
 To the government, measures of the firm’s tax paying ability and a basis for legislative action.
 To the customers they are a hint for demanding price cuts.
The following are the main profitability ratios:
1. Gross Profit Margin
 Gross Profit Margin indicates the percent of each sales dollar remaining after cost of goods
sold has been subtracted.
 It also reflects the effectiveness of pricing policy and of production efficiency..
Gross Profit Margin = .

For Biftu Company, gross profit margin for 2012 is or 53%.

2. Operating Margin
 The net operating margin indicates the profitability of sales before taxes and interest expenses.
 This ratio measures the effectiveness of production and sales of the company’s product in
generating pretax income for the firm..
Operating Margin = .

Rift Valley University Lecture Note Page 25

FINANCIAL MANAGEMENT I LECTURE NOTE

For Biftu Company, this ratio would amount to or 14%.

 Generally the higher the net operating margin the better the company is..
3. Net Profit Margin
 Net profit margin is a measure of the percent of each dollar of sales that flows through to the
stockholders as net income.
 It shows what percent of every sales dollar the firm was able to convert into net income.
 Firms with a low volume of sales may need a higher profit margin to generate a satisfactory
return for its shareholders.
Net Profit Margin = .

For Biftu Company, this ratio for 2012 is or 8%.

 Generally the stockholders always like to have a higher net profit margin..

4. Return on Investment
 It is also referred to as Return on Assets. It measures the return to the firm as a percentage of
the total amount invested in the firm or how profitable the firm used its assets.
ROI = .

The value of this ratio for Biftu Company for the year 2012 is or 10.5%.

 Managers generally prefer this ratio to be very high for their firms. However, a high ratio can
also mean that the firm is failing to replace worn-out assets.
 A low return on assets shows that the firm is not utilizing its assets profitably.

5. Return on Equity (ROE)

This ratio measures the return earned on the owners' (both preferred and common stockholders)
investment in the firm. Generally, the higher this return, the better off is the owners. Return on
equity is calculated as follows:
Return on Equity (ROE)=

This ratio for Biftu Company for 2012 is or 41%.

 It is the duty and objective of the management to generate maximum return on shareholders’
investments in the firm. Common

Rift Valley University Lecture Note Page 26

FINANCIAL MANAGEMENT I LECTURE NOTE

 Stockholders prefer ROE to be very high, since it indicates high returns relative to their
investment. However, if the return is abnormally high, it may increase the risk and therefore
the reasons must be determined..

(E) Market Value Ratios

These ratios relate the firm’s stock price with its earnings and book value per share..
1) Price Earnings Ratio:
Ratio:
 Used to assess the owner’s appraisal of share value.
 It also measures the amount investors are willing to pay for each Birr of the firm’s earnings.
 The level of P/E ratio indicates the degree of confidence that investors have in the firm’s
future performance.

 A rise in the price earnings ratio could be seen as a signal of increase in the market value of
the firm’s stocks..

2) Market/Book Ratio:
 The ratio of a stock’s market price to its book value gives another indication of how investors
regard the company.
 Firms with relatively high rates of return on equity generally sell at higher multiples of book
value than those with low return.
Market/Book Ratio

Book Value per Share

1) Dividend Ratios: The primary interest of stockholders on a company’s operation is to see

whether it pays a good amount of dividend or not. The two ratios relative to dividends are::
Dividend Yield

Dividend payout

CHAPTER THREE
3. TIME VALUE OF MONEY AND CONCEPT OF INTEREST

3.1 THE CONCEPT OF TIME VALUE OF MONEY

A dollar on hand today is worth more than a dollar to be received in the future because the dollar on
hand today can be invested to earn interest to yield more than a dollar in the future. The Time Value
of Money mathematics quantifies the value of a dollar through time. This, of course, depends upon
the rate of return or interest rate which can be earned on the investment.

Rift Valley University Lecture Note Page 27

FINANCIAL MANAGEMENT I LECTURE NOTE

The Time Value of Money concepts will be grouped into two areas: Future Value and Present Value.
3.2 REASONS FOR TIME VALUE OF MONEY
Money has time value because of the following reasons:
a) Risk and Uncertainty: Future is always uncertain and risky. Outflow of cash is in our
control as payments to parties are made by us. There is no certainty for future cash inflows.
b) Inflation: In an inflationary economy, the money received today, has more purchasing power
than the money to be received in future.
c) Consumption: Individuals generally prefer current consumption to future consumption.
d) Investment opportunities: An investor can profitably employ a rupee received today, to give
him a higher value to be received tomorrow or after a certain period of time.

3.3 TECHNIQUES OF TIME VALUE OF MONEY

There are two techniques for adjusting time value of money.
1. Future value/Compounding Techniques
2. Present Value/Discounting

3.3.1 FUTURE VALUE/COMPOUNDING TECHNIQUES

Future value answers the following question: "If I deposit Br 1 today in the bank (or in some other
investment), how much it will be worth in the future?"
Future Compound value: where a sum of money deposited one time and earns interest for a
specified period. The interest is paid on principal as well as on an interest earned but not withdrawn
during earlier period is called compound interest.
FV = PV + (interest X principal) For example you deposit
Birr 100 @10% interest
After one year = 100 + (100 x .10)
= 110
After two years = 110 + (110 x .10)
= 121
After three years = 121 + (121 x .10)
= 133.10
n
Fn = Pv(1+i) = P.FVIFi,n

Example1 Suppose you deposit Br. 55, 650 in a bank which will pay you 12 percent interest for a
period of 10 years. How much would the deposit grow at the end of ten year?
FV = P(CVFn . i)
FV = 55, 650 (CVF10 . 12)
FV = 55, 650 (3 . 106)
= 172, 849.90
Exercise 1 George Jackson placed Br 1,000 in a savings account earning 8 percent interest
compounded annually. How much money will he have in the account at the end of 4 years?
Answer 1,360.5
Exercise 2 If I deposit Br 1,000 for 10 years and the rate is 10% compounded semiannually,
Calculate Future value

Rift Valley University Lecture Note Page 28

FINANCIAL MANAGEMENT I LECTURE NOTE

Since it is semi annually, i=5% n=20

Then, future value is Br 2,653
Exercise 3 If a deposit of Br 1,000 for 10 years at the rate of 12% is compounded quarterly, find
future value.
Answers 3,262
Exercise 4. Ayantu deposited Br. 1,800 in her savings account in September 2008. Her account earns
6 percent compounded annually. How much will she have in September 2015?
Answer = Br. 2,706.53
A. Future Value of an Annuity
An annuity is a series of equal periodic rents (receipts, payments, withdrawals, or deposits) made at
fixed intervals for a specified number of periods. For a series of cash flows to be an annuity four
conditions should be fulfilled.
1. The cash flows must be equal.
2. The interval between any two cash flows must be fixed.
3. The interest rate applied for each period must be constant.
4. Interest should be compounded in same manner during each period.
If any one of these conditions is missing, the cash flows cannot be an annuity.
Basically, there are two types of annuities namely ordinary annuity and annuity due. Broadly
speaking, however, annuities are classified into three types:
i) Ordinary Annuity,
ii) Annuity Due

(i) Future Value of an Ordinary Annuity:

An ordinary annuity is an annuity for which the cash flows occur at the end of each period.
Therefore, the future value of an ordinary annuity is the amount computed at the period when
exactly the final (nth) cash flow is made. Graphically, future value of an ordinary annuity can be
represented as follows:
0 1 2 ------------------ n

PMT1 PMT2 ----------------------- PMT n

The future value is computed at point n where PMT n is made.

FVA n = PMT

Where:
FVA n = Future value of an ordinary annuity
PMT = Periodic payment
i = Interest rate per period
n = Number of periods
Or
FVA n = PMT (FVIFA i, n)
Example 1:

Rift Valley University Lecture Note Page 29

FINANCIAL MANAGEMENT I LECTURE NOTE

X Company has planned to acquire machinery after five years. To that end, the company deposits Birr
3,000.00 at the end of each year at a deposit rate of 12%. How much is the terminal (future value) of
the deposits at the end of the fifth year?
Given:
Given: FVA n =? i = 12% n = 5; PMT = 3,000
FVA n = PMT (FVIFA i, n)
 FVA 5 = 3,000 (FVIFA, 12 %, 5)
 FVA 5= 3,000 (6.35284736))
 FVA 5 = Birr 19,058.54

Example 2:
You need to accumulate Br. 250,000 to acquire a car. To do so, you plan to make equal monthly
deposits for 5 years. The first payment is made a month from today, in a bank account which pays 12
percent interest, compounded monthly. How much should you deposit every month to reach your
goal?
Given: FVA n = Br. 250,000; i = 12%  12 = 1%; n = 5 x 12 = 60 months; PMT =?
Given:
FVA n = PMT (FVIFA i, n)
 Br. 250,000 = PMT (FVIFA, %, 60)
 Br. 250,000 = PMT (81.670)
 PMT = Br. 250,000/81.670
 PMT = Birr 3,061

(ii) Future Value of an Annuity Due:Due:

An annuity due is an annuity for which the payments occur at the beginning of each period.
Therefore, the future value of an annuity due is computed exactly one period after the final payment
is made. Graphically, this can be depicted as:
0 1 2 --------------------- n

PMT1 PMT2 PMT3 ----------------------- PMT n + 1

The future value of an annuity due is computed at point n where PMT n + 1 is made
FVA n (Annuity due) = PMT (FVIFA i, n) (1 + i)
Or

= PMT (1 + i)

Example:
Example:
Assume example 1 for ordinary annuity except that the payments are made at the beginning instead of
end of each year. How much is the terminal (future value) of the deposits at the end of the fifth year?
FVA n (Annuity due) = PMT (FVIFA i, n) (1 + i)
 FVA 5 = 3,000 (FVIFA 12%, 5) (1 + 12%)
 FVA 5 = 3,000 (6.35284736) (1.12)
 FVA 5 = Birr 21, 345.57

Comparing Future Values

Rift Valley University Lecture Note Page 30

FINANCIAL MANAGEMENT I LECTURE NOTE

For the same number of periods, same discount rate, and same amount of money involved; which
one, ordinary annuity or annuity due, always will have greater future value?
Key: Annuity due will always have greater future value as the last cash flow earns interest for
annuity due; but not for ordinary annuity.

B) Future Value of Uneven Cash Flows

Uneven cash flow stream is a series of cash flows in which the amount varies from one period to
another. The future value of an uneven cash flow stream is computed by summing up the future value
of each payment.

Example: Find the future value of Br. 1,000, Br. 3,000, Br. 4000, Br. 1200, and Br. 900 deposited at
the end of every year starting year 1 through year 5. The appropriate interest rate is 8% compounded
annually. Assume the future value is computed at the end of year 5.

0 1 2 3 4 5

1,000 3,000 4,000 1,200 900

FVIF8%, 4 Br. 1,000 (1, 3605) = Br. 1,360.50
FVIF8%, 3 Br. 3,000 (1.2597) = 3,779.10
FVIF8%,2 Br. 4,000 (1.1664) = 4,665.60
FVIF8%, 1 Br. 1,200 (1.0800) = 1,296.00
Br. 900 (1.0000) = 900.00
FV = Br. 12,001.20

3.3.2 PRESENT VALUE OF MONEY

The present value of Br 1 answers the following question: "How much do I have to deposit today to
receive Br 1 in the future?" This is the opposite side of the coin of the future value of 1. There the
question was what will be the amount of the future withdrawal. Here the question is what the amount
of the present deposit?

P=

Example You wanted to know the present value of birr 50, 000 to be received after 15 years at the
rate of interest 9%
PV = FV (PVFn i)
= 50, 000 (PVF15 .09)
= 50, 000 (.275) present value table
= 13, 750

Rift Valley University Lecture Note Page 31

FINANCIAL MANAGEMENT I LECTURE NOTE

Exercise 1 If I wish to withdraw Br 8,000 seven years from now and the interest rate is 12%
compounded annually, Calculate present value
Answer 3,616. This means that to receive Br 8,000 seven years from now, I must deposit Br 3,616
today.
Exercise 2 Using the same facts as in Example 5 except that the 12% rate is compounded quarterly.
Calculate present value.
Solution
This requires that we look up the table for 28 periods at 3% (12% + 4). The table value is 0.437;
multiplying this by Br 8,000, then present value is 3,496.
Exercise 3.Bonsa Company owes Br. 50,000 to Adugna Co. at the end of 5 years. Adugna Co. could
earn 12% on its money. How much should Adugna Co. accept from Bonsa Company as of today?
Answer = Br. 28,370

A. Present Value of an Annuity

i) Present value of an Ordinary Annuity: is a single amount of money that should be invested now
at a given interest rate in order to provide for an annuity for a certain number of future periods..

PVA n = PMT = PMT (PVIFA i, n)

Where:
PVA n = the present value of an ordinary annuity
(PVIFA i, n) = the present value interest factor for an annuity

Example A company receives an annuity of birr 5, 000 for four year at the interest of 10 percent.
Then the present value would be

P=A

P = 5, 000 Simply, you can refer to the PV tables for PV factor.

= 5, 000 x 3.170
= 15, 850

Exercise-
Exercise- How much must one deposit now to be able to withdraw Br 1,000 per year at the end of
each of the next 5 years if the interest rate is 14%? Calculate present value of annuity
Answer is 3,433

ii) Present Value of an Annuity Due: is the present value computed where exactly the first payment
is to be made. Graphically, this is shown below:
0 1 2 3 ---------------- n

Rift Valley University Lecture Note Page 32

FINANCIAL MANAGEMENT I LECTURE NOTE

PMT1 PMT2 ---------------- PMT n

The present value of an annuity due is computed at point 1 while the present value of an ordinary
annuity is computed at point 0.

PVA n = (Annuity due) = PMT (1 + i) = PMT (PVIFA i, n) (1 + i)

Example: Ruth Corporation bought a new machine and agreed to pay for it in equal installments of
Br. 5,000 for 10years. The first payment is made on the date of purchase, and the prevailing interest
rate that applies for the transaction is 8%. Compute the purchase price of the machinery..

Given:
Given: PMT = Br. 5,000; n = 10 years; i = 8%; PVA n (Annuity due) =?
PVA (Annuity due) = Br. 5,000 (PVIFA 8%, 10) (1.08)
= Br. 5,000 (6.7101) (1.08)
= Br. 36,234.54

B) Present Value of Uneven Cash Flows

The present value of an uneven cash flow stream is found by summing the present values of
individual cash flows of the stream.
Example: Suppose you are given the following cash flow stream where the appropriate interest rate
is 12% compounded annually. What is the present value of the cash flows?
Year 1 2 3
Cash flow Br. 400 Br. 100 Br.300
Br. 400 (0.8929) PVIF12%, 1
= Br. 357.16
Br. 100 (0.7972) PVIF12%, 2
= Br. 79.72
Br. 300 (0.7118) PVIF12%, 3
= Br. 213.54
Br. 650.42

C) Present Value of Perpetuity

Perpetuity is an annuity with indefinite cash flows. In perpetuity payments are made continuously
forever. The present value of perpetuity is found by using the following formula:
PV (Perpetuity) = Payment = PMT
Interest rate i

Rift Valley University Lecture Note Page 33

FINANCIAL MANAGEMENT I LECTURE NOTE

Example: What is the present value of perpetuity of Br. 7,000 per year if the appropriate discount
rate is 7%?
Given: PMT = Br. 7,000; i = 7%;, PV (Perpetuity) = ?
PV (Perpetuity) = PMT = Br. 7,000 = Br. 100,000.
100,000.
i 7%
This means that receiving Br. 7,000 every year forever is equal to receiving Br. 100,000 now.

Rift Valley University

Faculty Of Business And Social Science

Name of Department: Accounting and Finance Program

Department Accounting & Finance
Program BA degree in Accounting & Finance
Module Corporate Finance
Number/Title
Module Code ACFN-3040

Rift Valley University Lecture Note Page 34

FINANCIAL MANAGEMENT I LECTURE NOTE

Objective of the Upon the successful completion of this module, students should be able to:
module  Identify, measure, and price the various risks faced by the companies
 Perform commercial banking procedures
 Explain the role and functions of financial institutions, and the related regulation
and supervision
Explain the role of financial markets for the well function of the economy
Total ETCTS and ETCTS: 10
Credit Hours of the Credit Hours: 6
module
Courses of the Module
Course Number AcFn3041
Course Title Financial Management I
ETCTS Credits 5
Contact Hours 3
(per week)
After successfully completing this course, students will be able to:

Course Objectives The course provides a sound understanding of the financial principles, theories and
& Competences to techniques, and aims to give a solid basis for decision making, incorporating the different
be Acquired aspects of the company. The course in general concentrates in developing a high level
understanding of the tactical and strategic significance of the financial management function
within organizations.

WEEKS Course Contents

Chapter One: Introduction
2WEEKS 1.An Overview of Financial Management
{1ST&2ND } 1.1 The nature and scope of financial management
1.2 Financial Markets and Institutions
 Financial institutions
1.3 Financial management decisions
1.4 The goal of the firm and financial management
1.5 Basic forms of business organizations
chapter 2 IFRS-Based Financial Statement and Ratio Analysis
3WEEKS Purposes of financial analysis
{3RD- 5TH } Tools for financial analysis
Ratio Analysis
 Short term solvency or liquidity measures
 Long-term solvency measures
 Asset Management or turnover measures
 Profitability Measures
 Market Value Ratios (Measures)
 Problems with financial statement
analysis
Chapter 3 The time value of money
2 WEEKS Why money has a time value?
{6TH - 7 TH } Future Value of a single amount
Present value of a single amount
Future value of annuity
Present value of annuity
Special Case Annuities
Perpetuities

Rift Valley University Lecture Note Page 35

FINANCIAL MANAGEMENT I LECTURE NOTE

Deferred Annuity
Uneven Cash Flow Streams
4. Risk and Return
2WEEKs 4.1 Understanding and Measuring Risk
{10TH - 12tTH}  Probability distributions
4.2 Portfolios
 Portfolio weights
 Portfolio expected returns
 Portfolio risk
4.3 Diversification and portfolio risk
 The principle of diversification
 Diversification and unsystematic risk
 Diversification and systematic risk
 Measuring systematic risk
 Portfolio betas
4.4 Risk and the required rate of return
 CAPM
2WEEKs Chapter 5 Cost of Capital
{13TH - 14tTH} 5.1 The meaning of cost capital
The components of the cost of capital
The cost of debt and preferred stock
5.2.2 The cost of common equity capital
5.2.3 The cost of retained earnings and new common stock
5.3 The meaning and use of the weighted average cost of capital
(WACC)
5.4 Adjusting cost of capital for project risk
Chapter 6. Capital Budgeting Decisions
The capital budgeting decision process
 Steps in the process
 Basic terminologies
Cash flows
 The rational for the use of cash flows
 The cash flow after-tax (CFAT)
 Types of cash flows
 Cash flow worksheet
Capital budgeting techniques
 Non-Discounted and Discounted Cash
Flow Techniques ( for independent projects
with or without capital rationing problems and
mutually exclusive projects )
Methods for incorporating risk in to capital budgeting
 Risk adjusted discount rate
 Certainty Equivalents
 Sensitivity and Scenario analysis

Assessment/ The evaluation scheme will be as follows:

Evaluation Component Weight coverage
Test 1 15% Chapter 1 &2
Test 2 15% Chapter 3 & 4
Assignment 1 5% Chapter 1 &2
Assignment 2 5% Chapter 3-6
Quiz 1 5%
Quiz 2 5%

Rift Valley University Lecture Note Page 36

FINANCIAL MANAGEMENT I LECTURE NOTE

Final Exam 50% All chapters

Work load in hours
Hours Required
Total
Assess Tutori Self- Assign Advi ECTS
Hrs
Lectures Lab ments als Studies ment sing
48 - 22 12 64 - - 162 6

Text Book:
Text and reference Ross, S.A., Westerfield, R.W. and Jordan, B.D., Fundamentals of
books Corporate finance,10th edition, McGraw-Hill/Irwin,USA,2013.
Reference Books
1. Ross, S.A., Westerfield,R.W. and Jordan, B.D.,
Fundamentals of Corporate Finance, 2nd edition, Richard D.
IrwinInc.,USA, 1993
2. Scott Besley and Brigham E. F., Essentials of Managerial
Finance, 14th edition, Thomson South-Western, USA, 2008.
3. Brigham, E.F. and Houston, J.F., Fundamentals of Financial
Management, 9th Edition, South-Western, USA, 2001.
4. Nevue, R.P., Fundamentals of Managerial Finance, 2nd
edition, South-Western Publishing Co., Ohio, 1985
5. Gitman, L.J., Principles of Managerial Finance, 12th edition,
Harper Collins, USA, 2009.
6. Petty & et. A., Basic Financial Management, 6th edition,
Prentice-Hall, Inc., 1993

Rift Valley University Lecture Note Page 37