Friday, December 8, 2017

Functions of Financial Officer

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Functions of a Chief Financial Officer / Finance Manager

The twin aspects viz procurement and effective utilization of funds are the crucial tasks, which the CFO/Finance Manager faces. The Chief Finance Officer / Finance Manager is required to look into financial implications of any decision in the firm. Thus all decisions involving management of funds comes under the purview of CFO / Finance Manager. These are namely

-       Estimating requirement of funds
-       Decision regarding capital structure
-       Investment decisions
-       Dividend decision
-       Cash management
-       Evaluating financial performance
-       Financial negotiation
-       Keeping in touch with stock exchange quotations & behavior of share prices

Role / responsibilities of Finance Manager in the Changing Scenario of Financial Management in India

In the modern enterprise, the finance manager occupies a key position and his role is becoming more and more pervasive and significant in solving the finance problems. The traditional role of the finance manager was confined just to raising of funds from a number of sources, but the recent development in the socio-economic and political scenario throughout the world has placed him in a central position in the business organization. He is now responsible for shaping the fortunes of the enterprise, and is involved in the most vital decision of allocation of capital like mergers, acquisitions, etc. He is working in a challenging environment which changes continuously.

Emergence of financial service sector and development of internet in the field of information technology has also brought new challenges before the Indian finance managers. Development of new financial tools, techniques, instruments and products and emphasis on public sector undertakings to be self-supporting and their dependence on capital market for fund requirements have all changed the role of a finance manager. His role, especially, assumes significance in the present day context of liberalization, deregulation and globalization.

The chief financial officer of an organisation plays an important role in the company’s goals, policies, and financial success. 

His main responsibilities include:
(a) Financial analysis and planning: Determining the proper amount of funds to be employed in
      the firm.
(b) Investment decisions: Efficient allocation of funds to specific assets.
(c) Financial and capital structure decisions: Raising funds on favorable terms as possible, i.e. Determining the composition of Liabilities.
(d) Management of financial resources (such as working capital).
(e) Risk Management: Protecting assets.

Note: Chief Financial Officer (CFO) and Finance Manager are one and the same, and can be used inter-changeably.

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Tuesday, November 21, 2017

Discounting Formula

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Concept of discounting

Present value of Rupees is in present term whereas future value of rupees is in future term. In future value of rupees required rate of return is included. To sacrifice the current consumption for certain period we would require compensation for sacrificing current consumption it is known as required rate of return.

The value of assets is the present value of future cash flows discounted at the appropriate required rate of return.

In financial management we would take decision based on future cash flow whereas investment will be at present so all the future cash flow discount are required rate to bring in present term.

Intrinsic value = PV of the future cash flow discounted at Re.

While discounting future cash flow would be discounted with the rate applicable for that year, if rate is different of each year, then successive cash flow would be discounted first with rate applicable for previous year then finally rate applicable for such year. For example 3rd year cash flow would be discounted first with the rate applicable for 1st year then 2nd year then finally with the discount rate of 3rd year.

Inflation in capital budgeting

There should be consistency between Nature of cash flow and discount rate. Nominal cash flow discount with nominal rate and real cash flow discount with real rate, etc. if cash flow is ex inflation then incorporate inflation in future cash flow in consecutive term. That to incorporate inflation in cash of third year, inflation affect 1, 2 and 3rd year should be incorporated.

While incorporating inflation in cash flow successive cash flaw with accumulate inflation cumulatively. For example 3rd year cash will include inflation of for 1st year then 2nd year then finally with the inflation rate of 3rd year.

Frequency of compounding

Effective annual yield compounded annually

Rate = (1+ rate)n-1

Money market yield compounded n time in a year.

Holding Period yield

Bond equivalent yield compounded half yearly.

Concept of continuous compounding (Exponential)

Rate change in real time that is compounded every moment. Without taking factor of exponential rate follow below step.

Step 1
Step 2
(+) 1
Step 3
X= 12 times

Dirty power x^1/n

Make a factor then follow below steps

Step 1

√ 12 times

Step 2

- 1

Step 3

Divide by power
Step 4

+ 1

Step 5

x= 12 times

Annuity and its application

Annuity is the sum of discounting factor. It is used to derive present of future cash flow if all the cash flow is equal. It is also used to derive equal future instalment of present value cash flow either by dividing with annuity factor or multiplied with capital recovery factor.

Capital recovery factor = 1/ annuity factor,

Application of normal distribution

# Ln

Without taking factor of exponential rate follow below step.

Step 1
x= 12 times
Step 2
- 1
Step 3
÷ .000244017206

Perpetuity and its application

It is used in case of no growth wherein a certain cash flow is expected to continue for uncertain future period.

IV= A/i

Future value

It is reverse of present value.
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Financial management Scope

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Object of financial management

Objective of financial management is to maximise shareholder wealth, it is measure by market capital of the company. Market capital is represented by number of share multiplied with share price.

Market capital = Number of share x Market share price

Shareholder is the owner of the company they appoint management the company, manager should manages the company in the best interest of shareholder. Management acquire fund at optimum cost and utilise it with the minimum risk to earn maximum return and distribute dividend to shareholder or retained earnings for further investment to generate maximum possible return.
Cost of capital

THE cost of capital of a firm is the minimum rate of return which the firm must earn on its investments in order to satisfy the expectations of investors who provide funds to the firm. 
It is the weighted average of the cost of various sources of finance used by it. The method of computing the cost of capital is to compute the cost of each type of capital and then find the weighted average of all types of costs of capital. 

In other words, two steps are involved in determination of cost of capital of a firm: 

(i) computation of cost of different sources of capital, and 
(ii) determining overall cost of capital of the firm by weighted average or total cost divided by total fund.

Kc- kc would be weighted average of effective cost of debt and equity

Kc = weight of debt x post-tax cost of debt + weight of equity x cost of equity.

Kc= wd x post-tax kd + we x ke

Cost of debt is to be calculated as follows.

Irredeemable debt:

Annual interest (1 - Tax rate)

Cost of debt =————————————------× 100

Net proceeds of debt

For debt redeemable after certain period

fm,financial management,fmfunda

(iii)       Earning price ratio.

Price is how many times of Earning Per Share.

        Price= Earning Per Share X P/E ratio

P/E ratio = 1/ke, Ke = 1/PE ratio.

Component of interest (Required rate of return)

Rf ( Risk free real rate )= it is compensation for sacrifice of current consumption

Inflation premium = it is compensation for loss of Purchasing Power

Risk Premium = it is compensation for bearing risk.

All rate should be taken in to factor while calculation in below.

Risk free nominal rate = Rf ( Risk free real rate ) x Inflation Premium

Risk adjusted rate = Rf ( Risk free real rate ) x Risk Premium

Risk adjusted nominal rate = Rf ( Risk free real rate ) x Inflation Premium x Risk Premium

When we invest in a inflation protected security we donot demand inflation premium i.e, rate would be Rf real. When we invest in a corporate security, there is default risk involved therefor we demand risk premium.

All interest rate are combine in multiplication fashion except CAPM, RADR & Spread.
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