FM Notes (CFA540) - Financial Management[CFA540...

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Financial Management [CFA540] Introduction to Financial Management 1. The financial goal of any firm is to maximise the wealth of the shareholders by maximising the value of the firm. 2. The objective of financial manager is to increase or maximise the wealth of the shareholders by maximising the value of the firm which is reflected in its earning per share and market value of the firm. 3. Function of finance manager includes mobilisation of funds, deployment of funds, control over the use of fund, and balancing the trade-off between risk and return. 4. advantages of sole proprietorship are: a. easy and inexpensive setup b. few governmental regulations and c. No firm tax. 5. Partnership firm is a business owned by two or more persons. They r partners in business and they bear the risks and reap the rewards of the business. A partnership firm is governed by Indian Partnership Act, 1932. Hence it is relatively free from governmental regulations as compared to the joint stock companies. 6. A group of persons working towards a common objective is a company. 7. Corporate investment and financing decisions are circumscribed by a government regulatory framework. The imp elements of these framework are: a. Industrial Policy b. Industrial Licensing Provisions and Procedure c. Regulation of foreign Collaborations and Investment d. Foreign Exchange Management Act (FEMA) e. Monopolies and Restrictive Trade Practice Act f. Companies Act, and g. SEBI Indian Financial System 1. The role of the financial sector can be broadly classified into the savings function, policy function and credit function. 2. The main types of financial markets are: money market, capital market, forex market and credit market. 3. A market is considered perfect if all the players are price takers, there are no significant regulations on the transfer of funds and transaction costs, if any, are very low. 4. The main financial intermediaries are stock exchanges, investment bankers, underwriters, registrars, depositories, custodians, primary dealers, satellite dealers and forex dealers. Time value of money 1. Annuity is the term used to describe a series of periodic flows of equal amounts. 2. Under the method of compounding, we find the Future Values (FV) of all the cash flows at the end of the time horizon at a particular rate of interest. 3. Under the method of discounting, we reckon the time value of money now i.e., at time zero on the time line. So, we will be comparing the initial outflow with the sum of the present values (PV) of the future inflows at a given rate of interest.
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Risk and Return 1. the most common measures of riskiness of security are standard deviation and variance of returns. 2. Unsystematic risk is the extent of the variability in the security’s return on account of the firm specific risk factors. This is also called diversifiable or avoidable risk factors.
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