Past events and performances serve as background for making projections if they are to be realistic. The financial statements provide important information concerning past financial transactions and their effects om the profitability and the financial position of the business. Various users of financial statements such as owners, investors, creditors, management etc. must make an analysis of financial statements to make right decision. Therefore financial statements are the means of conveying to owners, management or to interested outsiders a concise picture of profitability and financial position of the business. Financial statements are the end products of the accounting process which give a concise accounting information of the period after the accounting period is over. Financial statements are the summary reports of a company’s financial transactions during a given period of time. A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of the firm’s Continue reading
Financial Management Concepts
Shareholder Value Analysis (SVA)
Shareholder Value Analysis (SVA) is an approach to financial management, which focuses on the creation of economic value for shareholders, as measured by share price performance and flow of funds. It’s lead by the principle that the management of a company should take into consideration the shareholder’s interest and advantages before meets any decision, set short-term or long-term objectives and decide company’s strategy as well. Shareholder Value Analysis is a characteristic substitute for trade business measurement, which has improved a lot by time passing. Due to the fact that company’s value is calculated based on the value returned to its shareholders, in the past had been criticized for being either short-term measured or only based in past figures. Shareholder Value Analysis takes a longer-term view and is about measuring and managing cash-flows over time. The shareholder value is calculated by estimating the total net value of the company and dividing Continue reading
Hedging with Derivatives – Futures Hedging, Forwards Hedging, and Swap Hedging
Futures Hedging A futures contract compels the buyer to purchase a particular quantity of assets within a certain period of time. The price of the purchase is agreed in the contract at the time of entering this contract. The asset that is to be purchased is referred to as the underlying asset and the time when this asset is purchased or sold is known as the expiry date or maturity date. While the major difference between a futures contract from an options contract is the obligation to purchase an asset, forward contracts also oblige the buyer to purchase the underlying asset. However, in contrast to forward contracts, futures contracts are drawn according to standardized forms and are more liquid since they are traded on secondary markets. Futures contracts provide more liquidity in comparison with forward contracts. A party that enters a futures agreement to purchase security may sell this right Continue reading
Objectives of Financial Management
Financial management is concerned with procurement and use of funds. Its main aim is to use business funds in such a way that the firm’s value / earnings are maximized. Financial management provides a frame work for selecting a proper course of action and deciding a viable commercial strategy. The main objective of a business is to maximize the owner’s economic welfare. This objective can be achieved by; Profit Maximization, and Wealth Maximization. 1. Profit Maximization Profit earning is the main aim of every economic activity. A business being an economic institution must earn profit to cover its costs and provide funds for growth. No business can survive without earning profit. Profit is a measure of efficiency of a business enterprise. Profits also serve as a protection against risks which cannot be ensured. The accumulated profits enable a business to face Continue reading
Need for Financial Restructuring
Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy. Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion. Need Continue reading
Duration and Portfolio Immunization
Portfolio Duration Duration is a significant measurement of how sensitivity the change in price of a bond in the change of interest rate. It is broadly linked to the length of time before the bond is mature. Duration assists investors during the investment decision making process by expressing the relation between interest rate and price variables of the bond. Therefore, duration is useful measurement for investors because it protects investment from interest rate risk. When the duration of bond is lower that means investors can obtain the cash earlier and reinvest it at prevailing interest rate. As a result, the lower the duration of a bond, the lesser sensitive changes in the interest rate. Majority of investors are familiar with maturity which is the point of time when investors get back the principal of bond. However, duration is defined as the length of time before the maturity of the bond. Continue reading