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Financial Management

Subject code : MB0029

Contents

Unit 1

Financial Management 1

Unit 2

Financial Planning 15

Unit 3Time Value of Money 34

Unit 4

Valuation of Bonds and shares 50

Unit 5

Cost of Capital 72

Unit 6

Leverage 88Unit 7

Capital Structure 101

Unit 8

Capital Budgeting 113

Edition: Fall 2008

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7/28/2019 Financial Management introduction

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Dr. K. Jayakumar

Vice Chancellor

Sikkim Manipal University of Health, Medical, and Technological studies

Prof. Nandagopal V. B.

Director and Dean

Sikkim Manipal University of Health, Medical, and Technological studies.

Board of Studies

Dr. T. V. Narasimha Rao

Professor. Manipal Universal Learning

Prof. K. V. Varambally

Director, Manipal Institute of Management, Manipal

Ms. Vimala Parthasarathy

Asst. Professor. Sikkim Manipal University of Health,

Medical and Technological studies.

Mr. Shankar Jagannathan

Former Group Treasurer

Wipro Technologies Limited, Bangalore

Ms. Sadhana Dash

Senor Manager HR

Microsoft India corporation ( Pvt) limited

Mr. Abraham Mathews

Chief Financial Officer

Infosys BPO, Bangalore

Mr. Pankaj Khanna

Director, HR, Fidelity Mutual Fund

Content Preparation Team Content Reviewed and Edited by

1. Prof V. Narayanan Dr. T. V. Narasimha Rao

Dean, M.S. Ramaiah Institute of Management, Bangalore Professor. Manipal Universal Learning2. Smt. Asha Nadig

Adarsh Institute of Management, Bangalore

Edition: Fall 2008

This book is a distance education module comprising of collection of learning material for our students.

All rights reserved. No part of this work may be reproduced in any form by any means without permissionin writing from Sikkim Manipal University of Health, Medical and Technological Sciences, Gangtok,Sikkim.

Printed and Published on behalf of Sikkim Manipal University of Health, Medical and Technological

Sciences, Gangtok, Sikkim by Mr. Rajkumar Mascreen, GM, Manipal Universal Learning Pvt. Ltd.,Manipal 576 104. Printed at Manipal Press Limited, Manipal.

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INTRODUCTION

Financial Management deals with the management of financial resource of a business firm. It

discusses the goal of financial management and emphasizes on shareholder value

maximization. Financial management mainly comprises of all managerial actions relating to the

three major decision areas such as Investment, Financing and Dividends and working capital

management. This courseware comprises 15 units:

Unit 1: Financial Management

Explains the meaning and scope of financial management. It examines the goal of

corporate financial management.

Unit 2: Financial Planning

Gives a brief account of the meaning and need for financial planning.

Unit 3: Time Value of Money

This unit introduces the concepts of time value of money, compounding and

Discounting of cashflows.

Unit 4: Valuation of Bonds and Shares

Explains the principles behind the valuations of bonds and equality shares

Unit 5: Cost of Capital

This unit describes the concept of cost of capital and the computation of the

weighted average cost of capital.

Unit 6: Leverage

Describes the concepts of operating, financial and combined leverage and gives the

procedure for computing the different types of leverage.

Unit 7: Capital Structure

This unit introduces the concept of capital structure and the importance thereof. It

also discusses the various theories of capital of structure.

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Unit 8: Capital Budgeting

Explains the meaning and significance of capital budgeting decisions. It gives a

detailed account of various investment appraisal techniques.

Unit 9: Risk Analysis in Capital Budgeting

Gives the meaning of risk types and sources of risk in capital budgeting decisions. It

also analysis the various approaches for handling the risk factor in investment

decisions

Unit 10: Capital Rationing

This unit explains the meaning of capital rationing. It also examines the steps

involved in capital rationing process.

Unit 11: Working Capital Management

Gives the meaning of various concepts of working capital. It gives a detailed

account of the factors that influence the working capital requirements of a firm.

Unit 12: Cash Management

Cash is an important component of working capital. It needs to be managed

efficiently so as to avoid either excess cash balances or cash shortages. This unit

looks at different cash management tools.

Unit 13: Inventory Management

This unit describes briefly the various forms of inventory that a firm keeps. A brief

description and pricing of inventory along with the determination of stock levels are

also explained.

Unit 14: Receivables Management

Gives the meaning of receivables management. Costs of maintaining receivables,

formulation of credit policy and determinations of an optimal credit period are

discussed.

Unit 15: Dividend Decision

Dividends are payments made by firm to its shareholders. Dividends form a part of

the returns expected by the shareholders. This unit explains the dividend policy

matters of a business firm and the different types of dividends.