Financial Management

Financial management is a core subject which provides unavoidable part of the overall business management. This book adopts a fresh and innovative approach to the study of financial management for the students of B.Com., B.B.A., M.Com., M.B.A. and other professional courses like C.A., ICWA, C.S. The text is presented in the simplest language with easy concepts. Each paragraph has been arranged under a suitable heading for quick retention of concepts. This book also contains the suitable illustrations, solved problems and model questions. About The Author: C. Paramasivan is working as a faculty and Research Supervisor, in the department of Commerce, Vivekananda College of Arts and Sciences for women, Periyar University, Salem, Tamil Nadu. He has completed postgraduate degree in Commerce, Economics, Management and Industries and Management. He has guided more than 50 M.Phil. scholars and published a dozen of research articles in various reputed journals. T. Subramanian is working as a faculty, in the department of Commerce, Vivekananda College of Arts and Sciences for women, Periyar University, Salem, Tamil Nadu. He has completed postgraduate degree in commerce, Management, Financial Management and M.Phil. in Commerce. He has guided more than 20 M. Phil. scholars and published research articles in various reputed journals. Table of Contents Introduction to financial management Financial statement analysis Sources of financing Capitalization Capital structure Cost of capital Leverage Dividend decision Capital budgeting Working capital Working capital management Special financing Financial system Preface......Page 6 Contents......Page 8 Definition of Finance......Page 20 Types of Finance......Page 21 Definition of Financial Management......Page 22 Scope of Financial Management......Page 23 Profit Maximization......Page 24 Wealth Maximization......Page 25 Unfavourable Arguments for Wealth Maximization......Page 26 Functions of Finance Manager......Page 27 Financial Planning......Page 28 Model Questions......Page 29 Meaning and Definition......Page 30 Statement of Changes in Financial Position......Page 31 Types of Financial Statement Analysis......Page 32 Techniques of Financial Statement Analysis......Page 33 Comparative Balance Sheet Analysis......Page 34 Comparative Profit and Loss Account Analysis......Page 35 Common Size Analysis......Page 36 Funds Flow Statement......Page 37 Difference Between Funds Flow and Cash Flow Statement......Page 38 Ratio Analysis......Page 39 Activity Ratio......Page 40 Profitability Ratio......Page 41 Model Questions......Page 43 Short-term Financial Requirements or Working Capital Requirement......Page 44 Sources of Finance......Page 45 Features of Equity Shares......Page 47 Advantages of Equity Shares......Page 48 Preference Shares ......Page 49 Advantages of Preference Shares......Page 50 No Par Shares......Page 51 Types of Debentures......Page 52 Disadvantages of Debenture......Page 53 Retained Earnings......Page 54 Disadvantages of Retained Earnings......Page 55 Commercial Banks......Page 56 Model Questions......Page 57 Fixed Capital......Page 60 Meaning of Capitalization......Page 61 Causes of Over Capitalization......Page 62 Effects of Under Capitalization......Page 63 Causes of Watered Capital ......Page 64 Definition of Capital Structure......Page 66 Financial Structure......Page 67 Forms of Capital Structure......Page 68 Capital Structure Theories ......Page 69 Assumptions......Page 70 Net Income (NI) Approach......Page 72 Net Operating Income (NOI) Approach......Page 74 Modigliani and Miller Approach......Page 77 Model Questions......Page 83 Definitions......Page 84 Explicit and Implicit Cost......Page 85 Importance to Structure Decision......Page 86 Dividend Price Approach......Page 87 Dividend Price Plus Growth Approach......Page 88 Earning Price Approach......Page 89 Realized Yield Approach......Page 90 Debt Issued at Premium or Discount......Page 91 Cost of Perpetual Debt and Redeemable Debt......Page 92 Cost of Preference Share Capital......Page 93 Cost of Retained Earnings......Page 95 Measurement of Overall Cost of Capital......Page 96 Model Questions......Page 99 Types of Leverage......Page 102 Degree of Operating Leverage......Page 103 Uses of Operating Leverage......Page 104 Degree of Financial Leverage......Page 105 Uses of Financial Leverage......Page 106 EBIT - EPS Break even chart for three different financing alternatives......Page 108 Degree of Combined Leverage......Page 109 Working of Capital Leverage......Page 112 Model Questions......Page 115 Types of Dividend/Form of Dividend......Page 118 Dividend Decision......Page 119 Modigliani and Miller’s Approach......Page 120 Walter’s Model......Page 126 Gordon’s Model......Page 130 Capital Market Conditions......Page 134 Model Questions......Page 135 Definitions......Page 138 Capital Budgeting Process......Page 139 Pay-back Period......Page 141 Post Pay-back Profitability Method......Page 143 Accounting Rate of Return or Average Rate of Return......Page 145 Net Present Value......Page 147 Internal Rate of Return......Page 150 Capital Rationing......Page 154 Risk-adjusted cutoff rate......Page 155 Certainly equivalent method......Page 156 Sensitivity technique......Page 157 Probability technique......Page 158 Standard deviation method......Page 159 Construction of Decision Tree......Page 161 Meaning of Working Capital......Page 168 Concept of Working Capital......Page 169 Component of Working Capital......Page 170 Permanent Working Capital......Page 171 Semi Variable Working Capital......Page 172 Working Capital Position/ Balanced Working Capital Position......Page 173 Factors Determining Working Capital Requirements......Page 174 Computation (Or Estimation) of Working Capital......Page 175 Working Capital Management Policy......Page 178 Sources of Working Capital......Page 179 Hedging Approach......Page 180 Aggressive Approach......Page 181 Model Questions......Page 182 Introduction......Page 184 Objectives of Inventory Management......Page 185 Stock Level......Page 186 Lead Time......Page 187 Economic Order Quantity (EOQ)......Page 188 Aging Schedule of Inventories......Page 190 Valuation of Inventories......Page 191 Motives for Holding Cash......Page 192 Lock Box System......Page 195 Cash Management Models......Page 196 Factors Considering the Receivable Size......Page 198 Model Questions......Page 213 Definition of Leasing......Page 218 Type of Leasing......Page 219 Advantages of Leasing......Page 221 Leasing by Specialized Institutions......Page 222 Definition of Venture Capital......Page 223 Venture Capital in India......Page 224 Myths on Factoring......Page 225 Factoring in India......Page 226 Why Factoring?......Page 227 Mechanics of Factoring......Page 228 Foreign Direct Investment......Page 229 Through Private Placements or Preferential Allotments......Page 230 SEBI and FIIs......Page 231 Classification of Merchant Banking......Page 233 Merchant Banking Organizations......Page 234 Credit Rating in India......Page 235 Credit Rating Symbols of Credit Rating Information Service of India Limited......Page 236 Credit Rating Symbols of Investment Information and Credit Rating Agency of India Limited ......Page 237 Operational Result of Credit Analysis and Research Limited......Page 238 Structure of Mutual Fund in India......Page 239 Advantages of Mutual Funds......Page 240 Open Ended Mutual Fund......Page 241 Top Ten Mutual Fund......Page 242 Model Questions......Page 243 Financial System in India......Page 244 Scheduled Commercial Banks......Page 245 Nationalised Banks......Page 246 State Bank of India (SBI)......Page 247 New Banks in Private Sectors......Page 248 Foreign Banks in India......Page 249 Origin......Page 250 Subsidies of Industrial Finance Corporation of India......Page 251 Management......Page 252 Functions......Page 253 Capital......Page 254 Origin......Page 255 Objectives......Page 256 Objectives......Page 257 Specialized Financial Institutions......Page 258 Insurance Sector in India......Page 259 Role of LIC......Page 260 General Insurance Companies......Page 261 Functions......Page 262 Working Result of Unit Trust of India......Page 263 Financial Markets......Page 264 Capital Market......Page 265 Primary Market......Page 267 Secondary Market......Page 268 Methods of Raising Capital......Page 269 Private Placement......Page 270 Functions......Page 271 Recent Trends in Capital Market......Page 272 Share Market Terminology......Page 274 Money Market......Page 276 Commercial Paper (CP)......Page 279 Money Market Mutual Funds(MMMFs)......Page 280 Fee Based Financial Services......Page 281 Non-banking Finance Companies (NBFC)......Page 282 Model Questions......Page 283 About the Book: Financial management is a core subject which provides unavoidable part of the overall business management. This book adopts a fresh and innovative approach to the study of financial management for the students of B.Com., B.B.A., M.Com., M.B.A. and other professional courses like C.A., ICWA, C.S. The text is presented in the simplest language with easy concepts. Each paragraph has been arranged under a suitable heading for quick retention of concepts. This book also contains the suitable illustrations, solved problems and model questions. Contents: Introduction to financial