PONDICHERRY UNIVERSITY

1 PONDICHERRY UNIVERSITY (A Central UNIVERSITY )DIRECTORATE OF DISTANCE EDUCATIONMASTER OF BUSINESS ADMINISTRATIONF irst Year II Semester Paper Code: MBAC2001 financial management (Common to all MBA Programs)AuthorsDr. BalachandranProfessorAlagappa G. RaghavanProfessorSDM Institute of management G. Shanmuga SundaramAssociate ProfessorDept. of CommercePondicherry UniversityPuducherry. All Rights are Reserved TABLE OF CONTENTS UNITPAGE - I Finance - An Introduction3 Unit - II Capital Budgeting - A Conceptual Framework55 Unit - III Capital Structure Theories116 Unit - IV Dividend Policies156 Unit - V Working Capital Management193 MBA - II Semester Paper code: MBAC2001 financial ManagementObjectives To know the various sources of finance To understand the various uses for finance and To familiarize oneself with the techniques used in financial financial management financial goals - Profit vs.

2 Wealth Maximization; Finance Functions Investment, Financing and Dividend Decisions Cost of Capital Significance of Cost of Capital Calculation of Cost of Debt Cost of Preference Capital Cost of Equity Capital (CAPM Model and Gordon s Model) and Cost of Retained Earnings Combined Cost of Capital (weighted/Overall).Unit-II Capital Budgeting Nature of Investment Decisions Investment Evaluation criteria Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Payback Period, Accounting Rate of Return (ARR) NPV and IRR Operating and financial Leverage Measurement of Leverages Effects of Operating and financial Leverage on Profit Analyzing Alternate financial Plans - Combined financial and Operating Leverage Capital Structure Theories - Traditional approach - Hypotheses without Taxes and with Taxes Net Income Approach (NI) Net Operating Income Approach (NOI) - Determining capital structure in Disciplines 1.

3 Accounting 2. Economics 3. Taxation 1 MBA - II Semester Paper code: MBAC2001 financial ManagementObjectives To know the various sources of finance To understand the various uses for finance and To familiarize oneself with the techniques used in financial financial management financial goals - Profit vs. Wealth Maximization; Finance Functions Investment, Financing and Dividend Decisions Cost of Capital Significance of Cost of Capital Calculation of Cost of Debt Cost of Preference Capital Cost of Equity Capital (CAPM Model and Gordon s Model) and Cost of Retained Earnings Combined Cost of Capital (weighted/Overall).

4 Unit-II Capital Budgeting Nature of Investment Decisions Investment Evaluation criteria Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Payback Period, Accounting Rate of Return (ARR) NPV and IRR Operating and financial Leverage Measurement of Leverages Effects of Operating and financial Leverage on Profit Analyzing Alternate financial Plans - Combined financial and Operating Leverage Capital Structure Theories - Traditional approach - Hypotheses without Taxes and with Taxes Net Income Approach (NI) Net Operating Income Approach (NOI) - Determining capital structure in Disciplines 1. Accounting 2. Economics 3.

5 Taxation 2 Unit- IV Dividend Policies Issues in Dividend Decisions Relevance Theory Walter s Model Gordon s Model Irrelevance Theory M-M hypothesis - Dividend Policy in Practice Forms of Dividends Stability in Dividend Policy Corporate Dividend management of Working Capital Significance and types of Working Capital Calculating Operating Cycle Period and Estimation of Working Capital Requirements Financing of Working Capital and norms of Bank Finance Sources of Working capital Factoring services Various committee reports on Bank Finance Dimensions of Working Capital management .[Note: Distribution of Questions between Problems and Theory of this paper must be 40:60 , Problem Questions: 40 % & Theory Questions: 60 %]REFERENCESKhan MY, Jain PK, BASIC financial management , Tata McGraw Hill, Delhi , , Prasanna.

6 financial management , Tata McGraw Hill, Banerjee, FUNDAMENTALS OF financial management , PHI, Delhi, Bose D, FUNDAMENTALS OF financial management , PHI, Delhi, Singh, FUNDAMENTALS OF financial management , Ane, ILesson 1 - Finance An Introduction Lesson Outline Significance Definition of Finance Functions of Finance Types of Finance Business Finance Direct Finance Indirect Finance Public Finance Private Finance Corporation Finance Finance in Relation to other Allied DisciplinesLearning ObjectivesAfter reading this lesson you should be able to Understand the significance and definition of finance Know the functions of finance Identify the different types of finance Describe this relationship between finance with other allied disciplines 4 Significance Finance is the life blood of business.

7 Before discussing the nature and scope of financial management , the meaning of finance has to be explained. In fact, the term, finance has to be understood clearly as it has different meaning and interpretation in various contexts. The time and extent of the availability of finance in any organization indicates the health of a concern. Every organization, may it be a company, firm, college, school, bank or UNIVERSITY requires finance for running day to day affairs. As every organization previews stiff competition, it requires finance not only for survival but also for strengthening themselves. Finance is said to be the circulatory system of the economy body, making possible the required cooperation between the innumerable units of activity.

8 Definition of Finance According to , Finance may be defined as the position of money at the time it is wanted. In the words of John J. Hampton, the term finance can be defined as the management of the flows of money through an organization, whether it will be a corporation, school, bank or government agency. According to Howard and Upton, finance may be defined as that administrative area or set of administrative functions in an organization which relates with the arrangement of each and credit so that the organization may have the means to carry out the objectives as satisfactorily as possible. In the words of Bonneville and Dewey, Financing consists in the raising, providing, managing of all the money, capital or funds of any kind to be used in connection with the business.

9 As put forth by Hurband and Dockery in his book Modern Corporation Finance , finance is defined as an organism composed of a myriad of separate enterprise, each working for its own ends but simultaneously making a contribution to the system as a whole, some force is necessary to bring about direction and co-ordination. Something must direct the flow of economic activity and facilitate its smooth operation. Finance is the agent that produces this result . The Encyclopedia Britannica defines finance as the act of 5providing the means of payment. It is thus the financial aspect of corporate planning which may be described as the management of money.

10 An analysis of the aforesaid definition makes it clear that finance directs the flow of economic activity and facilitates the smooth operation. Finance provides the required stimulus for continued business operations of all categories. Finance is essential for expansion, diversification, modernization, establishment, of new projects and so on. The financial policy of any organization to a greater extent, determines not only its existence, and survival but also the performance and success of that organization. Finance is required for investment, purposes as well as to meet substantial capital expenditure projects. Functions of Finance According to Paul G. Hasings, finance is the management of the monetary affairs of a company.