PAPER – 8 : FINANCIAL MANAGEMENT AND ECONOMICS FOR FINANCE
(One paper – Three hours – 100 Marks)
SECTION A: FINANCIAL MANAGEMENT (60 MARKS)
Objective: To develop an understanding of various aspects of Financial Management and acquire the ability to apply such knowledge in decision-making.
1. Financial Management and Financial Analysis
(i) Introduction to Financial Management Function
a) Objective and scope of financial management
b) Role and purpose
c) Financial management environment
d) Functions of finance executives in an organization
e) Financial distress and insolvency.
(ii) Financial Analysis through Ratios
a) Users of the financial analysis
b) Sources of financial data for analysis
c) Calculation and Interpretation of ratios:
– Analysing liquidity
– Analysing leverage
– Analysing solvency
– Analysing efficiency/ activity
– Analysing profitability
d) Limitations of ratio analysis
2. Financing Decisions
(i) Sources of Finance
a) Different Sources of Finance, Characteristics of different types of long term debt and equity finance, Method of raising long term finance
b) Different Sources of short term Finance
c) Internal fund as a source of finance
d) International sources of finance
e) Other sources of finance- Sale and lease back, Convertible debt, Venture capital, Grants etc.
(ii) Lease Financing
a) Concept and Classification
b) Significance and Limitations of Lease Financing
c) Financial Evaluation of Leasing Decision
(iii) Cost of Capital
a) Significance of cost of capital
b) Factors of cost of capital
c) Measurement of costs of individual components of capital
d) Weighted average cost of capital (WACC)
e) Marginal cost of capital
f) Effective Interest rate
(iv) Capital Structure Decisions
a) Significance of capital structure
b) Determinants of capital structure
c) Capital structure planning and designing
d) Designing of optimum capital structure
e) Theories of Capital Structure and value of the firm- relevancy and Irrelevancy of capital structure.
f) EBIT- EPS Analysis, Breakeven- EBIT Analysis.
g) Under/ Over Capitalisation.
(v) Leverages
a) Types of Leverages- Operating, Financial and Combined
b) Analysis of leverages
3. Capital Investment and Dividend Decisions
(i) Capital Investment Decisions
a) Objective of capital investment decisions
b) Methods of Investment appraisal:
– Payback period, Discounted payback period
– Accounting Rate of Return (ARR),
– Net Present Value (NPV) – The meaning of NPV, Strengths and limitations of NPV method, The impact of taxation on the NPV analysis, The impact of Inflation on the NPV analysis, The working capital adjustment in an NPV
analysis, Capital rationing, Equivalent Annual Costs, Adjusted present value
– Internal Rate of return (IRR)- Limitations of the IRR method, Multiple IRRs,
– Modified internal Rate of Return (MIRR)- Definition and explanation of MIRR, The process for calculating MIRR, Strengths of the MIRR approach.
– Profitability Index
(ii) Adjustment of Risk and Uncertainty in Capital Budgeting Decision
a) Probability Analysis
b) Certainty Equivalent Method
c) Risk Adjusted Discount Rate
d) Monte Carlo Simulation
e) Decision Tree Analysis
f) Scenario Analysis
g) Sensitivity Analysis
(iii) Dividend Decisions
a) Basics of Dividends
b) Forms of dividend
c) Determinants of dividend
d) Relevancy and Irrelevancy of Dividend Policies- Traditional Approach, Walter’s model, Gordon’s model, Modigliani and Miller (MM) Hypothesis.
4. Management of Working Capital
(i) Management of Working Capital
a) The management of working capital- Liquidity and Profitability
b) The Working capital financing decisions- Primary and Secondary Sources of Liquidity
c) The working Capital Cycle (operating Cycle), Effectiveness of Working Capital based on its operating and cash conversion cycles
d) Assessment of working capital requirement
e) Management of Accounts Receivables (Debtors)
f) Factoring and Forfaiting
g) Management of Accounts Payables (Creditors)
h) Management of Inventory
i) Management of Cash, Treasury management
j) Banking norms of working capital finance
SECTION B : ECONOMICS FOR FINANCE (MARKS: 40)
Objective:
To develop an understanding of the concepts and theories of Economics in the context of Finance and acquire the ability to address application oriented issues.
1. Determination of National Income
(i) Macro Economic Aggregates and Measurement of National Income
(ii) The Keynesian Theory of Determination of National Income
2. The Money Market
(i) The Concept of Money Demand: Important Theories of Demand for Money
(ii) The Concept of Money Supply
(iii) Monetary Policy
3. Public Finance
(i) Fiscal functions: An Overview.
(ii) Market Failure
(iii) Government Interventions to Correct Market Failure
(iv) Fiscal Policy
4. International Trade
(i) Theories of International Trade
(ii) Trade Policy – The Instruments of Trade Policy
(iii) Trade Negotiations
(iv) Exchange Rates and its economic effects
(v) International Capital Movements: Foreign Direct Investment