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    Introduction To Financial Management BM40002: Course Instructor Dr. Devlina Chatterjee

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    AyanChatterjee
    This document provides an introduction and overview of the "Introduction to Financial Management" course. It discusses why students may take the course, the learning objectives which include understanding finance, financial statements, and key areas like capital budgeting, capital structure, and working capital management. It outlines the course syllabus which covers topics like financial systems, valuation, risk and return, and international finance. The document also discusses the organization of finance functions in companies and differences between finance and accounting. It provides an overview of key concepts like time value of money, goals of firms, types of business organizations, and components of the financial system.

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    Introduction To Financial Management BM40002: Course Instructor Dr. Devlina Chatterjee

    Uploaded by

    AyanChatterjee
    140 views32 pages
    This document provides an introduction and overview of the "Introduction to Financial Management" course. It discusses why students may take the course, the learning objectives which include understanding finance, financial statements, and key areas like capital budgeting, capital structure, and working capital management. It outlines the course syllabus which covers topics like financial systems, valuation, risk and return, and international finance. The document also discusses the organization of finance functions in companies and differences between finance and accounting. It provides an overview of key concepts like time value of money, goals of firms, types of business organizations, and components of the financial system.

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    Lec 2 Introduction

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    This document provides an introduction and overview of the "Introduction to Financial Management" course. It discusses why students may take the course, the learning objectives which include understanding finance, financial statements, and key areas like capital budgeting, capital structure, and working capital management. It outlines the course syllabus which covers topics like financial systems, valuation, risk and return, and international finance. The document also discusses the organization of finance functions in companies and differences between finance and accounting. It provides an overview of key concepts like time value of money, goals of firms, types of business organizations, and components of the financial system.

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    Download as PDF, TXT or read online from Scribd
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    140 views32 pages

    Introduction To Financial Management BM40002: Course Instructor Dr. Devlina Chatterjee

    Uploaded by

    AyanChatterjee
    This document provides an introduction and overview of the "Introduction to Financial Management" course. It discusses why students may take the course, the learning objectives which include understanding finance, financial statements, and key areas like capital budgeting, capital structure, and working capital management. It outlines the course syllabus which covers topics like financial systems, valuation, risk and return, and international finance. The document also discusses the organization of finance functions in companies and differences between finance and accounting. It provides an overview of key concepts like time value of money, goals of firms, types of business organizations, and components of the financial system.

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    Introduction to Financial Management

    BM40002
    Course Instructor Dr. Devlina Chatterjee

    Why are you taking this course?


    Need a breadth course that will not clash with other courses? Looks good on the resume? Want a job in a bank or a consulting firm? Understand how the business world works? Learning to manage your own personal finances? Understand current financial and economic news? Because your friends are taking it?

    Why study finance?


    To manage your personal resources To deal with the world of business To pursue interesting and rewarding career opportunities To be able to understand the financial news and make sense of the way the world economy is evolving For the intellectual challenge

    Course Description
    Aim: Provide an introduction to financial management to nonbusiness students

    Learning Objectives: What is finance and why is it important? Understand the financial system and how it operates Learn the language of finance and business Be able to read and analyze financial statements Be able to understand the principles guiding financial decisions of the three main areas of finance viz.
    Capital budgeting Capital Structure and Cost of Capital Working Capital Management

    Course Syllabus
    Sl No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Topic Financial Management an Overview The financial system Understanding Financial Statements Capitaline Database - Tutorial Analyzing Financial Statements Break-even analysis and leverages Time value of money & calculation of present values. Sources of long term finance, Securities Market Valuation of Securities Midterm Risk, Return & Portfolio Cost of Capital Concepts Basics of Capital Budgeting Working Capital Estimation Introduction to Mergers & Acquisition International Financial Management Suggested Readings, References Chapter 1 Chapter 2 Chapter 3 Handout Chapter 4, 6 Chapter 6 Chapter 8 Chapter 19, 21 Chapter 9 Chapter 10 Chapter 14 Chapter 11, 12, 13 Chapter 22,23,24,25 Chapter 28 Chapter 29

    Some things to remember


    Grading Policy: Final exam 50% (mandatory) Mid-semester exam 30% Quizzes and assignments 15% Attendance 5% Academic honesty and integrity is an absolute must. Cheating in any form will result in serious action. Text Book: Fundamentals of Financial Management 5th Edition, Prasanna Chandra, TATA McGraw Hill Publication, 2005

    Introduction
    What is finance? Finance is the study of the behavior of individuals in the intertemporal allocation (over time) of their resources in an uncertain environment, and the study of the function of economic institutions and markets in making these allocations possible.

    What does this mean?


    Some people have more cash than they need right now (Cash Surplus) savers, lenders, investors Some people have less cash than they need right now (Cash Deficit) - entrepreneurs, existing firms How can those who need cash get it from those who dont need it? How will the lenders or investors be rewarded for forgoing their present consumption? How can society ensure that the borrowers will pay back the money to the lenders (financial markets, institutions, regulatory bodies)

    Three areas within finance


    Financial management (Corporate finance)
    how firms raise and use funds to make short-term and

    long-term investments

    Investment
    how the securities markets work how to evaluate and manage investments in stocks and

    bonds

    Financial Markets and Institutions


    study of the banking system and markets

    Financial Management
    Financial Management deals with how the finances of a company Three primary decisions: Capital Budgeting what businesses should one invest in?

    Capital Structure how should one finance these investments?


    Working Capital Management how should one manage the day to day financial transactions?

    Possible goals of a firm


    Maximization of profits Maximization of market share Minimizing risk Maximizing the value for different stakeholders customers, employees, suppliers

    How does one balance these divergent interests and points of view?

    Pitfalls of some of these goals


    Alternative Goals Pitfalls Maximization of absolute profit Should not compare absolute profit for different size firms Short term profits may be misleading about the long term viability of a firm Riskiness of profits is not taken into account Maximization of earnings per share Accounting earnings may be manipulated showing higher earnings per share Short term earnings may be misleading Riskiness of the projects is not accounted for Maximization of market share Minimization of risk Market share may be gained by high expenditure on advertisement which may lead to lower profits Firm may be too cautious and hence miss some good opportunities

    Accepted goal of financial management


    Maximization of the value of the firm Maximization of shareholder wealth Assuming the existence of free and efficient financial markets, the share price of a publicly listed firm may be taken to be a good proxy of the perceived value of the firm

    Fundamental principle of finance


    A business proposal raises the value of the firm only if its net present value if positive

    Kinds of Business Organizations


    # of owners Sole Proprietorship Partnership 1 2-20 Act under which incorporated Liability Legal Entity Taxation No registration Unlimited required liability Indian Partnership Act, 1932 Unlimited Liability Limited liability Companies Act, 1956 Limited liability No separate legal entity Profit taxed as income

    Distinct legal Double entity taxation Distinct legal Double entity taxation Separate Legal Entity Separate Legal Entity Double taxation Double taxation

    Limited Liability Partnership Private Limited 2-50 Company Public limited company 7-no limit

    Companies Limited Act, 1956; SEBI liability Act, 1992

    Organization of the finance function


    Chief Finance Officer

    Treasurer

    Controller

    Cash Manager

    Credit Manager

    Financial Accounting Manager

    Cost Accounting Manager

    Capital Budgeting Manager

    Fund Raising Manager

    Tax Manager

    Data Processing Manager

    Portfolio Manager

    Internal Auditor

    Finance and Accounting


    Accounting Time-line Nature of the job Concerned with past Accurate reporting and keeping track (score-keeping) Accrual method Finance Concerned with future Making decisions for running the company (value-maximizing) Cash flow method

    Recognizing income and expenditure Level of certainty in the figures used Regulatory pressure

    More certain since it Less certain since it has to do with reporting deals with future which past history is uncertain Highly regulated and can Decisions can be held up be held up to scrutiny by to scrutiny by outsiders shareholders, but not so much by outsiders

    The Financial System

    THE FINANCIAL SYSTEM


    Funds Deposits/Shares
    Financial Institutions Commercial Banks Insurance Companies Mutual Funds Provident Funds Non-Banking Financial Companies

    Funds Loans

    Suppliers of Funds Individuals Businesses Governments

    Demanders of Funds

    Individuals Businesses Governments

    Financial Markets

    Funds Securities

    Money Market Capital Market

    Funds Securities

    Centre for Financial Management , Bangalore

    Functions of the Financial System


    Payment system banks, credit card companies Pooling of funds Transfer of resources Risk management pool, price and exchange risk
    (hedging, diversification, insurance)

    Price information for decentralized decision making


    (interest rates, security prices help households in making consumption/saving decisions, firms in making investment/financing decisions)

    Dealing with incentive problem Information asymmetry leads to agency problems


    Moral hazard Adverse selection

    Financial Assets
    Financial assets are intangible assets that represent claims to future cash flows. The terms financial asset, instrument, or security are used interchangeably

    Examples : A 10-year bond issued by the GOI carrying an interest rate of 7 percent. Equity shares issued by TCS to the general investing public through an initial public offering. Call options granted by WIPRO to its employees.

    Financial Markets
    A financial market is a market for creation and exchange of financial assets. Play a pivotal role in allocating resources in the economy Performs three important functions:
    Facilitate price discovery. Provide liquidity. Reduce the cost of transacting
    Search cost Information costs

    Classification of financial markets


    DEBT MARKET NATURE OF CLAIM

    EQUITY MARKET MONEY MARKET


    MATURITY OF CLAIM CAPITAL MARKET PRIMARY MARKET

    SEASONING OF CLAIM
    SECONDARY MARKET CASH OR SPOT MARKET TIMING OF DELIVERY FORWARD OR FUTURES MARKET EXCHANGE-TRADED MARKET ORGANISATIONAL STRUCTURE OVER-THE-COUNTER MARKET

    Financial Market Returns

    Interest Rate
    Function of the unit of account, maturity, and default risk

    Rate of Return on Risky Assets


    Cash dividend
    r= Beginning price Dividend yield + Beginning price Capital yield

    Ending price Beginning price

    Inflation and Real Interest Rate


    1 + Nominal rate 1 + Real rate = 1 + Inflation rate

    Determinants of rates of return


    Expected productivity of capital Degree of uncertainty about the productivity of capital Time preferences of people Degree of risk aversion

    EQUILIBRIUM IN FINANCIAL MARKETS


    (a) Supply and demand for loanable funds and determination of interest rate Interest rate

    Sf (lending)
    ie ie Df (borrowing) Sf

    A B Amount of loanable funds

    Centre for Financial Management , Bangalore

    (b) Supply and demand for securities and determination of prices

    Price Pe Pe

    SS (borrowing)

    Ds Ds (lending)

    A B Amount of securities
    Centre for Financial Management , Bangalore

    Financial Intermediaries
    Reserve Bank of India

    Commercial banks

    Developmental financial institutions

    Insurance companies

    Other public sector financial institutions

    Mutual funds

    Non-banking financial corporations

    Public sector banks

    All India institutions

    Life Insurance Corporation of India

    POSB

    Unit Trust of India

    Public sector firms

    Private sector insurance companies

    NABARD

    Private sector banks

    State level institutions

    General Insurance Corporation of India

    NHB

    Other mutual funds

    Private sector firms

    Rationale for Financial Intermediaries


    Diversification Lower transaction cost Economies of scale Confidentiality Signalling

    Regulatory Infrastructure
    RESERVE BANK OF INDIA

    SEBI

    Financial Sector Reforms in India


    The financial sector reforms initiated from the early 1990s have focused on the following objectives: Removal of financial repression. Creation of an efficient, productive, and profitable financial sector. Evolution of market-determined interest rates. Granting of operational and functional autonomy to institutions. Opening of operational and functional autonomy to institutions. Opening up of the external sector in a calibrated fashion. Maintenance of financial stability in face of domestic and external disturbances.

    Key Trends in Indian Financial Sector


    Market-determined interest rates and greater volatility

    of interest rates
    Emergence of universal banks Emphasis on prudential regulation and supervision Gradual integration with the global financial system Increase in financial innovation

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