Unit 1: Introduction to financial management
Financial Management notes · PTU syllabus (BBA 403-18)
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Unit summary
Financial management decides how a firm raises money and how it uses it. This unit covers the meaning, nature and scope of financial management, the profit versus wealth maximisation debate, the four finance decisions, sources of long- and short-term finance, and the time value of money.
After this unit you can
- Explain the nature and scope of financial management
- Compare profit maximisation and wealth maximisation
- Explain investment, financing, dividend and liquidity decisions
- Describe sources of finance and apply the time value of money
PTU syllabus topics
- Meaning
- nature and scope of financial management
- profit maximisation vs. wealth maximisation
- finance functions — investment
- financing
- liquidity and dividend decisions
- sources of long-term and short-term finance
- time value of money
Investment decision
Where to invest: capital budgeting
Financing decision
How to raise funds: debt or equity
Dividend decision
How much profit to pay out
Liquidity decision
Managing working capital
Topic 1
Meaning, nature and scope
Financial management is the planning, organising, directing and controlling of financial activities — procuring and using funds — to achieve the firm's objectives.
Investment decision
Where to invest: capital budgeting, working capital
Financing decision
How to raise funds: debt or equity mix
Dividend decision
How much profit to pay out or retain
Liquidity decision
Managing current assets for liquidity and profitability
Topic 2
Profit maximisation vs wealth maximisation
Focus
Total profit
Market value of shares (NPV)
Time value of money
Ignored
Considered
Risk
Ignored
Considered
Clarity
Ambiguous: which profit?
Clear: cash flows
Acceptance
Traditional
Modern, superior objective
Topic 3
Sources of finance
| Long-term sources | Short-term sources |
|---|---|
| Equity shares | Trade credit |
| Preference shares | Bank overdraft and cash credit |
| Debentures and bonds | Commercial paper |
| Term loans from banks and institutions | Bills discounting and factoring |
| Retained earnings | Customer advances |
| Venture capital, lease finance | Short-term loans |
Topic 4
Time value of money
A rupee today is worth more than a rupee tomorrow because money can earn interest, and because of inflation and risk.
Future value
FV = PV (1 + r)ⁿ
Present value
PV = FV / (1 + r)ⁿ
FV of an annuity
A × [(1 + r)ⁿ − 1] / r
PV of an annuity
A × [1 − (1 + r)⁻ⁿ] / r
Perpetuity
PV = A / r
Example
₹10,000 invested at 10% for 3 years grows to 10,000 × 1.331 = ₹13,310. The present value of ₹13,310 receivable in 3 years at 10% is ₹10,000.
Key terms
- Financial management
- Managing the raising and use of funds
- Wealth maximisation
- Maximising the market value of shareholders' wealth
- Capital budgeting
- Long-term investment decisions
- Time value of money
- Money today is worth more than the same money later
- Annuity
- A series of equal periodic payments
Quick revision
- Four decisions: investment, financing, dividend, liquidity.
- Wealth maximisation considers time value and risk.
- Long-term: shares, debentures, loans, retained earnings.
- FV = PV(1 + r)ⁿ; PV = FV/(1 + r)ⁿ.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define financial management.
- Q2.Why is wealth maximisation better than profit maximisation?
- Q3.List the four finance decisions.
- Q4.Name three short-term sources of finance.
- Q5.Find the present value of ₹11,000 receivable after one year at 10%.
Long-answer questions
- Q1.Explain the nature and scope of financial management.
- Q2.Compare profit maximisation and wealth maximisation.
- Q3.Explain the long-term and short-term sources of finance.
- Q4.Explain the time value of money with compounding and discounting.
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