1
Financial Management
What is FM?hi Concern the acquisition financing & management of assets with some overall goals in mind Investment decisions:3 most important decision 1:- What is optimal firm size? 2:- What specific assets should be acquired? 3:- What assets (if any) should be reduced or eliminated? Financing decisions:Determine how the assets (will be financed) 1:- What is the best type of financing? 2:- What is the best financing mix? 3:- What is the best dividend policy? 4:- What will the funds be physically acquired? Assets management decisions:1:- How do we manage existing assets efficiently? 2:- Financial manager has varying degrees of operating responsibility over assets. 3:- Great emphasis on current assets management then fixed assets management. Fundamentals of FM 11th edition van Horne. What is the goal of the firm? Maximization of the shareholders wealth. Value creation occurs when we maximize the share price of current shareholders. Short coming of alternative perspectives.
Financial Environment
1:- Financial institution: Commercial bank, DFIs, Leasing companies, mutual fund &brokerage house. 2:- Financial market: Karachi stock exchange, Islamabad, Lahore. 3:- Prospectus: For issuance of new shares. 4:- Offering document: Offer new shares to public. 5:- Listening procedures: To list the public Ltd. Co. in stock exchange. 6:- Financial instruments: Debentures, Debt equity.
Listing Resolution at S.E.
1:- Listing application under securities & exchange ordinance 1969 as per form1. 2:- Application for listing as per form 2.
2 3:- An unconditional undertaking on no-judicial stamp paper of Rs.20 as per form3. 4:- An under taking curtaining to issue of share certificates, computerized transfer. And verification of signature on transfer deed (annexure-A). 5:- Certified copy of certificate of incorporation. 6:- Certified copy of conversion certificate from private to public co. if applicable. 7:- Certified copy of the certificate of commencement of business. 8:- Copy of feasibility report and profile of the institution. 9:- Copy of the board resolution of the co. for listing & issues of the shares to general public. 10:-Name of directors along with directorship of other companies listed in stock exchange. 11:-Auditors certificate, separately indicating the amount subscribed by the promoters to the directors, the associates, the relatives & shares subscribed by foreign or local investors. 12:-Auditors certificate on the break up value of share on the basis of the latest value of share on the basis of latest audited accounts. 13:-Statement showing the cost of project & means of finance. 14:-Copies of agreement relating to issue o securities for consideration other than cash and private basement of shares. 15:-Proof of receipt of foreign currency from the foreign investors through normal banking channel. 16:-NOC from the under-writers to publish the prospectus. 17:-Copy of the concerned letter from banker to the issue (of shares). 18:-Name of the institution for computer belleting & letter of acceptance from an issue. 19:-So copies of memorandum & AOA, prospectus, and audited accounts. 20:-Complete list of shareholders. 21:-Copy of application submitted with CDC (Central Depositancy Co.) 22:-Report of the state bank line & name of the director of a co. are not in the defaulters list.
Activity Ratio
It use to measure the speed with which various account are converted into sales or cash OR It explains why 1 firm can turnover its assets more rapidly than others Inventory turnover ratio: It measures the activity or liquidity of a firms inventory C G S______ Average inventory More value show more efficiency. = __________360___________ Inventory turnover ratio =
3 Days the inventory should with(should less days). Account receivable turnover ratio: How many times the receivable hove been turned into cash during the year = ________Sales___________ Average A/R No. of days = _____360_______ ( less) A/R turnover ratio Asset turnover ratio: = Total sales ( efficiency) Total asset Fixed asset turnover ratio: = ______Sales___ Fixed Assets Creditors turnover ratio: = ___A. credit purchase/ CGS___ A. accounts payable ( cash flow wrong, liquidity ratio false. ) Capital analysis ratios: 1:- Debt to equity ratio: Measure the ratio of liabilities to stockholders equity. = _Debt___ = __T. Liability__ Equity Equity ( is beneficial ) 2:- Interest coverage ratio: = __Income before interest & tax____ Total interest It measures the firms ability to pay the contractual interest payments. 3:- Price earning ratio: = __C. Market price of the share______ Earning per share It reflects the amount investors are willing to pay for each dollar of earning of the firm the higher the P. Ratio the higher the confidence of the Co. Ratio Analysis: It is a systematic use of ratios to access the performance & status of the firm. It can be used to compare the risk & return of the firm.
4 Importance of Ratios: It depends on your prospective. 1:- Banks & suppliers are interested in liquidity ratios. 2:- Stockholders are more interested in profitability ratios. Liquidity ratios: It is ability of a firm to satisfy its short rum obligations as they become due. 1:- Current ratio: = ___ Current assets_____ Current liabilities 2:- Quick ratio: ( C.A inventory) = ___Quick assets_______ Quick liabilities Most liquid Ratio: 1:- Liquid ratio: = ___Liquid Assets___ Liquid Liability C. Ratio = 8,00,000 = 2.67 3,00,000 Quick Ratio Liquid Ratio = __8,00,000-3,70,000__ 60,000 =
Profitability Ratios:
Dividend yield: = _ Annual dividend per common share____ Market price of common stock per share
5 Dividend Payout Ratio: =____Cash dividend____ Net Income Return on Asset: = Profit margin x Asset turn over ratio
Q:1 Pay#158
C.Ratio
= __Current Asset____ Current Liability = __8,00,000__ = 1.6 : 1 5,00,000 a Current Asset = 8,00,000-1,00,000 = 7,00,000 Current Ratio =__7,00,000__ =1.4 5,00,000 Current ratio is decreased because cash is provided for the purchase of truck so current asset decrease. b Current Asset =8,00,000+ 1,00,000 =$ 9,00,000 Current Liability =5,00,000+ 1,00,000 =$6,00,000 Current Ratio = 9,00,000 =1.5 6,00,000 There is no increase in current ratio because with the increase of A/R in C.Asset, C. Liability also increase due to short term loan.8
c: Current Asset
=800,000 Current Liabilities =500,000 Current Ratio =800,000 =1.6 500,000
There is no effect on current ratio because fixed asset increase (common stock(200,000). ______________________________________ Q3:Pg#159 1: Long term debt to equity = 0.5 :1 Long term debt =200,000 x 0.5 =$100,000 2: Total asset turnover =2.5 times
6 =400,000 x 2.5 Sales = $1000,000 ________________
C.G.S
=1- Gross profit margin x sales =1- 0.10 x sales =0.9 x 1000,000 =$900,000
3:
No. of days
=360__________________ A/R turnover ratio
18
=360______ Sale | A/R
18
= __360__ 1000,000
x A/R
18x1000,000 360 A/R
= A/R
=$ 50,000
_________________________________ 4: Acid test ratio = Quick asset C.L 1 = Cash + A/R C.L = Cash + 50,000 1000,000 1000,000 50,000 50,000 = Cash = Cash
7
_____________________________
Inventory turnover ratio
= CGS__________ A. Inventory
= 900,000______ A. Inventory
A. Inventory
= 900,000 9
Inventory
= 100,000
