1-FINANCIAL MANAGEMENT.ppt

DR ANJANA RAJU

FINANCIAL FINANCIAL MANAGEMENTMANAGEMENT

DR ANJANA RAJUDR ANJANA RAJU

DR ANJANA RAJU

BASIC CONCEPTSBASIC CONCEPTS

• MEANING AND SCOPE OF FINANCIAL MANAGEMENT

• FORMS OF BUSINESS ORGANISATION

• TIME VALUE OF MONEY• COST OF CAPITAL • VALUATION OF SECURITIES• RISK AND RETURN

DR ANJANA RAJU

BASIC CONCEPTSBASIC CONCEPTS

SECTION I

MEANING AND SCOPE OF

FINANCIAL MANAGEMENT

DR ANJANA RAJU

QUESTION HOURQUESTION HOURWHY A COURSE TITLED

“FINANCE FOR NON- FINANCE EXECUTIVES”?

DR ANJANA RAJU

QUESTION HOURQUESTION HOURWHY A COURSE TITLED

“FINANCE FOR NON- FINANCE EXECUTIVES”?

DR ANJANA RAJU

QUESTION HOURQUESTION HOURWHY NOT PROGRAMS TITLED----

“ PRODUCTION MANAGEMENT FOR NON-PRODUCTION EXECUTIVES”

OR“MARKETING MANAGEMENT FOR

NON- MARKETING EXECUTIVES “

DR ANJANA RAJU

MEANING AND SCOPE OF FINANCIAL MANAGEMENTMEANING AND SCOPE OF FINANCIAL MANAGEMENT

• THE ANSWER IS SIMPLE

COMMON THREAD RUNNING THROUGH ALL DECISIONS TAKEN BY VARIOUS MANAGERS IS

MONEY

DR ANJANA RAJU

MEANING AND SCOPE OF FINANCIAL MANAGEMENTMEANING AND SCOPE OF FINANCIAL MANAGEMENT

R&D MANAGER HAS TO JUSTIFY THE MONEY SPENT ON RESEARCH SPEND

NEW PRODUCT

NEW PROCESSES

REDUCE COSTS AND INCREASE REVENUE

DR ANJANA RAJU

MEANING AND SCOPE OF FINANCIAL MEANING AND SCOPE OF FINANCIAL MANAGEMENTMANAGEMENT

OUTCOME

POSITIVE RESULTS IN RETURN

NOT NEGATIVE RESULTS

DR ANJANA RAJU


MATERIALS MANAGER SHOULD BE AWARE OF INVENTORY

(DIFFERENT ITEMS IN STORES IS NOTHING BUT MONEY IN SHAPE OF INVENTORY)

MAKE PRODUCTIVE USE

DO NOT REACH LOW LEVEL( TO INTERRUPT THE PRODUCTIVE USE)

RIGHT BALANCE BETWEEN TOO MUCH AND TOO LITTLE INVENTORY.

DR ANJANA RAJU


CONCULSION

THIS IS CALLED

“ LIQUIDITY –PROFITABILITY TRADE-OFF”

DR ANJANA RAJU


FINANCIAL MANAGER, AS HIS DESIGNATION IMPLIES

INVOLVED IN ALL FINANCIAL

MATTERS OF THE ORGANISATION

OUTCOME : ALL ACTIVITIES IN THE ORGANISATION HAVE FINANCIAL IMPLICATIONS.

DR ANJANA RAJU

OBJECTIVES OF FINANCIAL OBJECTIVES OF FINANCIAL MANAGEMENTMANAGEMENT

DR ANJANA RAJU

OBJECTIVES OF FINANCIAL MANAGEMENTOBJECTIVES OF FINANCIAL MANAGEMENT

OBJECTIVE SOUGHT TO BE ACHIEVED BY FINANCE MANAGER.

MAKE AVAILABLE THE REQUIRED FUNDS

(AT ACCEPTABLE COST)

FUNDS ARE SUITABLY INVESTED

(IF EVERYTHING GOES ACCORDING TO PLAN)

DR ANJANA RAJU


CONCULSION

GOOD PERFORAMANCE ARE REFLECTED IN THE

PROFITS OF THE FIRM EARNS.

DR ANJANA RAJU

OBJECTIVES OF FINANCIAL OBJECTIVES OF FINANCIAL MANAGEMENTMANAGEMENT

HOW ARE THE PROFITS UTILISED?

- PARTLY DISTRIBUTED AMONG THE OWNERS AS DIVIDEND

- PARTLY RECYCLED INTO OPERATIONS OF FIRMS.

( THE ABOVE PROCESS CONTINUES OVER A PERIOD OF TIME- THE VALUE OF THE FIRM

INCREASES)

DR ANJANA RAJU


- THE FIRM IS ABLE TO GENERATE ATTRACTIVE SURPLUSES FROM SURPLUSES FROM OPERATIONS.

- REFELECTED ON THE STOCK PRICE

( WEALTH INCREASES)

DR ANJANA RAJU


CONCULSION :

OBJECTIVE OF THE FINANCIAL MANAGER IS TO INCREASE OR MAXIMIZE THE WEALTH OF THE OWNERS

- BY INCREASING THE VALUE OF THE FIRM

- REFLECTED IN EPS ( EARNING PER SHARE)

AND MARKET PRICE OF THE SHARE

DR ANJANA RAJU

FUNCTIONS OF FINANCE FUNCTIONS OF FINANCE MANAGERMANAGER

DR ANJANA RAJU

FUNCTIONS OF FINANCE MANAGERFUNCTIONS OF FINANCE MANAGER

A. MOBILIZATION OF FUNDS

B. DEPLOYMENT OF FUNDS

C. CONTROL OVER THE USE OF FUNDS

D. RISK-RETURN TRADE-OFF

DR ANJANA RAJU


A. MOBILIZATION OF FUNDS

PLAN FOR FUNDS PLAN TO MOBILISE FROM

VARIOUS SOURCES. DECIDING ON COST OF FUNDS KNOW THE RESTRICTIVE

PROVISIONS ON LOANS

DR ANJANA RAJU


A. MOBILIZATION OF FUNDSREAL LIFE EXAMPLE- XYZ LTD KNOWN COMPANY IN COMPUTER

TRAINING, SOFTWARE DEVELOPMENT , INFORMATION SYSTEM UNDERTAKES UPGRADATION

COST OF MODERNIZATION RS 3,578 LAKH GOING TO MOBILISE AS FOLLOWS

DR ANJANA RAJU


A. MOBILIZATION OF FUNDS- COST OF MODERNIZATION RS 3,578 LAKH

GOING TO MOBILISE AS FOLLOWS

RS LAKH

PUBLIC ISSUE OF EQUITY SHARES INCLUDING PREMIUMTERM LOAN –ICICILEASING - ICICI - OTHERS DEFERRED PAYMENT GUARANTEEINTERNAL ACCRUALS

1804

130 125 75 991,345_________3,578

DR ANJANA RAJU


B.DEPLOYMENT OF FUNDS- ALWAYS MANY COMPETING FOR

ALLOCATION OF FUNDS - VARIOUS DEPARTMENTS - PRODUCTION - MARKETING - PERSONNEL - R&D - TOP MANAGEMENT( FINANCE MANAGER DECIDES ON THE MANNER

OF DEPLOYMENTOF FUNDS TO VARIOUS ASSETS)

DR ANJANA RAJU


B.DEPLOYMENT OF FUNDS FINANCE MANAGER APPRAISES THE

PROPOSAL

ALONG WITH FINANCIAL DIMENSIONS

( TO DETERMINE ITS WORTHINESS IN RELATION TO INVESTMENT INVOLVED)

DR ANJANA RAJU


B.DEPLOYMENT OF FUNDSCONCULSION

THIS DECISION CALLED THE “INVESTMENT DECISION”

CONSTITUTES ONE OF THE CORE ACTIVITIES OF FINANCE MANAGER.

DR ANJANA RAJU


MOBILIZATION OF FUNDS OF XYZ ARE PROPOSED TO BE DEPLOYED AS FOLLOWS AS INDICATED IN PROSPECTUS OF COMPANY.

RS LAKH

BUILDINGSCOMPUTERS & ACCESSORIESPLANT AND MACHINERYINFRASTRUCTURENORMAL CAPITAL EXPENDITUREREPAYMENT OF LOANSINCREASE IN WORKING CAPITAL

985 941 116 213 241 283 799_________3,578

DR ANJANA RAJU


C. CONTROL OVER THE USE OF FUNDS

CONTINUOUSLY MONITOR THEIR USE

(PROCUREMENT AND DEPLOYMENT OF FUNDS PROCEEDS ACCORDING TO PLAN)

THIS TASK OF FINANCE MANAGER IS

CALLED FINANCIAL CONTROL.

DR ANJANA RAJU

FUNCTIONS OF FINANCE MANAGERFUNCTIONS OF FINANCE MANAGERC. CONTROL OVER THE USE OF FUNDS FINANCE MANAGER --SENDS FREQUENT REPORTS

-- FUNDS REQUIRED AT DIFFERENT POINTS OF TIME.

--- PERFORMANCE OF INDIVIDUAL DEPARTMENTS

( ALL SUCH REPORTS ARE CALLED

” CONTROL REPORTS”)

DR ANJANA RAJU


D. RISK-RETURN TRADE-OFFFINANCE MANAGER SEEKS TO

ACHIEVE THE RIGHT BALANCE BETWEEN RISK AND RETURN.

IF FIRMS BORROWERS HEAVILY TO FINANCE

( SURPLUSES GENERATED COULD GO FOR

“ SERVICE OF THE DEBT”)

DR ANJANA RAJU


D. RISK-RETURN TRADE-OFF IF THINGS DONOT WORK

ACCORDING TO PLAN

( EXPOSES TO RISK OF SOLVENCY)

DECIDE WHETHER THE OPPORTUNITY IS WORTH MORE THAN ITS COST?

WHETHER ADDITIONAL BURDEN OF DEBT CAN BE SAFELY BORNE?

DR ANJANA RAJU


D. RISK-RETURN TRADE-OFF CONCULSION :

DECISION MAKING IN ALL AREAS OF MANAGEMENT INVLOVES BALANCING THE TRADE-OFF BETWEEN RISK AND RETURN

DR ANJANA RAJU

INTERFACE BETWEEN FINANCE INTERFACE BETWEEN FINANCE AND AND

OTHER FUNCTIONSOTHER FUNCTIONS

DR ANJANA RAJU

INTERFACE BETWEEN FINANCE AND OTHER INTERFACE BETWEEN FINANCE AND OTHER FUNCTIONSFUNCTIONS

1. MARKETING –FINANCE INTERFACE2. PRODUCTION –FINANCE

INFERFACE3.TOP MANAGEMENT –FINANCE

INTERFACE

o TREASURY OPERATIONSo FOREIGN EXCHANGEo FINANCIAL STRUCTURINGo MAINTAINING SHARE PRICE o ENSURING MANAGEMENT CONTROL.

DR ANJANA RAJU

INTERFACE BETWEEN FINANCE AND OTHER FUNCTIONSINTERFACE BETWEEN FINANCE AND OTHER FUNCTIONS

1. MARKETING –FINANCE INTERFACE

MARKETING MANAGER SHOULD CLEAR UNDERSTANDING OF

--- CREDIT EXTENTED ---- ANTICIPATION OF SALES ---- COSTS OF MAINTAINING LARGE

INVENTORY. --- FINANCIAL IMPLICATIONS OF

PRICING, PRODUCT PROMOTION AND ADVERTISEMENT , CHOICE OF PRODUCT MIX, AND DISTRIBUTION POLICY.

DR ANJANA RAJU


2. PRODUCTION –FINANCE INFERFACE

MAKES INVESTMENT IN EQUIPMENT, MATERIAL AND MEN.

USE OF EQUIPMENT IN CONTROL AND USED MOST PRODUCTIVELY..

DR ANJANA RAJU


2. PRODUCTION –FINANCE INFERFACE

MINIMIZED WORK STOPPAGES AND IDLE TIME.

HOLDING COST AND INCREASE OUTPUT, AS DETERMINED FOR SALE.

MAKE DECISIONS REGARDING MAKE OR BUY OR LEASE.

DR ANJANA RAJU


3.TOP MANAGEMENT –FINANCE INTERFACE

--OTHER CHALLENGES IN FINANCIAL MANAGEMENT

o TREASURY OPERATIONS

SHORT TERM FUND MUST BE SOPHISTICATED

MAKE SPECULATIVE GAINS BY ANTICIPATING

INTEREST RATE MOVEMENTS.

DR ANJANA RAJU


3.TOP MANAGEMENT –FINANCE INTERFACE FOREIGN EXCHANGE

WEIGH THE COSTS AND BENEFITS OF TRANSACTING IN FOREIGN EXCHANGE

FUTURE VALUE OF RUPEE HAS BECOME DIFFICULT TO PREDICT.

o

DR ANJANA RAJU


3.TOP MANAGEMENT –FINANCE INTERFACE o FINANCIAL STRUCTURING

OPTIMUM MIX BETWEEN DEBT AND EQUITY

TAILOR FINANCIAL INSTRUMENTS TO SUIT INVESTORS NEED.

PRICING OF NEW ISSUES.

DR ANJANA RAJU


3.TOP MANAGEMENT –FINANCE INTERFACE o MAINTAINING SHARE PRICE

IN PREMIUM EQUITY ERA

----- FIRM MUST ENSURE THE SHARE PRICE STAY HEALTHY.

----- DEVISE APPROPRIATE DIVIDEND AND

BONUS POLICIES.

DR ANJANA RAJU


3.TOP MANAGEMENT –FINANCE INTERFACE o ENSURING MANAGEMENT CONTROL.

DONOT EXPOSE COMPANY FOR BEEN

TAKEOVER SUITATION.

DR ANJANA RAJU

SECTION II

FORMS OF BUSINESS ORGANISATION

DR ANJANA RAJU

FORMS OF BUSINESS ORGANISATIONFORMS OF BUSINESS ORGANISATION

A. SOLE PROPRIETORSHIP

B. PARTNERSHIP

C. COMPANIES

DR ANJANA RAJU



OWNED BY SINGLE PERSON

ENJOYS ALL POWERS OF TAKING AND ASSUMING RISK

DR ANJANA RAJU


A. SOLE PROPRIETORSHIPADVANTAGES

1. EASY AND INEXPENSIVE TO SET UP

2. FEW GOVT. REGULATIONS

3. NO FIRM TAX.

DR ANJANA RAJU



DISAVANTAGES

1. LIFE OF THE FIRM LIMITED TO LIFE OF THE OWNER

2. UNLIMITED PERSONAL LIABILITIES

3.OUTSIDE FUND RAISING NOT POSSIBLE

( LACK OF GROWTH)

4. TAX ON THE INCOME WILL BE VERY HIGH

DR ANJANA RAJU


B. PARTNERSHIP BUSINESS OWNED BY TWO OR MORE

PERSONS.

THEY BEAR THE RISK AND REAP THE REWARDS OF BUSINESS

BEINGS THROUGH PARTNERSHIP AGREEMENT OR PARTNERSHIP DEED.

( GOVERNED BY INDIAN PARTNERSHIP ACT, 1923)

DR ANJANA RAJU


B. PARTNERSHIPADVANTAGES CAN BE SET UP EASILY AND

INEXPENSIVE

RELATIVETLY FREE FROM GOVT REGULATIONS

EXPERTISE AND EXPERIENCE OF PARTNERS USEFUL TO THE FIRM OPERATIONS

DR ANJANA RAJU


B. PARTNERSHIPDISADVANTAGES LIFE OF THE FIRM DEPENDS UPON THE

AGREEMENT (WITHDRAWAL OR DEATH OR DISSOLUTION) CONFLICT BETWEEN PARTNERS

THREATS EXISTENSE OF PARTNERSHIP FIRM

PERSONAL LIABILITY OF THE PARTNES UNLIMITED

ABILITY TO RAISE FUNDS LIMITED

DR ANJANA RAJU


C. COMPANIES A GROUP OF PERSONS WORKING

TOGETHER TOWARDS A COMMON OBJECTIVE IS A COMPANY.

TERM “ REGISTER COMPANY “ AS PER SECTION 3(1) (i) OF COMPANIES ACT, 1956.

A COMPANY CAN BE PRIVATE OR PUBLIC COMPANY

DR ANJANA RAJU


C. COMPANIES ACCORDING TO SECTION (1) (iii) OF

THE COMPANIES ACT, 1956,

A PRIVATE COMPANY MEANS A COMPANY WHICH HAS A MINIMUM PAID-UP CAPITAL OF ONE LAKH RUPEES OR SUCH HIGHER PAID –UP CAPITAL AS MAY BE PRESCRIBED.

DR ANJANA RAJU

FORMS OF BUSINESS ORGANISATIONFORMS OF BUSINESS ORGANISATIONC. COMPANIES ACCORDING TO SECTION (1) (iii) OF THE COMPANIES ACT, 1956,PRIVATE COMPANY

AND ITS ARTICLE –

RESTRICTS THE RIGHT TO TRANSFER ITS SHARES, IF ANY

LIMIT NO. OF MEMBERS TO FIFTY

PROHIBITS ANY INVITATION TO PUBLIC TO SUBSCRIBE FOR ANY SHARES.

PROHIBITS ANY INVITATION OR ACCEPTANCE OF DEPOSITS FROM PERSONS OTHER THAN MEMBERS.

DR ANJANA RAJU


C. COMPANIES

ACCORDING TO SECTION (1) (iv) OF THE COMPANIES ACT, 1956,

MININUM PAID-UP CAPITAL OF FIVE LAKH OR

SUCH HIGHER PAID –UP CAPITAL MAY BE PRESCRIBED.

DR ANJANA RAJU

SECTION III

TIME VALUE OF

MONEY

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEY

BACKGROUND KEEP PACE WITH INCREASING

COMPETITION NEW IDEAS IMPLEMENTED

THROUGH NEW PROJECTS PROJECT ACTIVITY INVLOVES

INVESTING A SUM OF MONEY ANTICIPATION OF BENEFITS

SPREAD OVER A PERIOD OF TIME

DR ANJANA RAJU


BACKGROUND QUESTION

HOW DO WE DETERMINE WHETHER THE PROJECT IS FINANCIALLY

VIABLE OR NOT?

DR ANJANA RAJU


BACKGROUNDANSWER

SUM OF BENEFITS ACCRUING OVER THE FUTURE PERIOD AND COMPARE THE TOTAL VALUE OF THE BENEFITS WITH THE INITIAL INVESTMENT.

DR ANJANA RAJU


BACKGROUNDANSWER

AGGREGATE VALUE OF THE BENEFITS EXCEEDS THE INITIAL INVESTMENT, THE PROJECT IS CONSIDERED TO BE FINANCIALLY VIABLE.

DR ANJANA RAJU


BACKGROUNDOUTCOME APPROACH PRIMA FACIE

APPREARS TO BE SATISFACTORY

(WE HAVE ASSUMED THE IRRESPECTIVE OF TIME WHEN MONEY IS INVESTED OR RECEIVED ,THE VALUE REMAINS THE SAME).

DR ANJANA RAJU


BACKGROUND

VALUE OF ONE RUPEE NOW = VALUE OF ONE RUPEE AT THE END OF YEAR 1= VALUE OF ONE RUPEE AT THE END OF YEAR 2 AND SO ON

DR ANJANA RAJU


BACKGROUND

ASSUMPTION IS INCORRECT BECAUSE MONEY HAS TIME VALUE.

DR ANJANA RAJU


WHY SHOULD MONEY HAVE TIME VALUE ?

CAN BE EMPLOYED PRODUCTIVELY TO GENERATE

REAL RETURNS

DR ANJANA RAJU


-- RS 1000 NOW IS MORE VALUABLE THAN RS 1000 AFTER A YEAR

-- WE WILL NOT PART WITH RS 1000 NOW IF WE ASSURED THE SAME RS 1000.

--- WE PART WITH RS 1000 NOW FOR SOMETHING MORE THAN RS 1000.

( THIS IS CALLED “INTEREST” OR THE TIME VALUE FOR MONEY”

DR ANJANA RAJU


IF SUM OF --RS 100 INVESTED IN RAW

MATERIAL AND LABOUR

--RESULTS IN FINISHED GOODS WORTH RS 105

--INVESTMENT OF RS 100 EARNED RATE OF RETURN OF 5 PERCENT.

DR ANJANA RAJU


IN AN INFLATIONARY PERIOD

- A RUPEE TODAY HAS HIGHER PURCHASING THAN A RUPEE IN FUTURE.

DR ANJANA RAJU


THREE DETERMINANTS COMBINE TO DETERMINE THE RATE OF INTEREST SYMBOLICALLY

REAL RATE OF INTEREST OR RETURN

EXPECTED RATE OF INFLATION

RISK PREMIUMS TO COMPENSATE FOR UNCERTAINTY

DR ANJANA RAJU


THREE DETERMINANTS COMBINE TO DETERMINE THE RATE OF INTEREST SYMBOLICALLY

REAL RATE OF INTEREST OR RETURN+ EXPECTED RATE OF INFLATION + RISK PREMIUMS TO COMPENSATE FOR UNCERTAINTY

DR ANJANA RAJU

TWO METHODS OF TIME VALUE

1. COMPOUNDING AND

2. DISCOUNTING

DR ANJANA RAJU


TWO METHODS BY WHICH TIME VALUE CAN BE TAKEN

1. COMPOUNDING AND

2. DISCOUNTING

DR ANJANA RAJU


ILLUSTRATION PROJECT INVOLVES AN IMMEDIATE

OUTFLOW OF SAY RS 1000. FOLLOWING PATTERN OF INFLOWS YEAR 1 : RS 250 YEAR 2: RS 500 YEAR 3 : RS 750 YEAR 4 : RS 750

DR ANJANA RAJU


INITIAL OUTFLOW AND SUBSEQUENT INFLOWS CAN BE REPRESENTED ON A TIME LINE AS GIVEN BELOW:

FIGURE 1

0

Yr 321 4

RS -1000 250 500 750 750

DR ANJANA RAJU


PROCESS OF COMPOUNDING

DR ANJANA RAJU


PROCESS OF COMPOUNDINGUNDER THE METHOD OF COMPOUNDING

1. WE FIND FUTURE VALUES (FV) ( of all the cash flows at the end of the time horizon at a

particular rate of return)

2. COMPARING THE FV OF INITIAL OUTFLOW OF RS 1000

( at the end of 4 yrs) WITH

3. SUM OF FV OF YEARLY CASH INFLOWS AT END OF YEAR 4

DR ANJANA RAJU


FIGURE 2 PROCESS OF COMPOUNDING

0 1 2 3 4

-1000250 500 750

750+

FV(750)

FV(500)

FV(250)

Compared with FV (1000)

+

+

DR ANJANA RAJU


PROCESS OF DISCOUNTING

DR ANJANA RAJU


PROCESS OF DISCOUNTING UNDER THE METHOD OF DISCOUNTING

WE RECKON THE TIME VALUE OF

MONEY NOW (i.e AT TIME 0 ON THE TIME LINE)

---WE COMPARE THE INITIAL OUTFLOW WITH THE SUM OF PRESENT (PV) OF THE FUTURE INFLOWS AT THE GIVEN RATE OF INTEREST.

DR ANJANA RAJU


FIGURE 3 PROCESS OF DISCOUNTING

0 1 2 3 4

-1000250 500 750 750

PV(750)

PV(500)

PV(750)

Compared with the sums of

PV (250)

+

+

+

+

DR ANJANA RAJU


WE MUST DRAW THE

DISTINCTION BETWEEN

THE CONCEPT OF COMPOUND INTEREST

AND SIMPLE INTEREST.

DR ANJANA RAJU


ILLUSTRATION

X HAS A SUM OF RS 1000 TO INVEST

THERE ARE TWO SCHEMES --- ONE OFFERING A RATE OF 10%

(COMPOUNDED ANNUALLY) AND---- OTHER OFFERING A SIMPLE RATE OF

10%

DR ANJANA RAJU


ILLUSTRATION

WHICH ONE SHOULD HE OPT FOR ASSUMING THAT HE WILL WITHDRAW THE AMOUNT END OF

(A) ONE YEAR (B) TWO YEARS AND (C ) FIVE YEARS?

DR ANJANA RAJU


SOLUTION

End of the year

Compound Interest Scheme

Simple Interest Scheme

1 1000+(1000 x 0.10)= 1100

1000+(1000X0.10) =1100

2 1100+(1100 x 0.10)= 1210

1100+(1000x0.10)= 1200

3 1210+(1210 x 0.10)= 1331

1200+(1000x0.10)= 1300

4 1331+(1331 x 0.10)= 1464

1300+(1000x0.10)= 1400

5 1464+(1464 x 0.10)= 1610

1400+(1000x0.10)= 1500

DR ANJANA RAJU


RESULT

COMPOUNDED INTEREST SCHEME INTEREST EARNS INTEREST.

UNDER SIMPLE INTEREST SCHEME INTEREST DOES NOT EARN ADDITIONAL INTEREST.

DR ANJANA RAJU


OUTCOME

WE EMPHASIZE THAT IN FINANCIAL

ANALYSIS WE ALWAYS ASSUME INTEREST TO BE COMPOUNDED

DR ANJANA RAJU


FUTURE VALUE OF SINGLE FLOW(LUMP SUM)

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEY FUTURE VALUE OF SINGLE FLOW(LUMP SUM)

GENERALISED PROCEDURE FOR CALULATING THE FUTURE VALUE(FV) OF SINGLE CASH FLOW COMPOUNDED ANNUALLY IS AS FOLLOWS:

FVn=PV(1+k)n

FVn=Future value of the initial flow n years hence

PV =Initial cash flow

k = Annual rate of interest

n = Life of investment

DR ANJANA RAJU



ILLUSTRATION

FIXED DEPOSIT SCHEME OF ANDHRA BANK OFFERS THE FOLLOWING INTEREST RATES

AN AMOUNT OF RS 10,000 INVESTED TODAY WILL GROW IN 3 YEARS

PERIOD OF DEPOSIT RATE PER ANNUM

46 DAYS TO 179 DAYS 10.0%

180 DAYS TO < 1YEAR 10.5%

1 YEAR AND ABOVE 11.0%

DR ANJANA RAJU



SOLUTION

FVn=PV(1+k)n

=10000(1+.11)3

= 10000(1.368) Rs 13,680

PV= Table 1 value of 10,000 for 3yrs is 1.368

DR ANJANA RAJU


EFFECTIVE vs

NOMINAL RATE OF INTEREST.

DR ANJANA RAJU


EFFECTIVE vs NOMINAL RATE OF INTEREST.

FOR EXAMPLE NOMINAL RATE OF INTEREST IS 10 PERCENT PER

ANNUM

WHEN COMPOUNDING IS DONE SEMI-ANNUALLY ( THE PRINCIPAL AMOUNT GROWS AT RATE OF 10.25%

P.A)

o 10.25 % IS CALLED AS EFFECTIVE INTEREST

DR ANJANA RAJU


GENERAL RELATIONSHIP BETWEEN THE EFFECTIVE AND NOMINAL RATES OF INTEREST IS AS FOLLOWS:

r=(1+k )m-1 m

WHERE

r= Effective rate of interest k= Nominal rate of interest m=Frequency of compounding per

year

DR ANJANA RAJU


PROBLEMFIND OUT EFFECTIVE RATE OF INTEREST IF THE NOMINAL RATE OF INTEREST IS 12 PERCENT

AND IS QUARTERLY COMPOUNDED EFFECTIVE RATE OF INTEREST

r=(1+k )m-1 m

r=(1+0.12 )4-1 4

=(1=0.03) 4-1= 1.126-1

=0.126= 12.6% P.A

DR ANJANA RAJU


FUTURE VALUE OF MULTIPLE FLOWS

DR ANJANA RAJU


FUTURE VALUE OF MULTIPLE FLOWS SUPPOSE WE INVEST RS 1,000 NOW

(BEGINNING OF YEAR 1)

RS 2,000 AT BEGINNING OF YEAR 2

RS 3,000 AT THE BEGINNING OF YEAR 3

HOW MUCH WILL THESE FLOWS ACCUMULATE TO AT THE END OF YEAR 3

( AT THE RATE OF 12 PERCENT PER ANNUM?)

DR ANJANA RAJU


FIGURE 4 COMPOUNDING PROCESS OF MULTIPLE FLOWS

0

1 2 3

1000 2000 3000ACCUMULATION

FV(3000)

FV(2000)

FV(1000)

+

+

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYFUTURE VALUE OF MULTIPLE FLOWS TO DETERMINE THE ACCUMULATED SUM AT

THE END OF YEAR 3

WE HAVE TO JUST ADD FUTURE COMPOUNDED VALUES OF RS 1,000, RS 2,000 AND RS 3,000 RESPECTIVELY

FV (Rs 1,000)+FV(Rs 2,000)+ FV( Rs 3,000)

AT k =0.12, THE ABOVE SUM IS EQUAL TO

1,000 x FVIF(12,3)+2,000 x FVIF(12,3) 3,000x FVIF (12,3)

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYFUTURE VALUE OF MULTIPLE FLOWS

RS{(1,000 x1.405)+(2,000 x 1.254)

+(3,000x1.120)}

=RS 7,273 NOTE : ABOVE PROCESS TEDIOUS IF WE

HAVE TO DETERMINE ACCUMULATION OF MULTIPLE FLOWS OVER A LONGER PERIOD OF TIME

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYFUTURE VALUE OF MULTIPLE FLOWS

FOR EXAMPLE

ACCUMULATION OF A RECURRING DEPOSIT OF RS 100 PER MONTH FRO 60 MONTHS AT RATE OF 1 PERCENT PER MONTH

( SHORT CUT METHOD CAN BE EMPLOYED

PROVIDED THE FLOWS ARE EQUAL)

DR ANJANA RAJU


FUTURE VALUE OFANNUITY

DR ANJANA RAJU



ANNUITY IS THE TERM USED TO DESCIBE A SERIES OF PERIODIC FLOWS OF EQUAL AMOUNTS

DR ANJANA RAJU



TERMS TO UNDERSTAND IF EQUAL AMOUNTS OF CASH FLOWS

OCCUR AT THE END OF EACH PERIOD OVER THE SPECIFIED TIME HORIZON, THEN THIS STREAM OF CASH FLOWS IS DEFINED AS A REGULAR ANNUITY OR DEFERRED ANNUITY.

WHEN CASH FLOWS OCCUR AT BEGINNING OF EACH PERIOD THE ANNUITY IS KNOWN AS AN ANNUITY DUE

DR ANJANA RAJU



THE FUTURE VALUE OF REGULAR ANNUITY FOR THE A PERIOD OF n YEARS AT THE RATE OF INTEREST “k” IS GIVEN BY FORMULA

FVAn =A(1+k)n-1+ A (1+k)n-2+ A (1+k)n-3 +…+ A

WHICH REDUCES TO

FVAn =A[ (1+k)n – 1 ] k

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYFUTURE VALUE OFANNUITY

WHICH REDUCES TO

FVAn =A[ (1+k)n – 1 ] k

WHERE A= AMOUNT DEPOSITED /INVESTED AT

THE END OF EVERY YEAR FOR n YEARS k= RATE OF INTEREST (EXPRESSED IN

DECIMALS) n= TIME HORIZON

FVAn = ACCUMULATION AT THE END OF n YEARS

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYFUTURE VALUE OFANNUITY

DO ILLUSTRATION 7 AND 8

DR ANJANA RAJU


PRESENT VALUE

DR ANJANA RAJU


PRESENT VALUE BACKGROUND

THIS APPROACH CAN DETERMINE THE PRESENT VALUE OF FUTURE CASH FLOW OR A STREAM OF FUTURE CASH FLOWS

COMMONLY FOLLOWED APPROACH FOR EVALUATING FINANCIAL VIABILITY OF PROJECTS

DR ANJANA RAJU


PRESENT VALUE

1. PRESENT VALUE OF SINGLE FLOW

2. PRESENT VALUE OF UNEVEN MULTIPLE FLOWS

3. PRESENT VALUE OF AN ANNUITY

DR ANJANA RAJU


PRESENT VALUE

1. PRESENT VALUE OF SINGLE FLOW

IF WE INVEST RS 1,000 TODAY AT 10% P.A FOR PERIOD OF 5 YEARS

PV= FVn

(1+k)n

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYPRESENT VALUE OF SINGLE FLOW IF WE INVEST RS 1,000 TODAY AT 10% P.A FOR

PERIOD OF 5 YEARS

PV= FVn

(1+k)n

RS 1,000 x FVIF(10,5) =RS 1,000x1.611= RS 1,611 AT END OF 5 YEARS

THE SUM OF RS 1,611 IS CALLED THE ACCUMULATION OF RS 1,000 FOR GIVEN VALUES OF “k” AND “n”

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEYPRESENT VALUE OF SINGLE FLOW


DR ANJANA RAJU



DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEY2. PRESENT VALUE OF UNEVEN MULTIPLE FLOWS SUPPOSE A PROJECT INVOLVES AN INITIAL

INVESTMENT OF RS 10 LAKH AND GENERATES NET INFLOWS AS FOLLOWS

END OF THE YEAR- 1 RS 2 LAKH 2 RS 4 LAKH 3 RS 6 LAKH

DR ANJANA RAJU

TIME VALUE FOR MONEYTIME VALUE FOR MONEY2. PRESENT VALUE OF UNEVEN MULTIPLE FLOWS QUESTION TO BE ANSWERED

1. WHAT IS THE PRESENT VALUE OF THE FUTURE CASH FLOWS?

ANSWER : WE HAVE TO DETERMINE THE RELEVANT RATE OF INTEREST

NOTE: RELEVANT RATE OF INTEREST WILL BE THE COST OF FUNDS INVESTED

ASSUMPTION : WE ASSUME COST IS 12%P.A( THEN WE CAN NOW DETERMINE PRESENT

VALUES OF CASH FLOWS USING THE TWO-STEP PROCEDURE)

DR ANJANA RAJU



STEP 1 EVALUATE THE PRESENT VALUE OF CASH FLOW

INDEPENDENTLY

YEAR

CASHFLOW (RS IN LAKHS

PRESENT VALUE (RS.IN LAKH)

1 2 2 x PVIF(12,1)=2 x0.893 = 1.79

2 4 4 x PVIF(12,2)=4 x0.797 = 3.19

3 6 6 x PVIF(12,3)=6 x0.712 = 4.27

DR ANJANA RAJU



STEP 2 AGGREGATE THE PRESENT VALUES

OBTAINED IN STEP 1( TO DETERMINE THE PV OF CASHFLOWS STREAM)

CASHFLOW OF RS(1.79+3.19+4.27)=RS 9.25 LAKH.

DR ANJANA RAJU



WHEN PROJECT IS VIABLE

IF PRESENT VALUE OF CASHFLOWS INFLOWS EXCEEDS THE PRESENT VALUE OF CASH OUTFLOW

IN THE ABOVE ILLUSTRATION THE PROJECT IS NOT VIABLE

CASH INFLOWS RS 9.25 LAKH CASHOUTFLOWS RS 10 LAKHS (INITIAL INVESTMENT)

DIFFERENCE OF RS 0.75 LAKHS IS CALLED NET PRESENT VALUE

DR ANJANA RAJU


PRESENT VALUE

3. PRESENT VALUE OF AN ANNUITY

DR ANJANA RAJU


3. PRESENT VALUE OF AN ANNUITY PVIFA ( PRESENT VALUE INTEREST FACTOR ANNUITY)

PRESENT VALUE OF AN ANNUITY “A” RECEIVABLE AT THE END OF EVERY YEAR FOR THE PERIOD OF n YEARS AT RATE OF INTEREST k IS EQUAL TO

PVAn = A + A + A +… A (1+k) (1+k)2 (1+k)3 (1+k)n

DR ANJANA RAJU


3. PRESENT VALUE OF AN ANNUITY WHICH REDUCES TO

PVA n = A x [ (1+k)n -1 ]

k(1+k)n

THE EXPRESSION IS CALLED

PVIFA ( PRESENT VALUE INTEREST FACTOR ANNUITY)

DR ANJANA RAJU


3. PRESENT VALUE OF AN ANNUITY PVIFA ( PRESENT VALUE INTEREST FACTOR ANNUITY)

REPRESENTS THE VALUE OF REGULAR ANNUITY OF RE 1 FOR GIVEN VALUES OF k AND n.


DR ANJANA RAJU

SECTION IV

COST OF CAPITAL

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITAL

MEANING OF COST OF CAPITAL

COST ASSOCIATED WITH PRINCIPAL SOURCES OF LONG –TERM FINANCE

DR ANJANA RAJU


MEANING OF COST OF CAPITAL

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITALMEANING OF COST OF CAPITAL

WHAT IS COSTS THE COMPANY TO RAISE FINANCE THROUGH VARIOUS SOURCES?

COST OF DIFFERENT FINANCIAL RESOURCES THAT THE COMPANY USES IS TERMED AS ITS COST OF CAPITAL.

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITALFOR EXAMPLE

TOTAL CAPITAL BASE OF RS 500 LAKHS

IN THE RATIO OF 1:1 OF DEBT-EQUITY

250 LAKHS EACH OF DEBT AND EQUITY

IF POST –TAX COSTS OF DEBTS AND EQUITY ARE 7% AND 18% RESPECTIVELY.

COST OF CAPITAL TO THE COMPANY WILL BE EQUAL TO WEIGHTED AVERAGE COST

250 x 7% 250 x 18% = 12.5% 500 500

DR ANJANA RAJU



DR ANJANA RAJU



COST OF

DEBENTURES

TERM LOANS

EQUITY CAPITAL

RETAINED EARNINGS

EXTERNAL EQUITY

DR ANJANA RAJU

COST OF DEBENTURES

DR ANJANA RAJU

COST OF DEBENTURESCOST OF DEBENTURESCOST OF DEBENTURES DEFINED AS

THE DISCOUNTED RATE WHICH EQUATES THE NET PROCEEDS FROM ISSUE OF DEBENTURES TO

THE EXPECTED CASH FLOWS IN THE FORM OF INTEREST AND PRINCIPAL REPAYMENTS.

n P=∑ I (1+t) + F t=1 (1+kd)t (1+kd)n

DR ANJANA RAJU

COST OF DEBENTURESCOST OF DEBENTURES

COST OF DEBENTURES DEFINED AS

n P=∑ I (1+t) + F t=1 (1+kd)t (1+kd)n

WHERE

kd = POST –TAX COST OF DEBENTURES CAPITAL I = ANNUAL INTEREST PAYMENT PER DEBENTURE CAPITAL T= CORPORATE TAX RATE F= REDEMPTION PRICE PER DEBENTURE P=NET AMOUNT REALIZED PER DEBENTURES AND n= MATURITY PERIOD

DR ANJANA RAJU

COST OF DEBENTURES COST OF DEBENTURES


n P=∑ I (1+t) + F t=1 (1+kd)t (1+kd)n

WHERE

kd = POST –TAX COST OF DEBENTURES CAPITAL I = ANNUAL INTEREST PAYMENT PER DEBENTURE CAPITAL T= CORPORATE TAX RATE F= REDEMPTION PRICE PER DEBENTURE P=NET AMOUNT REALIZED PER DEBENTURES AND n= MATURITY PERIOD

DR ANJANA RAJU



INTEREST PAYMENT (I) IS MULTIPLIED BY THE FACTOR (1-t)

( because interest on debt is tax-deductible expenses)

ONLY POST –TAX COSTS ARE CONSIDERED.

DR ANJANA RAJU


COST OF DEBENTURES

I(1-t) + (F-P) (1-t)

n kd = ____________________ F+P 2

ILLUSTRATION 1

DR ANJANA RAJU

COST OF TERM LOANS

DR ANJANA RAJU

COST OF TERM LOANS

SIMPLY EQUAL TO THE INTEREST RATE

MULTIPLIED BY (1-Tax rate)

INTEREST RATE APPLICABLE TO NEW TERM LOAN.

INTEREST IS TAX DEDUCTIBLE


DR ANJANA RAJU

COST OF TERM LOANS

Kt= I (1-t)

where I = Interest rate t= tax rate


DR ANJANA RAJU

COST OF PREFERNCE SHARE (KP)

DR ANJANA RAJU



D+ F-P n

kp= ___________

F+P 2

kp = cost of preference capital D = PREFERENCE DIVIDEND PER SHARE PAYABLE ANNUALLY

F= REDEMPTION PRICE P= NET AMOUNT REALISED PER SHARE AND n= MATURITY PERIOD

DR ANJANA RAJU



ILLUSTRATION 2

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITALCOST ASSOCIATED WITH PRINCIPAL SOURCES OF

LONG –TERM FINANCE

COST EQUITY CAPITAL

DR ANJANA RAJU


COST OF EQUITY CAPITAL

n

kp=

∑ Dt

t=1 (1+ ke)t

pe =PRICE PER EQUITY SHARE

Dt= EXPECTED DIVIDEND PER SHARE AT THE END OF YEAR ONE, AND

Ke = RATE OF RETURN REQUIRED BY EQUITY SHAREHOLDERS

DR ANJANA RAJU


COST OF EQUITY CAPITAL ASSUMING A CONSTANT GROWTH RATE IN

DIVIDENDS.

Ke = D1 + g Pe

D1 AND g ARE KNOWN IF THE CURRENT MARKET PRICE OF THE SHARE IS GIVEN

DO ILLUSTRATION 3

DR ANJANA RAJU

COST OF RETAINED EARNINGS

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITAL COST OF RETAINED EARNING AND COST OF EXTERNAL EQUITY

EARNINGS OF THE FIRM CAN BE REINVESTED OR

PAIDED AS DIVIDEND TO SHAREHOLDERS

INCASE EARNINGS ARE RETAINED THEN SHAREHOLDERS DEMAND COMPENSATION

COST OF RETAINED EARNING LESSER COSTLY THEN NEW ISSUE COST( NO FLOATING COST)

DR ANJANA RAJU


COST OF EXTERNAL EQUITY

ke= D1+g

P0(1-f)

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITALCOST OF EXTERNAL EQUITY

ke=cost of external equity

D1= Dividend expected at the end of year 1

P0 = current market price per share

g= constant growth rate applicable to dividends

f= floatation costs as a percentage of current market price

DR ANJANA RAJU

COST OF CAPITALCOST OF CAPITALCOST OF EXTERNAL EQUITY

K’e = ke/(1-f)

Ke = rate of return required by equity investors

K’e= cost of external equity

f =flotation costs as a percentage of current market price

DO ILLUSTRATION 5

DR ANJANA RAJU

SECTION V

VALUATION OF SECURITIES

DR ANJANA RAJU

VALUATION OF SECURITIES

o VALUATION CONCEPT

o BOND VALUATION

o EQUITY VALUATION

DR ANJANA RAJU

VALUATION OF SECURITIESVALUATION OF SECURITIESo VALUATION CONCEPT

BOOK VALUE IS AN ACCOUNTING CONCEPT

ASSETS RECORDED AT HISTORICAL COSTS

BOOK VALUE OF DEBT IS STATED AT OUTSTANDING AMOUNT.

DR ANJANA RAJU


REPLACEMENT VALUE : AMT SPEND TO REPLACE THE EXISTING ASSET IN CURRENT CONDITION

LIQUIDATION VALUE: AMOUNT REALISED IF THE ASSET IS SOLD AFTER HAVING TERMINATING ITS BUSINESS.

DR ANJANA RAJU


GOING CONCERN VALUE: AMOUNT REALISED IF BUSINESSN IS SOLD AS AN OPEARTING ONE.

MARKET VALUE: THE CURRENT PRICE AT WHICH THE ASSET OR SECURITY IS BEING SOLD OR BROUGHT.

DR ANJANA RAJU

VALUATION OF SECURITIESVALUATION OF SECURITIESo VALUATION OF BOND

BONDS ARE NEGOTIABLE PROMISSORY NOTES USED BY

INDIVIDUALS,BUSINESS FIRMS,GOVERNMENTS,GOVERNMENT AGENCIES.

DR ANJANA RAJU

VALUATION OF SECURITIESVALUATION OF SECURITIESo VALUATION OF BOND

PRIVATE SECTOR ISSUE SECURED OR UNSECURED BONDS.

RATE OF INTEREST IS FIXED AND KNOWN

REDEEMABLE AFTER A SPECIFIC PERIOD

EXPECTED CASHFLOW CONSISTS OF ANNUAL INTEREST PAYMENTS PLUS PRINCIPAL.

DR ANJANA RAJU

BOND – RELATED TERMS

DR ANJANA RAJU

BOND – RELATED TERMSBOND – RELATED TERMSFACE VALUE

COUPON RATE OF INTEREST

MATURITY

REDEMPTION VALUE

MARKET VALUE

DR ANJANA RAJU

BOND – RELATED TERMSBOND – RELATED TERMS

FACE VALUE

VALUE STATED ON THE FACE OF THE BOND AND IS ALSO KNOW AS PAR VALUE

DR ANJANA RAJU


FACE VALUE

REPRESENTS THE AMOUNT OF BORROWING BY FIRM

( WHICH IT SPECIFIES TO REPAY AFTER A SPECIFIC

PERIOD)

ISSUED AT RS 100 OR RS 1000

DR ANJANA RAJU


COUPON RATE OF INTEREST

CARRIES A SPECIFIC RATE OF INTEREST WHICH IS CALLED THE COUPON RATE

INTEREST PAID ON THE BOND IS TAX DEDUCTIBLE.

DR ANJANA RAJU


MATURITY

ISSUED FOR SPECIFIC PERIOD

TYPICALLY CORPORATE BONDS HAVE MATURITY PERIOD 7-10 YEARS.

GOVERNMENT BONDS UPTO 20-25 YEARS

DR ANJANA RAJU


REDEMPTION VALUE

VALUE THE BONDHOLDER GETS ON MATURITY IS CALLED REDEMPTION VALUE.

A BOND MAY BE REDEMMED AT PAR , AT PREMIUM (MORE THAN PAR) OR AT A DISCOUNT(LESS THAN PAR VALUE)

DR ANJANA RAJU


MARKET VALUE

BOND TRADED IN STOCK EXCHANGE

PRICE AT WHICH IT IS BROUGHT

MARKET VALUE MAY BE DIFFERENT FROM PAR VALUE OR REDEMPTION VALUE

DR ANJANA RAJU

VALUATION OF SECURITIESVALUATION OF SECURITIES

o CONVERTIBLE DEBENTURES

CONVERTIBLE PARTLY OR FULLY INTO EQUITY SHARES

DR ANJANA RAJU


EQUITY VALUATION

INTRINSIC VALUE IS THE VALUE OF A STOCK WHICH IS

JUSTIFIED BY ASSETS , EARNING, DIVIDEND, DEFINITE PROSPECTS AND THE FACTOR OF THE MGT OF THE ISSUING COMPANY.

DR ANJANA RAJU


WHAT ARE MAJOR COMPONENTS OF INTRINSIC VALUE ?

1. EARNING POWER AND PROFITABILITY OF THE MGT IN EMPLOYMENT OF ASSETS.

2. DIVIDENDS PAID AND ABILITY TO PAY IN FUTURE.

3. ESTIMATES OF THE GROWTH OF EARNINGS

DR ANJANA RAJU

SECTION VI

RISK AND RETURN

DR ANJANA RAJU

RISK AND RETURNRISK AND RETURN1. CONCEPTS OF RISK AND RETURN

2. THE COMPONENTS OF RETURN

3. RELATION BETWEEN RISK AND EXPECTED RATE OF RETURN

5. SOURCES OF RISK

DR ANJANA RAJU

RISK AND RETURNRISK AND RETURN WHAT IS THE IMPORTANCE OF RETURNS IN

ANY INVESTMENT DECISION?

ENABLES INVESTORS TO COMPARE ALTERNATIVE IN TERMS OF WHAT THEY HAVE TO OFFER THE INVESTOR .

MEASUREMENT OF HISTORICAL (PAST) RETURNS.

ESTIMATION OF FUTURE RETURNS

DR ANJANA RAJU

RISK AND RETURNRISK AND RETURN

TWO TYPES OF RETURNS

REALISED OR HISTORICAL RETURNS

EXPECTED RETURN

DR ANJANA RAJU


TYPES OF RETURNS

DR ANJANA RAJU



REALISED OR HISTORICAL RETURNSThe rate of return on an investment can be calculated

as follows:(Amount received – Amount invested)

Return = ________________________

Amount invested

For example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is: ($1,100 - $1,000) / $1,000 = 10%.

DR ANJANA RAJU



EXPECTED RETURN

RETURN FROM AN ASSET THAT INVESTOR ANTICIPATE OR EXPECT TO EARN OVER SOME FUTURE PERIOD.

EXPECTED RETURN IS SUBJECT TO UNCERTAINTY OR RISK,AND MAY OR MAY NOT OCCUR.

DR ANJANA RAJU

THE COMPONENTS OF RETURNTHE COMPONENTS OF RETURN

DR ANJANA RAJU


RETURN IS BASICALLY MADE UP OF TWO COMPONENTS.

1. PERIODIC CASH RECEIPT OR INCOME ON INVESTMENT.

(IN FORM OF DIVIDEND, INTEREST ETC)

TERM YIELD IS OFTEN USED IN CONNECTION COMPONENT OF RETURN

FOR EXAMPLE 10% BOND AT PURCHASE PRICE OF RS 900 IS 11.11%

DR ANJANA RAJU


2. APPRECIATION (DEPRECIATION) IN THE ASSET, IS REFFERED TO AS CAPITAL GAIN (LOSS)

MANY INVESTORS HAVE CAPITAL GAINS AS THEIR PRIMARY OBJECTIVE AND EXPECT THIS COMPONENT TO BE LARGER THAN THE INCOME COMPONENT.

DR ANJANA RAJU

RISKRISK

DR ANJANA RAJU

RISKRISK

BACKGROUND

RISK AND RETURN GO HAND IN HAND IN INVESTMENTS AND FINANCE.

ONE CANNOT TALK ABOUT RETURNS WITHOUT TALKING ABOUT RISK

DR ANJANA RAJU

RISKRISK

CONCULSION

INVESTMENT DECISIONS ALWAYS INVOLVE A TRADE –OFF BETWEEN RISK AND RETURN.

DR ANJANA RAJU

RISKRISK

RISK DEFINED AS

THE CHANCE THAT THE ACTUAL OUTCOME FROM AN INVESTMENT WILL DIFFER FROM THE EXPECTED OUTCOME

DR ANJANA RAJU

SOURCES OF RISKSOURCES OF RISKFACTORS WHICH MAKE ANY FINANCIAL

ASSET RISKY

1. INTEREST RATE RISK- 2. MARKET RISK3. INFLATION RISK4. BUSINESS RISK 5. FINANCIAL RISK6. LIQUIDITY RISK

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