304 Fin-

Advance Financial
Management
1.Financial Planning and Shareholder Value: Overview of Financial Planning; Long term and short term
sources of finance; Financial Statements including Funds Flow and Cash Flow Statements; Importance of
Cash Flows; Concept of Financial Distress; Shareholder wealth and managerial behavior; Growth and Value;
Concept and features of value-based management; Economic Value Added (EVA): Meaning, Components,
Advantages & Drawbacks, Calculating EVA (6+2)
2.Capital Structure and Firm Value: Assumptions and Definitions; Net Income Approach; Net Operating
Income Approach; Traditional Position; Modigliani and Miller Position Taxation and Capital Structure;
Tradeoff; Signaling Theory; PBIT - EPS Analysis; ROI - ROE Analysis ; Leverage Ratios; Guidelines for Capital
Structure Planning (7+2)
3.Investment Decisions: Meaning and Process, Risk and Uncertainty in Capital Budgeting: Capital rationing
and Project Selection.
Inflation and Capital budgeting; Capital budgeting practices in Indian companies (5+2)
4.Working Capital Management: Determination of level of current assets, Working capital financing by
banks; Cash and liquidity Management- aspects of cash management, motives for holding cash and
marketable securities, Cash Management Models, Strategies for managing surplus funds; Credit
Management: Objectives of trade credit, credit policies. Control and collection of accounts receivables, role
of factoring in receivables management (No problems on estimation of working capital). (9+2)
5.Dividend Policy and Firm Value: Why Firms Pay Dividends ; Factors Influencing Dividend Policy ; Legal and
Procedural Aspects ; Bonus Shares and Stock Splits; Share Buybacks and Valuation ; Dividend Policies in
Practice; Dividend Models: Walter’s model, Gordon’s model, Modigliani and Miller’s Hypothesis; Models in
Which Investment and Dividend Decisions are Related (8+2)
 Numerical problems on the following
 Funds Flow Statement and Cash Flow Statement
 Calculating EVA
 Firm value (Theories of Capital Structure), PBIT - EPS Analysis
 Sensitivity analysis and Scenario analysis in risk analysis in Capital
budgeting, Capital Rationing
 Calculation of Optimum Cash Balance using Operating Cycle Model
and Inventory Model
 Receivables Management- calculation of collection period,
Determining the number of uncollectible Receivables and Bad Debt
Expense: Percent of Sales Method, Percent of Receivables Method
Dividend Models: Walter’s Model, Gordon’s Model, Modigliani and
Miller’s Hypothesis;
 Finance
Introduction
Business needs finance to meet their requirements in the
economic world. Any kind of business activity depends on
finance. Hence, it is called as life blood of business
organization.
Finance in real sense, is the cornerstone of the enterprise
system good. It is vitally important to the economic health
business firms, and hence to the nation and the world.
All of this makes finance stimulating and exciting but also
challenging and sometimes confusing . Thus study of
finance will helps for better understanding of our
financial system
 Definition of Finance
According to Dr. S.N. Maheshwari : “Financial
Management is concerned with raising financial
resources and their effective utilization towards
achieving the organizational goals.”
According to Bonneville and Dewey : Financing
consists of raising , providing , managing of all the
money , capital or funds of any kind to be used in
connection with the business .
 Scope of Finance
1. Financing Decisions – These decisions basically
deal with acquiring funds & deployment of funds
2. Investment Decisions – These decisions are
related with selection of assets . Assets are
classified into two types – Fixed Assets
- Current Assets
The decisions regarding Fixed Assets are known as
capital budgeting decisions
The decisions regarding current assets come under
Working Capital Management
 Scope of Finance
3 Dividend Policy Decisions – Whatever profit
company earns , the owners are entitled to
receive them. These decisions are related with
distribution of dividends i e to decide how much
profit we should distribute as dividend & how
much should be retained in business
 Financial Management
Financial management means managing
the funds/ money in such a way that by
investing optimum capital we can get
maximum output i e profit
 Objectives Of Financial Management

1. Profit Maximization –
The primary objective of any business is to earn profit so the
finance dept has to manage the funds so that the company
can get maximum profit. All such actions which generate
profit or cut down costs should be undertaken & those that
are likely to have adverse impact on profitability should be
avoided.
According to then financial experts , this objective is simple
& has the in – built advantage of judging economic
performance .
 Limitations / Criticisms of this objective

1 Ambiguous concept
2 Timing of benefits (Ignores pattern of
return)
3 Quality of benefits (Ignores Risk)
4 Ignores social consideration
 Objectives Of Financial Management
2. Wealth Maximization –
It means the value of any business activity
should not be measured in terms of costs but in
terms of benefits it produce.
The word Wealth refers to Net Present Worth,
which is the difference between gross present
worth & the amount of capital investment
required to achieve the benefits
This objective is widely accepted , it considers
time value of money .
 FINANCIAL PLANNING

Definition : Financial Planning is the process of
estimating the capital required and determining it’s
competition. It is the process of framing financial policies
in relation to procurement, investment and administration
of funds of an enterprise.

Objectives :
a. Determining capital requirements-This will depend
upon factors like cost of current and fixed assets,
promotional expenses and long-range planning. Capital
requirements have to be looked with both aspects: short-
term and long-term requirements.
 FINANCIAL PLANNING
b. Determining capital structure-The capital
structure is the composition of capital, i.e., the
relative kind and proportion of capital required
in the business. This includes decisions of debt-
equity ratio-both short-term and long-term.
c. Framing financial policies with regards to
cash control, lending, borrowings, etc.
d. Ensuring that the scarce financial
resources are maximally utilized in the best
possible manner at least cost in order to get
maximum returns on investment.
 Sources of Finance
Long term finance
Short term finance
 Long term finance
It is required for investment in fixed assets like
land, building, plant and machinery, and for
financing expansion programme.

Sources:
Shares
Debentures
Long term Loans
Retained earnings
 Shares
share or stock is a document issued by a
company, which entitles its holder to be one of the
owners of the company. A share is issued by a
company or can be purchased from the stock
market.

It can be
Preference Shares
Equity Shares
 Debentures
Debenture may be defined as an
acknowledgement of a debt by the company.
Debentures are creditorship securities
which provides funds to the company on
loan basis rather than on capital basis.
Debenture holders are entitled to periodical
payment of interest at a fixed rate.
 Long term loans
Long term loans from the financial
institutions on the basis of collateral
security.
 Retained Earnings
It is Internal source of finance.
It is a method of self financing by
established companies.
The undistributed or retained profits
of the company are used to finance the
requirements of the company.
 Short term finance
Short term financing deals with raising money
required for a short period, i.e. less than one year.
It is raised to meet the short term working
capital requirements of the business.
 sources:
Trade Credit
Bank Credit
Customer Advance
Installment Credit
 Trade Credit
Trade credit refers to credit granted to manufactures
and traders by the suppliers of raw material, finished
goods, components, etc.
Usually business enterprises buy raw material on a
30 to 90 days credit. This means that the goods are
delivered but payments are not made until the expiry
of period of credit. This type of credit does not make
the funds available in cash but it facilitates purchases
without making immediate payment.
This is quite a popular source of finance
 Bank Credit
Commercial banks grant short-term finance to
business firms which is known as bank credit.
When bank credit is granted, the borrower gets a
right to draw the amount of credit at one time or in
installments as and when needed.
Bank credit may be granted by way of:
 loans,
 cash credit,
 overdraft
 discounted bills.
 Customer Advances
Sometimes businessmen insist on their customers to
make some advance payment.
It is generally asked when the value of order is quite
large or things ordered are very costly. Customers’
advance represents a part of the payment towards price
on the product (s) which will be delivered at a later
date.
Customers generally agree to make advances when such
goods are not easily available in the market or there is
an urgent need of goods. A firm can meet its short-term
requirements with the help of customers’ advances.
 Installment credit
Installment credit is now-a-days a popular source
of finance for consumer goods like television,
refrigerators as well as for industrial goods.
Only a small amount of money is paid at the time
of delivery of such articles. The balance is paid in a
number of installments.
 The amount of interest is included while deciding
on the amount of installment.
 Fund Flow Statement
Fund flow statement indicates the
amount of change in various balance
sheet items between two accounting
dates. It shows the source and use of
funds during an accounting period. In
another words , it is a statement that
shows how the funds are obtained
and how they are put into use.
Objectives of Fund Flow Statement

1. To help to understand the changes in

assets as well as asset sources which
are not revealed by the Income
Statement or Balance Sheet.
2. To find out the uses of loans raised
by the business .
3. To indicate the financial strength and
weakness of the business.
STEPS INVOLVE IN THE PREPRATION
OF FUND FLOW STATEMENT

A. Statement showing changes in Working

Capital

B. Adjusted Profit and Loss A/C

C. Fund Flow Statement or Statement

showing Sources and Application of Funds

Statement Showing changes in
Working Capital
Adjusted Profit and Loss A/C
Fund Flow Statement
Adjustments
Problem No.1
Problem No.2
Problem No.3
Problem No.4
Problem No.5