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Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Contemporary Issues in Financial Management Concepts for Financial Management and Policy MCOM sem 2 Delhi University : Financial Management is an essential part of the economic and non economic activities which leads to decide the efficient procurement and utilization of finance with profitable manner. In the olden days the subject Financial Management was a part of accountancy with the traditional approaches. Now a days it has been enlarged with innovative and multi dimensional functions in the field of business with the effect of industrialization, Financial Management has become a vital part of the business concern and they are concentrating more in the field of Financial Management. Financial Management also developed as corporate finance, business finance, financial economics, financial mathematics and financial engineering. Understanding the basic concept about the financial management becomes an essential part for the students of economics, commerce and management.

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

M.Com. Programme Structure

The programme shall be governed by the Department of Commerce, Faculty of Commerce and Business, University of Delhi, Delhi – 110007

Programme Structure

The M.Com. Programme is divided into two parts as under. Each Part will consist of two semesters.

  SemesterSemester
Part – IFirst YearSemester ISemester II
Part – IISecond YearSemester IIISemester IV

* There will be 4 lecture hours of teaching per week for each paper

* Duration of examination of each paper shall be 3 hours.

* Each paper will be of 100 marks out of which 70 marks shall be allocated for semester examination and 30 marks for internal assessment.

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Part I: Semester II

PAPERSMarksTotal MarksDuration (Hrs.)Credit (Hrs.)
Paper No.TitleWrittenInternal Assessment
4201Quantitative Techniques for Business70   301004
4202Financial management and Policy70  3010034
4203Marketing Management70  3010034
4204Legal Aspects of Business70  3010034
4205International Business70  3010034
TOTAL500 20

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Master of Commerce

Semester II
Course 4202: FINANCIAL MANAGEMENT AND POLICY

Marks: 100 (Theory = 70, Internal Assessment = 30)

Objective: To make students understand various issues involved in financial management of a firm and equip them with advanced analytical tools and techniques that are used for making sound financial decisions and policies.

Contents:

Unit I- Introduction:

Nature, scope and objectives of financial management. Financial decision making and types of financial decisions. Finance as a strategic function. Role of finance manager. Agency problem. Stock price maximization and agency costs. Alternatives to stock price maximization. Stakeholders’ wealth maximization. Risk-return framework for financial decision making.

Unit II- Capital Budgeting:

Nature, significance and kinds of capital budgeting decisions. Cash flow estimation. Capital budgeting techniques- ARR, Payback period, Discounted payback period, NPV, Equivalent annual NPV, IRR, Incremental IRR and Modified IRR. Capital budgeting decisions under constraints and with multiple objectives using mathematical programming models (Linear programming and Integer Programming). Capital rationing. Capital budgeting decision under inflation. Capital budgeting decision under uncertainty. Techniques for incorporating risk and uncertainty in capital budgeting decisions- RADR, Certainty equivalent method, DCF Break even analysis, Simulation method, Probability distribution method, Decision tree analysis, Sensitivity analysis and Scenario analysis. Real options.

Unit III- Capital Structure:

An overview of cost of capital- Specific and WACC. Financial leverage and evaluation of financial plans (EBIT-EPS analysis). Theories of capital structure- NI, NOI, MM Hypothesis without and with corporate taxes, Merton Miller argument with corporate and personal taxes, Trade off theory, Pecking order theory, Signaling theory and effect of information asymmetry on capital structure.Optimal capital structure. Determinants of Capital structure in practice.

Unit IV- Dividend Policy:

Forms of dividends. Theories of relevance and irrelevance of dividend in firm valuation (Walter’s model, Gordon’s Model, MM Hypothesis, Bird-in-hand theory and Dividend signaling theory).Relevance of dividend policy under market imperfections. Traditional and Radical position on dividend. Issues in dividend policy. Types of dividend polices in practice (constant rupee dividend policy, constant dividend payout policy, smooth stream dividend policy etc.) Determinants of dividend policy. Lintner’s Model on corporate dividend behavior.

Unit V- Working Capital Planning and Management:

Concept and types of working capital. Operating and cash cycle. Estimation of working capital requirement. Working capital financing. Determinants of working capital. Components of working capital management. Cash management- Baumol’s Model and Miller-Orr Model of managing cash. Receivables management- dimensions of credit policy of a firm and evaluation of credit policies; credit analysis. Inventory management.

Unit VI- Corporate Restructuring and Contemporary Issues in Financial Management:

Corporate restructuring. Mergers and Acquisitions- types, sources of takeover gains, valuation and financing of M&As. Leveraged buyouts; Spin offs; demerger. Contemporary issues in financial management.

Note: Use relevant case studies to supplement class discussions.

Suggested Readings:

1. Van Horne, James C., Financial Management and Policy, Prentice Hall of India.

2. Pandey, I. M., Financial Management, Vikas Publishing.

3. Ross S.A., R.W. Westerfield and J. Jaffe, Corporate Finance, McGraw Hill.

4. Brealey R.A. and S.C. Myers, Principles of Corporate Finance, McGraw Hill.

5. Damodaran, A.,Corporate Finance: Theory and Practice, John Wiley & Sons.

6. Chandra, P. Financial Management, Tata McGraw Hill.

7. Khan, M.Y & Jain, P.K Financial Management: Text, Problems and Cases, Tata McGraw Hill.

8. Ehrhardt, M. C. & Brigham E. F, Corporate Finance, Indian Edition, Cengage Learning

9. Srivastava, Rajiv and Misra. Anil, Financial Management, Oxford University Press.

10. Arthur J. Kewon, John H. Martin, J. William Petty &David F. Scott, Financial Management: Principles & Application, Pearson.

11. Meyer. et.al, Contemporary Financial Management, Cengage Learning.

Note: Latest edition of the readings may be used.

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Financial management is one of the important parts of overall management, which is directly related with various functional departments like personnel, marketing and production. Financial management covers wide area with multidimensional approaches.

The following are the important scope of financial management.

1. Financial Management and Economics

Economic concepts like micro and macroeconomics are directly applied with the financial management approaches. Investment decisions, micro and macro environmental factors are closely associated with the functions of financial manager. Financial management also uses the economic equations like money value discount factor, economic order quantity etc. Financial economics is one of the emerging area, which provides immense opportunities to finance, and economical areas.

2. Financial Management and Accounting

Accounting records includes the financial information of the business concern. Hence, we can easily understand the relationship between the financial management and accounting. In the olden periods, both financial management and accounting are treated as a same discipline and then it has been merged as Management Accounting because this part is very much helpful to finance manager to take decisions. But nowaday’s financial management and accounting discipline are separate and interrelated.

3. Financial Management or Mathematics

Modern approaches of the financial management applied large number of mathematical and statistical tools and techniques. They are also called as econometrics. Economic order quantity, discount factor, time value of money, present value of money, cost of capital, capital structure theories, dividend theories, ratio analysis and working capital analysis are used as mathematical and statistical tools and techniques in the field of financial management.

4. Financial Management and Production Management

Production management is the operational part of the business concern, which helps to multiple the money into profit. Profit of the concern depends upon the production performance. Production performance needs finance, because production department requires raw material, machinery, wages, operating expenses etc. These expenditures are decided and estimated by the financial department and the finance manager allocates the appropriate finance to production department. The financial manager must be aware of the operational process and finance required for each process of production activities.

5. Financial Management and Marketing

Produced goods are sold in the market with innovative and modern approaches. For this, the marketing department needs finance to meet their requirements. Introduction to Financial Management. The financial manager or finance department is responsible to allocate the adequate finance to the marketing department. Hence, marketing and financial management are interrelated and depends on each other.

6. Financial Management and Human Resource

Financial management is also related with human resource department, which provides manpower to all the functional areas of the management. Financial manager should carefully evaluate the requirement of manpower to each department and allocate the finance to the human resource department as wages, salary, remuneration, commission, bonus, pension and other monetary benefits to the human resource department. Hence, financial management is directly related with human resource management.

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

Capital Budgeting

The word Capital refers to be the total investment of a company of firm in money, tangible and intangible assets. Whereas budgeting defined by the “Rowland and William” it may be said to be the art of building budgets. Budgets are a blue print of a plan and action expressed in quantities and manners.

The examples of capital expenditure:

1. Purchase of fixed assets such as land and building, plant and machinery, good will, etc.

2. The expenditure relating to addition, expansion, improvement and alteration to the fixed assets.

3. The replacement of fixed assets.

4. Research and development project.

Definitions

According to the definition of Charles T. Hrongreen, “capital budgeting is a long-term planning for making and financing proposed capital out lays.

According to the definition of G.C. Philippatos, “capital budgeting is concerned with the allocation of the firms source financial resources among the available opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earning from a project, with the immediate and subsequent streams of expenditure”.

Need and Importance of Capital Budgeting

1. Huge investments: Capital budgeting requires huge investments of funds, but the available funds are limited, therefore the firm before investing projects, plan are control its capital expenditure.

2. Long-term: Capital expenditure is long-term in nature or permanent in nature. Therefore financial risks involved in the investment decision are more. If higher risks are involved, it needs careful planning of capital budgeting.

3. Irreversible: The capital investment decisions are irreversible, are not changed back. Once the decision is taken for purchasing a permanent asset, it is very difficult to dispose off those assets without involving huge losses.

4. Long-term effect: Capital budgeting not only reduces the cost but also increases the revenue in long-term and will bring significant changes in the profit of the company by avoiding over or more investment or under investment. Over investments leads to be unable to utilize assets or over utilization of fixed assets. Therefore before making the investment, it is required carefully planning and analysis of the project thoroughly.

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

CAPITAL BUDGETING PROCESS

Capital budgeting is a difficult process to the investment of available funds. The benefit will attained only in the near future but, the future is uncertain. However, the following steps followed for capital budgeting, then the process may be easier are: 

1. Identification of various investments proposals: The capital budgeting may have various investment proposals. The proposal for the investment opportunities may be defined from the top management or may be even from the lower rank. The heads of various department analyse the various investment decisions, and will select proposals submitted to the planning committee of competent authority.

2. Screening or matching the proposals: The planning committee will analyse the various proposals and screenings. The selected proposals are considered with the available resources of the concern. Here resources referred as the financial part of the proposal. This reduces the gap between the resources and the investment cost.

3. Evaluation: After screening, the proposals are evaluated with the help of various methods, such as pay back period proposal, net discovered present value method, accounting rate of return and risk analysis. Each method of evaluation used in detail in the later part of this chapter.

The proposals are evaluated by.

(a) Independent proposals

(b) Contingent of dependent proposals

(c) Partially exclusive proposals. Independent proposals are not compared with another proposals and the same may be accepted or rejected. Whereas higher proposals acceptance depends upon the other one or more proposals. For example, the expansion of plant machinery leads to constructing of new building, additional manpower etc. Mutually exclusive projects are those which competed with other proposals and to implement the proposals after considering the risk and return, market demand etc.

4. Fixing property: After the evolution, the planning committee will predict which proposals will give more profit or economic consideration. If the projects or proposals are not suitable for the concern’s financial condition, the projects are rejected without considering other nature of the proposals.

5. Final approval: The planning committee approves the final proposals, with the help of the following:

(a) Profitability

(b) Economic constituents

(c) Financial violability

(d) Market conditions. The planning committee prepares the cost estimation and submits to the management.

6. Implementing: The competent autherity spends the money and implements the proposals. While implementing the proposals, assign responsibilities to the proposals, assign responsibilities for completing it, within the time allotted and reduce the cost for this purpose. The network techniques used such as PERT and CPM. It helps the management for monitoring and containing the implementation of the proposals. 

7. Performance review of feedback: The final stage of capital budgeting is actual results compared with the standard results. The adverse or unfavourable results identified and removing the various difficulties of the project. This is helpful for the future of the proposals.

KINDS OF CAPITAL BUDGETING DECISIONS

The overall objective of capital budgeting is to maximize the profitability. If a firm concentrates return on investment, this objective can be achieved either by increasing the revenues or reducing the costs. The increasing revenues can be achieved by expansion or the size of operations by adding a new product line. Reducing costs mean representing obsolete return on assets.

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

METHODS OF CAPITAL BUDGETING OF EVALUATION

By matching the available resources and projects it can be invested. The funds available are always living funds. There are many considerations taken for investment decision process such as environment and economic conditions. The methods of evaluations are classified as follows:

(A) Traditional methods (or Non-discount methods)

(i) Pay-back Period Methods

(ii) Post Pay-back Methods

(iii) Accounts Rate of Return

(B) Modern methods (or Discount methods)

(i) Net Present Value Method

(ii) Internal Rate of Return Method

(iii) Profitability Index Method

Contemporary Issues in Financial Management Concepts for Financial Management and Policy Mcom sem 2 Delhi University

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