B.Com (General) – Electives & Projects
Discipline Elective II: Financial Management
(You can replace “Financial Management” with the actual subject you have chosen – the structure of the notes stays the same.)
1. Simple Explanation
Financial Management is the art and science of planning, directing, monitoring, organizing, and controlling the financial activities of an organization.
Its main goal is to maximize the value of the firm (shareholder wealth) while ensuring liquidity, solvency, and profitability.
Key decisions that managers make include:
| Decision | What it involves | Why it matters |
|---|---|---|
| Capital Budgeting | Selecting long‑term projects (investments). | Determines the future growth and returns. |
| Capital Structure | Mix of debt & equity financing. | Affects risk, cost of capital, and overall firm value. |
| Working‑Capital Management | Managing short‑term assets & liabilities. | Keeps operations smooth & avoids liquidity crises. |
| Dividend Policy | How profits are returned to shareholders. | Balances growth and shareholder satisfaction. |
2. Key Points to Remember
| Area | Core Concepts | Important Formulas / Ratios | Typical Questions |
|---|---|---|---|
| Time Value of Money (TVM) | Present Value (PV), Future Value (FV), Net Present Value (NPV), Internal Rate of Return (IRR) | (\text{PV} = \frac{FV}{(1+r)^n}) (\text{NPV} = \sum_{t=0}^{n}\frac{C_t}{(1+r)^t}) |
“Is this project worth investing in?” |
| Capital Budgeting | Discounted Cash Flow (DCF), Payback Period, Discounted Payback, Profitability Index | Payback (= \frac{\text{Initial Investment}}{\text{Annual Cash Inflow}}) PI (= \frac{\text{PV of CFs}}{\text{Initial Investment}}) |
“Which project should we accept?” |
| Capital Structure | Cost of Debt (Kd), Cost of Equity (Ke), Weighted Average Cost of Capital (WACC) | ( \text{WACC} = \frac{D}{V}K_d(1-T_c) + \frac{E}{V}K_e ) | “Is the firm over‑leveraged?” |
| Working‑Capital | Current Ratio, Quick Ratio, Cash‑Conversion Cycle | Current Ratio (= \frac{A_c}{L_c}) Quick Ratio (= \frac{A_c - \text{Inventories}}{L_c}) |
“Are we liquid enough?” |
| Dividend Policy | Dividend Payout Ratio, Dividend Yield, Modigliani‑Miller Theorem | Payout Ratio (= \frac{Dividends}{Net Income}) Dividend Yield (= \frac{Dividends}{Stock Price}) |
“What share of profit should we return?” |
3. Worked Example
Scenario: A company is evaluating a new project that requires an initial outlay of ₹10,00,000. The projected cash inflows over the next 5 years are:
| Year | Cash Inflow (₹) |
|---|---|
| 1 | 2,00,000 |
| 2 | 2,50,000 |
| 3 | 3,00,000 |
| 4 | 3,50,000 |
| 5 | 4,00,000 |
The company's cost of capital (WACC) is 12 %.
Step‑by‑Step
| Step | Calculation | Result |
|---|---|---|
| 1. Discount each cash inflow to present value | ( \text{PV}_t = \frac{C_t}{(1+0.12)^t} ) | |
| 2. Sum all PVs | ( \text{PV}{\text{total}} = \sum{t=1}^{5} \text{PV}_t ) | |
| 3. Compute NPV | ( \text{NPV} = \text{PV}_{\text{total}} - \text{Initial Investment} ) | |
| 4. Interpret | NPV > 0 → accept |
Detailed Calculation
| Year | Cash Inflow | PV Factor ((1.12)^t) | PV (₹) |
|---|---|---|---|
| 1 | 2,00,000 | 1.12 | 1,78,571 |
| 2 | 2,50,000 | 1.2544 | 1,99,411 |
| 3 | 3,00,000 | 1.404928 | 2,13,115 |
| 4 | 3,50,000 | 1.573 |