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Finance For Engineers

03-04-2024
  • Objective of business and Financial Management is 'Wealth Maximisation'
  • Decisions made by Financial Management
    1. Financing Decisions -> Raising Funds
    2. Investment Decisions -> Where & When to invest?
    3. Dividend Decisions -> How much to distribute to shareholders from the surplus companies made?

  • Risk and Return Relationship

    • Higher the Risk, greater the returns
    • returns over stocks > bonds > fixed deposits because stocks have the highest risk among the three and FDs have the lowest risks
    • To quantify the Risk -> Variance or Standard Deviation is used | Probability models when enough historical data is not enough, Decision tree
    • How to Reduce the Risk -> Diversification of Portfolio

  • Limited Liability Companies Act

    • A normal company, if goes in loss has to pay to the outsiders who claim money from personal property .. i.e Unlimited Liability
    • Limited Liability companies on the other hand if go into losses, the liability of share holders is limited to the extent of share capital and not their personal property.
    • e.g. Tata Steel Limited, Bajaj Autos Limited.

  • Unique feature of Corporate Business …. Companies

    • Limited Liability
    • Perpetual succession ….. Shareholders may come, may die, may leave the company….. But company continues
    • Company is getting certificate of incorporation ….. Birth certificate by Law
    • Directors are acting on behalf of the company like Trustees in a Trust…... Directors get their remuneration whereby Trustees of charitable trust are not eligible for any salary / income
    • Clear cut demarcation between directors and shareholders …... Directors need not be shareholders….but they can be the shareholders
    • Management of the company is in the hand of directors
    • W.r.t certain decisions, directors need to get approval from shareholders

  • Types of Companies TypesOfCompanies.excalidraw

  • Private Limited Company

    • Maximum 200 share holders
    • Minimum 2 Share Holders
    • Restriction on transfer of shares (Not Prohibition)
      • example …... Suppose A & B formed / incorporate a pvt limited company, They put a restriction that the shareholders can not transfer the shares to any outsider without the written permission from both A & B
    • Pvt. Limited companies can not be a listed company

  • Public Limited Company

    • Sub-types
      • Unlisted Public Company
      • Listed Public Company
        • Company with shares available on any stock market
    • Minimum 7 share holders, Maximum no upper limit
    • Freely transferable shares without any restrictions

  • PSU - Public Sector Undertakings

    • Government (State/Central) holds at least 51% shares
    • E.g. IOC, BPCL, BHEL, Coal India

  • Non Profit Making Company

    • AKA Section 8 company -> Social Upliftment purposes

IPO -> Initial Public Offer ( Whenever a company lauches its issue of share through public offer for first time) FPO -> Follow-on Public Order (Listed companies offering shares again through stock market) (Rare occurance)

Types of Shares - Equity Shares - True owners of the company - Get equal voting rights (1 Share = 1 Vote) for making business decisions - Preference Shares - Generally Issued to financial institutions and not sold on stock market - Holder gets preference for getting paid the dividend - No voting rights | Unless company doesn't make profits for 2 years straight - Types 1. Redeemable Preference Shares (Refunded after certain time.. before 20 years!) 2. Convertible Preference Shares - Will get converted to equity shares after certain time at a pre-decided share ratio

  • Equity can be issued at Face Value or at premium
  • At face value the equity would be issued at whatever the current face value is
  • At premium
    • Let's say face value of equity share is Rs. 1
    • Company is making profit for last 5 years, so at the time of IPO, company decided to issue 1,00,000 shares of Rs 1 each, at Price of Rs 100
    • In this case its paid up share capital will be Rs. 1,00,000 and 99 Lakhs would be securities premium

Gross Profit -> EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) -> EBIT (Earnings before Interest and tax) -> PBT (Profit Before Tax) -> PAT (Profit After Tax)

Topics: - Ratio Analysis: Ratio Analysis - Terminology : Understanding Financial Terminology - Time Value of Money : Time Value of Money - Costing Terminologies: Various Types of Costs - CRR, SLR, REPO, Reverse Repo : CRR, SLR, etc. - Trading, Profit & loss, balance Sheet : Various Sheets and Statements

Financial Institutions: - Institutions and mechanisms that 1. Affect generation of savings by the community 2. Mobilisation of savings 3. Effective distribution of savings - E.g. Banks, insurance companies, Mutual Funds <- Promote/mobilise savings - Individual Investors, industrial and trading companies <- Borrowers

Money Market - Short Term funds - Organised -> Banks ( bank loan) - Unorganised -> Chit funds, money lenders - Short term borrowing is done through this market - Regulated by RBI - Companies raise short term fundings here

Call money market - Short term money market that allows for large financial institutions to borrow and lend money at interbank rates - Day to day surplus funds (mostly of banks) are traded here - Loans are of short term duration - Money lent for - one day is Call Money - 1+ and less than 15 days is Notice Money - 15+ days is Term Money - borrowing is exclusively limited to banks that are temporarily running low on funds - Money Market Instruments - Certificates of Deposit 1. Commercial Paper 2. Inter-bank participation certificates 3. Inter-bank term money 4. Treasury Bills 5. Bill rediscounting 6. Call/notice/term money 7. CBLO 8. Market Repo Capital Market - Long Term Funds - Stock Market, Bond market - Regulated by Securities and Exchange Board of India - 2 Types -> Primary and Secondary Market

Break Even Point - calculated by comparing the market price of an asset to the original cost - it is said to be reached when the two prices (SP and CP) are equal -