1-Financial Management

DR ANJANA RAJU
FINANCIAL
FINANCIAL
MANAGEMENT
MANAGEMENT
DR ANJANA RAJU
DR ANJANA RAJU
DR ANJANA RAJU
BASIC CONCEPTS
BASIC CONCEPTS
MEANING AND SCOPE OF FINANCIAL
MANAGEMENT
FORMS OF BUSINESS ORGANISATION
TIME VALUE OF MONEY
COST OF CAPITAL
VALUATION OF SECURITIES
RISK AND RETURN
DR ANJANA RAJU
BASIC CONCEPTS
BASIC CONCEPTS
SECTION I
MEANING AND SCOPE
OF
FINANCIAL MANAGEMENT
DR ANJANA RAJU
QUESTION HOUR
QUESTION HOUR
WHY A COURSE TITLED
FINANCE FOR NON- FINANCE
EXECUTIVES?
DR ANJANA RAJU
QUESTION HOUR
QUESTION HOUR
WHY A COURSE TITLED
FINANCE FOR NON- FINANCE
EXECUTIVES?
DR ANJANA RAJU
QUESTION HOUR
QUESTION HOUR
WHY NOT PROGRAMS TITLED----
PRODUCTION MANAGEMENT FOR
NON-PRODUCTION EXECUTIVES
OR
MARKETING MANAGEMENT FOR
NON- MARKETING EXECUTIVES
DR ANJANA RAJU
MEANING AND SCOPE OF FINANCIAL MANAGEMENT
THE ANSWER IS SIMPLE
COMMON THREAD RUNNING

THROUGH ALL DECISIONS TAKEN BY
VARIOUS MANAGERS IS MONEY
DR ANJANA RAJU
MEANING AND SCOPE OF FINANCIAL MANAGEMENT MEANING AND SCOPE OF FINANCIAL MANAGEMENT
R&D MANAGER HAS TO JUSTIFY
THE MONEY SPENT ON RESEARCH
SPEND
NEW PRODUCT
NEW PROCESSES
REDUCE COSTS AND INCREASE

REVENUE
DR ANJANA RAJU
OUTCOME
POSITIVE RESULTS IN RETURN
NOT NEGATIVE RESULTS

DR ANJANA RAJU
MATERIALS MANAGER SHOULD BE AWARE

OF INVENTORY
DIFFERENT ITEMS IN STORES IS NOTHING BUT
MONEY IN SHAPE OF INVENTORY!
MAKE PRODUCTIVE USE
DO NOT REACH LOW LEVEL

TO INTERRUPT THE PRODUCTIVE USE!
RIGHT BALANCE BETWEEN TOO MUCH

AND TOO LITTLE INVENTORY"
DR ANJANA RAJU
CONCULSION
THIS IS CALLED
LIQUIDITY #PROFITABILITY TRADE-
OFF
DR ANJANA RAJU
FINANCIAL MANAGER$ AS HIS
DESIGNATION IMPLIES

INVOLVED IN ALL FINANCIAL
MATTERS OF THE ORGANISATION
OUTCOME % ALL ACTIVITIES IN THE
ORGANISATION HAVE FINANCIAL
IMPLICATIONS"
DR ANJANA RAJU
OBJECTIVES OF FINANCIAL
OBJECTIVES OF FINANCIAL
MANAGEMENT
MANAGEMENT
DR ANJANA RAJU
OBJECTIVES OF FINANCIAL MANAGEMENT
OBJECTIVE SOUGHT TO BE ACHIEVED BY FINANCE
MANAGER"
MAKE AVAILABLE THE REQUIRED

FUNDS
AT ACCEPTABLE COST!
FUNDS ARE SUITABLY INVESTED

IF EVERYTHING GOES ACCORDING TO PLAN!
DR ANJANA RAJU
CONCULSION
GOOD PERFORAMANCE ARE
REFLECTED IN THE PROFITS
OF THE FIRM EARNS"
DR ANJANA RAJU
HOW ARE THE PROFITS UTILISED?
- PARTLY DISTRIBUTED AMONG THE
OWNERS AS DIVIDEND
- PARTLY RECYCLED INTO OPERATIONS
OF FIRMS"
THE ABOVE PROCESS CONTINUES
OVER A PERIOD OF TIME- THE
VALUE OF THE FIRM INCREASES!
DR ANJANA RAJU
- THE FIRM IS ABLE TO GENERATE
ATTRACTIVE SURPLUSES FROM
SURPLUSES FROM OPERATIONS"
- REFELECTED ON THE STOCK PRICE
WEALTH INCREASES!
DR ANJANA RAJU
CONCULSION %
OBJECTIVE OF THE FINANCIAL
MANAGER IS TO INCREASE OR
MAXIMI&E THE WEALTH OF THE
OWNERS
-
BY INCREASING THE VALUE OF THE FIRM
-
REFLECTED IN EPS EARNING PER SHARE!
AND MARKET PRICE OF THE SHARE
DR ANJANA RAJU
FUNCTIONS OF FINANCE
FUNCTIONS OF FINANCE
MANAGER
MANAGER
DR ANJANA RAJU
FUNCTIONS OF FINANCE MANAGER
A" MOBILI&ATION OF FUNDS
B" DEPLOYMENT OF FUNDS
C" CONTROL OVER THE USE OF FUNDS
D" RISK-RETURN TRADE-OFF
DR ANJANA RAJU
PLAN FOR FUNDS
PLAN TO MOBILISE FROM VARIOUS

SOURCES"
DECIDING ON COST OF FUNDS
KNOW THE RESTRICTIVE

PROVISIONS ON LOANS
DR ANJANA RAJU
REAL LIFE EXAMPLE
- XY& LTD KNOWN COMPANY IN COMPUTER
TRAINING$ SOFTWARE DEVELOPMENT $
INFORMATION SYSTEM UNDERTAKES
UPGRADATION
COST OF MODERNI&ATION RS '$()* LAKH

GOING TO MOBILISE AS FOLLOWS
DR ANJANA RAJU
- COST OF MODERNI&ATION RS '$()* LAKH GOING
TO MOBILISE AS FOLLOWS
RS LAKH
PUBLIC ISSUE OF EQUITY SHARES INCLUDING
PREMIUM
TERM LOAN #ICICI
LEASING - ICICI
- OTHERS
DEFERRED PAYMENT GUARANTEE
INTERNAL ACCRUALS
1804
130
125
75
99
1,345
_________
3,578
DR ANJANA RAJU
B"DEPLOYMENT OF FUNDS
- ALWAYS MANY COMPETING FOR
ALLOCATION OF FUNDS
- VARIOUS DEPARTMENTS
- PRODUCTION
- MARKETING
- PERSONNEL
- R&D
- TOP MANAGEMENT
FINANCE MANAGER DECIDES ON THE MANNER OF
DEPLOYMENTOF FUNDS TO VARIOUS ASSETS!

DR ANJANA RAJU
FINANCE MANAGER APPRAISES THE

PROPOSAL
ALONG WITH FINANCIAL DIMENSIONS

TO DETERMINE ITS WORTHINESS IN RELATION
TO INVESTMENT INVOLVED!
DR ANJANA RAJU
CONCULSION
THIS DECISION CALLED THE
INVESTMENT DECISION
CONSTITUTES ONE OF THE
CORE ACTIVITIES OF FINANCE
MANAGER"
DR ANJANA RAJU
MOBILI&ATION OF FUNDS OF XY& ARE PROPOSED TO BE
DEPLOYED AS FOLLOWS AS INDICATED IN PROSPECTUS
OF COMPANY"
RS LAKH
BUILDINGS
COMPUTERS & ACCESSORIES
PLANT AND MACHINERY
INFRASTRUCTURE
NORMAL CAPITAL EXPENDITURE
REPAYMENT OF LOANS
INCREASE IN WORKING CAPITAL
985
941
116
213
241
283
799
_________
3,578
DR ANJANA RAJU
CONTINUOUSLY MONITOR THEIR

USE
PROCUREMENT AND DEPLOYMENT OF FUNDS
PROCEEDS ACCORDING TO PLAN!
THIS TASK OF FINANCE MANAGER IS
CALLED FINANCIAL CONTROL"
DR ANJANA RAJU
FINANCE MANAGER
--SENDS FREQUENT REPORTS
-- FUNDS REQUIRED AT DIFFERENT
POINTS OF TIME"
--- PERFORMANCE OF INDIVIDUAL
DEPARTMENTS
ALL SUCH REPORTS ARE CALLED
CONTROL REPORTS!
DR ANJANA RAJU
FINANCE MANAGER SEEKS TO
ACHIEVE THE RIGHT BALANCE

BETWEEN RISK AND RETURN"
IF FIRMS BORROWERS HEAVILY TO

FINANCE
SURPLUSES GENERATED COULD GO FOR
SERVICE OF THE DEBT)
DR ANJANA RAJU
IF THINGS DONOT WORK

ACCORDING TO PLAN
EXPOSES TO RISK OF SOLVENCY!
DECIDE WHETHER THE

OPPORTUNITY IS WORTH MORE
THAN ITS COST?
WHETHER ADDITIONAL BURDEN OF

DEBT CAN BE SAFELY BORNE?
DR ANJANA RAJU

CONCULSION %
DECISION MAKING IN ALL AREAS
OF MANAGEMENT INVLOVES
BALANCING THE TRADE-OFF
BETWEEN RISK AND RETURN

DR ANJANA RAJU
INTERFACE BETWEEN FINANCE
INTERFACE BETWEEN FINANCE
AND
AND
OTHER FUNCTIONS
OTHER FUNCTIONS
DR ANJANA RAJU
INTERFACE BETWEEN FINANCE AND OTHER
INTERFACE BETWEEN FINANCE AND OTHER
FUNCTIONS
FUNCTIONS
+" MARKETING #FINANCE INTERFACE
," PRODUCTION #FINANCE INFERFACE
'"TOP MANAGEMENT #FINANCE
INTERFACE
o TREASURY OPERATIONS
o FOREIGN EXCHANGE
o FINANCIAL STRUCTURING
o MAINTAINING SHARE PRICE
o ENSURING MANAGEMENT CONTROL"

DR ANJANA RAJU
INTERFACE BETWEEN FINANCE AND OTHER FUNCTIONS INTERFACE BETWEEN FINANCE AND OTHER FUNCTIONS
+" MARKETING #FINANCE INTERFACE
MARKETING MANAGER SHOULD CLEAR

UNDERSTANDING OF
--- CREDIT EXTENTED
---- ANTICIPATION OF SALES
---- COSTS OF MAINTAINING LARGE
INVENTORY"
--- FINANCIAL IMPLICATIONS OF
PRICING$ PRODUCT PROMOTION AND
ADVERTISEMENT $ CHOICE OF PRODUCT
MIX$ AND DISTRIBUTION POLICY"
DR ANJANA RAJU
MAKES INVESTMENT IN EQUIPMENT$

MATERIAL AND MEN"
USE OF EQUIPMENT IN CONTROL AND

USED MOST PRODUCTIVELY""
DR ANJANA RAJU
MINIMI&ED WORK STOPPAGES AND IDLE

TIME"
HOLDING COST AND INCREASE OUTPUT$

AS DETERMINED FOR SALE"
MAKE DECISIONS REGARDING MAKE OR

BUY OR LEASE"
DR ANJANA RAJU
'"TOP MANAGEMENT #FINANCE INTERFACE
--OTHER CHALLENGES IN FINANCIAL
MANAGEMENT
o TREASURY OPERATIONS
SHORT TERM FUND MUST BE SOPHISTICATED
MAKE SPECULATIVE GAINS BY ANTICIPATING

INTEREST RATE MOVEMENTS"

DR ANJANA RAJU

FOREIGN EXCHANGE
WEIGH THE COSTS AND BENEFITS OF

TRANSACTING IN FOREIGN EXCHANGE
FUTURE VALUE OF RUPEE HAS BECOME

DIFFICULT TO PREDICT"
o
DR ANJANA RAJU

o FINANCIAL STRUCTURING
OPTIMUM MIX BETWEEN DEBT AND

EQUITY
TAILOR FINANCIAL INSTRUMENTS TO

SUIT INVESTORS NEED"
PRICING OF NEW ISSUES"

DR ANJANA RAJU

o MAINTAINING SHARE PRICE

IN PREMIUM EQUITY ERA

----- FIRM MUST ENSURE THE SHARE PRICE
STAY HEALTHY"
----- DEVISE APPROPRIATE DIVIDEND AND
BONUS POLICIES"
DR ANJANA RAJU

o ENSURING MANAGEMENT CONTROL"
DONOT EXPOSE COMPANY FOR BEEN

TAKEOVER SUITATION"
DR ANJANA RAJU
SECTION II
FORMS OF BUSINESS
ORGANISATION
DR ANJANA RAJU
A" SOLE PROPRIETORSHIP
B" PARTNERSHIP
C" COMPANIES
DR ANJANA RAJU
OWNED BY SINGLE PERSON
ENJOYS ALL POWERS OF TAKING AND

ASSUMING RISK
DR ANJANA RAJU
ADVANTAGES
+" EASY AND INEXPENSIVE TO SET
UP
," FEW GOVT" REGULATIONS
'" NO FIRM TAX"
DR ANJANA RAJU
DISAVANTAGES
+" LIFE OF THE FIRM LIMITED TO LIFE OF
THE OWNER
," UNLIMITED PERSONAL LIABILITIES
'"OUTSIDE FUND RAISING NOT POSSIBLE
LACK OF GROWTH!
-" TAX ON THE INCOME WILL BE VERY HIGH
DR ANJANA RAJU
B" PARTNERSHIP
BUSINESS OWNED BY TWO OR MORE

PERSONS"
THEY BEAR THE RISK AND REAP THE

REWARDS OF BUSINESS
BEINGS THROUGH PARTNERSHIP

AGREEMENT OR PARTNERSHIP DEED"
GOVERNED BY INDIAN PARTNERSHIP
ACT$ +.,'!
DR ANJANA RAJU
B" PARTNERSHIP
ADVANTAGES
CAN BE SET UP EASILY AND

INEXPENSIVE
RELATIVETLY FREE FROM GOVT

REGULATIONS
EXPERTISE AND EXPERIENCE OF

PARTNERS USEFUL TO THE FIRM
OPERATIONS
DR ANJANA RAJU
B" PARTNERSHIP
DISADVANTAGES
LIFE OF THE FIRM DEPENDS UPON THE

AGREEMENT
WITHDRAWAL OR DEATH OR DISSOLUTION!
CONFLICT BETWEEN PARTNERS THREATS

EXISTENSE OF PARTNERSHIP FIRM
PERSONAL LIABILITY OF THE PARTNES

UNLIMITED
ABILITY TO RAISE FUNDS LIMITED

DR ANJANA RAJU
C" COMPANIES
A GROUP OF PERSONS WORKING

TOGETHER TOWARDS A COMMON
OBJECTIVE IS A COMPANY"
TERM REGISTER COMPANY AS

PER SECTION '+! /! OF
COMPANIES ACT$ +.(0"
A COMPANY CAN BE PRIVATE OR

PUBLIC COMPANY
DR ANJANA RAJU
C" COMPANIES
ACCORDING TO SECTION +! ///! OF

THE COMPANIES ACT$ +.(0$
A PRIVATE COMPANY MEANS A
COMPANY WHICH HAS A
MINIMUM PAID-UP CAPITAL OF
ONE LAKH RUPEES OR SUCH
HIGHER PAID #UP CAPITAL AS
MAY BE PRESCRIBED"
DR ANJANA RAJU
FORMS OF BUSINESS ORGANISATION FORMS OF BUSINESS ORGANISATION
C" COMPANIES
ACCORDING TO SECTION +! ///! OF THE COMPANIES ACT$ +.(0$

PRIVATE COMPANY
AND ITS ARTICLE #
RESTRICTS THE RIGHT TO TRANSFER ITS SHARES$ IF

ANY
LIMIT NO" OF MEMBERS TO FIFTY
PROHIBITS ANY INVITATION TO PUBLIC TO SUBSCRIBE

FOR ANY SHARES"
PROHIBITS ANY INVITATION OR ACCEPTANCE OF

DEPOSITS FROM PERSONS OTHER THAN MEMBERS"

DR ANJANA RAJU
FORMS OF BUSINESS ORGANISATION FORMS OF BUSINESS ORGANISATION
C" COMPANIES
ACCORDING TO SECTION +! /1! OF THE

COMPANIES ACT$ +.(0$
MININUM PAID-UP CAPITAL OF FIVE LAKH OR
SUCH HIGHER PAID #UP CAPITAL MAY BE

PRESCRIBED"

DR ANJANA RAJU
SECTION III
TIME VALUE
OF
MONEY
DR ANJANA RAJU
TIME VALUE FOR MONEY
BACKGROUND
KEEP PACE WITH INCREASING

COMPETITION
NEW IDEAS IMPLEMENTED

THROUGH NEW PROJECTS
PROJECT ACTIVITY INVLOVES

INVESTING A SUM OF MONEY
ANTICIPATION OF BENEFITS
SPREAD OVER A PERIOD OF TIME

DR ANJANA RAJU
BACKGROUND
QUESTION
HOW DO WE DETERMINE WHETHER
THE PROJECT IS FINANCIALLY
VIABLE OR NOT?
DR ANJANA RAJU
BACKGROUND
ANSWER
SUM OF BENEFITS ACCRUING OVER
THE FUTURE PERIOD AND COMPARE
THE TOTAL VALUE OF THE
BENEFITS WITH THE INITIAL
INVESTMENT"
DR ANJANA RAJU
BACKGROUND
ANSWER
AGGREGATE VALUE OF THE
BENEFITS EXCEEDS THE INITIAL
INVESTMENT$ THE PROJECT IS
CONSIDERED TO BE FINANCIALLY
VIABLE"
DR ANJANA RAJU
BACKGROUND
OUTCOME
APPROACH PRIMA FACIE APPREARS
TO BE SATISFACTORY
WE HAVE ASSUMED THE
IRRESPECTIVE OF TIME WHEN
MONEY IS INVESTED OR RECEIVED
$THE VALUE REMAINS THE SAME!"
DR ANJANA RAJU
BACKGROUND
VALUE OF ONE RUPEE NOW 2 VALUE
OF ONE RUPEE AT THE END OF
YEAR +2 VALUE OF ONE RUPEE AT
THE END OF YEAR , AND SO ON
DR ANJANA RAJU
BACKGROUND
ASSUMPTION IS INCORRECT
BECAUSE MONEY HAS TIME
VALUE"
DR ANJANA RAJU
WHY SHOULD MONEY HAVE TIME
VALUE ?
CAN BE EMPLOYED PRODUCTIVELY

TO GENERATE REAL RETURNS
DR ANJANA RAJU
-- RS +333 NOW IS MORE VALUABLE THAN
RS +333 AFTER A YEAR
-- WE WILL NOT PART WITH RS +333 NOW
IF WE ASSURED THE SAME RS +333"
--- WE PART WITH RS +333 NOW FOR
SOMETHING MORE THAN RS +333"
THIS IS CALLED INTEREST OR THE
DR ANJANA RAJU
IF SUM OF
--RS +33 INVESTED IN RAW
MATERIAL AND LABOUR
--RESULTS IN FINISHED GOODS
WORTH RS +3(
--INVESTMENT OF RS +33 EARNED
RATE OF RETURN OF ( PERCENT"
DR ANJANA RAJU
IN AN INFLATIONARY PERIOD
- A RUPEE TODAY HAS HIGHER
PURCHASING THAN A RUPEE IN
FUTURE"
DR ANJANA RAJU
THREE DETERMINANTS COMBINE TO
DETERMINE THE RATE OF INTEREST
SYMBOLICALLY
REAL RATE OF INTEREST OR RETURN
EXPECTED RATE OF INFLATION
RISK PREMIUMS TO COMPENSATE FOR

UNCERTAINTY
DR ANJANA RAJU
THREE DETERMINANTS COMBINE TO
DETERMINE THE RATE OF INTEREST
SYMBOLICALLY
REAL RATE OF INTEREST OR RETURN4
EXPECTED RATE OF INFLATION 4 RISK
PREMIUMS TO COMPENSATE FOR
UNCERTAINTY
DR ANJANA RAJU
TWO METHODS OF TIME VALUE
+" COMPOUNDING AND
," DISCOUNTING
DR ANJANA RAJU
TWO METHODS BY WHICH TIME
VALUE CAN BE TAKEN
+" COMPOUNDING AND
," DISCOUNTING
DR ANJANA RAJU
ILLUSTRATION
PROJECT INVOLVES AN IMMEDIATE

OUTFLOW OF SAY RS +333"
FOLLOWING PATTERN OF INFLOWS

YEAR + % RS ,(3
YEAR ,% RS (33
YEAR ' % RS )(3
YEAR - % RS )(3
DR ANJANA RAJU
INITIAL OUTFLOW AND SUBSEQUENT INFLOWS CAN BE
REPRESENTED ON A TIME LINE AS GIVEN BELOW%

FIGURE +
0
Yr 3
2
1
4
RS
-+333
,(3 (33
)(3
750
DR ANJANA RAJU
PROCESS OF COMPOUNDING
DR ANJANA RAJU
PROCESS OF COMPOUNDING
UNDER THE METHOD OF COMPOUNDING
+" WE FIND FUTURE VALUES FV!
56 788 9:; <7=: 685>= 79 9:; ;?@ 56 9:; 9/A; :5B/C5? 79 7
D7B9/<E87B B79; 56 B;9EB?!
," COMPARING THE FV OF INITIAL
OUTFLOW OF RS +333
79 9:; ;?@ 56 - FB=! WITH
'" SUM OF FV OF YEARLY CASH INFLOWS
AT END OF YEAR -
DR ANJANA RAJU
FIGURE , PROCESS OF COMPOUNDING
0
1 2 3 4
-+333
,(3 (33
)(3
)(3
4
FV)(3!
FV(33!
FV,(3!
C5AD7B;@ >/9: FV +333!
4
4
DR ANJANA RAJU
PROCESS OF DISCOUNTING
DR ANJANA RAJU
PROCESS OF DISCOUNTING
UNDER THE METHOD OF DISCOUNTING
WE RECKON THE TIME VALUE OF MONEY
NOW /"; AT TIME 3 ON THE TIME
LINE!
---WE COMPARE THE INITIAL OUTFLOW
WITH THE SUM OF PRESENT PV! OF THE
FUTURE INFLOWS AT THE GIVEN RATE
OF INTEREST"
DR ANJANA RAJU
FIGURE ' PROCESS OF DISCOUNTING
0
1 2 3 4
-+333
,(3 (33
)(3
)(3
PV)(3!
PV(33!
PV)(3!
C5AD7B;@ >/9: 9:; =EA= 56
PV
,(3!
4
4
4
4
DR ANJANA RAJU
WE MUST DRAW THE
DISTINCTION BETWEEN
THE CONCEPT OF
COMPOUND INTEREST
AND
SIMPLE INTEREST"
DR ANJANA RAJU
ILLUSTRATION
X HAS A SUM OF RS +333 TO INVEST
THERE ARE TWO SCHEMES

--- ONE OFFERING A RATE OF +3G
COMPOUNDED ANNUALLY! AND
---- OTHER OFFERING A SIMPLE RATE OF
+3G
DR ANJANA RAJU
ILLUSTRATION
WHICH ONE SHOULD HE OPT FOR

ASSUMING THAT HE WILL WITHDRAW
THE AMOUNT END OF
A! ONE YEAR
B! TWO YEARS AND
C ! FIVE YEARS?
DR ANJANA RAJU
SOLUTION
End of
the
year
Como!nd "ntere#t S$heme S%m&e "ntere#t S$heme
' '((()*'((( + (,'()- ''(( '((()*'(((.(,'() -''((
/ ''(()*''(( + (,'()- '/'( ''(()*'(((+(,'()- '/((
0 '/'()*'/'( + (,'()- '00' '/(()*'(((+(,'()- '0((
1 '00')*'00' + (,'()- '121 '0(()*'(((+(,'()- '1((
3 '121)*'121 + (,'()- '2'( '1(()*'(((+(,'()- '3((
DR ANJANA RAJU
RESULT
COMPOUNDED INTEREST SCHEME

INTEREST EARNS INTEREST"
UNDER SIMPLE INTEREST SCHEME

INTEREST DOES NOT EARN ADDITIONAL
INTEREST"
DR ANJANA RAJU
OUTCOME
WE EMPHASI&E THAT IN FINANCIAL
ANALYSIS WE ALWAYS ASSUME
INTEREST TO BE
COMPOUNDED
DR ANJANA RAJU
FUTURE VALUE OF
SINGLE FLOWLUMP SUM!

DR ANJANA RAJU
FUTURE VALUE OF SINGLE FLOWLUMP SUM!
GENERALISED PROCEDURE FOR CALULATING THE

FUTURE VALUEFV! OF SINGLE CASH FLOW COMPOUNDED
ANNUALLY IS AS FOLLOWS%
FV
?
2PV+4H!
?

FV
?
2FE9EB; 178E; 56 9:; /?/9/78 685> ? F;7B= :;?<;
PV 2I?/9/78 <7=: 685>
H 2 A??E78 B79; 56 /?9;B;=9

? 2 L/6; 56 /?1;=9A;?9

DR ANJANA RAJU
ILLUSTRATION
FIXED DEPOSIT SCHEME OF ANDHRA BANK OFFERS THE
FOLLOWING INTEREST RATES
AN AMOUNT OF RS +3$333 INVESTED TODAY WILL

GROW IN ' YEARS

PERIOD OF DEPOSIT RATE PER
ANNUM
-0 DAYS TO +). DAYS +3"3G
+*3 DAYS TO I +YEAR +3"(G
+ YEAR AND ABOVE ++"3G
DR ANJANA RAJU
SOLUTION
FV
?
2PV+4H!
?
2+3333+4"++!
'
2 +3333+"'0*!
R= +'$0*3
PV2 T7J8; + 178E; 56 +3$333
65B 'FB= /= +"'0*
DR ANJANA RAJU
EFFECTIVE 1=
NOMINAL RATE OF INTEREST"

DR ANJANA RAJU
EFFECTIVE 1= NOMINAL RATE OF INTEREST"

FOR EXAMPLE
NOMINAL RATE OF INTEREST IS +3 PERCENT PER

ANNUM
WHEN COMPOUNDING IS DONE SEMI-ANNUALLY

THE PRINCIPAL AMOUNT GROWS AT RATE OF +3",(G P"A!
o +3",( G IS CALLED AS EFFECTIVE INTEREST

DR ANJANA RAJU
GENERAL RELATIONSHIP BETWEEN THE
EFFECTIVE AND NOMINAL RATES OF
INTEREST IS AS FOLLOWS%
B2+4H !
A
-+
A
WHERE
B2 E66;<9/1; B79; 56 /?9;B;=9
H2 N5A/?78 B79; 56 /?9;B;=9
A2FB;KE;?<F 56 <5AD5E?@/?L D;B F;7B

DR ANJANA RAJU
PROBLEM
FIND OUT EFFECTIVE RATE OF INTEREST
IF THE NOMINAL RATE OF INTEREST IS +, PERCENT AND

IS QUARTERLY COMPOUNDED
EFFECTIVE RATE OF INTEREST

B2+4H !
A
-+
A
B2+43"+, !
-
-+
-
2+23"3'!
-
-+
2 +"+,0-+
23"+,02 +,"0G P"A
DR ANJANA RAJU
FUTURE VALUE OF
MULTIPLE FLOWS
DR ANJANA RAJU
FUTURE VALUE OF MULTIPLE FLOWS
SUPPOSE WE INVEST RS +$333 NOW

BEGINNING OF YEAR +!
RS ,$333 AT BEGINNING OF YEAR ,
RS '$333 AT THE BEGINNING OF YEAR '
HOW MUCH WILL THESE FLOWS ACCUMULATE

TO AT THE END OF YEAR '
AT THE RATE OF +, PERCENT PER ANNUM?!
DR ANJANA RAJU
FIGURE - COMPOUNDING PROCESS OF MULTIPLE FLOWS
0
1
2 3
+333
,333 '333
ACCUMULATION
FV'333!
FV,333!
FV+333!
4
4
DR ANJANA RAJU
TO DETERMINE THE ACCUMULATED SUM AT

THE END OF YEAR '
WE HAVE TO JUST ADD FUTURE COMPOUNDED

VALUES OF RS +$333$ RS ,$333 AND RS '$333
RESPECTIVELY
FV R= +$333!4FVR= ,$333!4 FV R= '$333!
AT H 23"+,$ THE ABOVE SUM IS EQUAL TO
+$333 M FVIF
+,$'!
4,$333 M FVIF
+,$'!
'$333M FVIF
+,$'!
DR ANJANA RAJU
RSN+$333 M+"-3(!4,$333 M +",(-! 4'$333M+"+,3!O
2RS )$,)'
NOTE % ABOVE PROCESS TEDIOUS IF WE
HAVE TO DETERMINE ACCUMULATION
OF MULTIPLE FLOWS OVER A LONGER
PERIOD OF TIME
DR ANJANA RAJU
FOR EXAMPLE
ACCUMULATION OF A RECURRING DEPOSIT OF

RS +33 PER MONTH FRO 03 MONTHS AT RATE
OF + PERCENT PER MONTH
SHORT CUT METHOD CAN BE EMPLOYED PROVIDED
THE FLOWS ARE EQUAL!
DR ANJANA RAJU
FUTURE VALUE OFANNUITY
DR ANJANA RAJU
ANNUITY IS THE TERM USED TO

DESCIBE A SERIES OF PERIODIC FLOWS
OF EQUAL AMOUNTS
DR ANJANA RAJU
TERMS TO UNDERSTAND
IF EQUAL AMOUNTS OF CASH FLOWS

OCCUR AT THE END OF EACH PERIOD
OVER THE SPECIFIED TIME HORI&ON$
THEN THIS STREAM OF CASH FLOWS IS
DEFINED AS A REGULAR ANNUITY OR
DEFERRED ANNUITY"
WHEN CASH FLOWS OCCUR AT

BEGINNING OF EACH PERIOD THE
ANNUITY IS KNOWN AS AN ANNUITY
DUE
DR ANJANA RAJU
THE FUTURE VALUE OF REGULAR ANNUITY
FOR THE A PERIOD OF ? YEARS AT THE
RATE OF INTEREST H IS GIVEN BY
FORMULA
FVA
?
2A+4H!
?-+
4 A +4H!
?-,
4 A +4H!
?-'
4P4 A
WHICH REDUCES TO
FVA
?
2AQ +4H!
?
# + R

H
DR ANJANA RAJU
WHICH REDUCES TO
FVA
?
2AQ +4H!
?
# + R

H
WHERE A2 AMOUNT DEPOSITED SINVESTED AT

THE END OF EVERY YEAR FOR ? YEARS
H2 RATE OF INTEREST EXPRESSED IN
DECIMALS!
?2 TIME HORI&ON
FVA
?
2 ACCUMULATION AT THE END OF ?
YEARS
DR ANJANA RAJU
DO ILLUSTRATION ) AND *
DR ANJANA RAJU
PRESENT VALUE
DR ANJANA RAJU
PRESENT VALUE
BACKGROUND
THIS APPROACH CAN DETERMINE THE PRESENT VALUE

OF FUTURE CASH FLOW OR A STREAM OF FUTURE CASH
FLOWS
COMMONLY FOLLOWED APPROACH FOR EVALUATING

FINANCIAL VIABILITY OF PROJECTS
DR ANJANA RAJU
PRESENT VALUE
+" PRESENT VALUE OF SINGLE FLOW
," PRESENT VALUE OF UNEVEN MULTIPLE
FLOWS
'" PRESENT VALUE OF AN ANNUITY
DR ANJANA RAJU
PRESENT VALUE
+" PRESENT VALUE OF SINGLE FLOW
IF WE INVEST RS +$333 TODAY AT +3G

P"A FOR PERIOD OF ( YEARS
PV2 FV
?
+4H!
?
DR ANJANA RAJU
PRESENT VALUE OF SINGLE FLOW
IF WE INVEST RS +$333 TODAY AT +3G P"A FOR PERIOD

OF ( YEARS
PV2 FV
?
+4H!
?
RS +$333 M FVIF+3$(! 2RS +$333M+"0++2 RS +$0++ AT END
OF ( YEARS
THE SUM OF RS +$0++ IS CALLED THE ACCUMULATION OF

RS +$333 FOR GIVEN VALUES OF H AND ?
DR ANJANA RAJU
PRESENT VALUE OF SINGLE FLOW
DO ILLUSTRATION . AND +3
DR ANJANA RAJU
," PRESENT VALUE OF
UNEVEN MULTIPLE FLOWS
DR ANJANA RAJU
," PRESENT VALUE OF UNEVEN MULTIPLE FLOWS
SUPPOSE A PROJECT INVOLVES AN INITIAL

INVESTMENT OF RS +3 LAKH AND GENERATES
NET INFLOWS AS FOLLOWS
END OF THE YEAR- + RS , LAKH
, RS - LAKH
' RS 0 LAKH

DR ANJANA RAJU
QUESTION TO BE ANSWERED
+" WHAT IS THE PRESENT VALUE OF THE FUTURE
CASH FLOWS?
ANSWER % WE HAVE TO DETERMINE THE RELEVANT
RATE OF INTEREST
NOTE% RELEVANT RATE OF INTEREST WILL BE
THE COST OF FUNDS INVESTED
ASSUMPTION % WE ASSUME COST IS +,GP"A
THEN WE CAN NOW DETERMINE PRESENT VALUES
OF CASH FLOWS USING THE TWO-STEP
PROCEDURE!

DR ANJANA RAJU
STEP +

EVALUATE THE PRESENT VALUE OF CASH FLOW
INDEPENDENTLY

YEAR
CASHFLOW RS IN
LAKHS
PRESENT VALUE RS"IN LAKH!
+ , , M PVIF+,$+!2, M3"*.' 2 +").
, - - M PVIF+,$,!2- M3").) 2 '"+.
' 0 0 M PVIF+,$'!20 M3")+, 2 -",)
DR ANJANA RAJU
STEP ,
AGGREGATE THE PRESENT VALUES

OBTAINED IN STEP +
TO DETERMINE THE PV OF CASHFLOWS STREAM!
CASHFLOW OF RS+").4'"+.4-",)!2RS .",( LAKH"

DR ANJANA RAJU
WHEN PROJECT IS VIABLE
IF PRESENT VALUE OF CASHFLOWS INFLOWS

EXCEEDS THE PRESENT VALUE OF CASH OUTFLOW
IN THE ABOVE ILLUSTRATION THE PROJECT IS NOT

VIABLE
CASH INFLOWS RS .",( LAKH
CASHOUTFLOWS RS +3 LAKHS INITIAL INVESTMENT!
DIFFERENCE OF RS 3")( LAKHS IS CALLED NET

PRESENT VALUE

DR ANJANA RAJU
PRESENT VALUE
DR ANJANA RAJU
PVIFA PRESENT VALUE INTEREST FACTOR ANNUITY!
PRESENT VALUE OF AN ANNUITY A

RECEIVABLE AT THE END OF EVERY YEAR FOR
THE PERIOD OF ? YEARS AT RATE OF
INTEREST H IS EQUAL TO
PVA? 2 A 4 A 4 A 4P A
+4H! +4H!
,
+4H!
'
+4H!
?

DR ANJANA RAJU
WHICH REDUCES TO
PVA
?
2 A M Q
+4H!
?
-+
R

H+4H!?
THE EXPRESSION IS CALLED

DR ANJANA RAJU
REPRESENTS THE VALUE OF REGULAR

ANNUITY OF RE + FOR GIVEN VALUES OF H
AND ?"
DO ILLUSTRATION ++ AND +,

DR ANJANA RAJU
SECTION IV
COST OF CAPITAL
DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
MEANING OF COST OF CAPITAL
COST ASSOCIATED WITH

PRINCIPAL SOURCES OF LONG #
TERM FINANCE

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
WHAT IS COSTS THE COMPANY TO RAISE

FINANCE THROUGH VARIOUS SOURCES?
COST OF DIFFERENT FINANCIAL RESOURCES

THAT THE COMPANY USES IS TERMED AS
ITS COST OF CAPITAL"

DR ANJANA RAJU
COST OF CAPITAL COST OF CAPITAL
FOR EXAMPLE
TOTAL CAPITAL BASE OF RS (33 LAKHS
IN THE RATIO OF +%+ OF DEBT-EQUITY
,(3 LAKHS EACH OF DEBT AND EQUITY
IF POST #TAX COSTS OF DEBTS AND EQUITY ARE )G

AND +*G RESPECTIVELY"
COST OF CAPITAL TO THE COMPANY WILL BE EQUAL TO

WEIGHTED AVERAGE COST
,(3 M
)G
,(3 M
+*G
2 +,"(G
(33 (33

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST ASSOCIATED WITH
PRINCIPAL SOURCES OF
LONG #TERM FINANCE

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST ASSOCIATED WITH PRINCIPAL
SOURCES OF LONG #TERM FINANCE

COST OF
DEBENTURES
TERM LOANS
EQUITY CAPITAL
RETAINED EARNINGS
EXTERNAL EQUITY

DR ANJANA RAJU
COST OF DEBENTURES

DR ANJANA RAJU
COST OF DEBENTURES
COST OF DEBENTURES
COST OF DEBENTURES DEFINED AS
THE DISCOUNTED RATE WHICH EQUATES THE NET

PROCEEDS FROM ISSUE OF DEBENTURES TO
THE EXPECTED CASH FLOWS IN THE FORM OF INTEREST

AND PRINCIPAL REPAYMENTS"
?
P2T I +49! 4 F
92+ +4H
@
!9 +4H
@
!
?

DR ANJANA RAJU
COST OF DEBENTURES
COST OF DEBENTURES
?
P2T I +49! 4 F
92+ +4H
@
!9 +4H
@
!
?
WHERE
H
@ 2
POST #TAX COST OF DEBENTURES CAPITAL
I 2 ANNUAL INTEREST PAYMENT PER DEBENTURE
CAPITAL
T2 CORPORATE TAX RATE
F2 REDEMPTION PRICE PER DEBENTURE
P2NET AMOUNT REALI&ED PER DEBENTURES AND
?2 MATURITY PERIOD

DR ANJANA RAJU
COST OF DEBENTURES
COST OF DEBENTURES
?
P2T I +49! 4 F
92+ +4H
@
!9 +4H
@
!
?
WHERE
H
@ 2
POST #TAX COST OF DEBENTURES CAPITAL
I 2 ANNUAL INTEREST PAYMENT PER DEBENTURE
CAPITAL
T2 CORPORATE TAX RATE
F2 REDEMPTION PRICE PER DEBENTURE
P2NET AMOUNT REALI&ED PER DEBENTURES AND
?2 MATURITY PERIOD

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
INTEREST PAYMENT I! IS MULTIPLIED BY THE FACTOR

+-9!
J;<7E=; /?9;B;=9 5? @;J9 /= 97M-@;@E<9/J8; ;MD;?=;=!
ONLY POST #TAX COSTS ARE CONSIDERED"

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF DEBENTURES

I+-9! 4 F-P! +-9!
?
H
@
2 UUUUUUUUUUUUUUUUUUUU

F4P
,

ILLUSTRATION +

DR ANJANA RAJU
COST OF TERM
LOANS

DR ANJANA RAJU
COST OF TERM LOANS
SIMPLY EQUAL TO THE INTEREST RATE

MULTIPLIED BY +-T7M B79;!

INTEREST RATE APPLICABLE TO NEW

TERM LOAN"
INTEREST IS TAX DEDUCTIBLE

DR ANJANA RAJU
COST OF TERM LOANS
K
9
2 I +-9!
>:;B; I 2 I?9;B;=9 B79;
92 97M B79;
DR ANJANA RAJU

COST OF PREFERNCE
SHARE K
P
!

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF PREFERNCE SHARE K
P
!

D4
F-P

?

H
D
2 UUUUUUUUUUU

F4P
,
H
D 2
<5=9 56 DB;6;B;?<; <7D/978

D 2 PREFERENCE DIVIDEND PER SHARE PAYABLE ANNUALLY
F2 REDEMPTION PRICE

P2 NET AMOUNT REALISED PER SHARE AND

?2 MATURITY PERIOD

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF PREFERNCE SHARE K
P
!
ILLUSTRATION ,

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST ASSOCIATED WITH PRINCIPAL SOURCES OF
LONG #TERM FINANCE

COST EQUITY CAPITAL

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF EQUITY CAPITAL

?

H
D
2
T
D
9

92+ +4 H
;
!9
D
; 2
PRICE PER EQUITY SHARE

D
92
EXPECTED DIVIDEND PER SHARE AT THE END OF YEAR ONE$
AND
K; 2 RATE OF RETURN REQUIRED BY EQUITY SHAREHOLDERS

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF EQUITY CAPITAL

ASSUMING A CONSTANT GROWTH RATE IN

DIVIDENDS"
K
;
2 D
+
4 L
P;
D+ AND L ARE KNOWN IF THE CURRENT

MARKET PRICE OF THE SHARE IS GIVEN
DO ILLUSTRATION '

DR ANJANA RAJU
COST OF RETAINED EARNINGS

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF RETAINED EARNING AND COST OF EXTERNAL EQUITY
EARNINGS OF THE FIRM CAN BE REINVESTED OR
PAIDED AS DIVIDEND TO SHAREHOLDERS
INCASE EARNINGS ARE RETAINED THEN SHAREHOLDERS

DEMAND COMPENSATION
COST OF RETAINED EARNING LESSER COSTLY THEN NEW

ISSUE COST NO FLOATING COST!

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
COST OF EXTERNAL EQUITY

H
;
2
D
+4
L

P
3
+-6!

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
H
;
2<5=9 56 ;M9;B?78 ;KE/9F
D
+
2 D/1/@;?@ ;MD;<9;@ 79 9:; ;?@ 56 F;7B +
P
3
2 <EBB;?9 A7BH;9 DB/<; D;B =:7B;
L2 <5?=97?9 LB5>9: B79; 7DD8/<7J8; 95 @/1/@;?@=
62 6857979/5? <5=9= 7= 7 D;B<;?97L; 56 <EBB;?9
A7BH;9 DB/<;

DR ANJANA RAJU
COST OF CAPITAL
COST OF CAPITAL
KV; 2 H
;
S+-6!

K
; 2
B79; 56 B;9EB? B;KE/B;@ JF ;KE/9F /?1;=95B=

KV;2 <5=9 56 ;M9;B?78 ;KE/9F
6 2685979/5? <5=9= 7= 7 D;B<;?97L; 56 <EBB;?9 A7BH;9 DB/<;

DO ILLUSTRATION (

DR ANJANA RAJU
SECTION V
DR ANJANA RAJU
o VALUATION CONCEPT
o BOND VALUATION
o EQUITY VALUATION
DR ANJANA RAJU
o VALUATION CONCEPT
BOOK VALUE IS AN ACCOUNTING CONCEPT
ASSETS RECORDED AT HISTORICAL COSTS
BOOK VALUE OF DEBT IS STATED AT

OUTSTANDING AMOUNT"
DR ANJANA RAJU
o VALUATION CONCEPT
REPLACEMENT VALUE % AMT SPEND TO

REPLACE THE EXISTING ASSET IN
CURRENT CONDITION
LIQUIDATION VALUE% AMOUNT REALISED

IF THE ASSET IS SOLD AFTER HAVING
TERMINATING ITS BUSINESS"
DR ANJANA RAJU
o VALUATION CONCEPT
GOING CONCERN VALUE% AMOUNT

REALISED IF BUSINESSN IS SOLD AS AN
OPEARTING ONE"
MARKET VALUE% THE CURRENT PRICE AT

WHICH THE ASSET OR SECURITY IS
BEING SOLD OR BROUGHT"
DR ANJANA RAJU
o VALUATION OF BOND
BONDS ARE NEGOTIABLE PROMISSORY
NOTES USED BY
INDIVIDUALS$
BUSINESS FIRMS$
GOVERNMENTS$
GOVERNMENT AGENCIES"
DR ANJANA RAJU
o VALUATION OF BOND
PRIVATE SECTOR ISSUE SECURED OR

UNSECURED BONDS"
RATE OF INTEREST IS FIXED AND KNOWN
REDEEMABLE AFTER A SPECIFIC PERIOD
EXPECTED CASHFLOW CONSISTS OF

ANNUAL INTEREST PAYMENTS PLUS
PRINCIPAL"
DR ANJANA RAJU
BOND # RELATED TERMS
DR ANJANA RAJU
FACE VALUE
COUPON RATE OF INTEREST
MATURITY
REDEMPTION VALUE
MARKET VALUE
DR ANJANA RAJU
FACE VALUE
VALUE STATED ON THE FACE OF THE
BOND AND IS ALSO KNOW AS PAR VALUE
DR ANJANA RAJU
FACE VALUE
REPRESENTS THE AMOUNT OF

BORROWING BY FIRM
WHICH IT SPECIFIES TO REPAY AFTER A SPECIFIC PERIOD!
ISSUED AT RS +33 OR RS +333

DR ANJANA RAJU
COUPON RATE OF INTEREST
CARRIES A SPECIFIC RATE OF INTEREST
WHICH IS CALLED THE COUPON RATE
INTEREST PAID ON THE BOND IS TAX

DEDUCTIBLE"
DR ANJANA RAJU
MATURITY
ISSUED FOR SPECIFIC PERIOD
TYPICALLY CORPORATE BONDS HAVE

MATURITY PERIOD )-+3 YEARS"
GOVERNMENT BONDS UPTO ,3-,( YEARS

DR ANJANA RAJU
REDEMPTION VALUE
VALUE THE BONDHOLDER GETS ON

MATURITY IS CALLED REDEMPTION
VALUE"
A BOND MAY BE REDEMMED AT PAR $ AT

PREMIUM MORE THAN PAR! OR AT A
DISCOUNTLESS THAN PAR VALUE!
DR ANJANA RAJU
MARKET VALUE
BOND TRADED IN STOCK EXCHANGE
PRICE AT WHICH IT IS BROUGHT
MARKET VALUE MAY BE DIFFERENT FROM

PAR VALUE OR REDEMPTION VALUE
DR ANJANA RAJU
o CONVERTIBLE DEBENTURES
CONVERTIBLE PARTLY OR FULLY INTO

EQUITY SHARES
DR ANJANA RAJU
EQUITY VALUATION
INTRINSIC VALUE
IS THE VALUE OF A STOCK WHICH IS
JUSTIFIED BY ASSETS $ EARNING$
DIVIDEND$ DEFINITE PROSPECTS AND THE
FACTOR OF THE MGT OF THE ISSUING
COMPANY"

DR ANJANA RAJU
WHAT ARE MAJOR COMPONENTS OF
INTRINSIC VALUE ?
+" EARNING POWER AND PROFITABILITY OF
THE MGT IN EMPLOYMENT OF ASSETS"
," DIVIDENDS PAID AND ABILITY TO PAY
IN FUTURE"
'" ESTIMATES OF THE GROWTH OF
EARNINGS
DR ANJANA RAJU
SECTION VI
RISK AND RETURN
DR ANJANA RAJU
RISK AND RETURN
RISK AND RETURN
+" CONCEPTS OF RISK AND RETURN
," THE COMPONENTS OF RETURN
'" RELATION BETWEEN RISK AND EXPECTED RATE
OF RETURN
(" SOURCES OF RISK
DR ANJANA RAJU
RISK AND RETURN
RISK AND RETURN
WHAT IS THE IMPORTANCE OF RETURNS IN
ANY INVESTMENT DECISION?
ENABLES INVESTORS TO COMPARE

ALTERNATIVE IN TERMS OF WHAT THEY
HAVE TO OFFER THE INVESTOR "
MEASUREMENT OF HISTORICAL PAST!

RETURNS"
ESTIMATION OF FUTURE RETURNS

DR ANJANA RAJU
RISK AND RETURN
RISK AND RETURN
TWO TYPES OF RETURNS
REALISED OR HISTORICAL RETURNS
EXPECTED RETURN
DR ANJANA RAJU
RISK AND RETURN
RISK AND RETURN
TYPES OF RETURNS
DR ANJANA RAJU
RISK AND RETURN
RISK AND RETURN
REALISED OR HISTORICAL RETURNS
The rate of return on an invet!ent "an #e "a$"u$ate%
a fo$$o&'
(A!ount re"eive% ) A!ount invete%*
Return +
________________________

A!ount invete%
,or e-a!.$e, if /1,000 i invete% an% /1,100 i
returne% after one 0ear, the rate of return for thi
invet!ent i'
(/1,100 1 /1,000* 2 /1,000 + 1034
DR ANJANA RAJU
RISK AND RETURN
RISK AND RETURN
EXPECTED RETURN
RETURN FROM AN ASSET THAT INVESTOR

ANTICIPATE OR EXPECT TO EARN OVER
SOME FUTURE PERIOD"
EXPECTED RETURN IS SUBJECT TO

UNCERTAINTY OR RISK$AND MAY OR MAY
NOT OCCUR"
DR ANJANA RAJU
THE COMPONENTS OF RETURN
DR ANJANA RAJU
RETURN IS BASICALLY MADE UP OF TWO
COMPONENTS"
+" PERIODIC CASH RECEIPT OR INCOME ON
INVESTMENT"
IN FORM OF DIVIDEND$ INTEREST ETC!
TERM YIELD IS OFTEN USED IN

CONNECTION COMPONENT OF RETURN
FOR EXAMPLE +3G BOND AT PURCHASE PRICE OF RS .33 IS
++"++G
DR ANJANA RAJU
," APPRECIATION DEPRECIATION! IN THE
ASSET$ IS REFFERED TO AS CAPITAL
GAIN LOSS!
MANY INVESTORS HAVE CAPITAL

GAINS AS THEIR PRIMARY
OBJECTIVE AND EXPECT THIS
COMPONENT TO BE LARGER THAN
THE INCOME COMPONENT"
DR ANJANA RAJU
RISK
RISK
DR ANJANA RAJU
RISK
RISK
BACKGROUND
RISK AND RETURN GO HAND IN

HAND IN INVESTMENTS AND FINANCE"
ONE CANNOT TALK ABOUT RETURNS

WITHOUT TALKING ABOUT RISK
DR ANJANA RAJU
RISK
RISK
CONCULSION
INVESTMENT DECISIONS ALWAYS
INVOLVE A TRADE #OFF BETWEEN RISK
AND RETURN"
DR ANJANA RAJU
RISK
RISK

RISK DEFINED AS
THE CHANCE THAT THE ACTUAL OUTCOME
FROM AN INVESTMENT WILL DIFFER
FROM THE EXPECTED OUTCOME
DR ANJANA RAJU
SOURCES OF RISK
SOURCES OF RISK
FACTORS WHICH MAKE ANY FINANCIAL
ASSET RISKY
+" INTEREST RATE RISK-
," MARKET RISK
'" INFLATION RISK
-" BUSINESS RISK
(" FINANCIAL RISK
0" LIQUIDITY RISK

1-Financial Management

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DR ANJANA RAJU

COMMON THREAD RUNNING

REDUCE COSTS AND INCREASE

POSITIVE RESULTS IN RETURN

NOT NEGATIVE RESULTS

MATERIALS MANAGER SHOULD BE AWARE

MAKE PRODUCTIVE USE

DO NOT REACH LOW LEVEL

RIGHT BALANCE BETWEEN TOO MUCH

MAKE AVAILABLE THE REQUIRED

FUNDS ARE SUITABLY INVESTED

PLAN FOR FUNDS

PLAN TO MOBILISE FROM VARIOUS

DECIDING ON COST OF FUNDS

KNOW THE RESTRICTIVE

COST OF MODERNI&ATION RS '$()* LAKH

FINANCE MANAGER APPRAISES THE

ALONG WITH FINANCIAL DIMENSIONS

CONTINUOUSLY MONITOR THEIR

ACHIEVE THE RIGHT BALANCE

IF FIRMS BORROWERS HEAVILY TO

IF THINGS DONOT WORK

DECIDE WHETHER THE

WHETHER ADDITIONAL BURDEN OF

MARKETING MANAGER SHOULD CLEAR

MAKES INVESTMENT IN EQUIPMENT$

USE OF EQUIPMENT IN CONTROL AND

MINIMI&ED WORK STOPPAGES AND IDLE

HOLDING COST AND INCREASE OUTPUT$

MAKE DECISIONS REGARDING MAKE OR

SHORT TERM FUND MUST BE SOPHISTICATED

MAKE SPECULATIVE GAINS BY ANTICIPATING

WEIGH THE COSTS AND BENEFITS OF

FUTURE VALUE OF RUPEE HAS BECOME

OPTIMUM MIX BETWEEN DEBT AND

TAILOR FINANCIAL INSTRUMENTS TO

PRICING OF NEW ISSUES"

IN PREMIUM EQUITY ERA

DONOT EXPOSE COMPANY FOR BEEN

OWNED BY SINGLE PERSON

ENJOYS ALL POWERS OF TAKING AND

BUSINESS OWNED BY TWO OR MORE

THEY BEAR THE RISK AND REAP THE

BEINGS THROUGH PARTNERSHIP

CAN BE SET UP EASILY AND

RELATIVETLY FREE FROM GOVT

EXPERTISE AND EXPERIENCE OF

LIFE OF THE FIRM DEPENDS UPON THE

CONFLICT BETWEEN PARTNERS THREATS

PERSONAL LIABILITY OF THE PARTNES

ABILITY TO RAISE FUNDS LIMITED

A GROUP OF PERSONS WORKING

TERM REGISTER COMPANY AS

A COMPANY CAN BE PRIVATE OR

ACCORDING TO SECTION +! ///! OF

ACCORDING TO SECTION +! ///! OF THE COMPANIES ACT$ +.(0$

RESTRICTS THE RIGHT TO TRANSFER ITS SHARES$ IF

LIMIT NO" OF MEMBERS TO FIFTY

PROHIBITS ANY INVITATION TO PUBLIC TO SUBSCRIBE

PROHIBITS ANY INVITATION OR ACCEPTANCE OF

ACCORDING TO SECTION +! /1! OF THE

MININUM PAID-UP CAPITAL OF FIVE LAKH OR