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ADVANCED FINANCIAL MANAGEMENT

Module No.1: Cost of Capital


Meaning and Definition
Significance of Cost of Capital
Types of Capital

Computation of Cost of Capital


Specific Cost
Cost of Debt

V
Cost of Preference Share Capital

YK
Cost of Equity Share Capital
Weighted Average Cost of Capital (Book Value and Market Value Weights)
–Problems.

DD
RE
MEANING OF COST OF CAPITAL
The cost of capital is the expense a company faces when it raises money to fund its
operations. It's like the price the company pays for using money from investors or
H

lenders.
AT

The sources of capital of a firm may be in the form of preference shares, equity
shares, debt, and retained earnings.
NN

Importance of cost of capital


GA

1. Capital Mix Decision


2. Capital Budgeting
JA

3. Project Expansion
4. Financial Performance Evaluation
5. Financial Decisions

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Explaination :
1. Capital Mix Decision: Cost of capital Determines optimal capital structure to
maximize firm value.
2. Capital Budgeting: Cost of capital Guides to accept/reject decisions by comparing
present value of expected returns with cost of investment.
3. Project Expansion: Cost of Capital assists in deciding whether to accept or reject
project expansions based on marginal return on investment compared to cost of
capital.
4. Financial Performance Evaluation: Cost of capital helps to assess firm's financial
performance by comparing actual profitability with projected and actual cost of

V
capital.
5. Financial Decisions: Cost of Capital serves as a financial decisions like working

YK
capital management, dividend policy, leasing, etc., ensuring returns exceed the cost
of capital.

DD
RE
TYPES OF COST OF CAPITAL
H

1. Average Cost and Marginal Cost


AT

2. Historical Cost and Future Cost


3. Explicit Cost and Implicit Cost
NN

4. Specific Cost and Combined Cost


GA

Explaination :
JA

1. Average Cost and Marginal Cost:


Average Cost: Weighted average cost of various sources of capital like debentures,
preference shares, and equity shares.
Marginal Cost: Weighted average cost of capital incurred to obtain additional funds
needed by a firm.
2. Historical Cost and Future Cost:
Historical Cost: Expenses already incurred in the past for financing a project.
Future Cost: Estimated costs for future periods; more relevant for financial decisions.
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3.Explicit Cost and Implicit Cost:


Explicit Cost: Discount rate equating present value of cash inflows with outflows;
internal rate of return.
Implicit Cost: Opportunity cost, i.e., cost of forgoing alternative projects.
4. Specific Cost and Combined Cost:
Specific Cost: Cost of a particular source of capital.
Combined Cost: Weighted average cost of all sources of finance, i.e., weighted
average cost of capital.

V
YK
COMPUTATION OF COST OF CAPITAL
The computation of the cost of capital of a firm involves:

DD
1) Computation of the cost of a specific source of finance.
2) Computation of weighted average cost of capital.
RE
1]. Computation of Specific Source of Finance:- For the computation of overall cost
of capital, calculation of the cost of each source of finance namely cost of debt, cost
H

of preferential capital, cost of equity share capital, and cost of retained earnings, etc.
AT

is the first step.


NN

a]. Cost of Debt:- the term cost of Debt refers to the rate of return or interest
expected by the debenture holders.
GA

In other words, Cost of debt is a rate of interest payable on debt. Thus, they expect
the cost of that be the rate of interest as per the contract suggested and the cost of
raising the debt.
JA

i) Cost of Redeemable Debt(Debentures)


ii) Cost of Irredeemable Debt(Debentures)
b]. Cost of Preference Share Capital: In the case of preference shares, the dividend
rate can be taken as its cost,
since it is this amount that the company intends to pay against the preference
shares. The issue expenses and discount and premium on the issue are also to be
taken into account.

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i) Cost of Redeemable Preference shares


ii) Cost of Irredeemable Preference shares

2]. Computation of Weighted Average Cost of Capital [WACC]


Weighted Average Cost of Capital is the average cost of the costs of various sources
of financing. It is also known as composite overall cost of capital or average cost of
capital.

V
YK
DD
H RE
AT
NN
GA
JA

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CHAPTER 02 - CAPITAL STRUCTURE THEORIES


Module No. 2: Capital Structure Theories

The Net Income Approach

The Net Operating Income Approach

Traditional Approach and

MM Hypothesis - Problems on all the approaches

1]. Net Income Approach:

V
Theory: Says using more debt is good because interest is tax-deductible, so it lowers

YK
taxes and increases profits.
Explanation: Basically, it's like saying, "Let's borrow more money because we can
save on taxes and make more money."

2]. Net Operating Income Approach:


DD
RE
Theory: Thinks how a company is financed doesn’t matter, as long as it earns the
same amount.
H

Explanation: This theory says, "It doesn't matter if we use more debt or equity, as
AT

long as we make the same amount of money, our value stays the same."
NN

3]. Traditional Approach:


Theory: Suggests a mix of debt and equity that minimizes costs and maximizes
GA

value.
Explanation: This approach is like saying, "Let's find the right balance of debt and
JA

equity to keep our costs low and our value high."

4]. MM Hypothesis:
Theory: Believes in a perfect world where capital structure doesn't affect firm value.
Explanation: It's like saying, "In a perfect world without taxes or bankruptcy costs, it
doesn't matter how we finance our company, our value stays the same."

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CHAPTER 3 - RISK ANALYSIS IN CAPITAL BUDGETING

Module No.3: Risk Analysis in Capital Budgeting

Meaning of Risk and Risk Analysis


Types of Risks
Risk and Uncertainty

Techniques of Measuring Risks :

V
1. Convention Techniques

YK
#Risk adjusted Discount Rate Approach
#Certainty Equivalent Approach

2. Statistical Techniques DD
RE
#Probability Approach
#Standard Deviation and
H
#Co-efficient of Variation- Theory and Problems.
AT

Sensitivity Analysis and Decision Tree Analysis (Theory only).


NN

Risk and Risk Analysis


GA

Risk: Risk is the chance of something bad happening. In finance, it means the
possibility of losing money because of uncertain events like market changes or
economic shifts.
JA

Risk Analysis: Risk analysis is like looking at a situation to see what could go wrong
and how likely it is to happen. It helps us understand and plan for potential problems
so we can make better decisions.

Types of Risks
1. Market Risk
2. Credit Risk
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3. Liquidity Risk
4. Operational Risk
5. Foreign Exchange Risk

Explaination :
1. Market Risk: This is about the risk of losing money due to changes in things like
interest rates or stock prices.
2. Credit Risk: Credit risk is the risk of not getting paid back when you lend money to

V
someone.
3. Liquidity Risk: Liquidity risk is when you can't turn your assets into cash quickly

YK
enough.
4. Operational Risk: Operational risk comes from things going wrong within a
company, like mistakes or accidents.

DD
5. Foreign Exchange Risk: This is about the risk of losing money because of changes
in currency exchange rates.
RE
Risk and Uncertainty
H

Risk vs. Uncertainty: Risk is when we can guess how likely something is to happen,
AT

but uncertainty is when we can't really predict what might happen.


Managing Risk and Uncertainty: To deal with risk and uncertainty, businesses use
NN

strategies like planning for different scenarios and staying flexible so they can adapt
to unexpected changes.
GA
JA

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Techniques of Measuring Risks


1. Conventional Techniques:
[i]. Risk Adjusted Discount Rate Approach: This is like adjusting the price of
something based on how risky it is. Riskier things have higher prices, so we discount
them more when calculating their value.
[ii]. Certainty Equivalent Approach: This is about figuring out how much guaranteed
money we'd be okay with instead of taking a chance on something risky. It helps us
understand how much risk we're willing to take.

V
2]. Statistical Techniques:

YK
[i]Probability Approach: This is like guessing the chances of different things
happening and then figuring out the average outcome based on those guesses. It

DD
helps us make decisions by considering the likelihood of different scenarios.
[ii]. Standard Deviation and Coefficient of Variation:
RE
a). Standard Deviation: This measures how much the outcomes of something can
vary from the average. Higher standard deviation means more variation and more
risk.
H

b). Coefficient of Variation: This compares the risk of different things by looking at
AT

how much risk there is for each unit of return. Lower coefficient of variation means
less risk for the same amount of return.
NN

Sensitivity Analysis (5 Marks)


GA

Meaning
Sensitivity Analysis is a tool used in financial modeling to analyze how the different
JA

values of a set of independent variables affect a specific dependent variable under


certain specific conditions.
In other words,
Sensitivity analysis is a way to check how changes in certain factors affect our
financial decisions. Here's how it works :
1. Identifying Important Factors
2. Testing the Water
3. Measuring the Impact

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4. Making Informed Choices

Explaination :
1]. Identifying Important Factors: First, we figure out which factors are really
important for our decision. These could be things like sales forecasts, interest rates,
or costs.
2]. Testing the Waters: Next, we start changing these factors one by one to see what
happens. For example, if we increase the sales forecast, does our profit go up? If we
lower the interest rate, does our investment look better?
3]. Measuring the Impact: By doing this, we can see how sensitive our decision is to

V
each factor. If a small change in sales forecast drastically changes our profit, we
know that sales forecast is a big deal for our decision.

YK
4]. Making Informed Choices: Sensitivity analysis helps us make smarter decisions
by understanding the risks and uncertainties involved. It shows us where we need to
be careful and where we can be more confident.
DD
RE
Decision Tree Analysis (5Marks)
H

Meaning
AT

Decision tree analysis in advanced financial management is like drawing a map of


our financial decisions to help us choose the best path. By seeing all the options and
their consequences, decision tree analysis guides us to make informed and smart
NN

financial decisions.
In other words,
GA

Decision tree analysis is like mapping out different paths to make better decisions.
Here's how it helps:
JA

1. Laying Out Options


2. Studying the Risks and Rewards
3. Studying the Risks and Rewards
4. Choosing the Best Path

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Explaination :
1]. Laying Out Options: We start by listing out all the choices we have. For example,
if we're thinking about investing in a project, our options might be to invest, not
invest, or wait and see.
2]. Predicting Outcomes: Next, we think about what might happen with each choice.
We draw branches to show different scenarios and their outcomes. For example, if
we invest, we might make a profit or a loss. If we don't invest, we might miss out on
potential gains.
3]. Studying the Risks and Rewards: By seeing all the possible outcomes laid out, we
can study the risks and rewards of each choice. This helps us make a more informed
decision based on what's best for us.

V
4]. Choosing the Best Path: Decision tree analysis helps us see the big picture and

YK
choose the path that gives us the best chance of success. It's like having a roadmap
to guide us through uncertain situations and make better choices.

DD
H RE
AT
NN
GA
JA

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CHAPTER 04 - Management of Current Assets


Module No. 4: Management of Current Assets
Introduction
Significance of Current Assets
Meaning of Cash and
Cash Management Objectives,
Motives of Holding Cash

V
Meaning and Definition of Receivables Management

YK
Factors influencing the size of Receivables
Objectives of Receivables Management
Problems on
#Debtors Turnover Ratio, DD
RE
#Average Collection Period,
#Creditors Turnover Ratio,
H

#Average Payment Period.


AT

Inventory Management
NN

Meaning and Definition of Inventory


Elements of Inventory
GA

Motives of holding the Inventory


Costs associated with Inventory Techniques of Inventory Management.
JA

Management of Current Assets


Introduction:
In advanced financial management, the management of current assets focuses on
handling short-term resources efficiently to support day-to-day operations. It
involves strategic decisions regarding cash, inventory, accounts receivable, and other
liquid assets to ensure optimal utilization and liquidity.

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Meaning of Current Assets


Current assets are like the money and things a company that can quickly be turned
into cash within a short time, usually within a year. Current Assets include cash,
inventory, and accounts receivable. These assets are important for covering day-to-
day expenses and keeping the business running smoothly.

Importance of Current Assets


1. Cash Flow

V
2. Smooth Operations

YK
3. Handling Unexpected Costs
4. Getting Loans
5. Growth Opportunities
6. Keeping Investors Happy
DD
RE
Explaination :
H

1]. Cash Flow: Current assets, like cash and accounts receivable, ensures that
AT

there's is a enough money to cover daily expenses and bills.


2]. Smooth Operations: Current Assets keep things running smoothly by providing
NN

resources for buying supplies and paying for services.


3]. Handling Unexpected Costs : Current assets act as a safety for unexpected costs
GA

or emergencies.
4]. Getting Loans: Having enough current assets makes it easier to get loans or
JA

credit from banks and lenders.


5]. Growth Opportunities: Current Assets offer flexibility for getting growth
opportunities and expanding the businesses.
6]. Keeping Investors Happy: Investors feel more confident when a company has
healthy current assets, showing it can handle its financial responsibilities.

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CASH MANAGEMENT
Meaning of Cash
Cash means Liquid assets that a business owns. Cash includes currency notes,
coins, and cheques.

Meaning of Cash Management


Cash management refers to the handling a company's money smartly. It's like
keeping track of how much cash the company has, making sure there is a enough
cash for everyday needs, and finding ways to make the money work harder by

V
investing it wisely.
In other words,

YK
Cash Management is about making sure that the company's cash is in the right place
at the right time to keep things running smoothly and make the most of rupee.

Objectives of Cash Management


DD
RE
1. To Keep Enough Cash
2. To Avoid Wasting Money
H

3. To Keep Cash Moving


AT

4. To Speed Things Up
NN

5. To Stay Safe
6. To Make Money Grow.
GA

Explaination :
JA

1]. To Keep Enough Cash: Cash Management objective is to make sure that the
company always has enough money to pay its bills and keep things running
smoothly.
2]. To Avoid Wasting Money: Cash Management objective is to not letting too much
cash sit idle, because that's like losing money. Keeping just the right amount to cover
expenses is one of the objective.
3]. To Keep Cash Moving: Cash Management objective is make sure that the money
flows in and out smoothly by collecting payments from customers quickly and

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paying suppliers on time.


4]. To Speed Things Up: Cash Management objective is to manage how long it takes
to turn inventory into sales and get paid by customers, so the business doesn't get
slowed down.
5]. To Stay Safe: Cash Management objective is to watch out for any risks or
problems with cash, like not having enough cash when it's needed, and planning
ahead to avoid them.
6]. To Make Money Grow: Cash Management objective is finding ways to invest if
any extra cash to earn more money for the company, but still keeping enough cash
on hand for emergencies.

V
Motives of Holding Cash

YK
Motives of Holding Cash
1. Transaction Motive
2. Precautionary Motive DD
RE
3. Speculative Motive
4. Compensating Motive
H
AT

Explaination :
NN

1. Transaction Motive: Companies hold cash to meet their day-to-day operational


needs, such as paying for supplies, salaries, and other routine expenses. Having
cash readily available ensures smooth business operations and facilitates
GA

transactions without delays.


2. Precautionary Motive: Cash is held as a precautionary measure to cover
unexpected expenses or emergencies, such as equipment breakdowns, unexpected
JA

downturns in sales, or sudden increases in operating costs.


3. Speculative Motive: Some companies hold cash with the intention of taking
advantage of investment opportunities that may arise in the future. By maintaining
liquidity, companies can capitalize on favorable market conditions, or expansion
opportunities when they arise.
4. Compensating Motive: This motive arises due to the internal mismatches in the
timing of receipts and payments in business operations. By holding cash reserves,
companies can bridge the gap between cash inflows and outflows, ensuring smooth
cash flow management and avoiding confusions in operations.
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Receivables Management
Meaning and Definition of Receivables Management
Receivables management means keeping track of the money customers hsve to pay
to you and making sure that you get paid on time.
In other words,
Receivables Management involves things like deciding who can buy on credit, &
sending out invoices, and following up to make sure payments come in smoothly.
The goal is to keep cash flowing in and minimize the risk of not getting paid.

V
YK
Factors influencing the size of Receivables
Meaning

DD
Factors Influence the Size of Receivables means that certain things affect how much
money a company is having obligation to be received by its customers.
1. Credit Policy
RE
2. Sales Volume
3. Customer Base
H

4. Economic Conditions
AT

5. Collection Policies
NN

6. Payment Terms
7. Seasonality
GA

8. Inventory Turnover
9. Competitive Pressure
JA

10. Technology
11. Regulations

Explaination :
1. Credit Policy: How easy or strict it is for customers to buy on credit.
2. Sales Volume: More sales mean more customers buying on credit, leading to
larger receivables.

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3. Customer Base: The type of customers and how good they are at paying on time.
4. Economic Conditions: When the economy is struggling, customers may take
longer to pay, leading to larger receivables.
5. Collection Policies: How well the company follows up on overdue payments.
6. Payment Terms: How long customers have to pay and whether there are
discounts for paying early.
7. Seasonality: Sales may vary throughout the year, affecting the size of receivables.
8. Inventory Turnover: How quickly goods are sold can affect receivables.
9. Competitive Pressure: Companies may offer more credit to compete, leading to

V
larger receivables.
10. Technology: New tech tools can make it easier to manage receivables and get

YK
paid faster.
11. Regulations: Laws about credit and collections can affect how receivables are
managed.
DD
H RE
Objectives of Receivables Management
AT

1. Get Paid On Time


2. Avoid Bad Debts
NN

3. Use Money Wisely


4. Make More Profit
GA

5. Keep Customers Happy


JA

6. Make Things Easier


7. Watch How Things Are Going
8. Follow the Rules
9. Support Big Plans
10. Get Cash Faster

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Explaination :
1. Get Paid On Time: The objective of Receivables Management is to make sure
customers pay what they have to repay when they're supposed to, so the company
has enough money to keep running smoothly.
2. Avoid Bad Debts: The objective of Receivables Management is to make sure the
company doesn't lose money from customers who don't pay their bills.
3. Use Money Wisely: The objective of Receivables Management is to manage the
money received by customers to balance having enough cash on hand for expenses
while not letting too much money sit idle.
4. Make More Profit: The objective of Receivables Management is to reduce costs

V
related to collecting money from customers and minimize losses from unpaid bills,
so the company can make more money.

YK
5. Keep Customers Happy: The objective of Receivables Management is to find
ways to collect money without upsetting customers, so they keep coming back to
buy more.

DD
6. Make Things Easier: The objective of Receivables Management is to find ways to
make the process of invoicing, collecting payments, and managing receivables
RE
simpler and cheaper.
7. Watch How Things Are Going: The objective of Receivables Management is to
keep an eye on how well the company is doing at collecting money from customers
H

and make changes if needed.


AT

8. Follow the Rules: The objective of Receivables Management is to make sure the
company follows all the laws and rules about collecting money from customers, so it
NN

doesn't get into trouble.


9. Support Big Plans: The objective of Receivables Management is to make sure
receivables management helps the company achieve its long-term goals, like
GA

growing the business or launching new products.


10. Get Cash Faster: The objective of Receivables Management is to speed up the
JA

process of turning sales into cash, so the company has money available when it's
needed most.

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INVENTORY MANAGEMENT
Definition of Inventory
Inventory refers to the stock that a company keeps on hand to sell or use in its
business. Inventory includes things like raw materials, goods, or products being
made, and finished goods ready to be sold.

Elements of Inventory
1. Raw Materials
2. Work-in-Progress (WIP)

V
3. Finished Goods

YK
4. Maintenance, Repair, and Operations (MRO) Inventory
5. Safety Stock
6. Finished Goods for Resale
DD
RE
Explaination :
1. Raw Materials: These are the basic materials that a company uses to
H

manufacture its products. Raw Materials are in their most basic form and are used in
the production process.
AT

2. Work-in-Progress (WIP): WIP inventory consists of partially completed goods that


are still undergoing the manufacturing process. These items have been started but
NN

are not yet finished.


3. Finished Goods: Finished goods inventory includes products that have been
GA

completed and are ready to be sold to customers. These are the final products that
have passed through the entire production process.
4. Maintenance, Repair, and Operations (MRO) Inventory: MRO inventory consists of
JA

supplies and materials used for maintaining equipment, repairing machinery, and
supporting ongoing operations.
5. Safety Stock: Safety stock refers to additional inventory held by a company as a
safe guard against unexpected fluctuations in demand or supply chain confusions. It
serves as a contingency measure to prevent stockouts and ensure continuity of
operations.
6. Finished Goods for Resale: Some businesses may also hold inventory that they
have purchased from suppliers for the purpose of resale. This inventory consists of
products that are ready for sale to customers without undergoing any further
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processing or manufacturing.

Motives of holding the Inventory


1. Meet Customer Demand
2. Smooth Production
3. Seasonal Demand
4. Support Just-in-Time (JIT) Operations
5. Take Advantage of Price Fluctuations:

V
6. Uncertainty

YK
Explaination :

DD
1. Meet Customer Demand: Having inventory on hand ensures that a company can
fulfill customer orders promptly and avoid stockouts, thereby maintaining customer
satisfaction and loyalty.
RE
2. Smooth Production: Inventory allows for smooth production processes by
ensuring that raw materials and components are readily available when needed,
reducing production delays and confusions.
H

3. Seasonal Demand: Businesses hold inventory to meet fluctuating seasonal


AT

demand, ensuring that they have sufficient stock to capitalize on peak selling
periods.
NN

4. Support Just-in-Time (JIT) Operations: While JIT aims to minimize inventory


levels, holding some inventory that is necessary to support JIT operations by
providing a safety against confusions and ensuring continuous production flow.
GA

5. Take Advantage of Price Fluctuations: Holding inventory allows companies to


take advantage of price fluctuations in raw materials or finished goods markets,
JA

enenabling purchasing or selling to maximize profitability.


6. Uncertainty : Inventory serves as a safeguard against uncertainties in demand,
supply chain confusions, and production variability, providing flexibility and resilience
to the business.

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Costs associated with inventory techniques in inventory management


include
1. Ordering Costs
2. Carrying Costs
3. Stockout Costs
4. Handling Costs
5. Order Processing Costs
6. Outdated Costs

V
7. Storage Costs
8. Inventory Valuation Costs

YK
Explaination :

DD
1. Ordering Costs: Money spent when ordering new inventory.
2. Carrying Costs: Money spent to store and maintain inventory, like rent for
RE
warehouse space and insurance.
3. Stockout Costs: Costs incurred when demand exceeds available inventory, leading
H

to lost sales or rushed orders.


AT

4. Handling Costs: Money spent to move and manage inventory within the
warehouse.
NN

5. Order Processing Costs: Expenses related to processing and fulfilling customer


orders, such as labor and packaging materials.
6. Outdated Costs: Money lost when inventory becomes obsolete or outdated.
GA

7. Storage Costs: Expenses related to storing inventory, including rent, utilities, and
maintenance.
JA

8. Inventory Valuation Costs: Money spent to determine the value of inventory for
financial reporting purposes.

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List any six inventory techniques


1. First-In, First-Out (FIFO)
2. Last-In, First-Out (LIFO
3. Weighted Average Cost
4. Just-in-Time (JIT):
5. ABC Analysis
6. Economic Order Quantity (EOQ)

V
Explaination :

YK
1. First-In, First-Out (FIFO): This method assumes that the oldest inventory items are
sold or used first, It is commonly used to value inventory and calculate cost of goods
sold.

DD
2. Last-In, First-Out (LIFO): LIFO assumes that the most recently acquired inventory
items are sold or used first, It is also used for inventory valuation and cost of goods
sold calculations.
RE
3. Weighted Average Cost: This method calculates the average cost of inventory
items by dividing the total cost of goods available for sale by the total number of
H
units available for sale. It provides a blended cost for inventory valuation.
AT

4. Just-in-Time (JIT): JIT inventory management aims to minimize inventory levels


by receiving goods only when they are needed for production or sale. It helps reduce
carrying costs and waste while improving efficiency.
NN

5. ABC Analysis: ABC analysis categorizes inventory items into three groups based
on their value and importance: A items (high-value, low-quantity), B items (moderate-
value, moderate-quantity), and C items (low-value, high-quantity). It helps prioritize
GA

inventory management efforts.


6. Economic Order Quantity (EOQ): EOQ calculates the optimal order quantity that
JA

minimizes total inventory costs, including ordering costs and holding costs. It helps
determine how much to order to balance ordering and holding costs effectively.

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Dividend Decision and Theories


Module No. 5: Dividend Decision and Theories
Introduction
Dividend Decisions:
Meaning
Types of Dividends
Types of Dividends Polices
Significance of Stable Dividend Policy

V
Determinants of Dividend Policy

YK
Dividend Theories:
Theories of Relevance
#Walter's Model and DD
RE
#Gordon's Model and
Theory of Irrelevance
H

#The Miller-Modigliani (MM) Hypothesis -Problems.


AT

Meaning of Dividend Decision


NN

Dividend decisions are choices made by a company about how much of its profits it
will share with its shareholders as dividends, and how much it will keep for itself to
reinvest in the business.
GA

In other words,
JA

Dividend decision refers to deciding how much allowance to give out and how much
to save for future needs.

Types of Dividends
1. Cash Dividends
2. Stock Dividends
3. Property Dividends

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4. Regular Dividends
5. Special Dividends
6. Interim Dividends
7. Liquidating Dividends

Explaination :
1. Cash Dividends: This is when a company pays its shareholders in cash from its
profits. It's like getting money as a reward for owning shares.
2. Stock Dividends: Instead of cash, companies sometimes give out additional

V
shares of stock to their shareholders. It's like getting more pieces of the company.

YK
3. Property Dividends: Sometimes, companies give out assets other than cash or
stock, like products or equipment. It's like receiving something useful from the
company instead of money.

DD
4. Regular Dividends: These are dividends paid out periodically, usually quarterly or
annually, based on the company's profits and dividend policy. It's like a regular
RE
paycheck for shareholders.
5. Special Dividends: These are one-time payments made by a company to its
shareholders, often when the company has excess cash or has had an exceptionally
H

profitable period. It's like a bonus payment on top of regular dividends.


AT

6. Interim Dividends: Sometimes, companies pay out dividends before the end of
their financial year, known as interim dividends. It's like getting a partial payout while
waiting for the full dividend at the end of the year.
NN

7. Liquidating Dividends: When a company is winding down its operations or closing,


it may issue liquidating dividends to distribute its remaining assets to shareholders.
GA

It's like getting a share of whatever's left when the company shuts down.
JA

Types of Dividends Polices


1. Stable Dividend Policy
2. Residual Dividend Policy
3. Hybrid Dividend Policy
4. No Dividend Policy (Zero Dividend Policy)
5. Low Dividend Policy
6. High Dividend Policy
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Explaination :
1. Stable Dividend Policy:
- Keeps giving the same amount of dividend regularly.
- Makes shareholders feel secure and happy.
- Shows the company is doing well consistently.
2. Residual Dividend Policy:
- Pays dividends only if there's extra profit after covering all expenses and
investments.

V
- Adjusts dividends based on what's left over.

YK
- Gives flexibility but may result in varying payouts.
3. Hybrid Dividend Policy:
- Mixes stable and residual policies.
DD
- Tries to offer regular dividends while also saving for future needs.
RE
- Balances consistency with flexibility.
4. No Dividend Policy (Zero Dividend Policy):
H

- Doesn't give any dividends to shareholders.


AT

- Reinvests all profits back into the company.


- Often seen in growing companies focusing on expansion rather than immediate
NN

payouts.
5. Low Dividend Policy:
GA

- Pays out a smaller portion of earnings as dividends.


- Retains more earnings for reinvestment in the business.
JA

- Commonly observed in high-growth companies that prioritize reinvestment


opportunities over immediate dividends.
6. High Dividend Policy:
- Distributes a larger portion of earnings as dividends.
- Appeals to investors seeking regular income from their investments.
- Often seen in mature companies with stable cash flows and limited growth
opportunities.

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Significance of Stable Dividend Policy


1. Shareholders satisfaction
2. Investor Confidence
3. Attracts Long-Term Investors
4. Easier Tax Planning
5. Builds Trust
6. Stands Out from Competition

V
7. Smart Money Management

YK
8. Less Risky Image
9. Supports Future Plans
10. Keeps Everyone Happy

DD
RE
Explaination :
1. Shareholders satisfaction : Regular dividends make shareholders feel secure and
satisfied.
H

2. Investor Confidence : Consistent dividends show investors that the company is


AT

doing well financially and can be trusted for the long term.
3. Attracts Long-Term Investors: Stable dividends attracts investors looking for
NN

steady income, keeping them invested even during tough times.


4. Easier Tax Planning: Regular dividends help shareholders plan their taxes better,
GA

making it simpler and more predictable.


5. Builds Trust: Consistent dividends build trust between management and
shareholders, enhancing the company's reputation.
JA

6. Stands Out from Competition: Offering stable dividends sets a company apart
from competitors, making it more appealing to investors.
7. Smart Money Management: Maintaining stable dividends encourages responsible
financial decisions by company management, ensuring money is used wisely.
8. Less Risky Image: Companies with stable dividends are seen as safer
investments, attracting more investors and lowering borrowing costs.
9. Supports Future Plans: Stable dividends provide a reliable source of funds for
future growth and expansion, helping the company plan ahead.
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10. Keeps Everyone Happy: Ultimately, stable dividends keep everyone


happy—shareholders, investors, and the company itself—leading to a healthier, more
successful business.

Determinants of Dividend Policy


1. Earnings Stability
2. Cash Flow Position
3. Investment Opportunities

V
4. Legal and Regulatory Constraints

YK
5. Tax Considerations
6. Financial Leverage
7. Ownership Structure
8. Industry Norms DD
RE
9. Market Conditions
10. Company's Growth Stage
H

11. Shareholder Preferences


AT

12. Corporate Governance Practices


NN

Explaination :
1. Earnings Stability: Companies with stable and predictable earnings are more likely
GA

to adopt a regular dividend policy as they can consistently generate sufficient profits
to pay dividends.
JA

2. Cash Flow Position: A company's ability to generate positive cash flows is crucial
for dividend payments. A strong cash flow position enables the company to sustain
dividend payouts even during periods of economic downturns.
3. Investment Opportunities: Companies with attractive investment opportunities
may retain earnings for reinvestment in growth projects rather than distributing them
as dividends. The availability of profitable investment avenues influences dividend
policy decisions.
4. Legal and Regulatory Constraints: Legal requirements and regulatory guidelines
may impose restrictions on dividend payments, such as minimum capital
requirements or limitations on dividend distributions in certain industries.
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5. Tax Considerations: Tax implications for both the company and shareholders play
a significant role in determining dividend policy. Tax rates on dividends, corporate
tax laws, and shareholder preferences for tax-efficient income impact dividend
decisions.
6. Financial Leverage: Companies with high levels of debt may adopt a conservative
dividend policy to ensure sufficient cash flows for debt servicing and to maintain
financial stability. High financial leverage can constrain dividend payouts.
7. Ownership Structure: The ownership composition of the company, including the
presence of controlling shareholders or institutional investors, may influence
dividend policy. Shareholder preferences and expectations regarding dividends can
shape the company's dividend decisions.

V
8. Industry Norms: Dividend policies may vary across industries based on industry
norms and practices. For example, mature industries with stable cash flows may

YK
have higher dividend payout ratios compared to growth-oriented industries.
9. Market Conditions: Economic conditions, interest rates, and market sentiment can

DD
impact dividend policy decisions. Companies may adjust dividend payments in
response to changes in market dynamics and investor preferences.
10. Company's Growth Stage: The growth stage of the company, whether it is in the
RE
early growth phase, mature stage, or declining phase, can influence dividend policy.
Growth-oriented companies may prioritize reinvestment of earnings for expansion,
while mature companies may focus on distributing dividends to shareholders.
H

11. Shareholder Preferences: Understanding shareholder preferences and


AT

expectations regarding dividends is essential for aligning dividend policy with


shareholder interests. Companies may conduct surveys or engage in shareholder
NN

dialogue to gauge preferences.


12. Corporate Governance Practices: Strong corporate governance practices,
including transparent communication, accountability, and board oversight, can
GA

influence dividend policy decisions. Companies with robust governance frameworks


are more likely to adopt shareholder-friendly dividend policies.
JA

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Dividend Theories
1. Theories of Relevance:
Walter's Model:

 Walter says companies should keep profits if they earn more than they need.

 Assumes no borrowing, constant profits, and no taxes.

 Critics say it's too basic and doesn't fit real situations well.
Gordon's Model:

 Gordon also says dividends matter for a company's value.

V
 Assumes no borrowing, constant profits and growth, and no taxes.

YK
 Critics say it's too simple and doesn't consider real-world complexities.

2. Theory of Irrelevance:
The Miller-Modigliani (MM) Hypothesis:
DD
RE
 Modigliani and Miller say dividends don't affect share prices in a perfect world.

 Assumes perfect markets, smart investors, no taxes, and no changes in


H

investment plans.
AT

 Critics say it's unrealistic and doesn't match how markets really work.
NN
GA
JA

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