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FINANCIAL
MANAGEMENT
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Introduction: Definition, Scope and Objective of Financial
Management. Basic Financial Concepts
Long Term Sources Of Finance
Capital Budgeting Principal Techniques Concept and Measurement of Cost of Capital
Cash Flows For Capital Budgeting
Financial Statement and Analysis
Leverage and Capital Structure Decision
Working Capital Decision
Dividend Policy
Syllabus
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Introduction: Definition, Scope and Objective of Financial
Management. Basic Financial Concepts
Long Term Sources Of Finance
Capital Budgeting Principal Techniques Concept and Measurement of Cost of Capital
Cash Flows For Capital Budgeting
Financial Statement and Analysis
Leverage and Capital Structure Decision
Working Capital Decision
Dividend Policy
Syllabus
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Despite of the variations between businesses the basicfinance issues they face are essentially the same.
The most important activities of a business firm are
Financial Management is concerned with the financesof an organization.
Introduction
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Financial Management performs facilitation, reconciliationand controls functions in an organization.
All the decision having monetary implications comes underthe purview of financial management.
Financial decision making involves procurement of fundsand their optimal utilization through investment, financingdividend and working capital decisions.
The key issue in finance are
Where to raise financial resources from
Where to invest the resources How to best manage the production distribution function
How much of profit to distribute and how much to retain
Finance function reconciles the conflicting interest of
the varied stakeholders.
Defining Finance
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Finance is analytical.
Finance is based on economic principles.
Finance uses accounting information as an input fordecision-making.
Finance is international in perspective.
Finance is constantly changing.
Finance is the study of how to invest and raise moneyproductively
Finance is the study of how people allocate scarceresources over time
- costs and benefits are distributed over time
- but the actual timing and size of future cash flowsare often known only probabilistically
Defining Finance
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1. Investment or Long Term Asset Mix Decision Function of investing raised funds in assets are known as
investment decision. Examples include Expansion, Modernization, Replacement of
Long Term Assets, R & D (having long term implications). The 2 important aspect of investment decision are
(a) Evaluation of the prospective profitability of newinvestments(b) The measurement of a cut-off rate; against that the
prospective return of new investments could becompared.
Decisions are taken in the light of their impact on the wealth ofshareholders.
The decision involve huge capital outlay, have long termimplications, and are usually irreversible.
Investment decision also referred as Capital Budgeting decisions.
Finance Functions
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3. Dividend or Profit Allocation Decision Distributing returns earned from assets to shareholders are known
as dividend decision. The financial manager must decided whether the firm should
distribute all profits, or retain them, or distribute a portion andretain the balance.
Such a decision depends on trade off between the future financing
needs of the firm and current consumption requirement ofshareholders.
The proportion of profits distributed as dividends is called thedividend payout ratio and the retained portion of profits is known
as retention ratio. Normally firms follow a policy of stable dividend, but firms withhigh growth rate generally offers a high retention and low payoutratio.
Dividends are generally paid in cash, but it can also be given in
form of bonus shares.
nance unct ons
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4. Working Capital Decision/ Liquidity Decision Working Capital decisions are related to the management of
current assets. The two key decision points in working capital management are
level of investment in current assets and financing of such assets.
Current asset management affect the firmsliquidity.
A firm attempts to balance cash inflows and outflows whileperforming these functions. These are called liquidity decisions.
A conflict exists between profitability and liquidity while
managing current assets. Hence, a proper trade-off must be
achieved between profitability and liquidity.
inance unctions