In the Insolvency and Bankruptcy Board of India’s exam for Registered Valuer for the Securities and Financial Asset class, Finance and Financial Statement Analysis is a separate chapter for which 6 marks has been earmarked. For clearing this Registered Valuer exam of IBBI, one need to take a deep dive in the course contents of this chapter as it is very much relevant from the valuation point of view also. Clarity in finance related concepts also makes valuation simpler for the analysts.

Time value of money (TVM) is the idea that money that is available at the present time is worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. One of the most fundamental concepts in finance is that money has a time value attached to it. In simpler terms, it would be safe to say that a dollar was worth more yesterday than today and a dollar today is worth more than a dollar tomorrow.

Types of decisions in finance – Everything you need to know about the types of financial decisions taken by a company. The key aspects of financial decision-making relate to financing, investment, dividends and working capital management. Decision making helps to utilise the available resources for achieving the objectives of the organization, unless minimum financial performance levels are achieved, it is impossible for a business enterprise to survive over time. Therefore, financial management basically provides a conceptual and analytical framework for financial decision making.

The types of financial decisions can classified under:- 1. Long-Term Finance Decisions 2. Short-Term Finance Decisions.

There are four main financial decisions:- 1. Capital Budgeting or Long term Investment Decision 2. Capital Structure or Financing Decision 3. Dividend Decision 4. Working Capital Management Decision.

Investment Decision – A financial decision which is concerned with how the firm’s funds are invested in different assets is known as investment decision. Investment decision can be long-term or short-term. A long-term investment decision is called capital budgeting decisions which involve huge amounts of long term investments and are irreversible except at a huge cost. Short-term investment decisions are called working capital decisions, which affect day to day working of a business. It includes the decisions about the levels of cash, inventory and receivables. A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business. A bad working capital decision affects the liquidity and profitability of a business.

Financing Decision – A financial decision which is concerned with the amount of finance to be raised from various long term sources of funds like, equity shares, preference shares, debentures, bank loans etc. Is called financing decision. In other words, it is a decision on the ‘capital structure’ of the company.

Capital Structure Owner’s Fund + Borrowed Fund

Dividend Decision – A financial decision which is concerned with deciding how much of the profit earned by the company should be distributed among shareholders (dividend) and how much should be retained for the future contingencies (retained earnings) is called dividend decision.

Dividend refers to that part of the profit which is distributed to shareholders. The decision regarding dividend should be taken keeping in view the overall objective of maximizing shareholder s wealth.

What is Capital Structure Analysis?

Capital structure analysis is a periodic evaluation of all components of the debt and equity financing used by a business. The intent of the analysis is to evaluate what combination of debt and equity the business should have. This mix varies over time based on the costs of debt and equity and the risks to which a business is subjected. Capital structure analysis is usually confined to short-term debt, leases, long-term debt, preferred stock, and common stock.

When to Conduct a Capital Structure Analysis?

The analysis may be on a regularly scheduled basis, or it could be triggered by the upcoming maturity of a debt instrument, which may need to be replaced or paid off. Alternatively, an analysis may be required when there is a need to find funding for the acquisition of a fixed asset or another business. It may also be needed when a key investor demands to have the business buy back shares or pay out a larger dividend. It may also be useful when there is an expected change in the market interest rate.

Credit Analysis

Credit analysis is a type of financial analysis that an investor or bond portfolio manager performs on companies, governments, municipalities, or any other debt-issuing entities to measure the issuer’s ability to meet its debt obligations. Credit analysis seeks to identify the appropriate level of default risk associated with investing in that particular entity’s debt instruments.

To judge a company’s ability to pay its debt, banks, bond investors, and analysts conduct credit analysis on the company. Using financial ratios, cash flow analysis, trend analysis, and financial projections, an analyst can evaluate a firm’s ability to pay its obligations. A review of credit scores and any collateral is also used to calculate the creditworthiness of a business. The outcome of the credit analysis will determine what risk rating to assign the debt issuer or borrower. The risk rating, in turn, determines whether to extend credit or loan money to the borrowing entity and, if so, the amount to lend.

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