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Financial Management, 12th Edition by Pearson

Name: Financial Management, 12th Edition by Pearson
Author: I M Pandey
ISBN: 9789390689897

by I M Pandey

December 2021

Intermediate to advanced

1056 pages

50h 22m

English

Pearson India

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Cover
About Pearson
Title Page
Brief Contents
Contents
Preface
Acknowledgements
About the Author
PART 1 VALUATION AND RETURN
1 Nature of Financial Management
IntroductionScope of FinanceReal and Financial AssetsEquity and DebtFinance and Management FunctionsFinance FunctionLong-term Finance DecisionsShort-term Finance DecisionsFinancial Procedures and SystemsFinancial Manager’s RoleFunds RaisingFunds AllocationProfit PlanningUnderstanding Capital MarketsFinancial Goal: Profit Maximization Vs Wealth MaximizationProfit MaximizationObjections to Profit MaximizationMaximizing Profit After TaxesMaximizing EPSShareholder Wealth Maximization (SWM)Need for a Valuation ApproachRisk-return Trade-offAgency Problems: Managers’ Vs Shareholders’ GoalsFinancial Goal and Firm’s Mission and ObjectivesOrganization of the Finance FunctionsStatus and Duties of CFO, Treasurer and ControllerController’s and Treasurer’s Functions in the Indian ContextSummaryKey ConceptsStudent Activities

2 Time Value of Money
IntroductionWhy Time Value of Money?Required Rate of ReturnFuture ValueFuture Value of a Single Cash FlowFuture Value of an AnnuitySinking FundPresent ValuePresent Value of a Single Cash FlowPresent Value of an AnnuityCapital Recovery and Loan AmortizationPresent Value of PerpetuityPresent Value of an Uneven Cash FlowPresent Value of Growing AnnuityPresent Value of Growing PerpetuitiesValue of an Annuity DueFuture Value of an Annuity DuePresent Value of an Annuity DueMulti-period CompoundingContinuous CompoundingSummaryKey ConceptsStudent Activities
3 Valuation of Bonds and Shares
IntroductionConcepts of ValueBook ValueReplacement ValueLiquidation ValueGoing Concern ValueMarket ValueFeatures of a BondBonds Values and YieldsBond with MaturityYield-to-MaturityCurrent YieldYield-to-CallBond Value and Amortization of PrincipalBond Values and Semi-annual Interest PaymentsPure Discount BondsPerpetual BondsBond Values and Interest RatesBond Maturity and Interest Rate RiskBond Duration and Interest Rate SensitivityThe Term Structure of Interest RatesThe Expectation TheoryThe Liquidity Premium TheoryThe Segmented Markets TheoryDefault Risk and Credit RatingValuation of Preference SharesFeatures of Preference and Ordinary SharesValuation of Ordinary SharesDividend Discount Model (DDM)Dividend Growth Model (DGM)Firm Paying no DividendsEarnings CapitalizationCaution in Using Constant-Growth ModelEquity Capitalization RateLinkages Between Share Price, Earnings and DividendsHow to Value Growth Opportunities?Price-earnings (P/E) Ratio: Is It Significant?Can P/E Ratio Mislead?SummaryKey ConceptsStudent Activities
4 Risk and Return of a Single Asset
IntroductionReturn on a Single AssetAnnual Rates of Return: Example of Hindustan Unilever LimitedAverage Rate of ReturnRates of Return and Holding PeriodsRisk of Rates of Return: Variance and Standard DeviationHow to Calculate Variance and Standard DeviationExpected Return and Risk: Incorporating Probabilities in EstimatesExpected Rate of ReturnRisk PreferenceNormal Distribution and Probability of ReturnHistorical Capital Market ReturnsHistorical Risk PremiumSummaryKey ConceptsStudent Activities
5 Portfolio Theory and Assets Pricing Models
IntroductionPortfolio Return: Two-asset CasePortfolio Risk: Two-asset CaseMeasuring Portfolio Risk for Two AssetsProbable Returns of Two-Asset PortfolioVariance and Standard Deviation of a Two-Asset PortfolioMinimum Variance PortfolioPortfolio Risk Depends on Correlation between AssetsPortfolio Risk-return Analysis: Two-asset CasePerfect Positive CorrelationPerfect Negative CorrelationZero CorrelationPositive CorrelationEfficient Portfolio and Mean-variance CriterionInvestment Opportunity Set: Two-Asset CaseMean-variance CriterionInvestment Opportunity Set: The n-Asset CasePortfolio Risk: the n-Assets CaseRisk Diversification: Systematic and Unsystematic RiskSystematic RiskUnsystematic RiskTotal RiskCombining a Risk-free Asset and A Risky AssetBorrowing and LendingMultiple Risky Assets and a Risk-free AssetCapital Asset Pricing Model (CAPM)Assumptions of CAPMCharacteristic LineSecurity Market Line (SML) and BetaExpected Return and Required ReturnCML vs SMLImplications and Relevance of CAPMImplicationsLimitationsRelevance of CAPMThe Fama-french Three-factor ModelThree-Factor ModelThe Arbitrage Pricing Theory (APT)Concept of Return under APTConcept of Risk under APTSteps in Calculating Expected Return under APTSummaryKey ConceptsStudent Activities
6 Beta Estimation and the Cost of Equity
IntroductionBeta EstimationDirect MethodThe Market ModelBeta Estimation in PracticeExamples of Beta Estimation for Companies in IndiaMarket Model and Beta EstimationCapm and Beta EstimationBetas of Selected NSE CompaniesDoes Beta Remain Stable Over Time?Determinants of BetaNature of BusinessOperating LeverageFinancial LeverageAsset Beta and Equity BetaCapm and the Opportunity Cost of Equity CapitalIndustry vs Company BetaSummaryKey ConceptsStudent Activities
7 Options and Their Valuation
IntroductionOptionsCall OptionCall PremiumPut OptionCombinations of Put, Call and ShareProtective Put: Share and PutProtective Put vs CallPut-call ParityCovered Calls: Buy Share and Sell CallStraddle: Call and Put at Same Exercise PriceStrips and StrapsStrangle: Call and Put at Different Exercise PricesSpread: Put and Call at Different Exercise PricesSpread: Long and Short OptionsButterfly Spread: Buying and Selling CallsCollarsFactors Determining Option ValueExercise Price and Value of Underlying AssetVolatility of Underlying AssetInterest RateTime to Option ExpirationBinomial Model for Option ValuationImportance of Binomial Model: Inadequacy of DCF AnalysisA Simple Binomial Approach to Option ValuationRisk NeutralityBlack–Scholes Model for Option ValuationAssumptionsOption’s Delta or Hedge RatioImplied VolatilityDividend-paying Share OptionOrdinary Share as an OptionSummaryKey ConceptsStudent Activities
PART 2 INVESTMENT DECISIONS
8 Capital Budgeting Decisions
IntroductionNature and Features of Capital Budgeting DecisionsImportance of Investment DecisionsTypes of Investment DecisionsExpansion and DiversificationReplacement and ModernizationMutually Exclusive InvestmentsIndependent InvestmentsContingent InvestmentsInvestment Evaluation CriteriaInvestment Decision RuleEvaluation CriteriaNet Present ValueWhy is NPV Important?Acceptance RuleEvaluation of the NPV MethodInternal Rate of ReturnUneven Cash Flows: Calculating IRR by Trial and ErrorLevel Cash FlowsNPV Profile and IRRAcceptance RuleEvaluation of IRR MethodProfitability IndexAcceptance RuleEvaluation of PI MethodPaybackAcceptance RuleEvaluation of PaybackPayback Reciprocal and the Rate of ReturnDiscounted PaybackAccounting Rate of ReturnAcceptance RuleEvaluation of ARR MethodNPV vs IRREquivalence of NPV and IRR: Case of Conventional Independent ProjectsLending and Borrowing-type ProjectsNon-conventional Investments: Problem of Multiple IRRsDifference: Case of Ranking Mutually Exclusive ProjectsReinvestment Assumption and Modified Internal Rate of Return (MIRR)Varying Opportunity Cost of CapitalNPV vs PISummaryKey ConceptsStudent Activities
9 The Cost of Capital
IntroductionSignificance of the Cost of CapitalInvestment EvaluationDesigning Debt PolicyPerformance AppraisalThe Concept of the Opportunity Cost of CapitalShareholders’ Opportunities and ValuesCreditors’ Claims and OpportunitiesRisk Differences in Shareholders’ and Creditor ClaimsGeneral Formula for the Opportunity Cost of CapitalWeighted Average Cost of Capital vs Specific Costs of CapitalDetermining Component Costs of CapitalCost of DebtDebt Issued at ParDebt Issued at Discount or PremiumTax AdjustmentCost of the Existing DebtCost of Preference CapitalIrredeemable Preference ShareRedeemable Preference ShareCost of Equity CapitalIs Equity Capital Free of Cost?Cost of Internal Equity: The Dividend- growth ModelCost of External Equity: The Dividend-growth ModelEarnings-Price Ratio and the Cost of EquityCost of Equity and the Capital Asset Pricing Model (CAPM)Cost of Equity: CAPM vs Dividend-growth ModelCost of Risky Debt and CAPMThe Weighted Average Cost of CapitalBook Value vs Market Value WeightsFlotation Costs, Cost of Capital and Investment AnalysisCalculation of the Cost of Capital in Practice: Case of Larsen & Toubro LimitedEstimation of L&T’s Cost of EquityCapital Asset Pricing Model and L&T’s Cost of EquityL&T’s Cost of DebtL&T’s Weighted Average Cost of CapitalDividend Distribution Tax and the Cost of EquityDivisional and Project Cost of CapitalThe Pure-play TechniqueThe Cost of Capital for ProjectsSummaryKey ConceptsStudent Activities
10 Cash Flows for Investment Analysis
IntroductionCash Flows Vs ProfitIncremental Cash FlowsComponents of Cash FlowsInitial InvestmentNet Cash FlowsDepreciation and TaxesNet Working CapitalFree Cash FlowsTerminal Cash FlowsSalvage ValueRelease of Net Working CapitalCalculation of Depreciation for Tax PurposesCash Flow Estimates for a New ProductSalvage Value and Tax Effects in IndiaHorizon Period and Terminal ValueCash Flow Estimates for Replacement DecisionsAdditional Aspects of Incremental Cash Flow AnalysisAllocated OverheadsOpportunity Costs of ResourcesIncidental EffectsSunk CostsInvestment Decisions Under InflationNominal vs Real Rates of ReturnFinancing Effects in Investment EvaluationSummaryKey ConceptsStudent Activities
11 Complex Investment Decisions
IntroductionInvestment Decisions: Projects with Different LivesAnnual Equivalent Value (AEV) MethodAEV for PerpetuitiesNominal Cash Flows and Annual Equivalent ValueInvestment Timing and DurationTree Harvesting ProblemReplacement of an Existing AssetInvestment Decisions Under Capital RationingWhy Capital Rationing?External Capital RationingInternal Capital RationingUse of Profitability Index in Capital RationingLimitations of Profitability IndexProgramming Approach to Capital RationingLinear Programming (LP)Integer Programming (IP)Dual VariableLimits to the Use of Programming ApproachCapital Rationing in PracticeSummaryKey ConceptsStudent Activities
12 Risk Analysis in Capital Budgeting
IntroductionNature of RiskStatistical Techniques for Risk AnalysisProbability DefinedRisk and UncertaintyExpected Net Present ValueVariance or Standard Deviation: Absolute Measure of RiskCoefficient of Variation: Relative Measure of RiskConventional Techniques of Risk Analysis in Capital BudgetingPaybackRisk-Adjusted Discount RateCertainty EquivalentRisk-Adjusted Discount Rate vs Certainty-equivalentSensitivity AnalysisDCF Break-even AnalysisExcel Goal Seek to Calculate DCF Break-evenPros and Cons of Sensitivity AnalysisScenario AnalysisCapital Budgeting SimulationCapital Budgeting Simulation Model in ExcelDecision Trees for Sequential Investment DecisionsSteps in Decision Tree ApproachUsefulness of Decision Tree ApproachUtility Theory and Capital BudgetingRisk AttitudeBenefits and Limitations of Utility TheorySummaryKey ConceptsStudent Activities
13 Real Options, Investment Strategy and Process
IntroductionCapital InvestmentsCapital Investment Planning and ControlInvestment Ideas: Who Generates?Developing Cash Flow EstimatesProject EvaluationAuthorizationControl and MonitoringQualitative Factors and Judgment in Capital BudgetingInvestment Decisions and Corporate StrategyManagerial Flexibility and CommitmentStrategic Real OptionsGrowth OptionsAbandonment OptionTiming OptionFlexibility and Operating OptionsCapital Budgeting Decision-making LevelsSummaryKey ConceptsStudent Activities
PART 3 FINANCING AND DIVIDEND DECISIONS
14 Financial and Operating Leverage
IntroductionCapital Structure DefinedMeaning of Financial LeverageMeasures of Financial LeverageFinancial Leverage and the Shareholders’ ReturnEPS and ROE CalculationsAnalyzing Alternative Financial Plans: Constant EBITInterest Tax ShieldAnalyzing Alternative Financial Plans: Varying EBITEBIT-EPS ChartCombining Financial and Operating LeveragesDegree of Operating LeverageDegree of Financial LeverageCombined Effect of Operating and Financial LeveragesFinancial Leverage and Shareholders’ RiskOperating RiskFinancial RiskMeasuring the Operating and Financial RiskRisk-Return Trade-offSummaryKey ConceptsStudent Activities
15 Capital Structure: Theory and Policy
IntroductionRelevance of Capital Structure: The Net Income and the Traditional ViewsThe Net Income ApproachThe Traditional ViewCriticism of the Traditional ViewIrrelevance of Capital Structure: NOI Approach and the MM Hypothesis Without TaxesProposition IArbitrage ProcessKey AssumptionsProposition IIProposition II under Extreme LeverageCriticism of the MM HypothesisRelevance of Capital Structure: The Mm Hypothesis Under Corporate TaxesValue of Interest Tax ShieldValue of the Levered FirmEnhancing the Firm Value through Debt: Infosys Technologies LimitedImplications of the MM Hypothesis with Corporate TaxesFinancial Leverage and Corporate & Personal TaxesLimits to BorrowingsCorporate and Personal Tax Rates in IndiaMiller’s ModelThe Trade-off TheoryCosts of Financial DistressAgency CostsPecking Order TheoryCapital Structure Planning and PolicyElements of Capital StructureFramework for Capital Structure: The FRICT AnalysisApproaches to Establish Target Capital StructureEBIT-EPS AnalysisValuation ApproachCash Flow AnalysisPractical Considerations in Determining Capital StructureAssetsGrowth OpportunitiesDebt and Non-debt Tax ShieldsFinancial Flexibility and Operating StrategyLoan CovenantsFinancial SlackSustainability and FeasibilityControlMarketability and TimingIssue CostsCapacity of Raising FundsCapital Structure Analysis of Larsen & Toubro Ltd.SummaryKey ConceptsStudent Activities
16 Valuation and Financing
IntroductionBeta, Cost of Capital and Capital Structure Without TaxRisk-free Debt, Equity Beta and Cost of EquityCorporate Taxes, Interest Tax Shield and BetaCapital Structure Changes: Unlevering and Relevering BetaFree Cash Flow and the Weighted Average Cost of CapitalConstant Capital Structure and Debt RebalancingAdjusting the Firm’s WACC for the Project’s Risk and Debt CapacityLimitations of the WACCEquity Cash Flows or Flow-to-equity ApproachCapital Cash Flows and the Opportunity Cost of CapitalFixed DebtFixed Debt RatioAdjusted Present Value (APV)Issue CostsFixed Debt RatioSubsidized FinancingValue of the Subsidized FinancingThe Adjusted Cost of Capital: Case of Perpetual Cash FlowsWacc and Miles-Ezzell’s Formula for Adjusted Cost of CapitalChoice of the Appropriate Valuation ApproachValuation of a FirmHorizon Period and Terminal ValueValue of the Firm’s EquityGrowth Patterns and the Firm ValueComparative Firms Valuation ApproachBalance Sheet Approach to Firm ValuationSummaryKey ConceptsStudent Activities
17 Dividend Theory
IntroductionIssues in Dividend PolicyDividend Relevance: Walter’s ModelGrowth Firm: Internal Rate More than Opportunity Cost of Capital (r > k)Normal Firms: Internal Rate Equals Opportunity Cost of Capital (r = k)Declining Firms: Internal Rate Less than Opportunity Cost of Capital (r < k)Criticism of Walter’s ModelDividend Relevance: Gordon’s ModelDividend and Uncertainty: The Bird-in-the-hand ArgumentDividend Irrelevance: The Miller-Modigliani (MM) HypothesisResidual Theory of DividendsRelevance of Dividend Policy Under Market ImperfectionsUncertainty and Shareholders’ Preference for DividendsTransaction Costs and the Case Against Dividend PaymentsInformation Asymmetry and Agency Costs and the Case for Dividend PaymentsTax Differential: Low-payout and High-payout ClienteleNeutrality of Dividend Policy: The Black-Scholes HypothesisInformational Content of Dividends and Dividend SignallingSummaryKey ConceptsStudent Activities
18 Dividend Policy
IntroductionObjectives of Dividend PolicyFirm’s Need for FundsShareholders’ Need for IncomePractical Considerations in Dividend PolicyFirm’s Investment Opportunities and Financial NeedsShareholders’ ExpectationsConstraints on Paying DividendsStability of DividendsConstant Dividend Per Share or Dividend RateConstant PayoutConstant Dividend Per Share Plus Extra DividendMerits of Stability of DividendsDanger of Stability of DividendsTarget Payout and Dividend Smoothing: Lintner’s Model of Corporate Dividend BehaviourForms of DividendsCash DividendBonus SharesAdvantages of Bonus SharesLimitations of Bonus SharesConditions for the Issue of Bonus SharesShare SplitBonus Share vs Share SplitReasons for Share SplitReverse SplitBuyback of SharesMethods of Shares BuybackEffects of the Shares BuybackEvaluation of the Shares BuybackDividend Policy Analysis: L& t Ltd. and Hul Ltd.Hindustan Unilever Ltd. (HUL) – Lintner’s ModelSummaryKey ConceptsStudent Activities
PART 4 LONG-TERM FINANCING
19 Capital Market Efficiency and Capital Markets in India
IntroductionCapital Market EfficiencyLiquidityFair Price of SecuritiesRandomness of Share PriceForms of Capital Market EfficiencyAre Capital Markets Perfect?Capital Markets in IndiaPrimary Capital Market in IndiaFinancial InstrumentsPrivate PlacementEuro IssuesGovernment SecuritiesPricing of New IssuesBook Building and Price DiscoverySecondary Markets in IndiaSecurities and Exchange Board of India (SEBI)Government Securities MarketDerivatives MarketTrading and SettlementMerchant Banking: Role in Capital MarketsStatus of Merchant Banking in IndiaMutual Funds and Capital MarketsBenefits of Mutual FundsDrawbacks of Mutual FundsIndex FundHedge FundSummaryKey ConceptsStudent Activities
20 Long-term Finance: Shares, Debentures and Term Loans
IntroductionOrdinary Shares or EquityReporting of Ordinary SharesFeatures of Ordinary SharesPros and Cons of Equity FinancingPublic issue of EquityUnderwriting of issuesPrivate PlacementRights Issue of Equity SharesTerms and ProceduresValue of a RightEffect on Shareholders’ WealthIs the Subscription Price of Any Significance?Pros and Cons of Rights IssuePreference SharesFeaturesPros and Cons of Preference SharesDebenturesFeaturesTypes of DebenturesPros and Cons of DebenturesTerm LoansFeatures of Term LoansRepayment ScheduleSummaryKey ConceptsStudent Activities
21 Convertible Debentures and Warrants
IntroductionConvertible DebenturesCharacteristics of Convertible DebenturesValuation of Convertible DebenturesThe Black Scholes Model for Valuing Convertible DebenturesWhy Issue Convertible Debentures?WarrantsCharacteristics of WarrantsValuation of WarrantsThe Black–Scholes Model for the Valuation of WarrantsWhy Issue Warrants?Convertible Zero-interest DebenturesSecured Premium Notes (spn) with WarrantsSummaryKey ConceptsStudent Activities
22 Asset-based Financing: Lease, Hire Purchase and Project Financing
IntroductionLease FinancingLease DefinedTypes of LeaseMyths About LeasingAdvantages of LeasingCash Flows Under Buy and LeaseEvaluating a Financial LeaseEquivalent Loan MethodNet Present Value and Net Advantage of LeasingCan a Lease Benefit Both Lessor And Lessee?Where from do Leasing Benefits Come?Net Advantage of a Lease (NAL) Including Operating Costs and Salvage ValueInternal Rate of Return Approach for Evaluating a LeaseDepreciation Tax Shield and Salvage Value Under Indian Tax LawsLeveraged LeaseHire Purchase FinancingHire Purchase Financing vs. Lease FinancingInstalment SaleEvaluation of Hire Purchase FinancingInfrastructure Project FinancingWhat is Project Financing?Financing Arrangements for Infrastructure ProjectsRisks Allocation in Project FinancingGovernment Guarantees and Risk MitigationFinancial Structure of Infrastructure ProjectsAppropriate Return to Equity and Financial Structure in Infrastructure Project FinancingConclusionSummaryKey ConceptsStudent Activities
23 Venture Capital Financing
IntroductionNotion of Venture CapitalFeatures of Venture CapitalStages in Venture FinancingThe Business PlanEssential Elements of a Business PlanWhat does a Venture Capitalist Look for in a Venture?The Process of Venture Capital FinancingDeal OriginationScreeningDue DiligenceDeal StructuringPost-investment ActivitiesExit PlanMethods of Venture FinancingEquityConditional LoanIncome NoteOther Financing MethodsDisinvestment MechanismsBuyback by PromotersInitial Public Offerings (IPOs)Secondary Stock MarketManagement BuyoutsDevelopment of Venture Capital in IndiaFuture Prospects of Venture FinancingSummaryKey ConceptsStudent Activities
PART 5 FINANCIAL ANALYSIS AND PLANNING
24 Financial Statements
IntroductionBalance SheetBalance Sheet in Practice: Example of GNFCProfit and Loss StatementConcepts of ProfitProfit and Loss Account: Example of GNFCDefinition of Profit: Economic Vs AccountingChanges in Financial PositionNature of Changes in the Financial PositionDefinition of FundsFunds Flow StatementConcept of Working Capital FlowSources of Working CapitalUses of Working CapitalForms of Funds Flow StatementWorking Capital from OperationsWorking Capital Flow from Non-current AccountsComprehensive Funds Flow Statement: Financial Resources BasisCash Flow StatementSources and Uses of CashComprehensive Cash Flow Statement: Financial Resources BasisCash Flow Statement of Gujarat Narmada Valley Fertilizers CompanyUses of the Statement of Changes in Financial PositionSummaryKey ConceptsStudent Activities
25 Financial Statement Analysis
IntroductionUsers of Financial AnalysisNature of Ratio AnalysisStandards of ComparisonTypes of RatiosLiquidity RatiosCurrent RatioQuick RatioCash RatioInterval MeasureNet Working Capital RatioLeverage RatiosDebt RatioDebt-Equity (D/E) RatioDebt-to-Capital Employed (D/CE) RatioTotal Liabilities-to-Total Assets (TL/TA) RatioEquity MultiplierCoverage RatiosEfficiency (Activity) RatiosInventory TurnoverDebtors (Accounts Receivable) TurnoverCreditors (Accounts Payable) TurnoverTrade Payable-to-Trade Receivable RatioAssets Turnover RatiosProfitability RatiosHow is Profit Measured?Gross Profit MarginEBITDA MarginNet Profit MarginOperating Profit MarginOperating Expense RatioReturn on Investment (ROI)ROE Return on EquityEarnings Per Share (EPS)Dividend Per Share (DPS or DIV)Dividend-Payout RatioDividend Yield and Earnings YieldValuation RatiosPrice-Earnings RatioMarket Value-to-Book Value (MV/BV) RatioEnterprise Value (EV)Tobin’s qDupont Analysis: Evaluation of a Firm’s Earning PowerComparative Statements AnalysisTrend AnalysisInter-firm AnalysisUtility and Limitations of Ratio analysisDiagnostic Role of RatiosCautions in Using Ratio AnalysisFinancial Ratios as Predictors of FailureNon-parametric AnalysisMultiple Discriminant AnalysisSummaryKey ConceptsStudent Activities
26 Financial Planning and Strategy
IntroductionStrategic Decision-making and PlanningStrategic Choices and PlanningStrategic Financial PlanningFinancial PlanningFinancial Forecasting and ModellingConstructing Financial ModelLong-term Financial PlanSensitivity AnalysisSteps in Financial PlanningPlanning for Sustainable GrowthGrowth Potential of a Single-product CompanySustainable Growth Model for a Multi-product CompanySummaryKey ConceptsStudent Activities
PART 6 WORKING CAPITAL MANAGEMENT
27 Principles of Working Capital Management
IntroductionConcepts of Working CapitalFocusing on Current Assets ManagementFocussing on Liquidity ManagementOperating and Cash Conversion CycleLength of Operating CycleGross Operating Cycle (GOC)Cash Conversion or Net Operating CyclePermanent and Variable Working CapitalBalanced Working Capital PositionDeterminants of Working CapitalNature of BusinessMarket and Demand ConditionsTechnology and Manufacturing PolicyCredit PolicyAvailability of Credit from SuppliersOperating EfficiencyPrice Level ChangesIssues in Working Capital ManagementCurrent Assets to Fixed Assets RatioLiquidity vs Profitability: Risk-Return Trade-offThe Cost Trade-offEstimating Working Capital NeedsMethod 1: Current Assets Holding PeriodMethod 2: Ratio of SalesMethod 3: Ratio of Fixed InvestmentPolicies for Financing Current AssetsMatching ApproachConservative ApproachAggressive ApproachShort-term vs. Long-term Financing: A Risk-Return Trade-offSummaryKey ConceptsStudent Activities
28 Credit Management
IntroductionCredit Policy: Nature and GoalsGoals of Credit PolicyMarketing ToolOptimum Credit Policy: A Marginal Cost-benefit AnalysisCredit Policy VariablesCredit StandardsCredit-granting Decision: NPV RuleCollection Policy and ProceduresCredit Evaluation of Individual AccountsCredit InformationCredit Investigation and AnalysisCredit LimitCollection EffortsMonitoring ReceivablesAverage Collection PeriodAging ScheduleCollection Experience MatrixFactoringNature of FactoringFactoring ServicesFactoring and Short-term FinancingFactoring and Bills DiscountingTypes of FactoringCosts and Benefits of FactoringSummaryKey ConceptsStudent Activities
29 Inventory Management
IntroductionNature of InventoriesNeed to Hold InventoriesObjective of Inventory ManagementInventory Management TechniquesEconomic Order Quantity (EOQ)Reorder PointAnalysis of Investment in InventoryIncremental AnalysisInventory Control SystemsABC Inventory Control SystemJust-in-time (JIT) SystemOut-sourcingComputerized Inventory Control SystemThe Inventory Management ProcessSummaryKey ConceptsStudent Activities
30 Cash Management
IntroductionFacets of Cash ManagementMotives for Holding CashTransaction MotivePrecautionary MotiveSpeculative MotiveCash PlanningCash Forecasting and BudgetingShort-term Cash ForecastsShort-term Forecasting MethodsSensitivity AnalysisLong-term Cash ForecastingManaging Cash Collections and DisbursementsAccelerating Cash CollectionsCash Collection Instruments in IndiaClearingControlling DisbursementsDetermining the Optimum Cash BalanceOptimum Cash Balance under Certainty: Baumol’s ModelOptimum Cash Balance under Uncertainty: The Miller-Orr ModelInvesting Surplus Cash in Marketable SecuritiesSelecting Investment OpportunitiesTypes of Short-term Investment OpportunitiesSummaryKey ConceptsStudent Activities
31 Working Capital Finance
IntroductionTrade CreditCredit TermsBenefits and Costs of Trade CreditAccrued Expenses and Deferred IncomeAccrued ExpensesDeferred IncomeBank Finance for Working CapitalForms of Bank FinanceSecurity Required in Bank FinanceRegulation of Bank FinanceGuidelines for Bank Finance: Historical PerspectiveCommercial PaperEligibility, Use and MaturityCostMerits and DemeritsSummaryKey ConceptsStudent Activities
PART 7 VALUE AND RISK MANAGEMENT
32 Corporate Restructuring, Mergers and Acquisitions
IntroductionCorporate Restructuring and Business CombinationTypes of Business CombinationsMerger or AmalgamationAcquisitionReverse MergerForms of MergerMergers and Acquisitions in IndiaLargest M&A Deals in IndiaMotives and Benefits of Mergers and AcquisitionsAccelerated GrowthEnhanced ProfitabilityDiversification of RiskReduction in Tax LiabilityFinancial BenefitsIncreased Market PowerValue Creation Through Mergers and AcquisitionsValuation Under Mergers and Acquisitions: Dcf ApproachEstimating Free Cash FlowsEstimating the Cost of CapitalHorizon ValueValue of Excel’s SharesFinancing a MergerCash OfferShare ExchangeAPV and CCF Approach to Merger ValuationMerger Negotiations: Significance of P/E Ratio and Eps AnalysisShare Exchange RatioEarnings GrowthTender Offer and Hostile TakeoverDefensive TacticsCorporate Strategy and AcquisitionsPlanningSearch and ScreeningFinancial EvaluationIntegrationPost-Merger Integration: Integrating VSNL with Tata GroupAccounting for Mergers and AcquisitionsPooling of Interests MethodPurchase MethodLeveraged BuyoutsLBO TargetsRisk and RewardsLBO EvaluationDivestmentSell-offSpin-offSebi Guidelines for TakeoversLegal ProceduresSummaryKey ConceptsStudent Activities
33 Derivatives for Managing Financial Risk
IntroductionDerivatives and Risk HedgingRisk Hedging with OptionsForward ContractsFutures ContractsFinancial FuturesFutures Contracts vs Forward ContractsFutures and Spot Prices of Financial FuturesSwapsCurrency SwapsInterest Rate SwapsRisk Management Strategy: Case of Bhp LimitedNew PolicyCash Flow at RiskUses of DerivativesSummaryKey ConceptsStudent Activities
34 International Financial Management
IntroductionThe Foreign Exchange MarketForeign Exchange RatesCross RatesSpot Exchange RatesBid-ask SpreadForward Exchange RatesSwap RateInternational Parity RelationshipsInterest Rate ParityPurchasing Power ParityExpectation Theory of Forward RatesInternational Fisher EffectForeign Exchange Risk and HedgingTransaction ExposureEconomic ExposureTranslation ExposureHedging Foreign Exchange RiskForeign Currency OptionMoney Market OperationsInternational Capital Investment AnalysisCash Flows in Taiwanese DollarsTaiwanese Dollar Cost of CapitalEstimating BetaThai Baht Cost of Capital and Cash FlowsInvestment Evaluation: Parent vs ProjectPolitical Risk of Foreign InvestmentsForeign Political Risks and Investment EvaluationFinancing International OperationsEurocurrency LoansEurobonds and Foreign BondsDepository ReceiptsCost and Risk of International FinancingSummaryKey ConceptsStudent Activities
35 Shareholder Value and Corporate Governance
IntroductionFinancial Goals and StrategyShareholder Value CreationMarket Value AddedMarket-to-Book Value (M/B)Economic Value Added (EVA)EVA AdjustmentsEvaluation of M/B and EVAValue DriversShareholder Value Analysis: Case of Cadila Healthcare LimitedManagerial Implications of Shareholder ValueBalanced ScorecardThe Learning and Growth PerspectiveThe Business Process PerspectiveThe Customer PerspectiveThe Financial PerspectiveShould a Balanced Scorecard Always Balance?Implementing Balanced Scorecard SystemSignificance of the Balanced ScorecardCorporate GovernanceTheories of Corporate GovernanceCorporate Governance PracticeSummaryKey ConceptsStudent Activities
Annexure
Index
Copyright

Overview

Financial Management, 12th edition is an honest and brave attempt at combining theory with practical applications. It begins with the discussion of fundamental concepts of value and return, risk and return relationship and valuation of shares and bonds. With this foundation, readers can easily understand the theories and methods, decision criteria, and financial policies and strategies necessary to manage funds and create and enhance the value of the Firm. Today, financial managers are responsible for shaping the fortunes of the enterprise and are involved in the most vital management decision of allocation of capital. Because of this change in emphasis, the descriptive treatment of the subject of financial management is being replaced by growing analytical content and sound theoretical underpinnings. This is exactly the kind of approach that has been adopted in this book. .

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