Fundamentals of Financial Management

Nature of financial management; Finance within an organization; Functions of financial management; The financial goal: creating value for investors; Balancing shareholder interest and the interests of society.

Financial statements: Balance sheet, profit or loss statement, cash flow statement, statement of change in shareholders’ equity; Framework for analysis; Nature and need of financial ratio analysis; Types of financial ratios: liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios; DuPont system of financial ratio analysis; Ratios in different industries; Uses and limitations of financial ratios; Common size and index analysis.

Concept time value of money; Cash flow time line; Future values and present values of a single cash flow; Finding the interest rate and the number of years; Future value and present value of an ordinary annuity and annuity due; Finding annuity payments, periods and interest rates; Present value of perpetuities; Present value and future value of uneven cash flows; Semiannual and other compounding periods; Preparation of loan amortization schedule; Application of the concept of time value of money.

Defining risk and return, expected rates of return, historical rates of return, standard deviation, coefficient of variation; Risk aversion and required returns; Return and risk in a portfolio context: The role of covariance and correlation; The capital asset pricing model (CAPM): the beta coefficient, the security market line (SML): The relationship between risk and rates of return.

Concept of financial assets; Key characteristics of bonds, common stocks and preferred stocks; Basic financial asset valuation models; Valuation of bonds: perpetual bonds, zero coupon bonds, coupon bonds with a finite maturity, bond valuation with semiannual interest; Discount bond and premium bond; Bond yields: current yield, capital gain yield, holding period return, yield to maturity, yield to call; Dividend discount model for stock valuation: zero-growth model, normal growth model, super-normal growth model, single period valuation, multi-period valuation; Valuation of preferred stock.

Concept of cost of capital; Applications of cost of capital in financial decision making, Component cost of capital: cost of debt, cost of preferred stock, the cost of retained earnings, the cost of new common stocks; Weighted average cost of capital (WACC); Factors affecting the WACC.

Concept of capital structure; Business risk and operating leverage; Financial risk and financial leverage; Total leverage; Break-even analysis: Operating break-even, cash break- even, financial break-even analysis.

Characteristic of capital budgeting decision; Capital budgeting decision process; Types of capital budgeting projects; Capital budgeting decision techniques: payback period, discounted payback period, net present value, profitability index, internal rate of return, modified internal rate of return; merits and limitations of each capital budgeting decision technique.

Concepts of working capital; Types of working capital: Seasonal and permanent working capital, Factors affecting the size of working capital; Significance of working capital management; The cash conversion cycle; Significance of inventory management; Basic inventory costs; The economic order quantity model; Reorder point and safety stock; Quantity discount; Significance cash management, Cash budget; Purpose of receivables management; Elements of credit policy.

Concept and types of dividends; Factors affecting dividend policy; Dividend payment procedures; Dividend policy in practice: Stability in dividends and residual dividend policy; Stock dividends, Stock splits, Reverse stock splits; Stock repurchases; Dividend payment practices in Nepal.