When the companies are distressed, the government may intervene and support them to recover and revive. For this, firstly the company has to declare the sick unit, in accordance with the compliances of sick industry company’s act 1985. Company is vested in the hands of board of industrial and financial reconstruction. In the best interest of company, the board may revive it, rehabilitates it or sell off the unit. In broad sense, corporate restructuring refers to the changes in ownership, business mix, assets mix and alliances with a view to enhance the shareholder value. Hence, corporate restructuring may involve ownership restructuring, business restructuring and assets restructuring.

The eva is used to measure the firm optimum value through value is the quantity an individual is prepared to pay for a good or service whereas contemplating the money could be spent elsewhere. However, the financial worth can change if the value of the good or service changes. If the price of a product rises significantly, people might not purchase the product resulting in a decline in its economic worth. As a end result, the producer of the product would possibly decrease costs since the lower economic value has to lead to a decline in gross sales of the product. Economic worth is the measurement of the profit derived from a great or service to an individual or an organization. It is essential for organizations to invest time and sources to determine the optimum worth for a product or service to maximise revenues.

How do you calculate economic value?

The decisions should be such that the share value does not decrease. Thus, wealth or value maximisation is the most important goal of financial management. However an enterprise has other considerations like the obligations to various interests of workers, consumers, society, as well as ethical trade practices. Working capital management strategies deal with the cost of capital factor.

The credit worthiness of borrower is evaluated and contract is entered into with repayment schedule structured over the life of the loan. However, over capitalisation is more dangerous to the company, shareholders and the society than under capitalization. The situation of under capitalization can be handled more easily than the situation of overcapitalisation. Moreover under capitalization is not an economic problem but a problem of adjusting capital structure.

According to this proposition the average cost of capital is a constant and is not affected by leverage. The EBIT-EBT analysis is the method that studies the leverage, i.e. comparing alternative methods of financing at different levels of EBIT. Simply put, EBIT-EPS analysis examines the effect of financial leverage on the EPS with varying levels of EBIT or under alternative financial plans. With business risk, the concern is that the company will be unable to function as a profitable enterprise.

The Cash Budget

The challenge is to make financial planning a value- added activity that helps the organization achieve its strategic goals and objectives. P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders. Companies that are able to sustain or increase MVA over time typically attract more investment, which continues to enhance MVA.

For every firm a particular quantity of net Working Capital is permanent. Borrowing companies have diverse attitudes toward the relative risk of long-term vs. short-term debt then lenders. Whereas lenders usually feel that risk increases with maturity, borrowers feel that there is more risk linked with short-term debt. Primarily, there is forever the chance that a firm will not be able to repayment its short-term debt.

Perhaps build discussion into group meetings about the project or hold special meetings of those most involved to discuss how it is going. Children of any age gain satisfaction from making a real contribution, doing something that benefits others. This nurtures a sense of belonging and helps the child and others appreciate his or her skills and talents. Some projects in children’s services may be sufficiently complex that over time they involve all the children, while others may be more contained and involve only a few children.

What are the 5 economic values?

Actually in a perfectly monopolistic situation, the business enterprise has no risk caused by competition. This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. As a result preference and patronage for the company depends significantly on the financial policy framework.

This quantity can be decided by making adjustments to GAAP accounting. Whereas, Financial risk refers to the additional risk placed on firm’s shareholders as a result of debt use in financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly by equity.

• Option may be defined as a contract between two parties where one gives the other the right to buy or sell an underlying asset as a specified price within or on a specific time.
• It could also mean it has shorter payment terms and stricter credit policy.
• There are spreads among the borrowing and lending rates for investments and financing of equivalent risk.
• Financial goals are deeply rooted in the company’s value and political philosophy.
• Working capital refers to that fraction of firm’s capital which is requisite for financing short-term or current assets such as cash, saleable securities, debtors, and stocks.
• Management of creditors involves administrative and accounting costs that would otherwise be incurred.

The relationship between financial management and accounting are closely related to the extent that accounting is an important input in financial decision making. Though financial management and accounting are closely related, still they differ in the treatment of funds and also with regards to decision making. 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. 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.

The firm can convert accounts receivables into cash without bothering about repayment. According to this model the net cash flow is completely stochastic. When changes in cash balance occur randomly, the application of control theory serves a useful purpose. It advises on aspects of corporate finance including capital structure, mergers and acquisitions. One of the methods of comparing such proposals is to workout what is known as the “Desirability factor” or “Profitability index”..

The net working capital is a qualitative portion of working capital and it measures the organizations liquidity. It also indicates the extent to which working capital can be financed with long term resources. This concept is helpful only for accountants, investors, creditors and interested persons in the liquidity and financial reliability of the organization. The weighted average cost of capital is an approach used to determine a discount rate. The WACC method determines the subject company’s actual cost of capital by calculating the weighted average of the company’s cost of debt and cost of equity. The WACC must be applied to the subject company’s net cash flow to total invested capital.

Some public enterprises have made large effort in developing plans of revival. But many of them remained unimplemented due to lack of confidence lack of new approach and lack of authority. This out – sourcing must be designed effectively with a time bound approach, quick evaluation and decision. One of the major causes of sickness is the over staffing in public enterprises.

Small businesses are less exposed to business risks; because they enjoy flexibility of operations and can easily adapt themselves to changing circumstances. On the other hand, the bigger is the size of business; the lesser is the flexibility possessed by it. If the management of the business enterprise is able to successfully handle and manage business risks; these provide many opportunities for gains to the business enterprise. It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio. Feasibility is concerned with whether the resources required to implement the strategy are available, can be developed or obtained. The strategic decisions should be within the boundaries of the corporate values.

• Operating personnel and upper-level management will decide on future capital spending.
• Under the conservative plan, the firm finances its permanent assets and also a part of temporary current assets with long term financing and hence less risk of facing the problem of shortage of funds.
• Cash flow analysis is more useful for identifying and correcting the current liquidity problems of the firm.
• The necessities of working capital in such cases depend upon the production strategy.
• The end-result is a Budget for Cost of Goods Sold, which we will use for our Forecasted Income Statement.
• We know that a firm can finance its investment from various sources such as borrowed capital or equity capital.

Recently, the fields of strategic management and financial management combined together to evolve a new discipline namely Strategic Financial Management. To communicate financial goals, most businesses utilize a variety of criteria. Strategic plans, for example, are measured in terms of profits and market share, whereas goods and production lines within a plant are measured in terms of profit margins or cash flows. The choice of marketable securities is mainly limited to Government treasury bills, Deposits with banks and Intercorporate deposits.

PSG College of Arts and Science > Department of Management Sciences

In case of shortage of cash the firm sells the marketable securities. Responsible for planning and sourcing firm’s short, medium and long term cash needs. It participates in capital structure, forecasting of future interest and foreign currency rates decision-making process. Financing and investment of funds are two crucial financial functions.

A historical analysis of the different sources and applications of cash will enable the management to make reliable cash flow projections for the immediate future. It may then plan out for investment of surplus or meeting the deficit, if any. Finance Manager has to decide optimum capital structure to maximise the wealth of the shareholders.

The accrual based accounting data do not reflect fully the financial conditions of the organisation. Whereas, the treatment of funds, in financial management is based on cash flows. The revenues are recognised only when cash is actually received (i.e. cash inflow) and expenses are recognised on actual payment (i.e. cash outflow). Thus, cash flow based returns help financial managers to avoid insolvency and achieve desired financial goals. The finance functions are divided into three major decisions, viz., investment, financing and dividend decisions.

To have better results both fixed and random effect models are applied on the panel data. Results of both the models are checked through applying Hausman Specification Test . In case where both models are found significant then Random Effect Model results are taken into consideration. The main objective of this paper is to examine the impact of Intellectual Capital on the performance of Indian software Industry.

A projected funds flow statement can be prepared and resources can be properly allocated after an analysis of the present state of affairs. Funds flow statement analyses the reasons for change in financial position between two balance sheets. It shows the inflow and outflow of funds i.e., sources and application of funds during a particular period.

Explain the assumptions of Net Operating Income approach theory of capital structure. Discuss the proposition made in Modigliani and Miller approach in capital structure theory. Depreciation is not an outgo in cash but it is deductible in computing the income subject to tax. There will be saving in tax on depreciation and such savings could be profitably employed.

In that case, the surplus of current assets over current liabilities is known as the net working capital or net current assets. A shorter operating cycle is more favorable as it means the company has enough cash to maintain operations, recover investments and meet various obligations. In contrast, if a business has a longer operating cycle, it means the company requires more cash to maintain operations. It’s also important to differentiate an operating cycle from a cash cycle. Whereas they’re both helpful and provide invaluable insight, a cash cycle lets companies see how they’re able to manage cash flow, whereas an operating cycle determines the efficiency of the operation. Companies typically measure how efficiently that balance is maintained by monitoring the inventory turnover ratio.

Working capital management can improve a company’searningsand profitability through efficient use of its resources. Management of working capital includes inventory management as well as management of accounts receivables andaccounts payables. Current assets include anything that can be easily converted into cash within 12 months.