2. • Finance is the life blood of business
• The financial activities related to running a corporation.
• Finance is the management of the monetary affairs of a company
• The process of organizing the flow of funds by a business firm to carry out
its objectives in the most efficient manner can be called as financing
4. • The F.M. process begins with financial planning and decision. In the course of
its implementation, it has to bear some risk and discharge certain return.
• Financial management is the managerial activity which is concerned with the
planning and controlling of the firm’s resources.
• Financial process / approach are of two types:
• TRADITIONAL APPROACH
• MODERN APPROACH
5. Profit maximization Wealth maximization
It is a traditional approach It is a modern approach
It emphasizes short term It emphasizes long term
It ignores time value of money It considers time value of money
It ignores risk and uncertainty It recognizes risk and uncertainty
It measures the performance of a business firm only
on the basis of its profit
It measures the performance of a business firm only
on the basis of shareholders wealth
It is based on the assumption of perfect competition
in the product market
It assumes an efficient capital market
A firm may not pay regular dividends to its
shareholders and reinvest its retained earnings to
achieve this goal
A firm pays regular dividends to its shareholders to
achieve this goal
9. Risk and Risk and Return
Risk is the chance or possibility of suffering loss due to
future uncertain.
It refers to the possibility of incurring a loss in a financial
transaction.
Elements of Risk may be classified into two groups
factors that are external to a company and affect a large number
of securities simultaneously. This is uncontrollable and is also
known as systematic risk
factors which are internal to companies and affect only those
particular companies. These are controllable to some extend.
This is also known as unsystematic risk.
10. Return
• The term return refers to income from a security after a defined period
either in the form of interest, dividend, or market appreciation in
security value.
• The total gain or loss experienced on an investment over a given
period of time
13. BASIS SYSTEMATIC RISK UNSYSTEMATIC RISK
Meaning Systematic risk refers to the hazard
which is associated with the market or
market segment as a whole.
Unsystematic risk refers to the risk
associated with a particular security,
company or industry.
Nature Uncontrollable Controllable
Factors External factors Internal factors
Affects Large number of securities in the
market.
Only particular company.
Types Interest risk, market risk and
purchasing power risk.
Business risk and financial risk
Protection Asset allocation Portfolio diversification
14. Measurement of risk
• The expected return from the investment can be calculated as follows:
• R = ( dividend + end of the period stock price/Initial investment )- 1
• R = (D/P0)+(P1 –P0/P0)
• P0- beginning of they year
• P1- end of the year
• Expected Return of the investment is the probability weighted
average of all the possible returns.
16. Measurement of systematic risk
The systematic risk is measured by a statistical measure called Beta.
Two statistical methods may be used for the calculation of Beta
• Correlation Method
• Regression Method
17. Standard deviation
It is the most common quantitative measure of risk of an asset. It considers
every possible event and weight to its probability is assigned to each to its
probability is assigned to each event.
Standard deviation is a measure of dispersion around the expected or average
mean value.
20. Regression method
• The model postulates a linear relationship between a dependent
variable and an independent variable. The Model helps to calculate the
values of two constants namely α and β
• α measure the value of dependent variable even when the independent
variable has zero value
• -β measure the change in the dependent variable in response to unit
change in the independent variable
21. regression equation
• Y₌α +βX
• Y = Dependent variable
• X = Independent variable
• - β α are constants
• The formula for the calculation of alpha and Beta
• -α =Y
̅ - βX
̅
-β= n∑XY –(∑X)(∑Y)/ n∑ X2 - (∑X)2
22. • Y̅ = Mean value of the dependent variable scores
• X
̅ = Mean value of the independent variable scores
• Y = Dependent variable scores
• X = Independent variable scores
• - n = Number of items
23.
24.
25.
26. Time value of money (TVM)
The time value of money is the concept that money available at the
present time is worth more than the identical sum in the future due to
its potential earning capacity.
The simple concept of time value of money is that the value of the
money received today is more than the value of same amount of
money received after a certain period.
In other words, money received in the future is not as valuable as
money received today, the sooner one receives money the better it is.
27. Reason for time preference of money
The future is always uncertain and involves risk.
People generally prefer to use their money for satisfying their present
needs in buying more food, or clothes or another car, than deferring in
future.
Money has time value because of the opportunities available to invest
money received at earlier dates at some interest or otherwise to
enhance future earnings.
28. Techniques of time value of money
• Compounding technique – this time preference for money encourages
a person to receive money at present instead of waiting for future
• Discounting- present value shows what the value is today of some
future sum of money. The present value of money to be received in
future will always be less.
29. • Annuities are level streams of payments. Each payment is the same
amount and occurs at a regular interval. Annuities are common in
business.
• They can arise in loans, retirement plans, leases, insurance settlements,
tax-related calculations, and so forth. Sometimes, one may be curious to
learn how much a recurring stream of payments will grow to after a
number of periods. This is called the future value of an annuity.
• When cash flows occur at the end of each period the annuity is called a
regular annuity or a deferred annuity. Is the cash flows occur at the
beginning of each period the annuity is called annuity due.
30. BASIS COMPOUNDING DISCOUNTING
Meaning The method used to determine the
future value of present investment is
known as Compounding.
The method used to determine the
present value of future cash flows
is known as Discounting.
Concept If we invest some money today, what
will be the amount we get at a future
date.
What should be the amount we
need to invest today, to get a
specific amount in future.
Use of Compound interest rate. Discount rate
Known Present Value Future Value
Factor Future Value Factor or Compounding
Factor
Present Value Factor or
Discounting Factor
Formula FV = PV (1 + r)^n PV = FV / (1 + r)^n
31. Where 1,2,3,…..n represents future years
FV = Cash flows generated in different years,
R = Discount Rate
Where R = Discount Rate
n = number of years
