Companies require material or financial human resources, whether small, medium or large. Finance consists of three interrelated areas: The role of finance will be oriented to financial resources, because money is a resource to acquire assets, cancel immediate and long – term obligations.
Financial management refers to the use of the financial resources of firm, business organization or company in efficient and effective manners. We may also say that financial management is all about planning, organizing, directing and controlling the money in business. Probably finance directly relate the management of a firm that's why its called financial management, but here jobs never ended, management also responsible for acquiring the sufficient funds for further investments in business.
Risk and return analysis in Financial Management is related with the number of different uncorrelated investments in the form of portfolio. It is an overall risk and return of the portfolio.
Capital budgeting techniques are related to investment in fixed assets. Fixed assets are that portion of balance sheets which are long term in nature. On the other hand current assets are short term by nature. We may also said that capital budgeting is technique employed to determine the value of project and investment in fixed assets.
Modified Internal Rate of Return Analysis :- In certain cases the Internal Rate of Return (IRR) exhibits certain problems which are covered with the new concept of Modified Internal Rate of Return (MIRR). Modified Internal Rate of Return is a useful technique that uses different method for calculation of IRR in those cases where there comes problem with calculation of IRR with the ordinary method of trial & error.
Financial Leverage is related with the debt. The extent or degree to which the total capital of the organization is composed of debt is referred to as financial leverage. So a company with 75% debt is highly leveraged. The formula of financial leverage is as follow:
Operating Leverage is defined as the effect of little change in the sales on the returns on equity. It means that the small decline in the sales results in the large decline in the ROE (in case the sales are below breakeven point). The formula of operating leverage is as follow
Earnings per Share (EPS) Pricing Model is useful method of calculating value of Common Stock on the basis of the cash flows generated by the company whose shares are under consideration. In other models the main concept is to ascertain the value of share on the basis of the cash flows associated with it. But in Earnings per Share (EPS) Pricing Model the concept is quite different in which the estimated fair present price of share is calculated from the anticipated future cash flows of the earnings of the company & from growth of its ploughed back reinvestment (retained earnings). The reason behind this new concept is that it is clear that the value of share (direct claim security) is associated with some underlying real asset. In case of share the assets of the company & the cash flows generated by it are regarded as underlying real assets.
Risk and return are important factors of Financial Management that must be considered in making new investments. It is the desire of every investor to earn maximum return on his investment but for that he should bear some kind of risk.
Shares Definition:- The equity papers that represent ownership of company are referred to as stocks/shares. The holder of stocks/shares of particular company is regarded as the part owner of that company. The stock/shares are direct claim securities whose value is associated with some underlying real asset. When a company needs to raise money it can issue stocks/shares to the general public.
Capital rationing is rationing of investments & capital among various opportunities by business organization. Capital rationing is the practical picture of capital budgeting because the financial resources available to certain company are limited in real life situations. Besides organizations, countries also perform capital rationing. For example in particular country food rationing is done.