Financial Management

MBA Semester II
 Module-1

Introduction to Financial Management

Contents
• Evolution of Financial Management.
• Key activities of Finance Manager
• Changing Role of Finance Managers
• Key Decision Areas in Financial Management
• Objectives of the firm.
• Time Value of Money
Evolution of Financial Management.

• Money required for any activity.

What is Finance?

• Money and credit employed in Business.

What is Business
Finance?
Business Finance
• Includes all types of Funds.

• Required in all types of organization

• Varies with Nature Size of Business

Organizations

• Varies from time to time.

• Required on continuous business

Significance of Business Finance Theories of Finance

• To acquire Fixed Assets • Traditional theory of Finance

• To purchase Raw Material • Procurement of funds
• To acquire Services of human • Modern theory of Finance
beings • Efficient allocation and effective
administration of funds.
• To meet other Operating
Expenses
• To adopt Modern Technology
• To meet Contingencies
• To diversify
and soon…
What is Financial Management?

Management of
Finances

Maximise the value

Procurement of
of shareholders
adequate finances
wealth

Managerial Effective utilisation

Decision making of funds

Risk, Cost and Financial decision

Control making
Financial decision making
• Financial Decision Making = I+F+D

Where to invest? Investment Decisions (I) (Microsoft buying Tik Tok $ 50

Billion )
From where to raise funds? Financing Decisions (F)
How much earnings to be retained and how much to be distributed? Divided
Decisions (D)
How to manage Working Capital? (W)

Hence, Wealth of Company = f (I, F,D,W)

Key Elements of Financial Management
Planning

Allocating
Reporting
Resources

Managing
Performance &
Resources
Objectives of Financial Management
Profit Maximization Wealth Maximization
• Maximizing rupee income of • It refers to Maximizing
firm. shareholder’s wealth.
• Resources are efficiently • Reflected in Maximising market
utilized. price of equity shares.
• Appropriate measure of firms • Price of shares should increase
performance. in long run by making efficient
• Vague concept. decisions.
• Ignores timing of returns.
• Ignores Risk.
Important Concept-1
• Risk-Return Trade Off : Higher the Risk, Higher the Return; Lower The
Risk, Lower the Return.
Financial Decision Making
• Investment Decision.
• Financing Decision.
• Dividend Decision.
Investment Decisions
• Meaning: Careful selection of • Importance of Investment Decisions
assets.
• Long term growth and effects
• Long term or short term.
• Large Amount of funds involved.
• Purpose: To invest financial
resources for setting up new • Risk Involved: Uncertainty about
business or for expansion. Cash inflow.
• Decisions Taken: • Irreversible Decisions.
• Capital Budgeting Decisions. (LTA)
• Working Capital Decisions. (STA) • Example Microsoft buying Linked In
Corp. $ 24 Billion.
Financing Decision
• Meaning: It relates to the • Decisions
composition of relative • Equity and Debt in Capital
proportion of various sources of Structure.
finance. • Source of equity: Preference
Shares Or Ordinary Equity Shares.
• Equity and Debt in capital
• Source of Debt: Issue of debenture
structure. or Long-term loans.
• Cost of capital and Financial Risk.
• Purpose: Sources of Funds. • (Suzlon Energy buying Re Power
System )
• Financing decision to finance
investment decision.
Dividend Decisions
• Meaning: Dividend or Retained
Earnings.
• Objective:
• Optimum dividend policy.
• Retained Earnings for
reinvestment.
• Decisions:
• How much earnings to be retained
for reinvestment?
• How much earnings to be
distributed as dividend?
Time Value of Money
Time Value of Money
• The money which is receivable at present has more value than the
money receivable in future.

• Hence, the relationship that exists between the value of money

receivable at present and value of money receivable at future is
referred as time value of money.

• Value of money receivable at present = Value of money receivable at

future + Time value of money
Future value of money (FV)
• Future value of money is the value of money held presently at some
given future time at a given rate of interest.

Future value of money = Value of money at present + Interest

How to calculate future value using tables?

 Q1. If we keep a deposit in a bank of amount Rs 100 for 2 years
at 10 % interest rate. What will the amount we receive after 2
years?
• Compound Value
Sol:
Amount = P (1+r)t

= 100 (1+0.10)2
= Rs 121

Future Value = P* CVF ( 10%, 2 years)

= 100 * 1.2100 = Rs 121
 Q2. Calculate compound value (future value) if principal
amount is Rs 1000, r = 10 %, time = 5 years using
formula and table both.
Amount = P (1+r)t
= 1000 (1+ 0.10)5
= Rs 1610.50

Future Value = P * CVF (10%, 5 years)

= 1000 * 1.611
= Rs 1611
Q3. Calculate compound value (future value) if principal
amount is Rs 10000, r = 8 %, time = 10 years using
formula and table both.

Amount = P (1+r)t

Future Value = P * CVF (8%, 10 years)

= 10000 * 2.159
= Rs 21590
Numericals on future value
Q1. A person deposits Rs. Sol:
1,00,000 in deposit account at
the beginning of 1st year. P = Rs 1,00,000
Determine the account balance FV =?
at the end of 4th year if deposit
interest rate is 10 % p.a. r = 10 %
(Use Compound value factor table of Rs 1
at the end of nth year; Re. 1 invested in
the beginning) FV = P * CVF (10%, 4 year)
= 1,00,000 * 1.464 = Rs 1,46,400
FV = P * CVF (r%, t year)

0 1 2 3 4
Q2. A person deposits Rs. • FV= P * CVF ( )
1,00,000 in deposit account at
the beginning of 1st year.
Determine the account FV =?
balance at the end of 5th year if P = Rs 1,00,000
deposit interest rate is 8 % p.a.
(Use Compound value factor table of Rs 1
r=8%
at the end of nth year; Re. 1 invested in n = 5 years
the beginning)

FV = P * CVF (r%, t year)

FV = 1,00,000 * CVF (8 %, 5 year)
= 1,00,000 * 1.469 = Rs 146900
0 1 2 3 4 5
 Year Deposits No. of Compound Deposit *CVF
compounding Value Factor
Q3. A person deposits Rs. periods @ 10 % p.a.
1,00,000, Rs 2,00,000, Rs.
1 1,00,000 4 1.464 146400
3,00,000 and Rs. 4,00,000 in
deposit account at the
2 2,00,000 3 1.331 266200
beginning of 1st year, 2nd
year, 3rd year and 4th year 3 3,00,000 2 1.210 363000
respectively. Determine the
account balance at the end 4 4,00,000 1 1.100 440000
of 4th year if deposit interest FV = 12,15,600
rate is 10 % p.a.
(Use Compound value factor
table of Rs 1 at the end of nth
year; Re. 1 invested in the
beginning)

0 1 2 3 4
 Year Deposits No. of Compound Deposit *CVF
Q4. A person deposits Rs. compounding Value Factor
periods @ 10 % p.a.
1,00,000, Rs 2,00,000, Rs.
3,00,000 and Rs. 4,00,000 1 1,00,000 3 1.331 133100
in deposit account at the
end of 1st year, 2nd year, 3rd 2 2,00,000 2 1.210 242000
year and 4th year
respectively. Determine 3 3,00,000 1 1.100 330000
the account balance at
the end of 4th year if
4 4,00,000 0 1 400000
deposit interest rate is 10 FV= 1105100
% p.a.
(Use Compound value factor table
of Rs 1 at the end of nth year; Re. 1
invested in the beginning)

0 1 2 3 4
Q5. A person deposits Rs. Sol: (1) Using CVF Table
5,00,000 in deposit account Year Amount CP CVF (10%) Future Value
at the end of every year. 1 5,00,000 4 1.464
Determine the account 2 5,00,000 3 1.331
balance at the end of 5th year
if deposit interest rate is 10 3 5,00,000 2 1.210
% p.a. 4 5,00,000 1 1.100
(Use Compound value annuity factor 5 5,00,000 0 1
table of Rs. 1 invested at the end of
each year)

Account balance = Amount * Alternate Solution:

CVAF (r%, t year) Use CVFA Table
Given:
CVAF (10%, 5 year) = 6.105 Amount (Future Value or Compound Value )
= Amount * CVFA (10%, 5 year)
= 5,00,000 * 6.105
= Rs 30,52,500
Q6. A person deposits Rs.
5,00,000 in deposit account
at the beginning of every
year. Determine the account
balance at the end of 5th year
if deposit interest rate is 10
% p.a.
(Use Compound value annuity factor
table of Rs. 1 invested at the end of
each year)

Account balance = Amount *

CVAF (r%, t year)
Given:
Find out CVAF (10%, 6 year) =
7.716 and Deduct 1 from it.
Q7. A person deposits Rs.
1,00,000 in deposit account
at the end of every year.
Determine the account
balance at the end of 3th year
if deposit interest rate is 9 %
p.a.
(Use Compound value annuity factor
table of Rs. 1 invested at the end of
each year)

Account balance = Amount *

CVAF (r%, t year)
Q7. A person deposits Rs.
1,00,000 in deposit account
at the beginning of every Find out Compound value factor
year. Determine the account
balance at the end of 3th year
if deposit interest rate is 9 %
p.a.
(Use Compound value annuity factor
table of Rs. 1 invested at the end of
each year)

Account balance = Amount *

CVAF (r%, t year)

Find out CVAF (9%, 4 year) and

Deduct 1 from it.
Q7. A person deposits Rs.
2,00,000 in deposit account
at the end of every year.
Determine the account
balance at the end of 5th year
if deposit interest rate is 10
% p.a.
(Use Compound value annuity factor
table of Rs. 1 invested at the end of
each year)

Account balance = Amount *

CVAF (r%, t year)
Q7. A person deposits Rs.
6,00,000 in deposit account
at the beginning of every
year. Determine the account
balance at the end of 5th year
if deposit interest rate is 10
% p.a.
(Use Compound value annuity factor
table of Rs. 1 invested at the end of
each year)

Account balance = Amount *

CVAF (r%, t year)
Q6. A person deposits Rs. Year Deposits No. of Compound Deposit *CVF
compounding Value Factor
2,00,000, Rs 4,00,000, Rs. periods @ 10 % p.a.
6,00,000 and Rs. 8,00,000
in deposit account at the 1 1,00,000
beginning of 1st year, 2nd
year, 3rd year and 4th year 2 2,00,000
respectively. Determine
the account balance at 3 3,00,000
the end of 4th year if
deposit interest rate is 10 4 4,00,000
% p.a.
CVF (r %, 0 year) = 1

0 1 2 3 4
 Year Deposits No. of Compound Deposit *CVF
Q7. A person deposits Rs. compounding Value Factor
periods @ 10 % p.a.
2,00,000, Rs 4,00,000, Rs.
6,00,000 and Rs. 8,00,000 1 1,00,000
in deposit account at the
end of 1st year, 2nd year, 3rd 2 2,00,000
year and 4th year
respectively. Determine 3 3,00,000
the account balance at
the end of 4th year if
4 4,00,000
deposit interest rate is 10
% p.a.
(Use Compound value factor
table of Rs 1 at the end of nth
year; Re. 1 invested in the
beginning)

0 1 2 3 4
Present Value
• Present value is today’s value of tomorrow’s money.

• Present value = Future Value * PVF ( r %, n year)

0 2
Q1. Calculate the present Present value = Future value * PVF ( )
value of Rs. 1,00,000
receivable at the end of 2nd
year at a rate of interest of
10 % p.a.

(Use Present value factor table of Rs. 1

receivable at the end of nth year)
Q2. Calculate the present • Present value = future value * PVF ()
value of Rs. 5,00,000
receivable at the end of 5th
year at a rate of interest of
10 % p.a.

(Use Present value factor table of Rs. 1

receivable at the end of nth year)
Q3. Calculate the present • Present value = future value * PVF ()
value of Rs. 2,50,000
receivable at the end of 3rd
year at a rate of interest of 8
% p.a.

(Use Present value factor table of Rs. 1

receivable at the end of nth year)
Q4. Calculate the present Year Cashflow PVF (10%) PVCF
value of Rs. 20,000,
Rs.30,000, Rs. 40,000. Rs
50,000 receivable at the end
of 1st year, 2nd year, 3rd year
and 4th year respectively at
rate of interest of 10 % p.a.

(Use Present value factor table of Rs. 1

receivable at the end of nth year)
Q8. Calculate the present Year Cashflow PVF PVCF
value of Rs. 50,000,
Rs.20,000, Rs. 60,000. Rs
45,000, Rs. 35000 receivable
at the end of 1st year, 2nd
year, 3rd year, 4th year and 5th
year respectively at rate of
interest of 9 % p.a.

(Use Present value factor table of Rs. 1

receivable at the end of nth year)
Q5. A fixed deposit receipt
carrying an interest rate of Amount at which FD receipt was bought =
12 % p.a. has a maturity
value of Rs. 1,57,400 after 4 Maturity Value * PVF ( )
years. Determine the amount
at which fixed deposit
receipt was initially
purchased.
(Use Present value factor table of Rs. 1
receivable at the end of nth year)
Q6. Calculate the present Year Cash Flow PVF (10%) PVCF
value of annuity of Rs.
2,50,000 receivable at the
end of each year for 5 years
at a rate of interest of 10 %
p.a.

(Use table: Present value of annuity of

Rs. 1 receivable at the end of nth year) Alternate Option:

Use PVIFA Table

Present value of annuity = future value *
PVFA (10 %, 5 year) Present Value = Amount * PVAF ()
Q6. Calculate the present
value of annuity of Rs. To calculate discounting factor
2,50,000 receivable at the
(1) Identify PVAF (10%, 4 year)
beginning of each year for 5
years at a rate of interest of
10 % p.a. (2) To this factor add 1 to get the discounting factor

(Use table: Present value of annuity of PVAF (10 %, 4 year) = 3.170

Rs. 1 receivable at the end of nth year) Discounting factor = 3.170 + 1 = 4.170

For Discounting Factor

Find out Present value annuity factor for
r %, t-1 year and add 1 to it. Present Value = Amount * 4.170 = 250000* 4.170
= Rs 10,42,500
Q6. Calculate the present Present Value of Annuity = Amount * PVAF (9%, 3 year)
value of annuity of Rs.
1,50,000 receivable at the
end of each year for 3 years at
a rate of interest of 9 % p.a.

(Use table: Present value of annuity of

Rs. 1 receivable at the end of nth year)

Present value of annuity =

future value * PVFA (9%, 3
year)
Q6. Calculate the present
value of annuity of Rs.
1,50,000 receivable at the
beginning of each year for 3
years at a rate of interest of 9
% p.a.

(Use table: Present value of annuity of

Rs. 1 receivable at the end of nth year)

For Discounting Factor

Find out Present value annuity
factor for r %, t-1 year and add
1 to it.
Q7. A fixed deposit receipt
carrying an interest rate of
10 % p.a. has a maturity
value of Rs. 3,14,800 after 4
years. Determine the amount
at which fixed deposit
receipt was initially
purchased.
(Use Present value factor table of Rs. 1
receivable at the end of nth year)