Financial management _mba_205_

financial management ,need ,scope ,objectives,evolution,long term sources of funds ,raising of long term funds

1. FINANCIAL MANAGEMENT NEELAKSHI SAINI ASSISTANT PROFESSOR

2. Contents Introduction Objectives Function of financial management Scope of financial management Relationship of finance with other Sources of long term finance raising of long term finance

3. INTRODUCTION Financial management refers to that part of management activity which is concerned with the planning and controlling of firms financial resources. It deals with finding out various sources for raising various funds for the firm.

4. DEFINITION According to solo man , Financial management is concerned with the efficient use of resources. According to phillppatu, financial management is concerned with the management decision that result in acquisition and financing of long term and short term credit for the firm

5. Objectives of financial management Profit maximization Wealth maximization

6. Function of financial management Determining financial needs Selecting the sources of funds Financial analysis and interpretation Cost volume profit analysis Capital budgeting Working capital management Profit planning and control Dividend policy

7. Scope of financial management Estimating financial requirement Deciding the capital structure Selecting the sources of funds Selecting a pattern of investment Proper cash management Implementing financial control Proper use of surpluses

8. Evolution of financial management Financial management emerged as a distinct field of study at the turn of this century. Its evolution may be divided into three broad phases : the traditional phase the transitional phase the modern phase.

9. Traditional phase The focus of financial management was mainly on certain episodic events like formation, issuance of capital, major expansion, merger, reorganization, and liquidation in the life cycle of the firm. The approach was mainly descriptive and institutional. The instruments of financing, the institutions and procedures used in capital markets, and the legal aspects of financial events formed the core of financial management. Financial management was viewed mainly from the point of the investment bankers, lenders, and other outside interests

10. Transitional phase The transitional phase begins around the early forties and continues through the early fifties. Though the nature of financial mgmt during this phase was similar to that of the traditional phase, greater emphasis was placed on the day to day problem faced by the finance managers in the area of funds analysis, planning, and control. These problems however were discussed within limited analytical framework.

11. Modern phase The modern phase begin in mid 50s and has witnessed an accelerated pace of development with the infusion of ideas from economic theories and applications of quantitative methods of analysis. The distinctive features of modern phase are: The scope of financial management has broadened. The central concern of financial management is considered to be a rational matching of funds to their uses in the light of appropriate decision criteria The approach of financial management has become more analytical and quantitative The point of view of the managerial decision maker has become dominant

12. Relationship of finance with other business functions Purchase function Productivity function Distribution function Accounting function Personnel function Research and development Financial management and economics

13. Sources of long term finance Equity capital Preference capital Debentures Term loans Deferred credit Lease financing Hire purchase New instrument

14. Equity shares Equity shares are the ordinary shares, represent the owner capital in a company. The holder of shares are the real owner of the company. They have a control over the working of a company. The rate of dividend on these shares depend upon the profit of the company. They may be paid higher rate of dividend or they may not get anything. They take risk both regarding dividend and return of capital.

15. Characteristics of equity capital Maturity Claims/right to income Claim on assets Voting rights Limited liability

16. Preference capital These shares are given two preferences. There is a preference of dividend. Whenever the company has distributable profits, the dividend is first paid on preference share capital. other shareholders are paid dividend only out of remaining profits. The second preference for these shares is the repayment of capital at the time of liquidation of the company. A fixed rate of dividend is paid on preference capital. They don't have voting rights.

17. Types of preference shares Cumulative preference shares Non cumulative preference shares Redeemable preference shares Irredeemable preference shares Participating preference shares Non participating preference shares Convertible preference shares Non convertible preference shares

18. Features of preference shares Maturity Claim on income Claim on assets Control Hybrid form of security

19. Debentures A debenture holder is a creditor of a company. A fixed rate of interest is paid on debentures. The debentures are generally given a floating charge over the assets of the company.

20. Types of debentures Simple ,naked or unsecured debentures Secured or mortgaged debentures Bearer debentures Registered debentures Redeemable debentures Irredeemable debentures Convertible debentures

21. Features of debentures Maturity Claim on assets Claim on income Control Call features

22. Term loans Term loans also referred to as term finance ,represent a source of debt finance which is generally repayable in more than 1 year but less than 10 years . This source of finance is more suitable to meet the medium term demand of working capital. interest is charged on fixed rate and amount of loan is to be repaid by a way of installments in a number of years.

23. Deferred credit Income that is received by a business but not immediately reported as income. Typically, this is done on income that is not fully earned and, consequently, has yet to be matched with a related expense. Such items include consulting fees, subscription fees and any other revenue stream that is intricately tied to future promises. For example, a book club might defer income from a two-year membership plan until all the costs of procurement and shipping are assessed. Also known as deferred revenue or deferred income

24. Lease financing Leasing is an arrangement that provides a firm with the use and control over assets without buying and owing the same. It is a form of renting assets. The lessee pays the lease rent periodically to the lessor as regular fixed payments over a period of time.

25. advantages Full security Financing of capital goods Additional source of finance Less cost Tax benefits High profitability

26. Hire purchase Hire purchase means a transaction where goods are purchased and sold on the terms that Payment will be made in installments The possession of goods given to buyers immediately. The property in the goods remains with the vendors till the last installments is paid Each installment is treated as hire charges till the last installment is paid.s

27. Advantages Higher realized income Low NPAs Fewer defaulter Recycle recovered funds

28. New instruments Bonds Any security that promises to pay fixed coupon at regular intervals until medium- or long-term maturity is considered a bond. There are however many different forms of bonds which are modifications of the basic principles. Domestic, foreign and Eurobonds There is a general distinction between domestic bonds, (issued in the issuer’s own country), foreign bonds (issued in a foreign country), and Eurobonds (issued in the currency of one country but sold internationally ).

29. A floating rate note (FRN) is a bond with a variable coupon. Interest payments are based on floating interest rates, for example EURIBOR, which are used as a reference rate at periodically set ‘ refix ’ dates. Typically the interest payment is a fixed spread over a three-month or six-month reference rate. At the beginning of the coupon period, the spread is added to the reference rate of that particular day to determine the coupon. While the spread is variable. Some special FRNs have maximum or minimum coupons, called capped and floored FRNs.

30. Zero-coupon bonds zero-coupon bonds do not have a coupon. The return for the investor is achieved by selling the bond at a significant discount to the nominal value of the bond which is due at a fixed maturity. perpetual bonds A perpetual bond does not have a redemption date and is redeemed only if the issuer goes into liquidation. This means perpetual bonds pay coupons indefinitely. Interest is fixed for the initial period or for the life of the bond. Perpetual bonds tend to have a call option, but in most cases this option can only be exercised after 10 years or more.

31. Hybrid securities Hybrid securities are a combination of debt and equity features. Hybrids are a source of capital that aims to provide the flexibility of equity, but avoid the dilution of shareholder value that may result from raising additional equity.

32. Raising of long term finance Venture capital Initial public offering Public issued by listed companies Right issues Preferential allotment Private placement Term loans

33. Venture capital The capital which is available for financing the new business ventures is called venture capital. Venture capital is the investment of long term equity finance where the venture capitalist earns his return primarily in the form of capital gain.

34. Advantages They can provide large sums of equity finance, bring a wealth of expertise to business. They could also be a part of economic growth. The venture capitalist could take part in promoting innovative ideas. It could encourage new breed of entrepreneurs to take up risk

35. Initial public offering (IPO) Public offering is the first sale of stock by a private company to the public.IPO are often issued by smaller ,younger companies seeking capital to expand ,but can also be done by large privately owned companies looking to become publicly traded.

36. Advantages of IPO Increase in capital Liquidity Valuation Increased wealth

37. Public issues A public issues involves sale of securities to the public at large. public issues in India are governed by the provision of the companies act 1956,SEBI guidelines on investor protection and the listing agreement between the issuing company and the stock exchanges.

38. Advantages of public issues The entire issue process become transparent to the public and the authorities. The issue get widely distributed and thus help in reducing concentration of wealth and economic power. The issue is allotted among the applicants on non discriminatory basis.

39. Right Issue A right issue involves selling securities in the primary market by issuing rights to the existing shareholders. when a company issues additional equity capital, it has to be offered in the first instance to the existing shareholders on a pro rata basis. This is required under 81 of the companies act 1956.

40. Advantages It is an economical method of raising capital. Existing shareholding pattern is not disturbed. Raising of capital through right is more certain than the public issues. It is an opportunity to the existing shareholders to invest in that company which they are well conversant.

41. Preferential allotment The ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.

42. Advantages It helps in save costs and time involved in a public issues. There is no requirement of filling any offer documents/notice to SEBI in case of preferential allotment. Preferential allotment the shares are issued in bulk and hence when huge fund requirement is there without incurring much costs and without investing much time .

43. Private placement It involves sale of securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks and so on.

44. Advantages Cost effective Time effective Access effective