Financial Management, 12th Edition by Pearson

Financial Management, 12th Edition by Pearson

by I M Pandey
Released December 2021
Publisher(s): Pearson India
ISBN: 9789390689897

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Book description

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. .

Table of contents

  1. Cover
  2. About Pearson
  3. Title Page
  4. Brief Contents
  5. Contents
  6. Preface
  7. Acknowledgements
  8. About the Author
  9. PART 1 VALUATION AND RETURN
    1. 1 Nature of Financial Management
      1. Introduction
      2. Scope of Finance
        1. Real and Financial Assets
        2. Equity and Debt
        3. Finance and Management Functions
      3. Finance Function
        1. Long-term Finance Decisions
        2. Short-term Finance Decisions
        3. Financial Procedures and Systems
      4. Financial Manager’s Role
        1. Funds Raising
        2. Funds Allocation
        3. Profit Planning
        4. Understanding Capital Markets
      5. Financial Goal: Profit Maximization Vs Wealth Maximization
        1. Profit Maximization
        2. Objections to Profit Maximization
        3. Maximizing Profit After Taxes
        4. Maximizing EPS
        5. Shareholder Wealth Maximization (SWM)
        6. Need for a Valuation Approach
        7. Risk-return Trade-off
      6. Agency Problems: Managers’ Vs Shareholders’ Goals
      7. Financial Goal and Firm’s Mission and Objectives
      8. Organization of the Finance Functions
        1. Status and Duties of CFO, Treasurer and Controller
      9. Controller’s and Treasurer’s Functions in the Indian Context
      10. Summary
      11. Key Concepts
      12. Student Activities
    2. 2 Time Value of Money
      1. Introduction
      2. Why Time Value of Money?
        1. Required Rate of Return
      3. Future Value
        1. Future Value of a Single Cash Flow
        2. Future Value of an Annuity
        3. Sinking Fund
      4. Present Value
        1. Present Value of a Single Cash Flow
        2. Present Value of an Annuity
        3. Capital Recovery and Loan Amortization
        4. Present Value of Perpetuity
        5. Present Value of an Uneven Cash Flow
        6. Present Value of Growing Annuity
        7. Present Value of Growing Perpetuities
      5. Value of an Annuity Due
        1. Future Value of an Annuity Due
        2. Present Value of an Annuity Due
      6. Multi-period Compounding
        1. Continuous Compounding
      7. Summary
      8. Key Concepts
      9. Student Activities
    3. 3 Valuation of Bonds and Shares
      1. Introduction
      2. Concepts of Value
        1. Book Value
        2. Replacement Value
        3. Liquidation Value
        4. Going Concern Value
        5. Market Value
      3. Features of a Bond
      4. Bonds Values and Yields
        1. Bond with Maturity
        2. Yield-to-Maturity
        3. Current Yield
        4. Yield-to-Call
        5. Bond Value and Amortization of Principal
        6. Bond Values and Semi-annual Interest Payments
        7. Pure Discount Bonds
        8. Perpetual Bonds
      5. Bond Values and Interest Rates
        1. Bond Maturity and Interest Rate Risk
        2. Bond Duration and Interest Rate Sensitivity
      6. The Term Structure of Interest Rates
        1. The Expectation Theory
        2. The Liquidity Premium Theory
        3. The Segmented Markets Theory
      7. Default Risk and Credit Rating
      8. Valuation of Preference Shares
        1. Features of Preference and Ordinary Shares
      9. Valuation of Ordinary Shares
        1. Dividend Discount Model (DDM)
        2. Dividend Growth Model (DGM)
        3. Firm Paying no Dividends
        4. Earnings Capitalization
        5. Caution in Using Constant-Growth Model
      10. Equity Capitalization Rate
      11. Linkages Between Share Price, Earnings and Dividends
        1. How to Value Growth Opportunities?
      12. Price-earnings (P/E) Ratio: Is It Significant?
        1. Can P/E Ratio Mislead?
      13. Summary
      14. Key Concepts
      15. Student Activities
    4. 4 Risk and Return of a Single Asset
      1. Introduction
      2. Return on a Single Asset
        1. Annual Rates of Return: Example of Hindustan Unilever Limited
        2. Average Rate of Return
        3. Rates of Return and Holding Periods
      3. Risk of Rates of Return: Variance and Standard Deviation
        1. How to Calculate Variance and Standard Deviation
      4. Expected Return and Risk: Incorporating Probabilities in Estimates
        1. Expected Rate of Return
      5. Risk Preference
      6. Normal Distribution and Probability of Return
      7. Historical Capital Market Returns
        1. Historical Risk Premium
      8. Summary
      9. Key Concepts
      10. Student Activities
    5. 5 Portfolio Theory and Assets Pricing Models
      1. Introduction
      2. Portfolio Return: Two-asset Case
      3. Portfolio Risk: Two-asset Case
        1. Measuring Portfolio Risk for Two Assets
        2. Probable Returns of Two-Asset Portfolio
        3. Variance and Standard Deviation of a Two-Asset Portfolio
        4. Minimum Variance Portfolio
        5. Portfolio Risk Depends on Correlation between Assets
      4. Portfolio Risk-return Analysis: Two-asset Case
        1. Perfect Positive Correlation
        2. Perfect Negative Correlation
        3. Zero Correlation
        4. Positive Correlation
      5. Efficient Portfolio and Mean-variance Criterion
        1. Investment Opportunity Set: Two-Asset Case
        2. Mean-variance Criterion
        3. Investment Opportunity Set: The n-Asset Case
      6. Portfolio Risk: the n-Assets Case
      7. Risk Diversification: Systematic and Unsystematic Risk
        1. Systematic Risk
        2. Unsystematic Risk
        3. Total Risk
      8. Combining a Risk-free Asset and A Risky Asset
        1. Borrowing and Lending
      9. Multiple Risky Assets and a Risk-free Asset
      10. Capital Asset Pricing Model (CAPM)
        1. Assumptions of CAPM
        2. Characteristic Line
        3. Security Market Line (SML) and Beta
        4. Expected Return and Required Return
      11. CML vs SML
      12. Implications and Relevance of CAPM
        1. Implications
        2. Limitations
        3. Relevance of CAPM
      13. The Fama-french Three-factor Model
        1. Three-Factor Model
      14. The Arbitrage Pricing Theory (APT)
        1. Concept of Return under APT
        2. Concept of Risk under APT
        3. Steps in Calculating Expected Return under APT
      15. Summary
      16. Key Concepts
      17. Student Activities
    6. 6 Beta Estimation and the Cost of Equity
      1. Introduction
      2. Beta Estimation
        1. Direct Method
        2. The Market Model
      3. Beta Estimation in Practice
        1. Examples of Beta Estimation for Companies in India
      4. Market Model and Beta Estimation
      5. Capm and Beta Estimation
        1. Betas of Selected NSE Companies
        2. Does Beta Remain Stable Over Time?
      6. Determinants of Beta
        1. Nature of Business
        2. Operating Leverage
        3. Financial Leverage
        4. Asset Beta and Equity Beta
      7. Capm and the Opportunity Cost of Equity Capital
        1. Industry vs Company Beta
      8. Summary
      9. Key Concepts
      10. Student Activities
    7. 7 Options and Their Valuation
      1. Introduction
      2. Options
      3. Call Option
        1. Call Premium
      4. Put Option
      5. Combinations of Put, Call and Share
        1. Protective Put: Share and Put
        2. Protective Put vs Call
        3. Put-call Parity
        4. Covered Calls: Buy Share and Sell Call
        5. Straddle: Call and Put at Same Exercise Price
        6. Strips and Straps
        7. Strangle: Call and Put at Different Exercise Prices
        8. Spread: Put and Call at Different Exercise Prices
        9. Spread: Long and Short Options
        10. Butterfly Spread: Buying and Selling Calls
        11. Collars
      6. Factors Determining Option Value
        1. Exercise Price and Value of Underlying Asset
        2. Volatility of Underlying Asset
        3. Interest Rate
        4. Time to Option Expiration
      7. Binomial Model for Option Valuation
        1. Importance of Binomial Model: Inadequacy of DCF Analysis
        2. A Simple Binomial Approach to Option ­Valuation
        3. Risk Neutrality
      8. Black–Scholes Model for Option Valuation
        1. Assumptions
        2. Option’s Delta or Hedge Ratio
        3. Implied Volatility
        4. Dividend-paying Share Option
      9. Ordinary Share as an Option
      10. Summary
      11. Key Concepts
      12. Student Activities
  10. PART 2 INVESTMENT DECISIONS
    1. 8 Capital Budgeting Decisions
      1. Introduction
      2. Nature and Features of Capital Budgeting Decisions
        1. Importance of Investment Decisions
      3. Types of Investment Decisions
        1. Expansion and Diversification
        2. Replacement and Modernization
        3. Mutually Exclusive Investments
        4. Independent Investments
        5. Contingent Investments
      4. Investment Evaluation Criteria
        1. Investment Decision Rule
        2. Evaluation Criteria
      5. Net Present Value
        1. Why is NPV Important?
        2. Acceptance Rule
        3. Evaluation of the NPV Method
      6. Internal Rate of Return
        1. Uneven Cash Flows: Calculating IRR by Trial and Error
        2. Level Cash Flows
        3. NPV Profile and IRR
        4. Acceptance Rule
        5. Evaluation of IRR Method
      7. Profitability Index
        1. Acceptance Rule
        2. Evaluation of PI Method
      8. Payback
        1. Acceptance Rule
        2. Evaluation of Payback
        3. Payback Reciprocal and the Rate of Return
      9. Discounted Payback
      10. Accounting Rate of Return
        1. Acceptance Rule
        2. Evaluation of ARR Method
      11. NPV vs IRR
        1. Equivalence of NPV and IRR: Case of ­Conventional Independent Projects
        2. Lending and Borrowing-type Projects
        3. Non-conventional Investments: Problem of Multiple IRRs
        4. Difference: Case of Ranking Mutually ­ Exclusive Projects
      12. Reinvestment Assumption and Modified Internal Rate of Return (MIRR)
      13. Varying Opportunity Cost of Capital
      14. NPV vs PI
      15. Summary
      16. Key Concepts
      17. Student Activities
    2. 9 The Cost of Capital
      1. Introduction
      2. Significance of the Cost of Capital
        1. Investment Evaluation
        2. Designing Debt Policy
        3. Performance Appraisal
      3. The Concept of the Opportunity Cost of Capital
        1. Shareholders’ Opportunities and Values
        2. Creditors’ Claims and Opportunities
        3. Risk Differences in Shareholders’ and Creditor Claims
        4. General Formula for the Opportunity Cost of Capital
        5. Weighted Average Cost of Capital vs Specific Costs of Capital
      4. Determining Component Costs of Capital
      5. Cost of Debt
        1. Debt Issued at Par
        2. Debt Issued at Discount or Premium
        3. Tax Adjustment
        4. Cost of the Existing Debt
      6. Cost of Preference Capital
        1. Irredeemable Preference Share
        2. Redeemable Preference Share
      7. Cost of Equity Capital
        1. Is Equity Capital Free of Cost?
        2. Cost of Internal Equity: The Dividend- growth Model
        3. Cost of External Equity: The Dividend-growth Model
        4. Earnings-Price Ratio and the Cost of Equity
      8. Cost of Equity and the Capital Asset Pricing Model (CAPM)
      9. Cost of Equity: CAPM vs Dividend-growth Model
      10. Cost of Risky Debt and CAPM
      11. The Weighted Average Cost of Capital
        1. Book Value vs Market Value Weights
      12. Flotation Costs, Cost of Capital and Investment Analysis
      13. Calculation of the Cost of Capital in Practice: Case of Larsen & Toubro Limited
        1. Estimation of L&T’s Cost of Equity
        2. Capital Asset Pricing Model and L&T’s Cost of Equity
        3. L&T’s Cost of Debt
        4. L&T’s Weighted Average Cost of Capital
        5. Dividend Distribution Tax and the Cost of Equity
      14. Divisional and Project Cost of Capital
        1. The Pure-play Technique
        2. The Cost of Capital for Projects
      15. Summary
      16. Key Concepts
      17. Student Activities
    3. 10 Cash Flows for Investment Analysis
      1. Introduction
      2. Cash Flows Vs Profit
      3. Incremental Cash Flows
      4. Components of Cash Flows
        1. Initial Investment
        2. Net Cash Flows
        3. Depreciation and Taxes
        4. Net Working Capital
        5. Free Cash Flows
        6. Terminal Cash Flows
        7. Salvage Value
        8. Release of Net Working Capital
      5. Calculation of Depreciation for Tax Purposes
        1. Cash Flow Estimates for a New Product
        2. Salvage Value and Tax Effects in India
        3. Horizon Period and Terminal Value
        4. Cash Flow Estimates for Replacement ­Decisions
      6. Additional Aspects of Incremental Cash Flow Analysis
        1. Allocated Overheads
        2. Opportunity Costs of Resources
        3. Incidental Effects
        4. Sunk Costs
      7. Investment Decisions Under Inflation
        1. Nominal vs Real Rates of Return
      8. Financing Effects in Investment Evaluation
      9. Summary
      10. Key Concepts
      11. Student Activities
    4. 11 Complex Investment Decisions
      1. Introduction
      2. Investment Decisions: Projects with Different Lives
        1. Annual Equivalent Value (AEV) Method
        2. AEV for Perpetuities
        3. Nominal Cash Flows and Annual Equivalent Value
      3. Investment Timing and Duration
        1. Tree Harvesting Problem
      4. Replacement of an Existing Asset
      5. Investment Decisions Under Capital Rationing
        1. Why Capital Rationing?
        2. External Capital Rationing
        3. Internal Capital Rationing
        4. Use of Profitability Index in Capital Rationing
        5. Limitations of Profitability Index
        6. Programming Approach to Capital Rationing
        7. Linear Programming (LP)
        8. Integer Programming (IP)
        9. Dual Variable
        10. Limits to the Use of Programming Approach
        11. Capital Rationing in Practice
      6. Summary
      7. Key Concepts
      8. Student Activities
    5. 12 Risk Analysis in Capital Budgeting
      1. Introduction
      2. Nature of Risk
      3. Statistical Techniques for Risk Analysis
        1. Probability Defined
        2. Risk and Uncertainty
        3. Expected Net Present Value
        4. Variance or Standard Deviation: Absolute Measure of Risk
        5. Coefficient of Variation: Relative Measure of Risk
      4. Conventional Techniques of Risk Analysis in Capital Budgeting
        1. Payback
        2. Risk-Adjusted Discount Rate
        3. Certainty Equivalent
        4. Risk-Adjusted Discount Rate vs Certainty-equivalent
      5. Sensitivity Analysis
        1. DCF Break-even Analysis
        2. Excel Goal Seek to Calculate DCF Break-even
        3. Pros and Cons of Sensitivity Analysis
        4. Scenario Analysis
        5. Capital Budgeting Simulation
      6. Capital Budgeting Simulation Model in Excel
      7. Decision Trees for Sequential Investment Decisions
        1. Steps in Decision Tree Approach
        2. Usefulness of Decision Tree Approach
      8. Utility Theory and Capital Budgeting
        1. Risk Attitude
        2. Benefits and Limitations of Utility Theory
      9. Summary
      10. Key Concepts
      11. Student Activities
    6. 13 Real Options, Investment Strategy and Process
      1. Introduction
      2. Capital Investments
      3. Capital Investment Planning and Control
        1. Investment Ideas: Who Generates?
        2. Developing Cash Flow Estimates
        3. Project Evaluation
        4. Authorization
        5. Control and Monitoring
      4. Qualitative Factors and Judgment in Capital Budgeting
      5. Investment Decisions and Corporate Strategy
      6. Managerial Flexibility and Commitment
      7. Strategic Real Options
        1. Growth Options
        2. Abandonment Option
        3. Timing Option
        4. Flexibility and Operating Options
      8. Capital Budgeting Decision-making Levels
      9. Summary
      10. Key Concepts
      11. Student Activities
  11. PART 3 FINANCING AND DIVIDEND DECISIONS
    1. 14 Financial and Operating Leverage
      1. Introduction
      2. Capital Structure Defined
      3. Meaning of Financial Leverage
      4. Measures of Financial Leverage
      5. Financial Leverage and the Shareholders’ Return
        1. EPS and ROE Calculations
        2. Analyzing Alternative Financial Plans: Constant EBIT
        3. Interest Tax Shield
        4. Analyzing Alternative Financial Plans: Varying EBIT
        5. EBIT-EPS Chart
      6. Combining Financial and Operating Leverages
        1. Degree of Operating Leverage
        2. Degree of Financial Leverage
        3. Combined Effect of Operating and Financial Leverages
      7. Financial Leverage and Shareholders’ Risk
        1. Operating Risk
        2. Financial Risk
        3. Measuring the Operating and Financial Risk
        4. Risk-Return Trade-off
      8. Summary
      9. Key Concepts
      10. Student Activities
    2. 15 Capital Structure: Theory and Policy
      1. Introduction
      2. Relevance of Capital Structure: The Net Income and the Traditional Views
        1. The Net Income Approach
        2. The Traditional View
        3. Criticism of the Traditional View
      3. Irrelevance of Capital Structure: NOI Approach and the MM Hypothesis Without Taxes
        1. Proposition I
        2. Arbitrage Process
        3. Key Assumptions
        4. Proposition II
        5. Proposition II under Extreme Leverage
        6. Criticism of the MM Hypothesis
      4. Relevance of Capital Structure: The Mm Hypothesis Under Corporate Taxes
        1. Value of Interest Tax Shield
        2. Value of the Levered Firm
        3. Enhancing the Firm Value through Debt: Infosys Technologies Limited
        4. Implications of the MM Hypothesis with Corporate Taxes
      5. Financial Leverage and Corporate & Personal Taxes
        1. Limits to Borrowings
        2. Corporate and Personal Tax Rates in India
        3. Miller’s Model
      6. The Trade-off Theory
        1. Costs of Financial Distress
      7. Agency Costs
      8. Pecking Order Theory
      9. Capital Structure Planning and Policy
        1. Elements of Capital Structure
        2. Framework for Capital Structure: The FRICT Analysis
      10. Approaches to Establish Target Capital Structure
        1. EBIT-EPS Analysis
        2. Valuation Approach
        3. Cash Flow Analysis
      11. Practical Considerations in Determining Capital Structure
        1. Assets
        2. Growth Opportunities
        3. Debt and Non-debt Tax Shields
        4. Financial Flexibility and Operating Strategy
        5. Loan Covenants
        6. Financial Slack
        7. Sustainability and Feasibility
        8. Control
        9. Marketability and Timing
        10. Issue Costs
        11. Capacity of Raising Funds
      12. Capital Structure Analysis of Larsen & Toubro Ltd.
      13. Summary
      14. Key Concepts
      15. Student Activities
    3. 16 Valuation and Financing
      1. Introduction
      2. Beta, Cost of Capital and Capital Structure Without Tax
        1. Risk-free Debt, Equity Beta and Cost of Equity
        2. Corporate Taxes, Interest Tax Shield and Beta
        3. Capital Structure Changes: Unlevering and Relevering Beta
      3. Free Cash Flow and the Weighted Average Cost of Capital
        1. Constant Capital Structure and Debt Rebalancing
        2. Adjusting the Firm’s WACC for the Project’s Risk and Debt Capacity
        3. Limitations of the WACC
      4. Equity Cash Flows or Flow-to-equity Approach
      5. Capital Cash Flows and the Opportunity Cost of Capital
        1. Fixed Debt
        2. Fixed Debt Ratio
      6. Adjusted Present Value (APV)
        1. Issue Costs
        2. Fixed Debt Ratio
        3. Subsidized Financing
        4. Value of the Subsidized Financing
      7. The Adjusted Cost of Capital: Case of Perpetual Cash Flows
      8. Wacc and Miles-Ezzell’s Formula for Adjusted Cost of Capital
      9. Choice of the Appropriate Valuation Approach
      10. Valuation of a Firm
        1. Horizon Period and Terminal Value
        2. Value of the Firm’s Equity
        3. Growth Patterns and the Firm Value
        4. Comparative Firms Valuation Approach
        5. Balance Sheet Approach to Firm Valuation
      11. Summary
      12. Key Concepts
      13. Student Activities
    4. 17 Dividend Theory
      1. Introduction
      2. Issues in Dividend Policy
      3. Dividend Relevance: Walter’s Model
        1. Growth Firm: Internal Rate More than Opportunity Cost of Capital (r > k)
        2. Normal Firms: Internal Rate Equals Opportunity Cost of Capital (r = k)
        3. Declining Firms: Internal Rate Less than Opportunity Cost of Capital (r < k)
        4. Criticism of Walter’s Model
      4. Dividend Relevance: Gordon’s Model
      5. Dividend and Uncertainty: The Bird-in-the-hand Argument
      6. Dividend Irrelevance: The Miller-Modigliani (MM) Hypothesis
      7. Residual Theory of Dividends
      8. Relevance of Dividend Policy Under Market Imperfections
        1. Uncertainty and Shareholders’ Preference for Dividends
        2. Transaction Costs and the Case Against Dividend Payments
        3. Information Asymmetry and Agency Costs and the Case for Dividend Payments
        4. Tax Differential: Low-payout and High-payout Clientele
        5. Neutrality of Dividend Policy: The Black-Scholes Hypothesis
      9. Informational Content of Dividends and Dividend Signalling
      10. Summary
      11. Key Concepts
      12. Student Activities
    5. 18 Dividend Policy
      1. Introduction
      2. Objectives of Dividend Policy
        1. Firm’s Need for Funds
        2. Shareholders’ Need for Income
      3. Practical Considerations in Dividend Policy
        1. Firm’s Investment Opportunities and Financial Needs
        2. Shareholders’ Expectations
        3. Constraints on Paying Dividends
      4. Stability of Dividends
        1. Constant Dividend Per Share or Dividend Rate
        2. Constant Payout
        3. Constant Dividend Per Share Plus Extra Dividend
        4. Merits of Stability of Dividends
        5. Danger of Stability of Dividends
      5. Target Payout and Dividend Smoothing: Lintner’s Model of Corporate Dividend Behaviour
      6. Forms of Dividends
        1. Cash Dividend
        2. Bonus Shares
        3. Advantages of Bonus Shares
        4. Limitations of Bonus Shares
        5. Conditions for the Issue of Bonus Shares
        6. Share Split
        7. Bonus Share vs Share Split
        8. Reasons for Share Split
        9. Reverse Split
      7. Buyback of Shares
        1. Methods of Shares Buyback
        2. Effects of the Shares Buyback
        3. Evaluation of the Shares Buyback
      8. Dividend Policy Analysis: L& t Ltd. and Hul Ltd.
        1. Hindustan Unilever Ltd. (HUL) – Lintner’s Model
      9. Summary
      10. Key Concepts
      11. Student Activities
  12. PART 4 LONG-TERM FINANCING
    1. 19 Capital Market Efficiency and Capital Markets in India
      1. Introduction
      2. Capital Market Efficiency
        1. Liquidity
        2. Fair Price of Securities
        3. Randomness of Share Price
        4. Forms of Capital Market Efficiency
      3. Are Capital Markets Perfect?
      4. Capital Markets in India
        1. Primary Capital Market in India
        2. Financial Instruments
        3. Private Placement
        4. Euro Issues
        5. Government Securities
        6. Pricing of New Issues
        7. Book Building and Price Discovery
      5. Secondary Markets in India
        1. Securities and Exchange Board of India (SEBI)
        2. Government Securities Market
        3. Derivatives Market
        4. Trading and Settlement
      6. Merchant Banking: Role in Capital Markets
        1. Status of Merchant Banking in India
      7. Mutual Funds and Capital Markets
        1. Benefits of Mutual Funds
        2. Drawbacks of Mutual Funds
        3. Index Fund
        4. Hedge Fund
      8. Summary
      9. Key Concepts
      10. Student Activities
    2. 20 Long-term Finance: Shares, Debentures and Term Loans
      1. Introduction
      2. Ordinary Shares or Equity
        1. Reporting of Ordinary Shares
        2. Features of Ordinary Shares
        3. Pros and Cons of Equity Financing
        4. Public issue of Equity
        5. Underwriting of issues
        6. Private Placement
      3. Rights Issue of Equity Shares
        1. Terms and Procedures
        2. Value of a Right
        3. Effect on Shareholders’ Wealth
        4. Is the Subscription Price of Any Significance?
        5. Pros and Cons of Rights Issue
      4. Preference Shares
        1. Features
        2. Pros and Cons of Preference Shares
      5. Debentures
        1. Features
        2. Types of Debentures
        3. Pros and Cons of Debentures
      6. Term Loans
        1. Features of Term Loans
        2. Repayment Schedule
      7. Summary
      8. Key Concepts
      9. Student Activities
    3. 21 Convertible Debentures and Warrants
      1. Introduction
      2. Convertible Debentures
        1. Characteristics of Convertible Debentures
        2. Valuation of Convertible Debentures
        3. The Black Scholes Model for Valuing Convertible Debentures
        4. Why Issue Convertible Debentures?
      3. Warrants
        1. Characteristics of Warrants
        2. Valuation of Warrants
        3. The Black–Scholes Model for the Valuation of Warrants
        4. Why Issue Warrants?
      4. Convertible Zero-interest Debentures
      5. Secured Premium Notes (spn) with Warrants
      6. Summary
      7. Key Concepts
      8. Student Activities
    4. 22 Asset-based Financing: Lease, Hire Purchase and Project Financing
      1. Introduction
      2. Lease Financing
        1. Lease Defined
        2. Types of Lease
        3. Myths About Leasing
        4. Advantages of Leasing
      3. Cash Flows Under Buy and Lease
      4. Evaluating a Financial Lease
        1. Equivalent Loan Method
        2. Net Present Value and Net Advantage of Leasing
      5. Can a Lease Benefit Both Lessor And Lessee?
        1. Where from do Leasing Benefits Come?
        2. Net Advantage of a Lease (NAL) Including Operating Costs and Salvage Value
        3. Internal Rate of Return Approach for Evaluating a Lease
      6. Depreciation Tax Shield and Salvage Value Under Indian Tax Laws
      7. Leveraged Lease
      8. Hire Purchase Financing
        1. Hire Purchase Financing vs. Lease Financing
        2. Instalment Sale
        3. Evaluation of Hire Purchase Financing
      9. Infrastructure Project Financing
        1. What is Project Financing?
        2. Financing Arrangements for Infrastructure Projects
        3. Risks Allocation in Project Financing
        4. Government Guarantees and Risk Mitigation
        5. Financial Structure of Infrastructure Projects
        6. Appropriate Return to Equity and Financial Structure in Infrastructure Project Financing
        7. Conclusion
      10. Summary
      11. Key Concepts
      12. Student Activities
    5. 23 Venture Capital Financing
      1. Introduction
      2. Notion of Venture Capital
        1. Features of Venture Capital
        2. Stages in Venture Financing
      3. The Business Plan
        1. Essential Elements of a Business Plan
        2. What does a Venture Capitalist Look for in a Venture?
      4. The Process of Venture Capital Financing
        1. Deal Origination
        2. Screening
        3. Due Diligence
        4. Deal Structuring
        5. Post-investment Activities
        6. Exit Plan
      5. Methods of Venture Financing
        1. Equity
        2. Conditional Loan
        3. Income Note
        4. Other Financing Methods
      6. Disinvestment Mechanisms
        1. Buyback by Promoters
        2. Initial Public Offerings (IPOs)
        3. Secondary Stock Market
        4. Management Buyouts
      7. Development of Venture Capital in India
      8. Future Prospects of Venture Financing
      9. Summary
      10. Key Concepts
      11. Student Activities
  13. PART 5 FINANCIAL ANALYSIS AND PLANNING
    1. 24 Financial Statements
      1. Introduction
      2. Balance Sheet
        1. Balance Sheet in Practice: Example of GNFC
      3. Profit and Loss Statement
        1. Concepts of Profit
        2. Profit and Loss Account: Example of GNFC
      4. Definition of Profit: Economic Vs Accounting
      5. Changes in Financial Position
        1. Nature of Changes in the Financial Position
        2. Definition of Funds
      6. Funds Flow Statement
        1. Concept of Working Capital Flow
        2. Sources of Working Capital
        3. Uses of Working Capital
        4. Forms of Funds Flow Statement
        5. Working Capital from Operations
        6. Working Capital Flow from Non-current Accounts
        7. Comprehensive Funds Flow Statement: Financial Resources Basis
      7. Cash Flow Statement
        1. Sources and Uses of Cash
        2. Comprehensive Cash Flow Statement: Financial Resources Basis
        3. Cash Flow Statement of Gujarat Narmada Valley Fertilizers Company
      8. Uses of the Statement of Changes in Financial Position
      9. Summary
      10. Key Concepts
      11. Student Activities
    2. 25 Financial Statement Analysis
      1. Introduction
      2. Users of Financial Analysis
      3. Nature of Ratio Analysis
        1. Standards of Comparison
        2. Types of Ratios
      4. Liquidity Ratios
        1. Current Ratio
        2. Quick Ratio
        3. Cash Ratio
        4. Interval Measure
        5. Net Working Capital Ratio
      5. Leverage Ratios
        1. Debt Ratio
        2. Debt-Equity (D/E) Ratio
        3. Debt-to-Capital Employed (D/CE) Ratio
        4. Total Liabilities-to-Total Assets (TL/TA) Ratio
        5. Equity Multiplier
        6. Coverage Ratios
      6. Efficiency (Activity) Ratios
        1. Inventory Turnover
        2. Debtors (Accounts Receivable) Turnover
        3. Creditors (Accounts Payable) Turnover
        4. Trade Payable-to-Trade Receivable Ratio
        5. Assets Turnover Ratios
      7. Profitability Ratios
        1. How is Profit Measured?
        2. Gross Profit Margin
        3. EBITDA Margin
        4. Net Profit Margin
        5. Operating Profit Margin
        6. Operating Expense Ratio
        7. Return on Investment (ROI)
        8. ROE Return on Equity
        9. Earnings Per Share (EPS)
        10. Dividend Per Share (DPS or DIV)
        11. Dividend-Payout Ratio
        12. Dividend Yield and Earnings Yield
      8. Valuation Ratios
        1. Price-Earnings Ratio
        2. Market Value-to-Book Value (MV/BV) Ratio
        3. Enterprise Value (EV)
        4. Tobin’s q
      9. Dupont Analysis: Evaluation of a Firm’s Earning Power
      10. Comparative Statements Analysis
      11. Trend Analysis
      12. Inter-firm Analysis
      13. Utility and Limitations of Ratio analysis
        1. Diagnostic Role of Ratios
      14. Cautions in Using Ratio Analysis
      15. Financial Ratios as Predictors of Failure
        1. Non-parametric Analysis
        2. Multiple Discriminant Analysis
      16. Summary
      17. Key Concepts
      18. Student Activities
    3. 26 Financial Planning and Strategy
      1. Introduction
      2. Strategic Decision-making and Planning
        1. Strategic Choices and Planning
      3. Strategic Financial Planning
      4. Financial Planning
        1. Financial Forecasting and Modelling
        2. Constructing Financial Model
        3. Long-term Financial Plan
        4. Sensitivity Analysis
        5. Steps in Financial Planning
      5. Planning for Sustainable Growth
        1. Growth Potential of a Single-product Company
        2. Sustainable Growth Model for a Multi-product Company
      6. Summary
      7. Key Concepts
      8. Student Activities
  14. PART 6 WORKING CAPITAL MANAGEMENT
    1. 27 Principles of Working Capital Management
      1. Introduction
      2. Concepts of Working Capital
        1. Focusing on Current Assets Management
        2. Focussing on Liquidity Management
      3. Operating and Cash Conversion Cycle
        1. Length of Operating Cycle
        2. Gross Operating Cycle (GOC)
        3. Cash Conversion or Net Operating Cycle
      4. Permanent and Variable Working Capital
      5. Balanced Working Capital Position
      6. Determinants of Working Capital
        1. Nature of Business
        2. Market and Demand Conditions
        3. Technology and Manufacturing Policy
        4. Credit Policy
        5. Availability of Credit from Suppliers
        6. Operating Efficiency
        7. Price Level Changes
      7. Issues in Working Capital Management
        1. Current Assets to Fixed Assets Ratio
        2. Liquidity vs Profitability: Risk-Return Trade-off
        3. The Cost Trade-off
      8. Estimating Working Capital Needs
        1. Method 1: Current Assets Holding Period
        2. Method 2: Ratio of Sales
        3. Method 3: Ratio of Fixed Investment
      9. Policies for Financing Current Assets
        1. Matching Approach
        2. Conservative Approach
        3. Aggressive Approach
        4. Short-term vs. Long-term Financing: A Risk-Return Trade-off
      10. Summary
      11. Key Concepts
      12. Student Activities
    2. 28 Credit Management
      1. Introduction
      2. Credit Policy: Nature and Goals
        1. Goals of Credit Policy
        2. Marketing Tool
      3. Optimum Credit Policy: A Marginal Cost-benefit Analysis
      4. Credit Policy Variables
        1. Credit Standards
        2. Credit-granting Decision: NPV Rule
        3. Collection Policy and Procedures
      5. Credit Evaluation of Individual Accounts
        1. Credit Information
        2. Credit Investigation and Analysis
        3. Credit Limit
        4. Collection Efforts
      6. Monitoring Receivables
        1. Average Collection Period
        2. Aging Schedule
        3. Collection Experience Matrix
      7. Factoring
        1. Nature of Factoring
        2. Factoring Services
        3. Factoring and Short-term Financing
        4. Factoring and Bills Discounting
        5. Types of Factoring
        6. Costs and Benefits of Factoring
      8. Summary
      9. Key Concepts
      10. Student Activities
    3. 29 Inventory Management
      1. Introduction
      2. Nature of Inventories
      3. Need to Hold Inventories
      4. Objective of Inventory Management
      5. Inventory Management Techniques
        1. Economic Order Quantity (EOQ)
        2. Reorder Point
      6. Analysis of Investment in Inventory
        1. Incremental Analysis
      7. Inventory Control Systems
        1. ABC Inventory Control System
        2. Just-in-time (JIT) System
        3. Out-sourcing
        4. Computerized Inventory Control System
      8. The Inventory Management Process
      9. Summary
      10. Key Concepts
      11. Student Activities
    4. 30 Cash Management
      1. Introduction
      2. Facets of Cash Management
      3. Motives for Holding Cash
        1. Transaction Motive
        2. Precautionary Motive
        3. Speculative Motive
      4. Cash Planning
        1. Cash Forecasting and Budgeting
        2. Short-term Cash Forecasts
        3. Short-term Forecasting Methods
        4. Sensitivity Analysis
        5. Long-term Cash Forecasting
      5. Managing Cash Collections and Disbursements
        1. Accelerating Cash Collections
        2. Cash Collection Instruments in India
        3. Clearing
        4. Controlling Disbursements
        5. Determining the Optimum Cash Balance
        6. Optimum Cash Balance under Certainty: Baumol’s Model
        7. Optimum Cash Balance under Uncertainty: The Miller-Orr Model
      6. Investing Surplus Cash in Marketable Securities
        1. Selecting Investment Opportunities
        2. Types of Short-term Investment Opportunities
      7. Summary
      8. Key Concepts
      9. Student Activities
    5. 31 Working Capital Finance
      1. Introduction
      2. Trade Credit
        1. Credit Terms
        2. Benefits and Costs of Trade Credit
      3. Accrued Expenses and Deferred Income
        1. Accrued Expenses
        2. Deferred Income
      4. Bank Finance for Working Capital
        1. Forms of Bank Finance
        2. Security Required in Bank Finance
      5. Regulation of Bank Finance
        1. Guidelines for Bank Finance: Historical Perspective
      6. Commercial Paper
        1. Eligibility, Use and Maturity
        2. Cost
        3. Merits and Demerits
      7. Summary
      8. Key Concepts
      9. Student Activities
  15. PART 7 VALUE AND RISK MANAGEMENT
    1. 32 Corporate Restructuring, Mergers and Acquisitions
      1. Introduction
      2. Corporate Restructuring and Business Combination
      3. Types of Business Combinations
        1. Merger or Amalgamation
        2. Acquisition
        3. Reverse Merger
        4. Forms of Merger
      4. Mergers and Acquisitions in India
        1. Largest M&A Deals in India
      5. Motives and Benefits of Mergers and Acquisitions
        1. Accelerated Growth
        2. Enhanced Profitability
        3. Diversification of Risk
        4. Reduction in Tax Liability
        5. Financial Benefits
        6. Increased Market Power
      6. Value Creation Through Mergers and Acquisitions
      7. Valuation Under Mergers and Acquisitions: Dcf Approach
        1. Estimating Free Cash Flows
        2. Estimating the Cost of Capital
        3. Horizon Value
        4. Value of Excel’s Shares
      8. Financing a Merger
        1. Cash Offer
        2. Share Exchange
      9. APV and CCF Approach to Merger Valuation
      10. Merger Negotiations: Significance of P/E Ratio and Eps Analysis
        1. Share Exchange Ratio
        2. Earnings Growth
      11. Tender Offer and Hostile Takeover
        1. Defensive Tactics
      12. Corporate Strategy and Acquisitions
        1. Planning
        2. Search and Screening
        3. Financial Evaluation
        4. Integration
        5. Post-Merger Integration: Integrating VSNL with Tata Group
      13. Accounting for Mergers and Acquisitions
        1. Pooling of Interests Method
        2. Purchase Method
      14. Leveraged Buyouts
        1. LBO Targets
        2. Risk and Rewards
        3. LBO Evaluation
        4. Divestment
        5. Sell-off
        6. Spin-off
      15. Sebi Guidelines for Takeovers
        1. Legal Procedures
      16. Summary
      17. Key Concepts
      18. Student Activities
    2. 33 Derivatives for Managing Financial Risk
      1. Introduction
      2. Derivatives and Risk Hedging
      3. Risk Hedging with Options
      4. Forward Contracts
      5. Futures Contracts
        1. Financial Futures
        2. Futures Contracts vs Forward Contracts
        3. Futures and Spot Prices of Financial Futures
      6. Swaps
        1. Currency Swaps
        2. Interest Rate Swaps
      7. Risk Management Strategy: Case of Bhp Limited
        1. New Policy
        2. Cash Flow at Risk
      8. Uses of Derivatives
      9. Summary
      10. Key Concepts
      11. Student Activities
    3. 34 International Financial Management
      1. Introduction
      2. The Foreign Exchange Market
        1. Foreign Exchange Rates
        2. Cross Rates
        3. Spot Exchange Rates
        4. Bid-ask Spread
        5. Forward Exchange Rates
        6. Swap Rate
      3. International Parity Relationships
        1. Interest Rate Parity
        2. Purchasing Power Parity
        3. Expectation Theory of Forward Rates
        4. International Fisher Effect
      4. Foreign Exchange Risk and Hedging
        1. Transaction Exposure
        2. Economic Exposure
        3. Translation Exposure
        4. Hedging Foreign Exchange Risk
        5. Foreign Currency Option
        6. Money Market Operations
      5. International Capital Investment Analysis
        1. Cash Flows in Taiwanese Dollars
        2. Taiwanese Dollar Cost of Capital
        3. Estimating Beta
        4. Thai Baht Cost of Capital and Cash Flows
        5. Investment Evaluation: Parent vs Project
      6. Political Risk of Foreign Investments
        1. Foreign Political Risks and Investment Evaluation
      7. Financing International Operations
        1. Eurocurrency Loans
        2. Eurobonds and Foreign Bonds
        3. Depository Receipts
        4. Cost and Risk of International Financing
      8. Summary
      9. Key Concepts
      10. Student Activities
    4. 35 Shareholder Value and Corporate Governance
      1. Introduction
      2. Financial Goals and Strategy
      3. Shareholder Value Creation
        1. Market Value Added
        2. Market-to-Book Value (M/B)
        3. Economic Value Added (EVA)
        4. EVA Adjustments
        5. Evaluation of M/B and EVA
        6. Value Drivers
      4. Shareholder Value Analysis: Case of Cadila Healthcare Limited
      5. Managerial Implications of Shareholder Value
      6. Balanced Scorecard
        1. The Learning and Growth Perspective
        2. The Business Process Perspective
        3. The Customer Perspective
        4. The Financial Perspective
        5. Should a Balanced Scorecard Always Balance?
        6. Implementing Balanced Scorecard System
        7. Significance of the Balanced Scorecard
      7. Corporate Governance
        1. Theories of Corporate Governance
        2. Corporate Governance Practice
      8. Summary
      9. Key Concepts
      10. Student Activities
  16. Annexure
  17. Index
  18. Copyright

Product information

  • Title: Financial Management, 12th Edition by Pearson
  • Author(s): I M Pandey
  • Release date: December 2021
  • Publisher(s): Pearson India
  • ISBN: 9789390689897