...UNIT-I Unit I: Nature of Financial Management: Meaning – Nature – Objectives – Scope- Functions of Financial Management – Financial forecasting – Financial Planning – Time Value of Money (NP) Nature of Financial Management: Meaning: Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Nature Scope/Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting).Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Get MBA study materials, articles, order business templates and stock market updates from or http://www.easymbaguide.in/ or www.easymbaguide.jimdo.com or www.easymbaguide.blogspot.com. Give your valuable feedback...
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...CHAPTER 14 FINANCIAL AND OPERATING LEVERAGE Q.1. A.1. Explain the concept of financial leverage. Show the impact of financial leverage on the earnings per share. The use of fixed-charges sources of funds, such as debt and preference capital, along with owners’ equity in the capital structure is known as financial leverage (or gearing or trading on equity). The financial leverage employed by a company is intended to earn more on the fixed charges funds than their costs. The surplus will increase the return on the owners’ equity. The role of financial leverage in magnifying the return of the shareholders’ is based on the assumptions that the fixed-charges funds (such as the loan from financial institutions and other sources or debentures or bonds) can be obtained at a cost lower than the firm’s rate of return on net assets. So, when the difference between the earnings generated by assets financed by the fixedcharges funds and costs of these funds is distributed to the shareholders, the earnings per share (EPS) (or return on equity, ROE) increases. EPS is calculated by dividing profits after tax (PAT) (net of preference dividend) by the number of shares outstanding. Example: All-equity Debt-equity 1. Investment 500,000 500,000 2. Equity capital 500,000 250,000 3. Debt capital @ 15% 0 250,000 4 EBIT 120,000 120,000 5. Less: Interest 0 37,500 6. PBT 120,000 82,500 7. Less: Taxes @ 50% 60,000 41,250 ------------8. PAT 60,000 41,250 9. No. of equity shares 50,000 25,000 10. EPS (5 ÷...
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...Advanced Corporate Finance [FN2] Examination Blueprint 2013/2014 Purpose The Advanced Corporate Finance [FN2] examination has been constructed using an examination blueprint. The blueprint, also referred to as the test specifications, outlines the content areas covered on the examination and the weighting allotted to each content area. This document also lists the topics, the level of competence for each topic, and the related learning objectives and competencies. The learning objectives have been designed to ensure that the competencies are met. In addition, information is provided on the proportion of each question type presented in the examination (that is, multiple choice, quantitative problems, and so on). Use Candidates should use the examination blueprint to prepare for the course examination. The blueprint may not include all the topics listed in the course materials; however, candidates are still responsible for acquiring a broad-based knowledge of all topics not listed in the blueprint since these topics will be tested in assignment and review questions. The topics not listed in the blueprint will also provide candidates with a greater depth of understanding of finance concepts. Examination Objectives The objective of the 4-hour comprehensive examination is to test CGA candidates on the prerequisite knowledge required for advancement into PA1 and PA2, so as to ensure that the candidates have the broad-based knowledge in finance needed to function properly in the association’s...
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...------------------------------------------------- Financial Planning and Forecasting Financial Statements ------------------------------------------------- ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS We like to use discussion questions along with relatively simple and easy to follow calculations for our lectures. Unfortunately, forecasting is by its very nature relatively complex, and it simply cannot be done in a realistic manner without using a spreadsheet. Accordingly, our primary “question” for Chapter 9 is really a problem, but one that can be discussed. Therefore, we base our lecture primarily on the BOC model and we use the class period to discuss forecasting and Excel modeling. We cover the chapter in about 2 hours, and then our students work a case on the subject later in the course. 9-1 The major components of the strategic plan include the firm’s purpose, the scope of its operations, its specific (quantified) objectives, its operating strategies, its operating plan, and its financial plan. Engineers, economists, marketing experts, human resources people, and so on all participate in strategic planning, and development of the plan is a primary function of the senior executives. Regional and world economic conditions, technological changes, competitors’ likely moves, supplies of resources, and the like must all be taken into account, along with the firm’s own R&D activities. The effects of all these forces, under alternative strategic plans, are analyzed by use...
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...Science Technology Company Presentation to the Board of Directors on 5 Year Plan Executive Summary Context Science Technology Company designs and manufactures electronic measuring equipment and systems The electronics industry is characterized by a short product life cycle, rapid growth and increasing competition The Problem STC’s financial policies and profit margins have limited their ability to finance their working capital requirements STC is approaching the prudent limit of debt financing in relation to its equity Our Recommendation STC needs to raise more equity by positioning itself for an IPO. To do so, the company needs to: – Increase their operational effectiveness to free up working capital – Improve financial performance through asset and liability management 2 Agenda Background The Finson Plan A New Financial Strategy Results 1. Background 2. Evaluating the CFO’s (Harry Finson) Five-year Plan 3. Developing a New Financial Strategy 4. Results 3 1. Background Science Technology Company Science Technology was an early pioneer in the design, manufacture and use of electronic measuring instruments Product Categories: Systems for testing electronic circuits and components Equipment for measuring and analyzing noise and vibration Audiometric devices Time 1915: Founding Pioneer of electronic measuring instruments 1915 – 1945: Pre-war Era Little serious competition Growth resulted from R&D “We don’t want to grow too large” 1945 – Present: Post-war...
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...Managing Financial Resources and Decisions Mark Anthony R. Casanova Kiyoung Jung (Justin) Section A 2.2 Explain the importance of financial planning The importance of financial planning for the business is best seen when a company is faced with a situation concerning outstanding debts and rising cost. So to be able to be prepared for the situation in advance, the company should have prepared a proper financial plan beforehand. The success of a business is greatly determined by the financial plans they have laid out and how well it is followed to support their business plan. Wealth maximization is the main goal of a financial plan. Wealth maximization is simply explained as maximization of the shareholder. The strategy of wealth maximization usually includes creating financial investment decisions that bring into any risk which is bigger than expected benefits. The objective of wealth maximization is commonly accepted goal of a corporation. As stated by this objective, the manager should be the one who makes decisions that maximize the wealth of shareholders. In other words, this is also to make the shareholder’s investment profitable. Shareholders’ wealth will be maximized when a decision made by manager raises the NPV (net present value). The NPV means the difference between present value of the benefits and present value of the costs. A decision which has a positive net present value will create wealth for shareholders and a decision that has a negative net present...
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...Financial Statements of THE ALGONQUIN COLLEGE OF APPLIED ARTS AND TECHNOLOGY Year ended March 31, 2005 THE ALGONQUIN COLLEGE OF APPLIED ARTS AND TECHNOLOGY Financial Statements and Supplementary Schedules Year ended March 31, 2005 Auditors’ Report Statement of Financial Position.....................................................................................................2 Statement of Operations ...............................................................................................................3 Statement of Changes in Net Assets ............................................................................................4 Statement of Cash Flows ..............................................................................................................5 Notes to Financial Statements ......................................................................................................6 Supplementary Schedules Schedule A - Revenue ..........................................................................................................24 Schedule B - Academic Expenditures ..................................................................................25 Schedule C - Educational Resources Expenditures .............................................................25 Schedule D - Student Services Expenditures.......................................................................26 Schedule E - Administrative Expenditures...............................
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...Presently Lawrence Sports has had to make some short-term decisions concerning its working capital management. In order to learn from this experience they will develop a working capital policy which will increase the predictability and efficiency of their cash. Working capital is defined as “the assets of a business that can be applied to the operations” or “the amount of current assets which exceed the current liabilities” (Answers, 2007, para. 1). Working capital management involves the “deployment of current assets and current liabilities as to maximize short-term liquidity” (The Free Dictionary, 2007, para. 1). The intent of a working capital management policy is to ensure an organization is able to continue business operations and has adequate ability to satisfy both short-term debt and upcoming operational expenses. Simply stated, “good management of working capital will generate cash, improve profits and reduce risks” (Anonymous, 2007, para. 2). Lawrence Sports, a manufacturer and distributor of sporting goods equipment, is currently facing a number working capital and cash flow management issues largely related to past due payment of their largest customer, Mayo Stores. This paper will take a closer look at Lawrence Sports’ simulation and identify the issues, goals, potential solutions, evaluate risks and define metrics to measure the success of the working capital management strategy selected to address the short and long-term financing needs of the organization...
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...Venture Capital (VC) | Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital. Private equity is a broad term that refers to any type of non-public ownership equity securities that are not listed on a public exchange. Private equity encompasses both early stage (venture capital) and later stage (buy-out, expansion) investing. In the broadest sense, it can also include mezzanine, fund of funds and secondary investing. Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.). The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken. With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding. Equity finance offers the significant advantage of having no interest charges. It is "patient" capital that...
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...Capital Budget Policy and Process Vernita Davis-Knight Susan Friguglietti Edna Primas Ronald Rehn University of Phoenix-Online February 27, 2008 Capital Budget Policy and Process Capital budgeting is the process by which capital investment decisions are made. Capital can be described as an organization’s operating assets (Diamond, Hanson &, Murphy, 1994). The capital budgeting process includes "planning, setting goals and priorities, arranging financing, and identifying criteria for making long-term investments" (Diamond et al., 1994, p. 463). Previously, capital budgets were known as plant and equipment budgets (Berman, Kukla &, Weeks, 1994). As the previous term implies, most capital expenditures are long-term investments for plant or equipment investments. Most, if not all, organizations have limited financial resources and must decide how to invest the financial resources for the best advantage of the organization. Capital investment decisions have a significant impact on the organization since large amounts of the organization’s resources are at risk for extended periods of time. This makes capital budgeting one of the most important decision making opportunities an organization can undertake (Diamond et al., 1994). There are two basic types of capital budgeting projects, independent projects and mutually exclusive projects. The independent project does not affect the cash flow of other projects. That is, regardless of whether the project is accepted...
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...(Weighted average cost of capital) The target capital structure for QM Industries is 45% common stock, 6% preferred stock, and 49% debt. If the cost of common equity for the firm is 17.9%, the cost of preferred stock is 10.6%, the before-tax cost of debt is 8.9%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital? QM’s WAAC is _%? 2).(Weighted average cost of capital)Crypton Electronics has a capital structure consisting of 45% common stock and 55% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell for $980. Common stock of the firm is currently selling for $29.76 per share and the firm expects to pay a $2.29 dividend next year. Dividends have grown at the rate of 5.3% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30%? Crypton’s cost of capital is _%? 3). (Weighted average cost of capital)The target capital structure for Jowers Manufacturing is 51% common stick, 18% preferred stock, and 31% debt. If the cost of common equity for the firm is 19.3%, the cost of preferred stock is 12.9% and before-tax cost of debt is 10.4%, what is Jowers’ cost of capital? The firm’s tax rate is 34% Jowers’ WACC is _% 4).(Weighted average cost of capital) As a member of the finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase...
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...Capital Budgeting Process These are the six steps that organizations use when they are issuing bonds. These steps are: 1. The healthcare provider plans and prepares for the issuance process. (Cleverley, Chapter 21) 2. The healthcare provider gets evaluated by a credit rating agency. (Cleverley, Chapter 21) 3. The bond is rated by a bond rating agency. (Cleverley, Chapter 21) 4. The healthcare provider provides a note or lease to the governmental authority, the issuer of the bonds, via a trustee. (Cleverley, Chapter 21) 5. The governmental authority delivers the bonds to one or more investment banking firms. (Cleverley, Chapter 21) 6. The investment banking firms sell the bonds to investors at the public offering price, and the trustee provides the healthcare provider with the net proceeds. (Cleverley, Chapter 21) An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for what purposes? Leasing is undertaken for the primary purpose of protecting the organization from having to buy equipment that depreciates. Another reason is that it creates safe harbors for investment in healthcare entities, certain discounts for products, and for waiver of coinsurance or deductibles, among others. (Cleverley, chapter4) The two major types of leases are operating and financial. With an operating lease, sometimes called service leases, is a lease for a period shorter than the equipment’s economic life, usually cancelable. (Cleverley, pg...
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...The Chief Executive Officer –ABC Inc. From: Vincent Mokwenye, Financial Controller. Subject: Pension Plan Disclosure and Reporting Requirement CC: This brief memo will address the topic of Pension Plans. Specifically, it shall discuss the two basic types of pension plans and the other postretirement plan. Then it shall examine the purpose of pension plan reporting requirements, their effect on the financial statements, and the significance of each type of pension plan. It will also examine the positive and negative implications of each of the pension plans. Defined Benefit Pension Plan - A defined benefit plan is a retirement plan set up to pay a fixed annual amount to eligible employees during their retirement. It is called defined benefit because the quarterly or annual contribution is based upon an actuarial determination of what the participants' retirement benefits should be, not on profits. The formulas look at how much money must be contributed in order for there to be enough money to pay a FIXED amount of benefit(s) to recipients in the future. These projections use a reasonable expected rate of return (401kpsp.com, 2012). Defined Contribution Plan- A defined contribution plan is a retirement plan that requires that an individual "account" be set up for each participant in the plan. It is called "defined contribution" because a participant can only contribute a fixed maximum amount to the plan each year. The contributions are not based on the expected retirement...
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...Assignment 4 FINC600 Financial forecasting is the process of estimating future business performance (sales, costs, earnings). Corporations use forecasting for financial planning, which includes an assessment of their future financial needs. It is also used by investors, analysts, and creditors to value companies and their securities. However, they are taking an aggregate view of the whole firm, rather than looking at individual projects (Advani, 2006). Growth is a key theme behind financial forecasting with an underlying theme of creating shareholder value. Although, shareholder value creation is realized through business growth. Financial planning is enabled by creating pro forma income statements and balance sheets. Since different income statement and balance sheet items grow at different rates, in order for a balance sheet to balance, firms look to outside funding to fill the balance sheet gaps, such as future debt financing, equity issues, dividend payout rates (Froot & Stein, 1998). As in cash flow preparation, the financial plan will have a forecast balance sheet, a forecast income statement, and a forecast sources-and-uses-of-cash statement. These are called pro forma statements. The financial plan will describe projected capital spending. In addition it will show the proposed uses of working capital such as ramping up inventories and financing customers’ purchases (Froot & Stein, 1998). The financial requirements plan will include a section on financing arrangements...
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...Health Care Budget Effective financial management is the basis of thriving health care organizations. Organizations must make good investment decisions based on objective analysis (Healthcare Financial Management Association [HFMA], 2005). Integration of financial management principles provides decision makers with guidance to make capital decisions maximize mission-based benefits at effective costs (HFMA, 2005). An operating budget is the statement of profit and loss for the entire organization. Various health care entities prepare operating budget for the following year for discussion and approval by top management (Academic Writing Tips, 2011). At the end of the year, departmental managers provide an account for the previous year’s financial performance (Academic Writing Tips, 2011). Effective Financial Management Practices in Creating and Monitoring a Budget Effective financial management is useful when creating and monitoring a budget. The budget must include data relevant to the organization. An operating budget is a profit and loss statement of projection. The budget must include estimates of revenues and future expenses. Financial managers should present the operating budget with the correct schedule. Leaders must present financial statements such as the Statement of Cash Flow, Statement of Revenue and Expense, and Balance Sheet with the operating budget as supporting documentation explaining the financial practices of a company (Academic Writing Tips, 2011)...
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