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Financial Management | Page 1 of 108
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TABLE OF CONTENTS
Note: click the cross-reference below for easy navigation. Click
press Ctrl + Home to see table of contents.
or
TABLE OF CONTENTS........................................................................................................................... 1
KEY TERMS ............................................................................................................................................ 3
AUTHORS PROFILE .............................................................................................................................. 8
IMPORTANT! .......................................................................................................................................... 9
DISCOUNT & ANNUITY FACTOR TABLES ......................................................................................... 11
Chapter 1: FINANCIAL MANAGEMENT FUNCTION ............................................................................ 13
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT .................................................................... 19
Chapter 3: THE NATURE, ELEMENTS & IMPORTANCE OF WORKING CAPITAL ............................ 29
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS ....................................................... 32
Chapter 5: DETERMINING WORKING CAPITAL NEEDS & FUNDING STRATEGIES ........................ 64
Chapter 6: THE NATURE OF INVESTMENT DECISIONS & THE APPRAISAL PROCESS ................. 67
Chapter 7: NON DISCOUNTED CASH FLOW TECHNIQUES .............................................................. 68
Chapter 8: DISCOUNTED CASH FLOW (DCF) TECHNIQUES ............................................................ 69
Chapter 9: ALLOWING FOR INFLATION & TAXATION IN DCF ........................................................... 72
Chapter 10: ADJUSTING FOR RISK & UNCERTAINTY IN INVESTMENT APPRAISAL ...................... 74
Chapter 11: SPECIFIC INVESTMENT DECISIONS .............................................................................. 75
Chapter 12: SHORT & LONG TERM FINANCE .................................................................................... 79
Chapters13: INTERNAL SOURCES OF FINANCE & DIVIDEND POLICY ............................................ 83
Chapter 14: GEARING & CAPITAL STRUCTURE CONSIDERATIONS ............................................... 85
Chapter 15: FINANCE FOR SMALL & MEDIUM SIZED ENTITIES (SMEs) .......................................... 87
Chapter 16: ESTIMATING COST OF CAPITAL .................................................................................... 89
Chapter 17: RELATIONSHIP B/W COST OF CAPITAL, CAPITAL STRUCTURE & INVESTMENTS ... 92
Chapter 18: BUSINESS VALUATION TECHNIQUES ........................................................................... 95
Chapter 19: EFFICIENT MARKET HYPOTHESIS................................................................................. 98
Chapter 20: BASICS OF FINANCIAL RISK MANAGEMENT ................................................................ 99
Chapter 21: HEDGING TECHNIQUES FOR FOREIGN CURRENCY RISK........................................ 101
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK ................................................. 104
RELATED eBOOKS ............................................................................................................................ 107
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Special Offer
Place a http://accasupport.com link at any ONE of your
or other account to get any TWO chapters above of your choice
for free not included in free version by emailing at
kabuli_52@hotmail.com or murtaza@accasupport.com
Email should contain web page URL where you have placed a
link and name of any TWO chapters you want.
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KEY TERMS
A
Agency 14
Aggregate demand 22
Aggregate Supply 22
Agreement Date 100, 102
Annuity 70
Average Growth Rate 90
B
Bad Debt Risk 42
Balance Of Payments 106
Barter Trade 52
Basis Risk 102, 105
Baumol Model 65
Benefits 16
Bill Of Exchange 51
Boom 28
Brand, Copyright & Patents 96
Business Angels 88
Business Cycle 27
Business Risk 93
Buying & Selling Rate 100
C
Cap 105
Capital Asset Pricing Model (CAPM)
90
Capital Cash Flows 73
Clientele Effect 84
Collar 105
Combine Probability 74
Confidence 22
Contingent Assets 96
Contingent Liabilities 96
Contract Price 102
Contract Size 102
Conversion Premium 97
Convertible Loan Notes 81
Cost of Equity 90
Credit Control 40
Credit Insurance 52
Credit Or Customer Analysis 39
Credit Policy 39
Currency Option 103
Currency Swap 103
Current Asset Ratio 38
D
Debt Finance 81
Deep Discount Bonds 81
Deflation 70
Deflationary Gap 27
Depression 27
Derivative 103
Development Expenditure 96
Direct Quote 100
Discount Rate 70
Discounted Payback Period 71
Discounting 70
Dividend Growth Model (DGM) 90
Dividend Valuation Model (DVM)
96
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Divisible Projects 77
E
Earnings Per Share 94
Earnings Yield 94
Economic Risk 100
Efficient Market Hypothesis 98
Equity Beta 91
Equity Finance 80
Equity Risk Premium
- 90
Equivalent Annual Cost (EAC) 77
Exchange Rate 23
Expectation Theory 106
Expected Values 74
Export Factoring 51
F
Factoring 44
Finance Lease 76
Financial Cash Flows 73
Financial Risk 93
Fiscal Policy 21
Fixed Interest Rate Risk 105
Floatation 80
Floor 105
Floor Value 97
Fluctuating Assets 65
Foreign Exchange Risk 100
Forward Contract Hedge 102
Forward Rate 102
Forward Rate Agreements (FRAs)
105
Franchise 78
Free Cash Flows 71
G
Goal congruence 14
Goodwill 96
Gordons Growth Rate 90
Government Grants 78
Government Policy 22
H
Hard Capital Rationing 77
Hedging 100
I
Indirect Quote 100
Inflation 24, 70
Inflation Rate 70
Inflation Rate Parity Theory 102
Inflationary Gap 27
Initial Investment 73
Initial Public Offer (IPO) 80
Interest Rate 70
Interest Rate Option 105
Interest Rate Parity Theory 102
Interest Rate Risk 105
Interest Rate Swap 105
Invoice Discounting 49
Invoicing In Home Currency 100
Irredeemable Loan Notes 81
J
Joint Venture 78
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Macro Economics 20
Macroeconomic Policy 20
Market Imperfection Theory 93
Market Rate Of Return 90
Market Segmentation Theory 106
Matching 100
Matching Policy 65
Micro Economics 20
Miller & Modigliani (M&M) Theory
93
Miller & Modigliani Theory 84
Miller-Orr Model 65
Monetary Policy 20, 106
Money Market Hedge 103
Mutually Exclusive Projects 78
Par Value 81
Pecking Order Theory 93
Pension 16
Permanent Assets 65
Perpetuity 70
Placing 80
Positive Gap 105
Pre-Emption Right 80
Preference Share Capital 80
Present Value (PV) 70
Price Earnings Ratio 94
Probability Analysis 74
Profit Related Pay 15
Project Specific Fixed Cost 73
Q
Financial management ebook, financial management guide, financial management tutorial, financial management book, financial management training, financial
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R
Real Return 106
Recession 27
Recourse Factoring 45
Recovery 28
Redeemable Loan Notes 81
Redemption Value 96
Redemption Yield 97
Renounce 86
Residual Value 73
Retained Earnings 80
Return Of Equity (ROE) 94
Return Of Investment (ROI) 93
Revenue Cash Flows 73
Risk 74
Risk Free Rate Of Return 90
S
Sale & Lease Back 81
Script Dividend 84
Semi Strong Form Efficient 98
Sensitivity Analysis 74
Settlement Date 100, 103
Settlement On Net Basis 100
Share Based Payment 15
Share Options 15
Short Term Loan 80
Signalling Effect 84
Single Period Capital Rationing 77
Smoothing 105
Soft Capital Rationing 77
Spot Rate 102
Stagnation 26
Strong Form Efficient 98
Subscribe 86
Systematic Risk 90
T
Tangible Assets 96
Tax Savings On Capital Allowance
73
Theoretical Ex-Right Share Price 86
Tick 102
Time Value of Money 70
Traditional View 84, 93
Transaction Risk 100
Translation Risk 100
U
Uncertainty 74
Unemployment 25
V
Variable Interest Rate Risk 105
Venture Capitalist 88
W
Weak Form Efficient 98
Weighted Average Cost of Capital
(WACC) 90
Weighted Average Cost Of Capital
(WACC) 70
Working Capital Cycle 33
Working Capital Investment 73
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AUTHORS PROFILE
Name: Murtaza Lanewala
Career Status:
Freelance writer & tutor for
professional accountancy
qualifications. Professional bodies
include ACCA, CIMA and ICAEW.
Author & CEO of accasupport.com
E-mail:
kabuli_52@hotmail.com or
murtaza@accasupport.com
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IMPORTANT!
1 Disclaimer
This material is sold only through accasupport.com website. However,
Clickbank.com is the credit card processing organization for collecting
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Demo version of this material is available free of cost, please take care,
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Readers of this material will be solely responsible for the consequences
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Recommendations made of any kind are intelligent guesses to the best of
authors knowledge.
Names of individuals, organizations, countries, religions etc are used for
educational purpose only. It is not intended to abuse, discriminate and
hurt anyone's feelings and dignity.
2 Copyright Notice
This material is subject to copyright protection law. Infringement of
copyright law results in criminal liability (fine or imprisonment or both).
Copyright infringement is effectively theft of intellectual property;
therefore, it is unethical from social viewpoint and sinful act from
religious viewpoint as well.
Copyright 2012 Murtaza Lanewala. All rights reserved.
2.1 Do
You can make a backup copy of this material.
You can use parts of this material provided you quote the appropriate
reference to the author and material.
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2.2 Do Not
You cannot publicly share this material in the form of hard copy or soft
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You cannot transform this material into other means of communication
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You cannot change the file format of this material or make it editable.
You cannot resell this material unless you are selling the original copy
purchased.
You cannot use any part of this material in or with contents associated
with violence, politics, religious and pornographic contents in any way.
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Financial Management | Page 13 of 108
Chapter 1: FINANCIAL MANAGEMENT FUNCTION
Chapter 1:
Pg.no
14
16
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Financial Management | Page 14 of 108
1 Agency
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Financial Management | Page 16 of 108
Chapter 1: FINANCIAL MANAGEMENT FUNCTION
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Financial Management | Page 17 of 108
Chapter 1: FINANCIAL MANAGEMENT FUNCTION
On the other hand, not for profit organizations do not have profitability
as its primary objective. However, not for profit organizations also need
to focus on profitability for meeting day-to-day expenses.
Example:
Rent of the premises used as office of the organization.
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Financial Management | Page 18 of 108
Chapter 1: FINANCIAL MANAGEMENT FUNCTION
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Financial Management | Page 19 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
Chapter 2:
FINANCIAL MANAGEMENT
ENVIRONMENT
Sub
S.no
1
2
3
Headings
Headings (click the cross-ref below for easy navigation)
Macro Vs Micro Economics
Macro-economic Policy
Macro-Economic Factors Affecting Business Activity
Pg.no
20
20
22
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Financial Management | Page 20 of 108
1.1 Macro-Economics
Macro-economics is study of effects of total activities of households,
firms & government on the national & international economy.
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Example:
Reduction in interest rates leads to increased activity in stock market
and bullion market.
Exchange rate influences imports and export from/to the country.
Government can encourage the use of imported goods by increasing
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Financial Management | Page 21 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
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Financial Management | Page 22 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
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Financial Management | Page 23 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
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Financial Management | Page 24 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
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Financial Management | Page 25 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
inflation but this growth will not benefit all the members of the society in
equal.
Inflation has impact on other objectives of economic policy also.
Inflation will lead to depreciation of exchange rates. Exchange rate
depreciation will make imports expensive for a home country and
exports cheaper for foreign countries. Expensive imports will result in
less demand for imported goods and cheaper exports will result in more
demand for goods to export. This will make balance of payment
favourable.
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All these events will be beneficial for economic growth but benefits may
not be evenly distributed among the members of society.
In times of high inflation, people tend to invest their earnings as earlier
as possible. Because keeping money in form of cash will erode the
purchasing power of their earnings.
High inflation leads to uncertainty about future economic wellbeing for
individuals and firms. Individual tends consume less to save money for
the future.
Inflation has some additional drawbacks as well.
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Financial Management | Page 26 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
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Financial Management | Page 27 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
Recession
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Recovery
Depression
3.12.1
Depression
Depression is the extremely adverse economic condition. Demand, prices
and employment level falls and at their bottom. Businesses tend to shut
down and investors lose their confidence in the market.
3.12.2
Recession
Recession is the less serious economic condition than depression. If
recession continues for long period time, it may turn in depression.
However, government intervention and technological changes can rescue
in situation.
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Financial Management | Page 28 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT
3.12.3
Boom
Boom is the extremely favourable economic condition. Demand, prices,
employment level all increases and reaches at peak. Businesses launches
new products and investors have optimistic view of the future economic
growth.
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3.12.4
Recovery
Recovery is the period of medium growth and is a way to boom.
Recovery is generally considered a slower process than recession.
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Financial Management | Page 29 of 108
Chapter 3: THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL
Chapter 3:
Pg.no
30
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Financial Management | Page 30 of 108
Chapter 3: THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL
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Financial Management | Page 31 of 108
Chapter 3: THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL
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Financial Management | Page 32 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Chapter 4:
Headings
Headings (click the cross-ref below for easy navigation)
Working Capital Cycle
Working Capital Ratios
Liquidity Ratios
Account Receivable Management
Factors Affecting Trade Receivables Policy
Credit Policy Evaluation
Factoring
Evaluating Proposal for Factoring
Invoice Discounting
Foreign Trade Receivables
Calculating & Commenting Early Settlement Discounts
Discounts from Suppliers
Economic Order Quantity (EOQ) Model
Optimal or Economic Order Quantity (EOQ)
Optimal Reorder Quantity with Bulk Purchase Discount
Just in Time (JIT)
Pg.no
33
34
38
39
40
40
44
45
49
50
52
55
57
57
60
62
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Financial Management | Page 33 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Not for profit organization needs working capital in the same way as
profit making organization.
Working capital is as important for organizations as blood for human
body.
Working capital is excess of current assets over current liabilities.
Formula:
Or
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Working capital is also called net current assets if current assets are
greater than current liabilities or net current liabilities if current assets
are less than current liabilities.
Efficiency of working capital depends on efficient control over elements
of working capital as above.
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Financial Management | Page 34 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Example:
Suppose, we pay supplier in 30 days, but we receive payment from
customers in 40 days. We will need working capital (cash) for ten days
to meet day to day trading expenses between 10 (40-30) days. This
need can be fulfilled through personal savings or raising finance.
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Cash paid to
suppliers
Cash received
from customers
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Financial Management | Page 35 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Trade receivable level or amount is increased to $2,740 ($21,918$24,658) and working capital requirement to finance credit sales of
$200,000 is increased by the same amount. It is because of increase in
trade receivable turnover from 40 to 45 days.
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Financial Management | Page 36 of 108
2.2 Inventory
Revision
Inventory turnover is the average number of days inventory is held
before it is sold to customers.
Inventory balance given in the balance sheet is taken as representative of
balance of inventory held at any point in time during the accounting
period.
Increase in inventory levels increases working capital. Similarly, decease
in inventory level decreases working capital.
If we assume inventory is purchased at constant rate, then increase in
inventory turnover in days will lead to increase in inventory levels and
working capital requirement. Similarly, decrease in inventory turnover
in days will lead to decrease in inventory levels and working capital
requirement.
Credit purchases for the year are $150,000.
Inventory turnover in days is 30 days.
Required:
Calculate the change in inventory level if inventory is sold to customer
after 25 days from the date of purchase.
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Financial Management | Page 37 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Financial Management | Page 38 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Financial Management | Page 40 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
They should send monthly statements to customers and ensure that any
differences are reconciled in timely manner. They should also deal with
any issues raised by customers in timely manner.
Sales ledger staff should follow up overdue debts. Following are the
actions that can be taken:
Cost of debt collection should not exceed the amount of debt.
5 Factors Affecting Trade Receivables Policy/Credit Policy
These are factors affecting the formulation of trade receivable
management policy or credit policy.
6 Credit Policy Evaluation
Points to consider for evaluating credit policy are as follows.
6.1 Incremental Cost/Savings of Financing Trade Receivables
Please keep reading till the end. You will probably do not understand
the text below. However, illustration given at the end will make you
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understand the text below.
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Financial Management | Page 41 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Trade receivables need to be financed just like inventory and noncurrent assets. Trade receivables are usually financed through shortterm source of finance such as overdraft and short-term bank loan.
Financing trade receivables involve financing cost such as interest charge
on overdraft and bank loan.
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Financial Management | Page 42 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Formula:
(
Formula:
(
)
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Financial Management | Page 43 of 108
Formula:
(
)
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Illustration:
Ulnad Co has annual sales revenue of $6 million and all sales are on 30
days credit, although customers on average take ten day more than this
to pay. Contribution represents 60% of sales and the company currently
has no bad debts. Accounts receivable are financed by an overdraft at an
annual interest rate of 7%.
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Weighted average is taken for 30% customers that would pay in 15 day
and 70% customers that would pay in 60 days.
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Financial Management | Page 44 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
To account for new credit sales those are increased by 5% from existing
sales.
)
(
$
Incremental in interest cost
(10,155)
Incremental administration costs ($6.3m x 0.5%)
(31,500)
Cost of discount ($6.3m x 1.5% x 30%
(28,350)
Contribution from increased sales ($6m x 5% x 60%) 180,000
Net benefit of credit policy change
109,995
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7 Factoring
Financial institution providing factoring services is known as factor.
Generally, factoring services are provided by insurance companies and
banks.
Factor takes over organizations sales ledger administration. Factor
performs following tasks on behalf on organization:
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Financial Management | Page 45 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Financial Management | Page 46 of 108
Formulae:
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Financial Management | Page 47 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
The average variable overdraft interest rate in each year was 5%. The 8%
bonds are redeemable in ten years time. A factor has offered to take over
the administration of trade receivables on a non-recourse basis for an
annual fee of 3% of credit sales. The factor will maintain a trade
receivables collection period of 30 days and Gorwa Co will save
$100,000 per year in administration costs and $350,000 per year in bad
debts. A condition of the factoring agreement is that the factor would
advance 80% of the face value of receivables at an annual interest rate of
7%.
Required:
Evaluate whether the proposal to factor trade receivables is financially
acceptable. Assume an average cost of short-term finance in this part of
the question only.
$
76,300
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Financial Management | Page 48 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Factor has claimed that they will reduce credit period to 30 days.
Therefore, we needed to determine new receivable balance for this new
credit period.
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Financial Management | Page 49 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Financial Management | Page 50 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Risk of bad debt rests with the organization.
If the customer defaults,
organization has to repay the amount advanced by the invoice
discounter.
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Financial Management | Page 51 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
10.2.2
Export Factoring
Export factoring can be used to reduce risk of foreign trade. Export
factoring is same as domestic factoring with the only different is that
factor is situated overseas in customers country.
10.2.3
Bill of exchange
Bills of exchange are used primarily in international trade. Bill of
exchange is unconditional order by issuer to his/her bank to pay the
bearer a specified sum on a specific date written at the face of document.
It is not frequently used credit instrument.
Unconditional order means it does not require any action by the bearer
to cash the bill of exchange.
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Bill of exchange can be dishonoured if the issuer does not have sufficient
cash balance to accept the bill of exchange.
10.2.4
Letter of Credit (LC)
Letters of credit are used primarily in international trade transactions of
significant value, for deals between a supplier in one country and a
customer in another.
Letter of credit is demanded by supplier from a customer. Bank
guarantees to a beneficiary (supplier) to pay specified sum of money on
completion of sales in accordance with agreed term and conditions on
behalf on his client (customer).
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Letter of credit is sent to the supplier, which he/she can use to receive
payment and send goods to customer according to term and conditions
written on letter of credit.
Bill of laden can be used as evidence of transfer of goods to customer.
Issuing letter of credit is costly and time-consuming process. However, it
is safer way to carry out foreign transaction. Unlike bill of exchange,
which can be dishonoured, letter of credit involves guarantee by the bank
to pay on behalf of client (customer) even he/she get bankrupt.
It is not ideal for urgent sales orders.
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Financial Management | Page 52 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
10.2.5
Credit Insurance
Credit insurance is risk management product used to used cover the risk
of default by foreign customers. It covers the risk of default due to
bankruptcy, death, deliberate non-payment etc.
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Inventory management
It has been suggested that the order size for Product KN5 should be
determined using the economic order quantity model (EOQ).
WQZ Co forecasts that demand for Product KN5 will be 160.000 units in
the coming year and it has traditionally ordered 10% of annual demand
per order. The ordering cost is expected to be $400 per order while the
holding cost is expected to be $512 per unit per year. A buffer inventory
of 5.000 units of Product KN5 will be maintained, whether orders are
made by the traditional method or using the economic ordering quantity
model.
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Financial Management | Page 53 of 108
Receivables management
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Financial Management | Page 54 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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$
297,000
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Financial Management | Page 55 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
$
Savings in administration and operating cost per year 753,000
Finance cost of early settlement discount
(219,000)
Total benefit of early settlement discount per year
831,000
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Financial Management | Page 56 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Required:
Calculate if ZPS Co will benefit financially by accepting the offer of the
early settlement discount.
$
Savings from early settlement discount
4,500
Refinancing cost of working capital
(6,657)
Net benefit/ cost of early settlement discount (2,157)
Increase in financing cost exceeds benefits/savings from early settlement
discount. Organization will be better by not taking early settlement
discount.
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Financial Management | Page 57 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Total cost
Ordering cost
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Holding cost
EOQ
Reorder quantity
13.2 Calculating Economic Order Quantity
Formula (given in the formula sheet):
Where
Co = ordering cost per order
CH = holding cost per unit (for the duration of demand)
D = total demand of the period
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Financial Management | Page 58 of 108
Inventory management
The current policy is to order 100,000 units when the inventory level
falls to 35,000 units. Forecast demand to meet production requirements
during the next year is 625.000 units. The cost of placing and processing
an order is 250, while the cost of holding a unit in stores is 050 per
unit per year. Both costs are expected to be constant during the next
year. Orders are received two weeks after being placed with the supplier.
You should assume a 50-week year and that demand is constant
throughout the year.
Required:
Calculate the cost of the current ordering policy and determine the
saving that could be made by using the economic order quantity model.
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Financial Management | Page 59 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Buffer stock is held in the warehouse during whole year. Each unit of
buffer of stock will incur holding cost. Therefore, 10,000 units of
inventory has incurred
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)(
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Financial Management | Page 60 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
(
(
)
)
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Financial Management | Page 61 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
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Financial Management | Page 62 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Savings due to obtaining bulk purchase discount is $6,000 (907,600901,400) per year.
15 Just in Time (JIT)
Just in time is modern inventory management philosophy. It means
inventory should only be produced or purchase when there is customer
available for it. Ideally, inventory level is assumed $0. However, in
practice, some butter stock is maintained to meet unexpected demand.
15.1 Benefits
JIT reduces inventory-holding costs. However, it increases inventoryordering costs but these are not so high because of application of
information technology.
Inventory does not generate revenue until it is sold. Cash invested in
inventory can be used to earn interest on short-term investments. JIT
results in no or little inventory level.
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15.2 Limitations
JIT is not suitable for organizations operating in health and safety and
rescue services sector. Cost of stock outs far more exceeds benefits in
such sectors.
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Financial Management | Page 63 of 108
Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS
Example:
Stock out of life saving drug in a hospital can be disastrous. In this
situation, cost of holding inventory is justified against the risk involved
in stock outs.
Organization may not be able to meet unexpected demand and suffer lost
sales from both existing and potential customer. At worst, customer may
turn to buy competitors product and may not return.
Efficient operation of JIT depends on reliable suppliers, location and
distance of organization premises from suppliers and infrastructure
available for communication and delivery of goods.
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Financial Management | Page 64 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 5:
Headings
Headings (click the cross-ref below for easy navigation)
Cash Management Models
Funding Working Capital Requirement
Level of Investment in Working Capital
Symptoms of Overtrading
Pg.no
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65
65
65
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Financial Management | Page 66 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 6:
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 7:
Pg.no
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 8:
Headings
Headings (click the cross-ref below for easy navigation)
Time Value of Money
Present Value (PV)
Discount Rate
Discounting
Annuity
Perpetuity
Conventional & Non-conventional Cash flows
Net Present Value (NPV)
Benefits & Limitations of Net Present Value (NPV)
Internal Rate of Return (IRR)
Benefits & Limitations of Internal Rate of Return (IRR)
IRR & Non-Conventional Cash flows
Discounted Payback Period
Commenting on Investment Proposals
Free Cash Flows
Pg.no
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70
70
70
70
70
70
70
70
71
71
71
71
71
71
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Financial Management | Page 70 of 108
Perpetuity
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Financial Management | Page 71 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 72 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 9:
Headings
Headings (click the cross-ref below for easy navigation)
Discounting & Timing Of Cash Flows
Capital & Revenue Cash Flows
Nominal & Real Cash flows
Nominal & Real Discount Rate
Cash flows & Discount Rate
Pg.no
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73
73
73
73
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Financial Management | Page 73 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 74 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 10:
Headings
Headings (click the cross-ref below for easy navigation)
Adjusting Risk for Investment Appraisal
Risk & Uncertainty
Sensitivity Analysis
Probability Analysis
Pg.no
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74
74
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 11:
Headings
Headings (click the cross-ref below for easy navigation)
Lease
Types of Lease
Buying
Lease or Buy
Approaches Investment Appraisal
Asset Replacement Decisions
Capital Rationing
Investment Decisions & Capital Rationing
Relaxing Capital Rationing
Pg.no
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Financial Management | Page 76 of 108
1 Lease
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 12:
Headings
Headings (click the cross-ref below for easy navigation)
Short Term Sources of Finance
Long Term Sources of Finance
Role of Intermediaries
Sources of Finance & Investment Appraisal
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 81 of 108
2.6.1 Benefits
2.6.2 Limitation
2.7 Ways of Raising Of Debt Finance
2.7.1 Loan Notes (Bonds or Debenture)
2.7.1.1 Par Value
2.7.1.2 Issue or Redemption at Discount
2.7.1.3 Issue or Redemption at Premium
2.8 Types of Loan Notes
2.8.1 Redeemable Loan Notes
2.8.2 Irredeemable Loan Notes
2.8.3 Convertible Loan Notes
2.8.4 Deep Discount Bonds
2.8.5 Zero Coupon Bond
2.8.6 Summary
2.9 Long Term Bank Loans
2.10 Sale & Lease Back
2.10.1
Benefits
2.10.2
Limitations
3 Role of Intermediaries
4 Sources of Finance & Investment Appraisal
4.1 Risk
4.2 Duration
4.3 Volatility
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Financial Management | Page 82 of 108
4.4 Trend
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Financial Management | Page 83 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapters13:
Headings
Headings (click the cross-ref below for easy navigation)
Dividend Policy
Factors Affecting level of Dividend
Script Dividend
Ex-dividend or Cum-divided Share Price
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Financial Management | Page 84 of 108
1 Dividend Policy
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 14:
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Financial Management | Page 86 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 87 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 15:
Headings
Headings (click the cross-ref below for easy navigation)
SMEs (Small & Medium Sized Entities)
Sources of Finance for SMEs
Islamic Finance
Islamic Financial Instruments
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Financial Management | Page 88 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 89 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 16:
Headings
Headings (click the cross-ref below for easy navigation)
Weighted Average Cost of Capital (WACC)
Calculating Market Value of Equity & Debt
Cost of Equity
Systematic Risk & Non Systematic Risk
Capital Asset Pricing Model (CAPM)
Gearing & Ungearing Betas
Benefits & Limitations of CAPM
Calculating Cost of Debt
Calculating Weighted Average Cost of Capital
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Financial Management | Page 90 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 91 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 92 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 17:
Headings
Headings (click the cross-ref below for easy navigation)
Financial Risk & Business Risk
WACC & Investment Appraisal
CAPM & Investment Appraisal
WACC & Capital Structure
Pecking Order Theory
Impact of Sources of Finance on Key Ratios
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Financial Management | Page 93 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 94 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Financial Management | Page 95 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 18:
Headings
Headings (click the cross-ref below for easy navigation)
Business Valuation
Net Assets Valuation Model
Price Earnings (P/E) Ratio Method
Earnings Yield Valuation Method
Dividend Valuation Model (DVM)
Valuation of Debt & other Financial Assets
Evaluating Financial Performance
Preparing Forecast Financial Statements
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Financial Management | Page 96 of 108
1 Business Valuation
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Financial Management | Page 98 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 19:
Headings
Headings (click the cross-ref below for easy navigation)
Features of Efficient Markets
Benefits of Efficient Markets
Efficient Market Hypothesis
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Financial Management | Page 99 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 20:
Headings
Headings (click the cross-ref below for easy navigation)
Direct Vs Indirect Quote
Buying & Selling Rate
Agreement & Settlement Date
Foreign Exchange Risk
Types of Foreign Exchange Risk
Managing Foreign Exchange Risk
Netting
Lead & Lag Payment
Pg.no
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100
100
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Financial Management | Page 100 of 108
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Financial Management | Page 101 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 21:
Headings
Headings (click the cross-ref below for easy navigation)
Step by Step Solution
Spot & Forward rate
Inflation Rate Parity Theory
Interest Rate Parity Theory
Forward Contract Hedge
Future Contract Hedge
Money Market Hedge
Currency Option
Currency Swap
Derivative
Pg.no
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102
103
103
103
103
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Financial Management | Page 103 of 108
6.8 Benefits
6.9 Limitations
7 Money Market Hedge
7.1 Step By Step Process
7.1.1 Money Market Hedge for Receipt
7.1.2 Money Market Hedge for Payment
7.2 Benefits
7.3 Limitations
8 Currency Option
8.1 Benefits
8.2 Limitations
9 Currency Swap
10 Derivative
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Financial Management | Page 104 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
Chapter 22:
Headings
Headings (click the cross-ref below for easy navigation)
Interest Rate Risk
Types of Interest Rate Risk
Managing Interest Rate Risk
Forward Rate Agreements (FRAs)
Future Contracts
Interest Rate Option
Interest Rate Swap
Effects of Interest Rate on Performance
Factor Affecting Interest Rates
Yield Curve
Macroeconomic Factors Affecting Interest Rates
Pg.no
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106
106
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Financial Management | Page 105 of 108
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Financial Management | Page 106 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK
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