Finance Management Notes
Module I: Overview of Indian Finance System
Characteristics, Components, and Functions of Financial System
- The financial system facilitates the flow of funds between savers and investors.
- Key components: financial institutions, financial markets, financial instruments, and
regulatory framework.
- Functions include liquidity provision, risk management, and capital allocation.
Financial Instruments
- **Definition:** Instruments that represent a claim to financial resources.
- **Types:**
- **Equity Shares** – Ownership in a company.
- **Preference Shares** – Fixed dividend, priority over equity.
- **Bonds/Debentures** – Fixed-income instruments.
- **Certificates of Deposit** – Short-term savings instruments.
- **Treasury Bills** – Government-issued short-term debt securities.
Financial Markets
- **Definition:** A market where financial securities are traded.
- **Types:**
- **Capital Market** – Long-term investments (stocks, bonds).
- **Money Market** – Short-term investments (T-bills, commercial paper).
- **Foreign Exchange Market** – Currency trading.
Financial Institutions
- **Commercial Banks:** Provide credit, accept deposits.
- **Investment Banks:** Assist in raising capital, mergers, acquisitions.
- **Stock Exchanges:** Facilitate trading of financial securities.
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Module II: Risk and Return & Time Value of Money
Concept of Returns and Risk
- **Historical vs. Expected Returns:**
- Historical return – based on past performance.
- Expected return – forecasted performance.
- **Risk Measurement:**
- Standard deviation measures volatility.
- Portfolio diversification reduces risk.
Time Value of Money (TVM)
- **Future Value (FV):** The value of money at a future date.
- FV formula: FV = PV (1 + r)^n
- **Present Value (PV):** The value of future money in today’s terms.
- PV formula: PV = FV / (1 + r)^n
- **Annuities:** Equal payments made over time.
- **Ordinary Annuity:** Payments at end of period.
- **Annuity Due:** Payments at beginning of period.
- **Continuous Compounding:** Interest calculated continuously.
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Module III: Corporate Finance & Ratio Analysis
Corporate Finance
- **Objectives:** Maximizing shareholder value.
- **Key Decisions:**
- **Investment Decisions** – Asset purchases, project selection.
- **Financing Decisions** – Capital structure, debt vs. equity.
- **Dividend Decisions** – Payout vs. reinvestment.
Financial Ratio Analysis
- **Liquidity Ratios:** Measure short-term obligations (e.g., current ratio).
- **Efficiency Ratios:** Assess operational efficiency.
- **Profitability Ratios:** Evaluate earnings potential.
- **Capital Structure Ratios:** Debt-to-equity analysis.
- **Stock Market Ratios:** Earnings per share, price-to-earnings.
- **Limitations:** Past data dependence, sector variations.
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Module IV: Capital Budgeting & Working Capital Management
Capital Budgeting
- **Definition:** Evaluating long-term investments.
- **Methods:**
- Net Present Value (NPV): Determines project value.
- Internal Rate of Return (IRR): Rate at which NPV = 0.
- Payback Period: Time to recover investment.
- Profitability Index: Benefit-to-cost ratio.
Working Capital Management
- **Definition:** Managing short-term assets/liabilities.
- **Key Areas:**
- **Inventory Management:** Balancing stock levels.
- **Receivables Management:** Timely collections.
- **Cash Management:** Liquidity maintenance.
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Module V: Sources of Finance & Capital Structure
Sources of Finance
- **Long-term:**
- Equity, Debt, Hybrid Instruments.
- **Mezzanine Finance:** A mix of debt and equity.
- **Short-term:**
- Trade Credit, Bank Finance, Commercial Paper.
- **Project Finance:** Large-scale funding for infrastructure projects.
Capital Structure
- **Factors Influencing:** Profitability, risk, market conditions.
- **Theories:**
- **Net Income Approach:** More debt increases firm value.
- **Net Operating Income Approach:** Capital structure irrelevant.
- **Traditional Approach:** Optimal mix of debt and equity.
- **Modigliani-Miller Theorem:** Market efficiency negates capital structure relevance.
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Module VI: Dividend Policy
Dividend Policy
- **Definition:** How firms distribute earnings.
- **Factors Affecting Decisions:**
- Profitability, growth opportunities, shareholder preferences.
- **Theories:**
- **Gordon’s Model:** High dividends increase value.
- **Walter’s Model:** Reinvestment vs. dividends.
- **Modigliani-Miller:** Dividend policy irrelevant in perfect markets.
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Key Books for Reference
- **Fundamental Financial Management** – Brigham & Houston.
- **Analysis for Financial Management** – Robert C. Higgins.
- **Indian Financial System** – M.Y. Khan.
- **Finance Management** – I.M. Pandey.
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Final Notes:
This document covers all key topics from your PowerPoint presentation, with added
explanations where necessary for clarity. Use this as your study guide to understand
financial management concepts thoroughly. Let me know if you need any modifications or
further clarifications!
