FINANCIAL MANAGEMENT

Dr Dowlath Ahammad MBA, M.Phil, Ph.D

Asst. Professor,
Dept of MBA, CMR CET
 UNIT-I
• Introduction to Financial Management: Nature and Scope;
Evolution of Finance Function – Its new role in the contemporary
scenario –Goals of Financial Management - Risk-Return trade off-
Concept of Time Value of Money – Future Values and Present Values
(Simple Problems).
 INTRODUCTION TO FINANCIAL
MANAGEMENT
• Finance is one of the basic foundations of all kinds of economic
activities.
• Finance is defined as “provision of money at the time when it is
required”.
• Every enterprise, whether big, medium, or small, needs finance to carry
on its operations and to achieve its targets.
• Without adequate finance, no enterprise can possibly accomplish its
objectives.
• So finance is regarded as the lifeblood of any business enterprise.
• Financial Management is the art and science of managing money. It is the
managerial activity, which is concerned with the planning and controlling of
the firm’s financial resources

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 MEANING OF
FINANCIAL
MANAGEMENT
• Financial management is that managerial activity which is concerned with the
planning and controlling of the firm’s financial resources.
• It is an integrated decision making process concerned with acquiring, financing
and managing assets to accomplish the overall goal of a business organization.
• It can also be stated as the process of planning decisions in order to maximize the
shareholder’s wealth.
• “Financial management deals with procurement of funds and their effective
utilization in the business.”
• Financial management can also be stated as “The management of all the processes
associated with the efficient acquisition and deployment of both short and long
term financial resources.”

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 IMPORTANCE OF FINANCIAL MANAGEMENT

• Financial management is all about managing expenditure within a

limited budget.
• It is about allocating money to the necessary items first. If after that,
you have some money left, it must be used to pay off the debts. If
there is still some money left you can use it as you like.
• Financial management means management of all matters related to
an organization's finances.
• This principle is the same whether it is an organization, a family, or
even a country’s economy. We must balance expenditure and income.

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 CLASSIFICATION OF FINANCE
1. Public Finance: - It deals with the requirements, receipts and disbursement
of funds in the Government of a Country.
Central government, States government and Local self-government

2. Private Finance: - It is concerned with requirements, receipts, and

disbursement of fund in case of an individual, a profit seeking business
organization and a non-profit organization.
Personal Finance: - Personal finance deals with managing one’s own daily need of
fund.
Finance of Non-Profit Organization: The finance of non-profit organization is
concerned with financial management of charitable, religion, educational, social
and other similar organizations.
Business Finance:. Business finance deals with the finance of business objectives
and it is concerned with the planning and controlling firm’s financial resources.

3. International Finance: International finance is the branch of

economics that studies the dynamics of exchange rates, foreign
investment, and how t h e s e a f f e c t s i n t e r n a t ional trade.
D r. D ow la th A ha m m ad ,A ss t. P ro fe ss or, CM R CE T
NATURE OF FINANCIAL MANAGEMENT

Nature of financial management is concerned with its

• Functions
• Goals
• Trade-off with conflicting goals
• Systems
• Relation with other subsystems in the firm
• Relationship with other disciplines

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 EVOLUTION OF FINANCIAL MANAGEMENT

Financial management has emerged as a distinct field of study only

in the early part of this century as a result of consolidation
movement and formation of large enterprises. Its evolution may be
divided in to three phases viz.,

• The Traditional phase

• The Transitional phase and
• Modern phase.

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 THE TRADITIONAL PHASE
This Phase has lasted for about four decades. In this phase the focus of
financial management was on following selected aspects.
• It treats the entire subject of finance from the outsiders point of view.
(investment banks, lenders, others) rather than the financial decision
maker view point in the firm.
• The sequence of treatment was on certain episodic events like
formation, issuance of capital
• It placed heavy emphasis on long term financing, institutions,
instruments, procedures used in capital markets and legal aspects of
financial events. That is it lacks emphasis on the problems of short
term finance i.e., working capital management.

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 THE TRANSITION PHASE
• It has begun around the early 1940’s and continued through the
early 1950’s.
• The nature of financial management in this phase is almost similar
to that of earlier phase but more emphasis was given to the day-
to-day (working capital) problems faced by the finance managers.
• Capital budgeting techniques were developed in this phase only.

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 THE MODERN PHASE
It has begun in the mid 1950’s. The main issue of this phase is rational
matching of funds to their uses, which leads to the maximization of
shareholders wealth. This phase witnessed significant developments. The areas
of advancements are:
• Capital structure – the study says that cost of capital and capital structure are
independent in nature.
• Dividend Policy – This says that there is the effect of dividend policy on the
value of the firm.
• Investment decisions under conditions of uncertainty.
• Portfolio analysis which gives the idea for allocation of a fixed
sum of money among the available investment securities.
• Capital Asset Pricing Model which suggests that some of the risks in
investments can be neutralized by holding diversified portfolio of securities.
• Cash management models
Dr. Dowlath Ahammad, Asst. etc.
Professor, CMRCET
SCOPE OF FINANCIAL MANAGEMENT

• Estimating the Requirement of Funds

• Determining the Capital Structure
• Choice of Sources of Finance
• Investment of Funds
• Management of Cash
• Disposal of Surplus
• Financial Controls

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 TIME VALUE OF MONEY

“Time value of money” is the value of a unit of money at different time intervals.
The value of the money received today is more than its value received at a later date.
Reasons for Time Value of Money
Production
Money can be employed productively to generate real returns. For example, if we spend Rs. 500 on materials,
Rs. 300 on labor and Rs. 200 on other expenses and the finished product is sold for Rs. 1100, we can say that the
investment of Rs. 1000 has fetched us a return of 10%.

Inflation
During periods of inflation, a rupee has higher purchasing power than a rupee in the future.

Risk and uncertainty

We all live under conditions of risk and uncertainty. As the future is characterized by uncertainty, individuals
prefer current consumption over future consumption. Most people have subjective preference for present
consumption either because of their current preferences or because of inflationary pressures.
Dr. Dowlath Ahammad, Asst. Professor, CMRCET
 TECHNIQUES OF TVM

1. Compounding Technique : Future Value

2. Discounting Technique : Present Value

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 COMPOUNDING TECHNIQUE : FUTURE VALUE
• The compounding technique is used to calculate future value of money
• The compound values can be calculated on a yearly basis, or on a half-yearly basis, or on a monthly
basis or on continuous basis or on any other basis you may so desire. This is because the formula
takes into consideration a specific time period and the interest rate for that time period only

• To calculate these values would be very tedious and would require scientific calculators. To ease our
jobs there are tables developed which can take care of the interest factor calculations so that our
formulas can be written as:
Future Value = (Present Value) * (Future Value Interest Factor n, r)

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 FUTURE VALUE OF AN ANNUITY
• Annuity is defined as periodic payment for a number of periods. This periodic payment is the same every year.
The compound value (future value) of this annuity can be calculated using a different formula:

• Here A is the constant periodic cash flow (annuity), r is the rate of return for one period and n is the number of
time periods. The term within the brackets is the compound value factor of an annuity. We can also use the tables
given at the end of the text book to calculate the compound values of the cash flows and the formula would
change to:

Future Value = Annuity * (Future Value Annuity Factor n,i)

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 DISCOUNTING TECHNIQUE : PRESENT VALUE

• Discounting technique is used determine the present value of future amount.

• Present value is the current value of future amount.
• The amount to be invested today at a given interest rate over a specified period to
equal the future amount.

Present Value = Future Value * (Present Value Interest Factor n, r)

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 PRESENT VALUE OF AN ANNUITY

• The present value of an annuity can be calculated by:

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒=A

• Or to use the tables the change would be:

Present Value = Annuity *(Present Value Annuity Factor n,i)

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

• A person deposits Rs. 25000 in a bank that pays 6% interest half-yearly. Calculate the amount at the end of 3
years
• Find the present value of Rs. 100000 receivable after 10 years if 10% is the time preference for money
• If a borrower promises to pay Rs. 20000 eight years from now in return for a loan of Rs. 12550 today, what is the
annual interest being offered?
• A loan of Rs. 500000 is to be repaid in 10 equal instalments. If the loan carries 12% interest p.a. what is the
value of one instalment?

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 SINKING FUND PROBLEM
• A company has Rs.200000 6% Debentures outstanding today. The company
has to redeem the debentures after 5 years and establishes a Sinking Fund
to provide funds for redemption. Sinking Fund Investments earn interest
@10% p.a. the investments are made a the end of each year. What annual
payments must the firm make to ensure that the needed Rs.200000 is a
available on the designated date?

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 CAPITAL RECOVERY PROBLEM
• A company has raised a loan of Rs. 500000 from a financial institution at
8% p.a. rate of interest. The amount has to be paid back in 5 equal annual
instalments. What shall be the size of instalment?

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 GROWTH RATE OF COMPANY
• From the following data available for ABC Co Ltd. You are required to
calculate compound rate of growth in profits.
Years 2016 2017 2018 2019 2020 2021
Profit (in Lakhs) 60 65 75 87 98 100

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 INTEREST RATE ESTIMATION
• An investment company offers to pay Rs. 20304at the end of 10 years to
investors who deposit annually Rs.1000. what interest rate is implicit in the
offer?

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 INTEREST RATE ESTIMATION
• A company offers to pay you Rs. 4007 annually for 5 years if you deposit
Rs.16000 initially with the company. What interest rate do you earn on the
deposit?

Dr. Dowlath Ahammad, Asst. Professor, CMRCET

 VALUATION OF FINANCIAL PRODUCTS

• What is the market price of a Rs.1000 par value bond? Assume coupon
rate is 10%, maturity period 5years and reinvestment rate is 15%.
• XYZ Company going to declare dividend of Rs20 at the end of the year.
Market price of share one year hence is Rs.80. An investor’s expected
rate of return is 12%. What is Current Market Price of XYZ?
• ABC company’s current dividend is Rs.40. its growth rate is 10%.
Market price of ABC Share after three years is Rs.640. An investor’s
required rate of return is 15%. You are required to calculate current
market price of ABC share.
Dr. Dowlath Ahammad, Asst. Professor, CMRCET