OVERVIEW OF FINANCIAL MANAGEMENT?

- Nature and scope of finance - Finance functions - Goals of a firm; financial and non-financial objectives, overlaps and conflicts among the objectives - Agency theory, stakeholder’s theory and corporate governance - Measuring managerial performance, compensation and incentives - Ethical issues in financial management - Corporate social responsibility (CSR) and financial management

THE FINANCING DECISION?

- Nature and objectives of the financing decision - Factors to consider when making financing decisions - Sources of finances for enterprises; internally generated funds and the externally generated funds, long term sources, medium term and short term sources of finance - Evaluation of financing options - Methods of issuing ordinary shares - pPublic issue, private placement, bonus issue, employee stock option plans (ESOPS) and rights issues

FINANCING INSTITUTIONS AND MARKETS?

- Nature and role of financial markets - Classification of financial markets: primary and secondary securities market, money and the capital markets, over-the counter and organised market, derivatives market, mortgage market, forex market - The security exchange listing and cross border listing - Market efficiency - efficient market hypothesis - Stock market indices - The financial institutions and intermediaries: commercial banks, savings and loans associations and co-operative societies, foreign exchange bureaus, Unit trusts and mutual funds, insurance companies and pension firms, insuranceagencies and brokerage firms, investment companies, investment banks and stock brokerage firms, micro-finance institutions and small and medium enterprises (SMEs) - The role of regulators in financial markets - Central depository system and automated trading system - Timing of investment at the securities exchange - Dow theory and Hatch system of timing

TIME VALUE OF MONEY?

- Concept of time value of money - Relevance of the concept of time value of money - Time value of money versus time preference of money - Compounding techniques - Discounting techniques

VALUATION MODELS?

- Concept of value; book value, going concern value, substitution value, replacement value, conversion value, liquidation value, intrinsic value and market value - Reasons for valuing financial assets/business - Theories on valuation of financial assets; fundamental theory, technical theory, random walk theory and the efficient market hypothesis - Valuation of redeemable, irredeemable and convertible debentures and corporate bonds - Valuation of redeemable, Irredeemable and convertible preference shares - Valuation of ordinary shares; net asset basis, price earnings ratio basis, capitalisation of earnings basis, Gordon’s model, finite earnings growth model, Super-profit model, Marakon model, Walter’s model, Discounted free cash flow, residual income model - Use of relative measures such as Economic Value added (EVA) and Market Value Added (MVA) - Valuation of unit trusts and mutual funds - Valuation of private companies: income and market based approaches

COST OF CAPITAL?

- Firms capital structure and factors influencing capital structure decisions - Factors influencing firms cost of capital - Relevance of cost of capital - Component costs of capital - The firm’s overall cost of capital - Weighted average cost of capital (WACC) - Weighted marginal cost of capital (WMCC) - Introduction to break-points in weighted marginal cost of capital schedule - Operating and financial leverage - degree of operating leverage and operating risk; degree of financial leverage and financial risk - Combined leverage - degree of combined leverage and total risk

CAPITAL BUDGETING DECISIONS?

- The nature and importance of capital investment decisions - Capital investment’s cash flows - initial cash outlay, terminal cash flows and annual net operating cash flows, incremental approach to cash flow estimation - Capital investment appraisal techniques - Non-discounted cash flow methods - payback period and accounting rate of return - Discounted cash flow methods - net-present value, internal rate of return, profitability index, discounted payback period and modified internal rate of return (MIRR) - Strengths and weaknesses of the investment appraisal techniques - Expected relations among an investment’s NPV, company value and share price - Capital rationing - evaluation of capital projects and determination of optimal capital budget in situations of capital rationing for a single period rationing - Capital investment options - timing option, strategic investment option, replacement option and abandonment option - Problems/difficulties encountered when making capital investment decisions in reality

FINANCIAL ANALYSIS AND FORECASTING?

- Users of financial statements and their information needs - Ratio analysis; nature of financial ratios, classification and calculation of financial ratios and limitation of financial ratios - Common size statements - Vertical and horizontal analysis - Financial forecasting; cash budgeting and percentage of sales method of forecasting

WORKING CAPITAL MANAGEMENT?

- Introduction and concepts of working capital - Working capital versus working capital management - Factors influencing working capital requirements of a firm - Importance and objectives of working capital management - Working capital operating cycle; the importance and computation of the working capital operating cycle - Working capital financing policies aggressive, conservative and matching financing policy - Management of stock, cash, debtors and creditors

DIVIDEND DECISIONS?

- Forms of dividend - How to pay dividends and when to pay dividends - How much dividend to pay - Firms dividend policy and factors influencing dividend decision - Why pay dividends - Dividend relevance theories; Bird in hand, Clientele effect, Information signaling theory, Walter’s model, Tax differential theory, Modigliani and Miller dividend irrelevance theory

INTRODUCTION TO RISK AND RETURN?

- Risk-return trade off/relationship - Distinction between risk free and risky assets - Expected return of an asset - Total risk of an asset - Relative risk of an asset - Expected return of a 2 asset-portfolio - The actual total risk of a 2-asset portfolio

ISLAMIC FINANCE?

- Justification for Islamic Finance; history of Islamic finance; capitalism; halal; haram; riba; gharar; usury - Principles underlying Islamic finance: principle of not paying or charging interest, principle of not investing in forbidden items such as alcohol, pork, gambling or pornography; ethical investing; moral purchases - The concept of interest (riba) and how returns are made by Islamic financial securities - Sources of finance in Islamic financing: muhabaha, sukuk, musharaka, mudaraba - Types of Islamic financial products:- sharia-compliant products: Islamic investment funds; takaful the Islamic version of insurance Islamic mortgage, murabahah,; Leasing - ijara; safekeeping - Wadiah; sukuk - islamic bonds and securitisation; sovereign - sukuk; Islamic investment funds; Joint venture -Musharaka, Islamic banking, Islamic contracts, Islamic treasury products and hedging products, Islamic equity funds; Islamic derivatives - International standardisation/regulations of Islamic Finance: case for standardisation using religious and prudential guidance, National regulators, Islamic Financial Services Board

EMERGING ISSUES AND TRENDS

Finance functions

The following explanation will help in understanding each finance function in detail

  1.  Investment Decision

One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield in future.

Following are the two aspects of investment decision

  1. Evaluation of new investment in terms of profitability
  2. Comparison of cut off rate against new investment and prevailing investment.

Since the future is uncertain therefore there are difficulties in calculation of expected return. Along with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. Therefore while considering investment proposal it is important to take into consideration both expected return and the risk involved.

Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It wise decisions to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR).

2. Financial Decision

Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s capital structure.

A firm tends to benefit most when the market value of a company’s share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds. A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure.

3.  Dividend Decision

Earning profit or a positive return is a common aim of all the businesses. But the key function a financial manger performs in case of profitability is to decide whether to distribute all the profits to the shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the other half in the business.

It’s the financial manager’s responsibility to decide a optimum dividend policy which maximizes the market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a common practice to pay regular dividends in case of profitability Another way is to issue bonus shares to existing shareholders.

4. Liquidity Decision

It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity and risk all are associated with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity it is important to invest sufficient funds in current assets. But since current assets do not earn anything for business therefore a proper calculation must be done before investing in current assets. Current assets should properly be valued and disposed of from time to time once they become non profitable. Currents assets must be used in times of liquidity problems and times of insolvency.

Role of finance manager

The functions of Financial Manager can broadly be divided into two: The Routine functions and the Executive/Managerial Functions.

a) Executive functions of financial management, and

b) Routine functions of financial management.

a) These executive functions of financial management (FM) are explained below.

  1. Estimating capital requirements : The company must estimate its capital requirements (needs) very carefully. This must be done at the promotion stage. The company must estimate its fixed capital needs and working capital need. If not, the company will become over-capitalized or under-capitalized.
  2. Determining capital structure : Capital structure is the ratio between owned capital and borrowed capital. There must be a balance between owned capital and borrowed capital. If the company has too much owned capital, then the shareholders will get fewer dividends. Whereas, if the company has too much of borrowed capital, it has to pay a lot of interest. It also has to repay the borrowed capital after some time. So the finance managers must prepare a balanced capital structure.
  3. Estimating cash flow : Cash flow refers to the cash which comes in and the cash which goes out of the business. The cash comes in mostly from sales. The cash goes out for business expenses. So, the finance manager must estimate the future sales of the business. This is called Sales forecasting. He also has to estimate the future business expenses.
  4. Investment Decisions : The business gets cash, mainly from sales. It also gets cash from other sources. It gets long-term cash from equity shares, debentures, term loans from financial institutions, etc. It gets short-term loans from banks, fixed deposits, dealer deposits, etc. The finance manager must invest the cash properly. Long-term cash must be used for purchasing fixed assets. Short-term cash must be used as a working capital.
  5. Allocation of surplus : Surplus means profits earned by the company. When the company has a surplus, it has three options, viz.,
  • It can pay dividend to shareholders.
  • It can save the surplus. That is, it can have retained earnings.
  • It can give bonus to the employees.

6. Deciding additional finance : Sometimes, a company needs additional finance for modernization, expansion, diversification, etc. The finance manager has to decide on following questions.

  • When the additional finance will be needed?
  • For how long will this finance be needed?
  • From which sources to collect this finance?
  • How to repay this finance?

Additional finance can be collected from shares, debentures, loans from financial institutions, fixed deposits from public, etc

  1. Negotiating for additional finance : The finance manager has to negotiate for additional finance. That is, he has to speak to many bank managers. He has to persuade and convince them to give loans to his company. There are two types of loans, viz., short-term loans and long-term loans. It is easy to get short-term loans from banks. However, it is very difficult to get long-term loans.
  1. Checking the financial performance : The finance manager has to check the financial performance of the company. This is a very important finance function. It must be done regularly. This will improve the financial performance of the company. Investors will invest their money in the company only if the financial performance is good. The finance manager must compare the financial performance of the company  with the established standards. He must find ways for improving the financial performance of the company.

b) The routine functions are also called as Incidental Functions.

Routine functions are clerical functions. They help to perform the Executive functions of financial management. The six routine functions of financial management are listed below.

  1. Supervision of cash receipts and payments.
  2. Safeguarding of cash balances.
  3. Safeguarding of securities, insurance policies and other valuable papers.
  4. Taking proper care of mechanical details of financing.
  5. Record keeping and reporting.
  6. Credit Management.

The finance manager will be involved with the managerial functions while the routine functions will be carried out by junior staff in the firm. He must however, supervise the activities of these junior staff.

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