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LECTURE NOTES ON FINANCIAL MANAGEMENT MBA II SEMESTER
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LECTURE NOTESON
FINANCIAL MANAGEMENT
MBA II SEMESTER
MASTER OF BUSINESS ADMINISTRATION
, FINANCIAL MANAGEMENT REVISED SYLLABUS
MBA I YEAR, II SEMESTER
UNIT – I
THE FINANCE FUNCTION:
Nature and scope, evolution of finance function , new role in the contemporary scenario , goals
of finance function ,maximizing vs. satisfying, profit vs. wealth vs. welfare, the agency
relationship and costs, risk-return trade off, concept of time value of money ,future value and
present value.
UNIT – II
THE INVESTMENT DECISION:
Investment decision process, developing cash flow, data for new projects, capital budgeting
techniques :traditional and discounted cash flow methods, the net present value vs. internal rate
return debate; approaches for reconciliation, capital budgeting decision under conditions of risk
and uncertainty; cost of capital: concept and measurement of cost of capital, debt vs. equity, cost
of equity, preference shares, equity capital and retained earnings, weighted average cost of capital
and marginal cost of capital. Importance of cost of capital in capital budgeting decisions.
UNIT – III
CAPITAL STRUCTURE DECISIONS:
Capital structure vs. financial structure: capitalization, financial leverage, operating leverage and
composite leverage, earnings before interest and tax, Earning Per Share Analysis.
Indifference Point/Break even analysis of financial leverage, capital structure theories: the
Modigliani miller Theory, NI, NOI theory and traditional Theory: a critical appraisal.
UNIT – IV
DIVIDEND DECISIONS:
Dividends and value of the firm .Relevance of dividends, the MM hypothesis, Factors determining
dividend policy, dividends and valuation of the firm, the basic models. Declaration and payment
of dividends, bonus shares, Rights issue, share-splits, Major forms of dividends: cash and bonus
shares, The theoretical backdrop: dividends and valuation, Major theories centered on the works
of GORDON, WALTER and LITNER. A brief discussion on dividend policies of Indian
companies, working capital management: components of working capital, gross vs. net working
capital, determinants of working capital needs, the operating cycle approach.
UNIT – V
MANAGEMENT OF CURRENT ASSETS:
Management of cash, basic strategies for cash management, cash budget, cash management
techniques/processes; management of receivables and management of inventory, the importance
of current assets management in working capital planning, planning of working capital, financing
of working capital through bank finance and trade credit, recommendations of Tandon and Daheja
committee on working capital, cases.
, UNIT-I
INTRODUCTION TO FINANCIAL MANAGEMENT
INTRODUCTION AND MEANING OF FINANCIAL MANAGEMENT:
Financial management is that managerial activity which is concerned with the planning
and controlling of the firm’s financial resources. Though it was a branch of economics till
1890, as a separate activity or discipline it is of recent origin. Still it has no unique body of
knowledge of its own and draws heavily on economics for its theoretical concepts even today.
Financial management is about analysing financial situation making financial decision
setting financial objectives. Formulating financial plan to attain this objectives and providing
effective system of financial control to ensure plan to progress towards the set of objective.
DEFINITIONS OF FINANCIAL MANAGEMENT:
1. According to Weston and Brighan, Financial Management is an area of financial
decision making, harmonising individual motives and enterprise goals”.
2. According to Howard and Upon, Financial Management is the application of the
planning and controlling functions to the finance function”.
3. According to Ezra Soloman and Pringle John, “Financial Management is concerned
with the effective use of an economic resource namely capital fund”.
4. A formal definition of finance would be determining acquisition, allocation,
understanding and utilisation of financial resources usually in the aim of achieving
of some particular goals of objective.
SCOPE OF FINANCIAL MANAGEMENT
Financial Management means the entire excise of managerial efforts devoted to the
management of finance, both its sources and uses of financial resources of an
enterprise.
Financial management has undergone significant changes over years as regards its
scope and coverage. As such the role of finance manager has also undergone
fundamental changes over the years. In order to have a better understanding of these
changes, it will be appropriate to study both traditional approach and modern
approach to the finance function.
, I.TRADITIONAL APPROACH:
The traditional approach, which was popular in the early part of this century, limited
role of financial management to raising and administering of funds required by the
enterprise to meet their financial needs. It broadly covered the following three
aspects,
i) Arrangement of funds from financial institutions.
ii) Arrangement of funds through issue of financial instruments.
iii) Looking after the legal and accounting relationship between a corporation and its
sources of funds.
Thus the traditional concept of financial management included the whole
exercise of raising funds externally. The finance manager had a limited role to
perform.
He was expected to keep accurate financial records, prepare reports on the
financial performance and manage cash in a way that the corporation is in a
position to pay bills in time. The term “Corporate Finance” was used in place of
the present term “Financial Management”.
The traditional approach evolved during 1920 continued to dominate academic
thinking during forties and through the early fifties. However, in the later fifties
it started to be severely criticised and later abandoned on account of the
following reasons:
1. Outsiders looking in Approach:
This approach treated the subject of finance from the view point of suppliers of
funds i.e., outsiders, bankers and investors etc.
It followed an outsider-looking in approach and not the insider looking-out
approach, since it completely ignored the viewpoint of those who had to take
internal financing decisions.
2. Ignored Routine Problems:
The approach gave undue emphasis to infrequent happenings in the life of an
enterprise. The subject of financial management was confined to the financial
problems arising during course of, incorporation, mergers, consolidations and
reorganisation of corporate enterprise. As a result this approach did not give any
importance to day-to-day financial problems of business undertakings.
3. Ignored Non-Corporate Enterprise:
The approach focused only the financial problems of corporate enterprise. Non-
corporate industrial organisations remained outside its scope.
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