FINANCIAL MANAGEMENT & CORPORATE FINANCE MBA - 2nd Semester : KMBN 204
Explained Video
Financial Management & Corporate Finance (KMBN 204) is the backbone of decision-making in a firm. It blends theory and practice — guiding managers on how to raise funds, invest profitably and return value to shareholders. This article gives you quick, exam-friendly tricks, clear examples and the core tools you must master.
Cost of capital is the required return the company must earn on its investments. Think of it as the "price" of money — both debt and equity. A simple trick: when the company mixes debt and equity, compute a weighted average (WACC). If an investment gives an expected return higher than WACC, it increases shareholder value.
Mini example: If debt cost is 6% (after tax), equity cost 12%, and weights are 40% debt & 60% equity, WACC = 0.4*6% + 0.6*12% = 9.6%.
Capital budgeting is deciding between projects. Use Net Present Value (NPV) as your primary guide — it measures added wealth directly. Internal Rate of Return (IRR) helps but can mislead for non-conventional cash flows or mutually exclusive projects. Shortcut trick: for mutually exclusive projects, always rely on NPV; IRR only as a sanity check.
Trick for payback vs NPV: Use payback for a quick liquidity check but never replace NPV for valuation. Payback ignores time value of money and cash flows beyond the cutoff.
Working capital keeps day-to-day operations running. The three levers: inventory, receivables and payables. Rule-of-thumb: improve cash conversion cycle by tightening receivables and inventory without harming sales. Small changes in days of receivables or inventory can cause big cash differences.
Example trick: Reducing receivables by 5 days on ₹1 crore sales (annual) improves cash by roughly ₹1,37,000 (1 crore / 365 * 5).
Dividend policy influences investor returns and retained earnings. There is no one-size-fits-all rule: growth firms prefer retention; mature firms favor dividends. The practical tip: analyze payout ratios, and always link dividend strategy with investment opportunities and target leverage.
Use DCF for intrinsic value and multiples (P/E, EV/EBITDA) for relative valuation. For quick exam answers, memorize formulae for Return on Capital Employed (ROCE), Current Ratio, Debt-to-Equity and Interest Coverage. One small trick: if ROCE > WACC consistently, the firm is creating value.
Mnemonic for CAPM: R_e = R_f + β (R_m - R_f). Remember: "Risk-free plus Beta times market premium." Keep β signs correct — that's a common slip in exams.
Practical exam tip: Always state assumptions — tax rate, life of project, terminal value method — when solving numerical problems. Clear steps win marks.
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