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Modified Internal Rate of Return (MIRR): There are several limitations attached with the concept of the conventional Internal Rate of Return. The MIRR addresses some of these defiencies. For example, it eliminates multiple IRR rates; it addresses the reinvestment rate issue and produces results, which are consistent with the Net Present Value method.
Under this method, all cash flows, apart from the initial investment, are brought to the terminal value using an appropriate discount rate(usually the cost of capital). This results in a single stream of cash inflow in the terminal year. The MIRR is obtained by assuming a single outflow in the zeroth year and the terminal cash inflow as mentioned above. The discount rate which equates the present value of the terminal cash in flow to the zeroth year outflow is called the MIRR.
Convexity is the measure of curvature that exists between bond prices and bond yields. It helps in more accurate estimations.
The functions of treasury department management is to ensure proper usage, storage and risk management of liquid funds so as to ensure that the organization is able to meet its obligations, collect its receivables and also maximize the return on its investments. Towards this end the treasury function may be divided into the following:
Free cash flow is the cash flow that exists for distribution. It is available for all the securities holders of the organization. They include debt holders, preferred stock holders, equity holders, convertible holders etc.
Time value of money me that worth of a rupee received today is different from the worth of a rupee to be received in future. The preference of money now as compared to future money is known as time preference for money.
A rupee today is more valuable than rupee after a year due to several reasons:
Many financial problems involve cash flow accruing at different points of time for evaluating such cash flow an explicit consideration of time value of money is required.
Financial Instruments in the International Market: Some of the various financial instruments dealt with in the international market are:
Credit spread is the difference between the value of two securities which have different prices but similar interest rates and maturities. It is also defined as the additional interest that is paid by a borrower who has a lower than a satisfactory credit rating.
FMIS is a component of the FMR. The new FMIS is required to:
In cases where project cash flows change signs or reverse during the life of a project for example, an initial cash outflow is followed by cash inflows and subsequently followed by a major cash out-flow, there may be more than one internal rate of return (IRR).
FMIS is financial management software that trforms financial data into information that is useful for decision- making. Government is in the process of acquiring a FMIS for the Whole of Government. This will replace the current General Ledger System.
Weighted Average Cost of Capital:
The composite or overall cost of capital of a firm is the weighted average of the costs of various sources of funds. Weights are taken in proportion of each source of funds in capital structure while making financial decisions. The weighted average cost of capital is calculated by calculating the cost of specific source of fund and multiplying the cost of each source by its proportion in capital structure. Thus, weighted average cost of capital is the weighted average after tax costs of the individual components of firm’s capital structure. That is, the after tax cost of each debt and equity is calculated separately and added together to a single overall cost of capital.
All managers need to understand finance if they are to play an active role in helping their organization achieve its objectives. Not all managers need the same level of skill and understanding as specialist financial managers, but a good knowledge of the key concepts of prudent financial management - such as modern financial accounting - should equip non-financial managers with the knowledge they require.
The Finance for Non-Financial Managers qualification is designed to provide both employers and employees with independent verification of the financial knowledge of managers who do not directly work within a finance role.
The limitations of financial ratios are listed below:
The Fiji Government’s current financial management structure, has been in place since the 1980s with minor changes throughout the years. A review of the current structure revealed the following problems:
Some Common Methods of Venture Capital Financing:
Optimum Capital Structure: Optimum capital structure deals with the issue of right mix of debt and equity in the long-term capital structure of a firm. According to this, if a company takes on debt, the value of the firm increases up to a certain point. Beyond that value of the firm will start to decrease. If the company is unable to pay the debt within the specified period then it will affect the goodwill of the company in the market. Therefore, company should select its appropriate capital structure with due consideration of all factors.
Ploughing back of Profits:
Long-term funds may also be provided by accumulating the profits of the company and by ploughing them back into business. Such funds belong to the ordinary shareholders and increase the net worth of the company. A public limited company must plough back a reasonable amount of its profits each year keeping in view the legal requirements in this regard and its own expion pl. Such funds also entail almost no risk. Further, control of present owners is also not diluted by retaining profits.
Responsibilities of Chief Financial Officer (CFO):
The chief financial officer of an organization plays an important role in the company’s goals, policies, and financial success. His main responsibilities include:
Assumptions of Modigliani – Miller Theory:
The Finance for Non-Financial Managers examination is currently only available in English.
Benefits of the FMIS include:
Though financial management and financial accounting are closely related, still they differ in the treatment of funds and also with regards to decision - making.
Treatment of Funds: In accounting, the measurement of funds is based on the accrual principle. The accrual based accounting data do not reflect fully the financial conditions of the organization. An organization which has earned profit (sales less expenses) may said to be profitable in the accounting sense but it may not be able to meet its current obligations due to shortage of liquidity as a result of say, uncollectble receivables. Whereas, the treatment of funds, in financial management is based on cash flows. The revenues are recognized only when cash is actually received (i.e. cash inflow) and expenses are recognized on actual payment (i.e. cash outflow).
Thus, cash flow based returns help financial managers to avoid insolvency and achieve desired financial goals.
Decision-making: The chief focus of an accountant is to collect data and present the data while the financial manager’s primary responsibility relates to financial planning, controlling and decision- making. Thus, in a way it can be stated that financial management begins where financial accounting ends.
Through the implementation of the following four major components:
There are some key problems associated with the current system. These include:
Assumptions of Net Operating Income (NOI) Theory of Capital Structure According to NOI approach, there is no relationship between the cost of capital and value of the firm i.e. the value of the firm is independent of the capital structure of the firm.
The term trading on equity me debts are contracted and lo are raised mainly on the basis of equity capital. Those who provide debt have a limited share in the firm’s earning and hence want to be protected in terms of earnings and values represented by equity capital.
Since fixed charges do not vary with firms earnings before interest and tax, a magnified effect is produced on earning per share. Whether the leverage is favorable, in the sense, increase in earnings per share more proportionately to the increased earnings before interest and tax, depends on the profitability of investment proposal. If the rate of returns on investment exceeds their explicit cost, financial leverage is said to be positive.
Debt securitization is a method of recycling of funds. It is especially beneficial to financial intermediaries to support the lending volumes. Assets generating steady cash flows are packaged together and against this assets pool, market securities can be issued. The debt securitization process can be classified in the following three functions.
The process of securitization is generally without recourse i.e. the investor bears credit risk or risk of default and the user is under an obligation to pay to investor only if the cash flows are received by him from the collateral.
Features of Deep Discount Bonds:
The Financial Management Reform is the new policy framework that had been adopted by the Fiji Government to improve performance and accountability.
Desirability Factor: In certain cases we have to compare a number of proposals each involving different amount of cash inflows. One of the methods of comparing such proposals is to work out, what is known as the ‘Desirability Factor’ or ‘Profitability Index’. In general terms, a project is acceptable if the Profitability Index is greater than 1.
The FMR will strengthen and modernize the management of Government finances to:
Concept of Discounted Payback Period
The differences between Factoring and Bills discounting are:
The framework has been introduced following public concern over Government’s in efficiencies and wastage as reflected in numerous Auditor-General Reports as well as reports by international agencies on public expenditure practices in Fiji. These reports have highlighted the need for Government to seriously address its resource allocation and financial management processes.
Profit maximization is a short–term objective and cannot be the sole objective of a company. It is at best a limited objective. If profit is given undue importance, a number of problems can arise like the term profit is vague, profit maximization has to be attempted with a realization of risks involved, it does not take into account the time pattern of returns and as an objective it is too narrow. Whereas, on the other hand, wealth maximization, is a long-term objective and me that the company is using its resources in a good manner.
If the share value is to stay high, the company has to reduce its costs and use the resources properly. If the company follows the goal of wealth maximization, it me that the company will promote only those policies that will lead to an efficient allocation of resources.
Business Risk and Financial Risk: