ADVANCED FINANCIAL

MANAGEMENT

Prof. (Dr.) Bharti Wadhwa

Course background

The financial management deals with the financial decisions making. All decisions taken by a financial manager have financial
implications. Financial management evaluates the financial implications and help taking these decisions in such a way as to
maximize the value of the firm or in other words to maximize the wealth of the shareholders. This course examines important
issues in finance from the perspectives of financial managers who make important investment decisions financing decisions and
dividend decisions. This course also covers the financial environment and the new paradigms in Finance. This course incorporates
financial management decisions from the business world to the classroom, through the case method approach.

Learning Objectives
1. To understand the fundamental tools & techniques in Financial Management;
2. To develop an analytical/practical approach to corporate financial decision making;
3. To apply & analyse the concepts in real life situations.
4. To describe the financial climate in which organizations need to work

Course Outcomes
On the successful completion of this course the student will be able to:
CO1: evaluate the structure of financial markets, the different types of securities, and the performance of market participants.
CO2: apply various techniques for taking the Financial Management decisions.
CO3: develop hands-on, pro forma modelling skills using Excel.
CO4: describe new paradigms and new trends in Finance.
CO5: learn and work in ethical environment in Finance.
 Session Topic
1 Financial Environment of Business
Markets: Capital Markets - Primary Markets & Secondary Markets, Debt Markets, Derivate
Market
Financial Institutions: Banks, NBFC, Mutual Funds, Insurance & Housing Finance Companies
 

2 Introduction to Financial Management: Objectives and Functions

3 Investment Decisions
Time Value of Money,
Capital Budgeting
Risk and Return
(Definition of risk, return, measurement of risk and return
Cost of Capital (Introduction to WACC – ke following dividend models)
 

4 Leverage Analysis
5 Financing Decisions
Long term financing
Introduction to Capital Structure Decision
Working Capital Management

6 Dividend Decisions
7 New paradigms in finance (flexible)
Mergers and Acquisitions
International Financial Management
Ethics in Finance

 
 Financial Environment of Business

• Markets
• Financial Instruments
• Financial Institutions
 Background of Financial Environment

Investment
Money we earn is partly spent and rest saved for meeting future expenses. Instead of keeping the savings
idle we like to use savings in order to get return on it in the future. This is called Investment.

Why Invest
E a r n Return on idle resources
Generate sum of money for specified goal
Provision for uncertain future
Meet the cost of inflation
Financial Market Financial Instrument
• A market is a venue where goods A financial instrument is a claim
and services are exchanged. against a person or an
institution for payment, at a
• A financial market is a place future date, of a sum of money
where individuals and and/or a periodic payment in
organizations wanting to borrow the form of interest or dividend.
funds are brought together with  Many financial instruments are
those having a surplus of funds. marketable as they are
denominated in small amounts
and traded in organized
markets.
 Types of Financial Market and Its Instruments

CAPITAL MARKET
• Capital market is a market for financial assets which have a long or indefinite maturity.
• Capital market instruments become mature for the period above one year.
• Stock market—Largest part of capital market and held by private and institutional investors
• Residential and commercial mortgages—Held by commercial banks and life insurance
companies
• Corporate bond market—Held by insurance companies, pension and retirement funds

• The capital markets may also be divided into primary markets and secondary markets.
• Newly formed (issued) securities are bought or sold in primary markets, such as during initial public
offerings. The transactions in primary markets exist between issuers and investors
• Secondary markets allow investors to buy and sell existing securities. In secondary market transactions
exist among investors
Instruments in Capital Markets

Equity shares
Equity shares are those shares which are held by the owners of a corporate entity. These are known as
ordinary shares. They occupy a primary position.
Preference shares
Preference shares that carry preferential rights in comparison with ordinary shares are called preference
shares. These are the rights regarding payment of dividend the distribution of the assets of the company in the
event of its winding up.
Types of preference shares:
• Cumulative and non cumulative shares
• Redeemable and irredeemable shares
• Convertible and non convertible shares
• Participating and non participating shares

Debentures
Debentures are another kind of security traded in the capital market. It is an acknowledgement of a debt by a
company usually issued under a common seal, and unsecured or secured by a fixed or floating charge on the
assets of the company.
 Types of Financial Market and Its Instruments

MONEY MARKET
• Exchange of short-term instruments—one year or less than
• Highly liquid, minimal risk
• Commercial paper—short-term liabilities of prime business firms and finance companies
• Bank Certificates of Deposits—liabilities of issuing bank, interest bearing to corporations that
hold them
• U.S. Treasury bills—short-term debts of US government
Instruments in Money Market

Call Money:
• lending and borrowing transactions are carried out for one day that may or may not be renewed the next day.
• Demand comes from commercial banks that need to meet requirements of CRR and SLR, whereas supply comes from commercial
banks with excess funds, and FIs like IDBI, etc.
Treasury Bill Market:
• It deals in Treasury Bills of short term duration: 14days, 182 days ,91 days, and 364 days.
• They are issued by Government and largely held by RBI.
• The treasury bills facilitate the financing of Central Government temporary deficits.
• The rate of interest for treasury bills is determined by the market, depending on the demand and supply of funds in the money market.
Commercial Bill Market:
• Deals in bills of exchange, a seller draws a bill of exchange on the buyer to make payment within ascertain period of time.
• The bills can be domestic bills or foreign bills of exchange.
• The commercial bills are purchased and discounted by commercial banks, and are rediscounted by FIs like EXIM Bank, SIDBI, IDBI,etc.
The Commercial Paper Market:
The scheme of Commercial Paper (CP) was introduced in1990 for short term financing issue .
They can be issued in multiples of Rs. 5 lakhs and in multiples thereof
Financial Institutions

They are the intermediaries that mobilize savings and facilitates the allocation
of funds in efficient manner.
Funds are transferred between those who have funds and those who need funds.

Financial Institutions :
◦ Banking – Non-Banking
◦ Term Finance: IDBI, ICICI, IFCI, SIDBI, IIBI
◦ Specialized: EXIM, TFCI, ICICI Venture, IDFC,
NABARD, NHB
◦ Sectoral: UTI, LIC, GIC
◦ Investment
◦ State – Level: State Financial Corporations, State
Industrial Development Corporations
Financial Environment

• The financial environment is the part of an Financial System

economy where financial firms, investors, and  Financial Instruments: WHAT:TRADE
markets make decisions on the allocation of
resources.  Financial Markets: WHERE
• A financial environment is a part of an economy  Financial Institutions: WHO
with the major players being firms, investors, and
markets.
 Flow of funds from lenders to borrowers
Purchase of
Govt. Bonds Financial markets
Financial Markets
Bonds,
IPO

Borrowers
Savers

Save Financial Intermediaries Business

salary borrows
Stock Market
• https://www.youtube.com/watch?v=ZCFkWDdmXG8