FINANCIAL MANAGEMENT Theory and Practice SATISH B MATHUR Ph.D (Business Management), CAIIB Mentor, Mathur Management Consultants, (MMC), Lucknow Former Professor of Finance and Accounting Indian Institute of Management, Lucknow, (IIML), Administrative Staff College of India, (ASCI), Hyderabad, and State Bank Staff College, (SBSC), Hyderabad, India With a Foreword by DR C RANGARAJAN Chairman, Economic Advisory Council to the Prime Minister Government of India, New Delhi, (India) Former Governor, Reserve Bank of India, Mumbai, and Governor, Andhra Pradesh, Hyderabad (An Imprint of Laxmi Publications Pvt Ltd.) BANGALORE ∑ CHENNAI ∑ COCHIN ∑ GUWAHATI ∑ HYDERABAD JALANDHAR ∑ KOLKATA ∑ LUCKNOW ∑ MUMBAI ∑ RANCHI ∑ 1(:'(/+, INDIA  USA ∑ GHANA KENYA FINANCIAL MANAGEMENT: THEORY AND PRACTICE Copyright © by the Author All rights reserved including those of translation into other languages In accordance with the Copyright (Amendment) Act, 2012, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise Any such act or scanning, uploading, and or electronic sharing of any part of this book without the permission of the publisher constitutes unlawful piracy and theft of the copyright holder’s intellectual property If you would like to use material from the book (other than for review purposes), prior written permission must be obtained from the publishers Printed and bound in India Typeset at Excellent Graphics First Edition 2015 TFM-3539-550-FIN MANAGEMENT-THEO PRA-SHA ISBN 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Websites listed in this work may have changed or disappeared between when this work was written and when it is read Published in India by (An Imprint of Laxmi Publications Pvt Ltd.) 113, GOLDEN HOUSE, DARYAGANJ, NEW DELHI - 110002, INDIA Telephone : 91-11-4353 2500, 4353 2501 Fax : 91-11-2325 2572, 4353 2528 www.laxmipublications.com info@laxmipublications.com Branches All trademarks, logos or any other mark such as Vibgyor, USP, Amanda, Golden Bells, Firewall Media, Mercury, Trinity, Laxmi appearing in this work are trademarks and intellectual property owned by or licensed to Laxmi Publications, its subsidiaries or affiliates Notwithstanding this disclaimer, all other names and marks mentioned in this work are the trade names, trademarks or service marks of their respective owners & Bangalore 080-26 75 69 30 & Chennai 044-24 34 47 26, 24 35 95 07 & Cochin 0484-237 70 04, 405 13 03 & Guwahati 0361-254 36 69, 251 38 81 & Hyderabad 040-27 55 53 83, 27 55 53 93 & Jalandhar 0181-222 12 72 & Kolkata 033-22 27 43 84 & Lucknow 0522-220 99 16 & Mumbai 022-24 91 54 15, 24 92 78 69 & Ranchi 0651-220 44 64 C— Printed at: To my Students for their inspiration and my Wife, Meera Mathur, and my Daughters, Archana Mathur and Kartika Mathur for their sustained support FOREWORD Financial Management is critical to the succes of any organization It is all the more so in the case of business organizations, since almost all decisions taken have financial implications It becomes, therefore, imperative for all executives in a business organization to acquire a fairly good knowledge of the fundamental principles of financial management and control Several books by Indian and foreign authors on the subject are available in the market However, not all of them are reader-friendly Dr Satish B Mathur’s ‘Financial Management : Theory and Practice’ is an exception It is written in a conversational style The narrative is lucid Difficult and complex topics like analysis and interpretation of financial statements, management and control of working capital, classification and control of costs and cost-volume-profit analysis are presented in a manner that readers may go through them with ease and sustained interest In writing the book, the author has brought to bear on it his personal experience as a senior executive with the State Bank of India for almost three decades As a senior faculty at the Indian Institute of Management, Lucknow, he knows what the requirements of students are I congratulate Dr Mathur on his endeavour to produce a book covering the basic and essential aspects of financial management and control I am sure that the book will be widely used by students and faculty in academic institutions as well as practising executives in industry and financial institutions (C Rangarajan) PREFACE My friends, colleagues and well-wishers, in banks, industries and academia, and the top and senior executives of banks and industries, participating in my Management Development Programmes (MDPs), and the PGP students at the Indian Institute of Management, Lucknow, have been persuading me, to venture into writing a comprehensive book on ‘Financial Management’, in the Indian context and conditions, citing suitable illustrative live cases and examples, drawn from Indian experiences They were, perhaps, thinking that, with my vast and varied experience as a professional banker with the State Bank of India for around three decades, in several senior positions, I may be able to full justice to the subject In fact, their such a high opinion of, and expectation from me, had been more a deterrent, rather than a facilitating factor, in my daring to take up such a demanding endeavour on my part Besides, my varied experience and widespread knowledge in the area had made me feel that the task was rather too stupendous, difficult and demanding, even to make a humble beginning in this direction But then, it took me long precious time to realise that howsoever long and difficult a journey may be, it can be completed only after taking the first step; that is, when a small beginning is made Thus, the hard and hefty, concerted and concentrated efforts, made in the right direction, and in right earnest, have made it possible for me to place the book, my humble work, before you A book, like one’s own baby, is invariably the most beloved and beautiful one to its author But then, the real judges are, definitely and decidedly, the readers themselves And, if they would think that the book has presented the difficult and dull subject like ‘Financial Management’ in a quite easy-to-understand, interesting and entertaining manner, I would think that my sincere endeavour was worth the effort And, if the readers, the students (of B.Com and M.Com., MBA and PGP, degrees and diplomas), the Chartered Accountants, the professional and practising bankers and industrialists, experience that, while reading the book, they tend to feel as if the author had personally been talking to them, instead, on a one-to-one basis, I would sincerely thank them all, and think that my sincere and strenuous efforts have been amply rewarded I sincerely feel that even the practising professionals of commercial banks and industries may find the book quite relevant for reference and refreshing purposes A summary, containing the essence of each Chapter at its end, may be found very useful and handy for the students at the time of their examination Even the Professors, teaching the subject, may find the synopsis immensely useful for preparing the required transparencies or slides on Power-Point Software, for use in their lecture sessions I earnestly solicit valuable suggestions from my worthy readers, for bringing in further improvements in the next edition of the book Satish B Mathur Bibliography Prasanna Chandra, Financial Management – Theory and Practice, 7th ed., Tata McGraw-Hill Publishing Company Limited, New Delhi, 2008 Prasanna Chandra, Projects: Planning, Analysis, Selection, Implementation, and Review, Tata McGraw- Hill Publishing Company Limited, New Delhi, 1995 I.M Pandey, Financial Management, 8th ed., Vikas Publishing House Private Limited, New Delhi, 1999 R.A Brealey and S.C Myers, Principles of Corporate Finance, 6th ed., McGraw-Hill Publishing Company, New York, 2000 S.C Myers (ed.), Modern Developments in Financial Management, Praeger Publishers, Inc., New York, 1976 J.C Van Horne, Financial Management and Policy, 9th ed., Prentice-Hall, New Delhi, 1995 E.I Altman and M.G Subrahmanyam (eds), Recent Advances in Corporate Finance, Richard D Irvin, Inc., Homewood, III., 1985 P.G Apte, International Financial Management, 2nd ed., Tata McGraw-Hill Publishing Company Limited, New Delhi, 1998 P Gopalakrishnan and M.S Shandilya, Inventory Management, Macmillan, New Delhi, 1978 L.C Gupta, Financial Ratios as Forewarning Indicators of Sickness, ICICI, Mumbai, 1979 S.S Srivastava and R.A Yadav, Management and Monitoring of Industrial Sickness, Concept Publishing Company, New Delhi, 1986 Satish B, Mathur, Sickness in Small Scale Sector: Causes and Cures, Concept Publishing Company, New Delhi, 1999 Satish B, Mathur, Working Capital Management and Control, New Age International (P) Limited, New Delhi, 2002 Tables TABLE 1  Future Value Interest Factor (FVIF) Period n 10 11 12 13 14 15 16 17 18 19 20 25 30 1% 1.000 1.010 1.020 1.030 1.041 1.051 1.062 1.072 1.083 1.094 1.105 1.116 1.127 1.138 1.149 1.161 1.173 1.184 1.196 1.208 1.220 1.282 1.348 2% 1.000 1.020 1.040 1.061 1.082 1.104 1.126 1.149 1.172 1.195 1.219 1243 1.268 1.294 1.319 1.346 1.373 1.400 1.428 1.457 1.486 1.641 1.811 3% 1.000 1.030 1.061 1.093 1.1-26 1.159 1.194 1.230 1.267 1.305 1.344 1.384 1.426 1.469 1.513 1.558 1.605 1.653 1.702 1.754 1.806 2.094 2.427 4% 1.000 1.040 1.082 1.125 1.170 1.217 1.265 1.316 1.369 1.423 1.480 1.539 1.601 1.665 1.732 1.801 1.873 1.948 2.026 2.107 2.191 2.666 3.243 5% 1.000 1.050 1.102 1.158 1.216 1.276 13.40 1.407 1.477 1.551 1.629 1.710 1.796 1.886 1.980 2.079 2.1S3 2.292 2.407 2.527 2.653 3.386 4.322 6% 1.000 1.060 1.124 1.191 1.262 1.338 1.419 1.504 1.594 1.689 1.791 1.898 2.012 2.133 2.261 2.397 2.540 2.693 2.854 3.026 3.207 4.292 5.743 7% 1.000 1.070 1.145 1.225 1.311 1.403 1.501 1.606 1.718 1.838 1.967 2.105 2.252 2.410 2.579 2.759 2.952 3.159 3.380 3.617 3.870 5.427 7.612 8% 1.000 1.080 1.166 1.260 1.360 1469 1.587 1.714 1.851 1.999 2.159 2.332 2.518 2.720 2.937 3.172 3.426 3.700 3.996 4.316 4.661 6.848 10.063 9% 1.000 1.090 1.188 1.295 1.412 1.539 1.677 1.828 1.993 2.172 2.367 2.580 2.813 3.066 3.342 3.642 3.970 4.328 4.717 5.142 5.604 8.623 13.268 10% 1.000 1.100 1.210 1.331 1.464 1.611 1.772 1.949 2.144 2.358 2.594 2.853 3.138 3.452 3.797 4.177 4.595 5.054 5.560 6.116 6.728 10.835 17.449 11% 1.000 1.110 1.232 1.368 1.518 1.685 1.870 2.076 2.305 2.558 2.839 3.152 3.498 3.883 4.310 4.785 5.311 5.895 6.544 7.263 8.062 13.585 22.892 12% 1.000 1.120 1.254 1.405 1.574 1.762 1.974 2.211 2.476 2.773 3.106 3.479 3.896 4.363 4.887 5.474 6.130 6.866 7.690 8.613 9.646 17.000 29.960 13% 1.000 1.130 1.277 1.443 1.630 1.842 2.082 2.353 2.658 3.004 3.395 3.836 4.335 4.898 5.535 6.254 7.067 7.986 9.024 10.197 11.523 21.231 39.116 (Contd.) Period n 10 11 12 13 14 15 16 17 18 14% 15% 16% 17% 18% 19% 20% 24% 28% 1.000 1.140 1.300 1.482 1.689 1.925 2.195 2.502 2.853 3.252 3.707 4.226 4.818 5.492 6.261 7.138 8.137 9.276 10.575 1.000 1.150 1.322 1.521 1.749 2.011 2.313 2.660 3.059 3.518 4.046 4.652 5.350 6.153 7.076 8.137 9.358 10.761 12.375 1.000 1.160 1.346 1.561 1.811 2.100 2.436 2.826 3.278 3.803 4.411 5.117 5.936 6.886 7.988 9.266 10.748 12.468 14.463 1.000 1.170 1.369 1.602 1.874 2.192 2.565 3.001 3.511 4.108 4.807 5.624 6.580 7.699 9.007 10.539 12.330 14.426 16.879 1.000 1.180 1.392 1.643 1.939 2.288 2.700 3.185 3.759 4.435 5.234 6.176 7.288 8.599 10.147 11.974 14.129 16.672 19.673 1.000 1.190 1.416 1.685 2.005 2.386 2.840 3.379 4.021 4.785 5.695 6.777 8.064 9.596 11.420 13.590 16.172 19.244 22.901 1.000 1.200 1.440 1.728 2.074 2.488 2.986 3.583 4.300 5.160 6.192 7.430 8.916 10.699 12.839 15.407 18.488 22.186 26.623 1.000 1.240 1.538 1.907 2.364 2.392 3.635 4.508 5.590 6.931 8.549 10.657 13.215 16.386 20.319 25.196 31.243 38.741 48.039 1.000 1.280 1.638 2.097 2.684 3.436 4.398 5.629 7.206 9.223 11.806 15.112 19.343 24.759 31.961 40.565 51.923 66.461 85.071 32% 1.000 1.320 1.742 2.300 3.036 4.007 5.290 6.983 9.217 12.166 16.060 21.199 27.983 36.937 48.757 64.359 84.954 112.139 148.023 36% 40% 1.000 1.360 1.850 2.515 3.421 4.653 6.328 8.605 11.703 15.917 21.647 29.439 40.037 54.451 74.053 100.712 136.969 186.278 253.388 1.000 1.400 1.960 2.744 3.842 5.378 7.530 10.541 14.758 20.661 28.925 40.496 56.694 79.372 111.120 155.568 217.795 304.914 426.879 678 19 20 25 30 FINANCIAL MANAGEMENT: THEORY AND PRACTICE 12.056 13.743 26.462 50.950 14.263 16.367 32.919 66.212 16.777 19.461 40.874 85.850 19.748 23.214 27.252 31.948 23.106 27.393 32.429 38.338 50.658 62.669 77.388 95.396 111.065 143.371 184.675 237.376 59.568 73.864 216.542 634.820 108.890 139.380 478.905 1645.504 195.391 257.916 1033.590 4142.075 344.540 597.630 468.574 836.683 2180.081 4499.880 10143.019 24201.432 TABLE 2  Future Value Interest Factor for an Annuity (FVIFA) Period n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2.010 2.020 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2.100 2.110 2.120 2.130 3.030 3.060 3.091 3.122 3.152 3.184 3.215 3.246 3.278 3.310 3.342 3.374 3.407 4.060 4.122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4.641 4.710 4.779 4.850 5.101 5.204 5.309 5.416 5.526 5.637 5.751 5.867 5.985 6.105 6.228 6.353 6.480 6.152 6.308 6.468 6.633 6.802 6.975 7.153 7.336 7.523 7.716 7.913 8.115 8.323 7.214 7.434 7.662 7.898 8.142 8.394 8.654 8.923 9.200 9.487 9.783 10.089 10.405 8.286 8.583 8.892 9.214 9.549 9.897 10.260 10.637 11.028 11.436 11.859 12.300 12.757 9.369 9.755 10.159 10.583 11.027 11.491 11.978 12.488 13.021 13.579 14.164 14.776 15.416 10 10.462 10.950 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.937 16.722 17.549 18.420 21.814 11 11.567 12.169 12.808 13.486 14.207 14.972 15.784 16.645 17.560 18.531 19.561 20.655 12 12.683 13.412 14.192 15.026 15.917 16.870 17.888 18.977 20.141 21.384 22.713 24.133 25.650 13 13.809 14.680 15.618 16.627 17.713 18.882 20.141 21.495 22.953 24.523 26.212 28.029 29.985 14 14.947 15.974 17.086 18.292 19.599 21.015 22.550 24.215 26.019 27.975 30.095 32.393 34.883 15 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 29.361 31.772 34.405 37.280 40.417 16 17.258 18.639 20.157 21.825 23.657 25.673 27.888 30.324 33.003 35.950 39.190 42.753 46.672 17 18.430 20.012 21.762 23.698 25.840 28.813 30.840 33.750 36.974 40.545 44.501 48.884 53.729 18 19.615 21.412 23.414 25.645 28.132 30.906 33.999 37.450 41.301 45.599 50.396 55.750 61.725 19 20.811 22.841 25.117 27.671 30.539 33.760 37.379 41.446 46.018 51.159 56.939 63.440 70.749 20 22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.275 64.203 72.052 80.947 25 28.243 32.030 36.459 41.646 47.727 54.865 63.249 73.106 84.701 98.347 114.413 133.334 155.620 30 34.785 40.568 47.575 56.805 66.439 79.058 94.461 113.283 136.308 164.494 199.021 241.333 293.199 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40% 1.000 2.140 3.440 4.921 6.610 8.536 10.730 13.233 16.085 19.337 23.044 27.271 32.089 37.518 43.842 50.980 59.118 68.394 78.969 91.025 181.871 356.787 1.000 2.150 3.473 4.993 6.742 8.754 11.067 13.727 16.786 20.304 24.349 29.002 34.352 40.505 47.580 55.717 65.075 75.836 88.212 102.440 212.793 434.745 1.000 2.160 3.506 5.066 6.877 8.977 11.414 14.240 17.518 21.321 25.733 30.850 36.786 43.672 51.660 60.925 71.673 84.141 98.603 115.380 249.214 530.321 1.000 2.170 3.539 5.141 7.014 9.207 11.772 14.773 18.285 22.393 27.200 32.824 39.404 47.103 56.110 66.649 78.979 93.406 110.285 130.033 292.105 647.439 1.000 2.180 3.572 5.215 7.154 9.442 12.142 15.327 19.086 23.521 28.755 34.931 42.219 50.818 60.965 72.939 87.068 103.740 123.414 146.628 342.603 790.948 1.000 2.190 3.606 5.291 7.297 9.683 12.523 15.902 19.923 24.709 30.404 37.180 45.244 54.841 66.261 79.850 96.022 115.266 138.166 165.418 402.042 966.712 1.000 2.200 3.640 5.368 7.442 9.930 12.916 16.499 20.799 25.959 32.150 39.580 48.497 59.196 72.035 87.442 105.931 128.117 154.740 186.688 471.981 1181.882 1.000 2.240 3.778 5.684 8.048 10.980 14.615 19.123 24.712 31.643 40.238 50.985 64.110 80.496 100.815 126.011 157.253 195.994 244.033 303.601 898.0921 2640.916 1.000 2.280 3.918 6.016 8.700 12.136 16.534 22.163 29.369 38.592 50.399 65.510 84.853 109.612 141.303 181.868 233.791 300.252 385.323 494.213 706.803 5873.231 000 2.320 4.062 6.362 9.398 13.406 18.696 25.678 34.895 47.062 63.122 84.320 112.303 149.240 197.997 262.356 347.310 459.449 607.472 802.863 3226.844 12940.859 1.000 2.360 4.210 6.725 10.146 14.799 21.126 29.732 41.435 57.352 78.998 108.437 148.475 202.926 276.979 377.692 514.661 700.939 954.277 1298.817 6053.004 28172.276 1.000 2.400 4.360 7.104 10.946 16.324 23.853 34.395 49.153 69.814 98.739 139.235 195.929 275.300 386.420 541.988 759.784 1064.697 1491.576 2089.206 11247.199 60501.081 (Contd.) Period n 10 11 12 13 14 15 16 17 18 19 20 25 30 INTERNATIONAL FINANCIAL MANAGEMENT 679 TABLE 3  Present Value Interest Factor (PVIF) Period n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 10 11 12 13 14 15 16 17 18 19 20 25 1.000 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.830 0.828 0.820 0.780 1.000 0.980 0.961 0.924 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 0.610 1.000 0.971 0.943 0.915 0.889 0.863 0.838 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 0.478 1.000 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.375 1.000 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 0.585 0.557 0.530 0.505 0.481 0.458 0.436 0.416 0.396 0.377 0.295 1.000 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.527 0.497 0.469 0.442 0.417 0.394 0.377 0.350 0.331 0.312 0.233 1.000 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.311 0.296 0.276 0.258 0.184 1.000 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 0.146 1.000 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 0.116 1.000 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 0.092 1.000 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124 0.074 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 0.059 1.000 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 0.047 30 0.742 0.552 0.412 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 (Contd.) Period n 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40% 10 11 12 13 14 15 16 17 18 19 20 25 30 1.000 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073 0.038 0.020 1.000 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.215 0.187 0.163 0.141 0.123 0.107 0.093 0.081 0.070 0.061 0.030 0.015 1.000 0.862 0.743 0.641 0.552 0.476 0.410 0.354 0.305 0.263 0.227 0.195 0.168 0.145 0.12,5 0.108 0.093 0.080 0.069 0.060 0.051 0.024 0.012 1.000 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043 0.020 0.009 1.000 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.226 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037 0.016 0.007 1.000 0.840 0.705 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.074 0.062 0.052 0.044 0.037 0.031 0.013 0.005 1.000 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026 0.010 0.004 1.000 0.806 0.650 0.524 0.423 0.341 0.275 0.222 0.179 0.144 0.116 0.094 0.076 0.061 0.049 0.040 0.032 0.026 0.021 0.017 0.014 0.005 0.002 1.000 0.781 0.610 0.477 0.373 0.291 0.227 0.178 0.139 0.108 0.085 0.066 0.052 0.040 0.032 0.025 0.019 0.015 0.012 009 0.007 0.002 0.001 1.000 0.758 0.574 0.435 0.329 0.250 0.189 0.143 0.108 0.082 0.062 0.047 0.036 0.027 0.021 0.016 0.012 0.009 0.007 0.005 0.004 0.001 0.000 1.000 0.735 0.541 0.398 0.292 0.215 0.158 0.116 0.085 0.063 0.046 0.034 0.025 0.018 0.014 0.010 0.007 0.005 0.004 0.003 0.002 0.000 0.000 1.000 0.714 0.510 0.364 0.260 0.186 0.133 0.095 0.068 0.048 0.035 0.025 0.618 0.013 0.009 0.006 0.005 0.003 0002 0.002 0.001 0.000 0.000 680 FINANCIAL MANAGEMENT: THEORY AND PRACTICE TABLE 4  Present Value Interest Factor for an Annuity (PVIFA) Period n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 10 11 12 13 14 15 16 17 18 19 20 25 1.000 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 22.023 1.000 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.678 16.351 19.523 1.000 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.945 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.877 17.413 1.000 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 15.622 1.000 0.952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 14.094 1.000 0.943 1.833 2.673 3.465 4212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470 12.783 1.000 0.935 1.808 2.624 3.387 4.100 4.766 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 11.654 1.000 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 10.675 1.000 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.060 8.312 8.544 8.756 8.950 9.128 9.823 1.000 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 9.077 1.000 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.370 7.549 7.702 7.839 7.963 8.422 1.000 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 7.843 1.000 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025 7.330 30 25.808 22.397 19.600 17.292 15.373 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 (Contd.) Period n 10 11 12 13 14 15 16 17 18 19 20 25 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40% 1.000 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.647 6.550 6.623 6.873 1.000 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 6.464 1.000 0.862 1.605 2.246 2.798 3.274 3.685 4.039 4.344 4.607 4.883 5.029 5.197 5.342 5.468 5.575 5.669 5.749 5.818 5.877 5.929 6.097 1.000 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628 5.766 1.000 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.467 1.000 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.970 5.101 5.195 1.000 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.193 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.844 4.870 4.948 1.000 0.806 1.457 1.981 2.404 2.745 3.020 3.242 3.421 3.566 3.682 3.776 3.851 3.912 3.962 4.001 4.033 4.059 4.080 4.097 4.110 4.147 1.000 0.781 1.392 1.868 2.241 2.532 2.759 2.937 3.076 3.184 3.269 3.335 3.387 3.427 3.459 3.483 3.503 3.518 3.529 3.539 3.546 3.564 1.000 0.758 1.332 1.766 2.096 2.345 2.534 2.678 2.786 2.868 2.930 2.978 3.013 3.040 3.061 3.076 3.088 3.097 3.104 3.109 3.113 3.122 1.000 0.735 1.276 1.674 1.966 2.181 2.339 2.455 2.540 2.603 2.650 2.683 2.708 2.727 2.740 2.750 2.758 2.763 2.767 2.770 2.772 2.776 1.000 0.714 1.224 1.589 1.849 2.035 2.168 2.263 2.331 2.379 2.414 2.438 2.456 2.469 2.478 2.484 2.489 2.492 2.494 2.496 2.497 2.499 30 7.003 6.566 6.177 5.829 5.517 5.235 4.979 4.160 3.569 3.124 2.778 2.500 INTERNATIONAL FINANCIAL MANAGEMENT 681 TABLE 5  Continuous Compounding of Re 1e and Continuous Discounting of ` 1e x ex Value e–x Value 0.00 1.0000 1.00000 0.01 1.0110 0.02 1.0202 0.03 0.04 x e–x Value ex Value x ex Value e–x Value 0.45 1.5683 63763 0.90 2.4596 40657 0.46 1.5841 63128 0.91 2.4843 40252 98020 0.47 1.6000 62500 0.92 2.5093 39852 1.0305 97045 0.48 1.6161 61878 0.93 2.5354 39455 1.0408 06079 0.49 1.6323 61263 0.94 2.5600 39063 0.05 1.0513 95123 0.50 1.6487 60653 0.95 2.5857 38674 0.06 1.0618 94176 0.51 1.6653 60050 0.96 2.6117 38298 0.07 1.0725 93239 0.52 1.6820 59452 0.97 2.6379 37908 0.08 1.0833 92312 0.53 1.6989 58860 0.98 2.6645 37531 0.09 1.0942 91393 0.54 1.7160 58275 0.99 2.6912 37158 0.10 1.1052 90484 0.55 1.7333 57695 1.00 2.7183 36788 0.11 1.1163 89583 0.56 1.7507 57121 1.20 3.3201 30119 0.12 1.1275 88692 0.57 1.7683 56553 1.30 3.6693 27253 0.13 1.1388 87809 0.58 1.7860 55990 1.40 4.0552 24660 0.14 1.1503 86936 0.59 1.8040 55433 1.50 4.4817 22313 0.15 1.1618 86071 0.60 1.8221 54881 1.60 4.9530 20190 0.16 1.1735 85214 0.61 1.8404 54335 1.70 5.4739 18268 0.17 1.1853 84366 0.62 1.8589 53794 1.80 6.0496 16530 0.18 1.1972 83527 0.63 1.8776 53259 1.90 6.6859 14957 0.19 1.2092 82696 0.64 1.8965 52729 2.00 7.3891 13534 0.20 1.2214 81873 0.65 1.9155 52205 3.00 20.086 04979 0.21 1.2337 81058 0.66 1.9348 51885 4.00 54.598 01832 0.22 1.2461 80252 0.67 1.9542 51171 5.00 148.41 00674 0.23 1.2586 79453 0.68 1.9739 50662 6.00 403.43 00248 0.24 1.2712 78663 0.69 1.9937 50158 7.00 1096.6 00091 0.25 1.2840 77880 0.70 2.0138 49659 8.00 2981.0 00034 0.26 1.2969 77105 0.71 2.0340 49164 9.00 8103.1 00012 0.27 1.3100 76338 0.72 2.0544 48675 10.00 22026.5 00005 0.28 1.3231 75578 0.73 2.0751 48191 0.29 1.3364 74826 0.74 2.0959 47711 0.30 1.3499 74082 0.75 2.1170 47237 0.31 1.3634 73345 0.76 2.1383 46767 0.32 1.3771 72615 0.77 2.1598 46301 0.33 1.3910 71892 0.78 2.1815 45841 0.34 1.4049 71177 0.79 2.2034 45384 0.35 1.4191 70569 0.80 2.2255 44933 0.36 1.4333 69768 0.81 2.2479 44486 0.37 1.4477 69073 0.82 2.2705 44043 0.38 1.4623 68386 0.83 2.2933 43605 0.39 1.4770 677–7 0.84 2.3164 43171 0.40 1.4918 67032 0.85 2.3396 42741 0.41 1.5068 66365 0.86 2.3632 42316 0.42 1.5220 65705 0.87 2.3869 41895 0.43 1.5373 65051 0.88 2.4109 41478 0.44 1.5527 64404 0.89 2.4351 41066 INDEX A Accounting period concept, 18 Accrual concept, 19 Accruals, 282 Acquisitions, 617 Activity-oriented supervision, 362 Allocation of funds, Annual reports, 218 Annuity, 509 Anti-takeover defences, 630 Arbitrageurs, 650 Auditor’s report, 14 Authorized capital, 28 Average collection period, 81 B Back-ended lease, 536 Badla financing, 184 Balance sheet, 14 Bank enquiries, 218 Bank guarantees, 399 Baumol model, 186 Bid-ask spread, 653 Bill of lading, 437 Bills limit, 314 Bills of exchange, 381 ‘Bird in hand’ fallacy, 586 Block capital turnover ratio, 80 Bonus shares, 593 Book value, 31 Break-even point, 457 Budget settlement, 485 Build-lease-transfer arrangement, 551 Build-own-operate arrangement, 551 Build-own-operate-transfer arrangement, 551 Bulk discount, 256 Business entity concept, 16 Buy decision, 463 C Capital budgeting, 7, 519 Capital finance, 305 Capital policies, 133 Carrying costs, 245 Cash budgeting, 168 Cash credit, 310 Cash cycle, 149 Cash discount, 213 Cash forecasting, 172 Cash profit, 65 Centralized payments, 178 Certificate of deposits, 180 Clientele effect, 585 Collection float, 178 Combination method, 487 Commercial papers, 181 Commercial risks insurance, 441 Commitment charges, 309 Conservatism concept, 17 684 FINANCIAL MANAGEMENT: THEORY AND PRACTICE Continuous compounding, 513 Corporate budget, 485 Corporate planning, 483 Cost concept, 17 Cost-volume-profit, 457 Coverage ratios, 82 Credit account, 175 Credit management, 205 Credit policy, 206, 217, 220 Credit risk assessment, 338 Credit risks, 335 Creditworthiness, 230 Criticality, 133 Cross rates, 651 Cross-section analysis, 150 Current account, 175 Current assets, 49 Current liabilities, 47, 308 Current ratio, 80 D Daily cash report, 173 Daily treasury report, 173 Debenture capital, 41 Debenture redemption reserve, 43 Decentralization, 174 Decision-making, 217 Deep discount bonds, 44 Demand loan, 310 Demergers, 638 Direct lease, 539 Directors’ report, 15 Direct quote, 654 Discounted payback period technique, 526 Discounting, 513 Disintermediation, Diversification, 625 Divestitures, 622 Divestments, 637 Dividend cover, 96 Dividend decision, 583 Dividend policy, 64, 563 Domestic lease, 540 Doubling period, 507 Draft budgets, 485 Dry lease, 537 Dual aspect concept, 18 E Economic order quantity, 244 Employee stock option plan, 448 Equity, 81 Equity share, 28 Euro-currency loan, 665 Expectation theory, 658 Expected scarcity, 259 Export credit guarantee corporation, 441 Export finance, 313, 435 Export financing, 667 F Face value, 31 Factoring, 285 Fast changing technology, 446 Final budget, 485 Finance lease, 537 Financial bank guarantees, 400 Financial management, Financial performance, 75 Financial restructuring, 633 Financial risks assessment, 339 Financial statements, 13 Fixed charge, 291 Fixed assets, 48 Fixed costs, 458 Flexibility, 132, 270 Floating charge, 291 Floating exchange rates, 649 Fluctuating prices, 259 Foreign currency risks, 552 Forfeiting, 287 Forward contract, 662 Forward exchange rates, 653, 658 Forward premium, 653 Full service lease, 540 Funds statements, 109 INDEX G Going concern concept, 17 Gordon model, 566 Gross margin, 62 H High capital output ratio, 446 Hire-purchase, 8, 535 Hypothecation, 290 I Incremental budgeting, 495 Indirect quote, 654 Industrial risks, 342 Inflation, 255 Inflationary economy, 256 Information signalling, 585 Input supply risks, 553 Intangible current assets, 448 Inter-corporate deposits, 183 Inter-corporate loans, 47 Inter-departmental coordination, 495 Interest cover, 96 Interest rate parity, 655 Internal auditors, Internal rate of return (IRR) technique, 524 International financial management, 647 International lease, 540 Inventory management, 243 Inventory turnover ratio, 81 Investment decisions, Investment evaluation, 523 Issue cost, 571 Issued capital, 29 Issue price, 32 J Joint ventures, 631 Just-in-case (JIC) system, 267 Just-in-time (JIT) system, 267 L Labour cost budget, 493 Lead time, 257 Lease agreement, 543 Leasing, 8, 535 Legal aspects, 591 Letter of credit, 375 Leveraged lease, 539 Leverage ratios, 81 Liberal credit policy, 220 Liquidity ratios, 79 Long gestation period, 449 Long-term bank gurantees, 400 Long-term investments, 49 Lower financial costs, 625 M Management control system, 214 Managerial risks, 342 Managing cash, Managing fixed assets, Managing inventories, Managing sundry debtors, Managing time, Manpower intensive, 446 Manufacturing overheads budget, 494 Margin money, 379 Margin of safety, 462 Marketing, 449 Market risks, 552 Market value, 32 Matching concept, 19 Matching principle, 147 Materiality concept, 19 Mergers, 621 Mergers and acquisitions, Miller and modigliani position, 568 Moderate credit policy, 220 Monetary measurement concept, 16 Money market operations, 663 Monthly performance report, 173 Mortgage, 290 N Net fixed assets, 81 Net float, 178 Net lease, 540 685 686 FINANCIAL MANAGEMENT: THEORY AND PRACTICE Net sales, 61 Non-SSI sector, 307 O Operating cycle, 148 Operating cycle approach, 155 Operating expenses, 62 Operating lease, 537 Operating profit, 62 Optimal order quantity, 251 Ordering costs, 245 Order point, 257 Organisational restructuring, 635 ORR model, 188 Overdraft, 310 P Packing credit, 437 Paid-up capital, 29 Payback (PB) period technique, 527 Payment float, 178 Performance bank guarantees, 400 Periodical reports, 173 Political risks insurance, 441 Portfolio restructuring, 632 Post-disbursement supervision, 437 Post-shipment finance, 438 Preference share capital, 34 Private placement, 33 Procedural aspects, 592 Production budget, 491 Production policy, 144 Product pricing decisions, 465 Profitability index (pi) technique, 526 Profitability ratios, 81 Profit after tax, 63 Profit and loss account, 59 Profit before tax, 63 Profit projection, 463 Project appraisal, 358 Project completion risks, 552 Project financing, 535 Project management, 141 Prompt collection, 174 Prompt payment, 283 Provisions, 48 Public deposits, 46 Public issue, 33 Punctuality, 270 Purchase budget, 493 Purchasing power parity, 657 Q Qualitative assessments, 339 Quick ratio, 80 Quoted shares, 124 R Ramifications, 212 Ratio analysis techniques, 75 Rationale, 115 Rationality, 269 Ready forward, 180 Realization concept, 19 Reserves and surplus, 37 Restructuring, 621 Retained earnings, 289 Rights debentures, 285 Rights issue, 33 S Safety stock, 258 Sale-and-lease back, 538 Sales incentive plan, 464 Sales method, 486 Seasonal purchases, 256 Secured loans, 39 Security-oriented supervision, 362 Selling efforts, 464 Share buybacks, 598 Share capital, 28 Share market report, 220 Shipment stage, 438 Shortage costs, 245 Short-term bank guarantees, 400 Short-term investments, 49 Single investor lease, 539 Sound judgement, 283 INDEX Speculators, 650 Spot exchange rate, 651 Stable dividend payout ratio, 589 Statutory reserves, 38 Stock splits, 593 Streamlined enquiry systems, 209 Strict credit policy, 220 Subscribed capital, 29 Sundry creditors, 118 Sundry debtors, 118 Surplus funds, 179 T Tail piece, 192 Takeovers, 628 Taxation, 624 Team spirit, 142 Temporary surplus cash, 586 Term loans, 40, 289 Time-series analysis, 150 Time value of money, 506 Trade credits, 282 Traditional position, 567 Transaction cost, 571 Treasury bills, 180 Trial and error, 246 Turnover ratios, 80 U Unwise investments, 573 Up-frontal lease, 536 V Valuation ratios, 82 Variable costs, 458 VED analysis, 260 Viable sick units, 367 W Walter model, 564 Wet lease, 537 Working capital leverage, 162 Working capital loans, 41, 118 Working capital policy, 139 World monetary system,  648 Z Zero base budgeting,  495 687 ... FINANCIAL MANAGEMENT Theory and Practice SATISH B MATHUR Ph.D (Business Management) , CAIIB Mentor, Mathur Management Consultants, (MMC), Lucknow Former Professor of Finance and Accounting... FINANCIAL MANAGEMENT: THEORY AND PRACTICE Summary 466 Review Questions 467 Practise Problems 468 23 Cost Management and Control – Steps and. .. thank my friends and colleagues in banks and academia, and the top and senior executives of industries and banks, who participated in my Management Development Programmes (MDPs), and the PGP students