Working on it!!!

Please start reading from the first post "welcome" (can be navigated from right hand part of the screen) to be in sync with, if reading for the first time!!!

Power of Compounding & Future Value!!

Simply put Interest earned on interest is known as compound interest. With the example earlier with you would have earned 5 Rs interest on your principle 1st year and then 5.25 Rs interest the next year, the .25 Rs earned is interest on interest.
One of the best Examples I read and remembered was the sale of Manhattans Island for only 24$ in the year 1626 to Peter Minuit. Whole of Manhattan for 24$ looks a great deal as of New-york's real estate today, But consider this what if Peter Minuit would have invested that 24$ @ of 8% till today?
Year 2009 – 1626= 383 years
Invested @ 8%
This would seem like
1st yr. -24$
2nd yr-24+ (24*8% interest)...and so on for 383 yrs.

Surprisingly the value comes to around

$ 151 TRILLION

Not so good Investment Mr.Peter, Manhattan is definately cheaper today!!

What we did here was tried to find out the Future value of 24$ investment made in 1626 after 383 year This can also be found by using formula for future value.

Where FV is Future value that an investment should generate, PV is the present value that you invest in, “I” here would mean interest and t would be for time frame of investment.

Now you know what to do if you want to be the richest person in the world……

• Invest 24$ in an 8% paying bond for 383 years

&

• Live 383 years to be able to enjoy them!!!!!

Time Value of Money!!

Time value of money simply tries to explain the future value of today's money so as to help in making investment decisions. A dollar today is worth more than a dollar tomorrow (thats true only if u earn returns more than the inflation rate and ur cost for raising capital) U might have heard this a million times but has a major impact in financial world that's why putting it on top of my list. If a Dollar or any currency for that matter is worth only a dollar tomorrow what sense does it make to put anything in the investment or to have financial market or pay interest on the loans?
For example, 100 Rs today, invested for one year with 5 percent interest will be worth 105 Rs after one year. Therefore, 100 Rs paid now or 105 Rs paid exactly one year from now both have the same value to the recipient (assuming 5 percent Internal Rate of Return) using time value of , 100 RS invested for one year at 5 percent interest has a future value of 105 Rs, and subsequently Present value of 100 rupees to be received after 1 year can be derived after discounting 105 Rs @5% (105/1+5%) for a period of one yr. i.e. 100, (Please note the two very important term present value and future value of Investment these are used widely in industry will be discussed further in details)

Objective of Financial management

Financial Management is not one of those subjects in which one can read a textbook and then do it, that is why is worth studying. Room for learning with everyday experience, dynamic, creative, luck, everything counts. One would argue that there is no creativity in financial world, I respectfully disagree there is as much amount of new products and investment tools created in this sector than any other product in different field if not more.As an Entrepreneur or a Financial Manager objective for detailed study and great deal of emphasis on this subject can boil down to two simple reasons.

• What investments should we make in &

• How should we pay for them

All said and done it’s easy to say this than to practically apply it in our life. It’s like saying to an Investor Buy low and sell High; the problem is how to do it? This can only be solved by knowing what options we have and which is the best one for both the questions, as I said just by reading some books and getting information wouldn’t solve the problem but it will increase your capability to solve it for sure.

What investments should we make in?

The first part of the problem is also called firms Investment decision or Capital Budgeting decision. As a firm we have plenty of options to invest in starting from Reinvesting in your own business, Mergers & Acquisition, tangible, intangible assets etc. Obviously the decision of what to investing would depend on lot of factor which would be the next topic of our discussion.

How should we pay for them?

Other Part of the problem being how we should pay for them also called Financing Decisions, weather raising loan is preferred for a certain investment or raising money through Equity. One might argue what’s the difference and what are the criteria? Raising Loan brings in inherent risk to the company that the debt raised has to be paid back with interest, but then why not raise all the money through Issuing equity shares, well that can be done but fundamentally strong company does not all ways prefer that, as Investor you and I consume the risk of any company getting defaulted and hence would expect higher return than what we get as a risk free return from the market (bank deposits 8.5 % typically in INDIA) because of this risk-return matrix company do realize that if it keeps on issuing shares to raise money in the market it will not only have to pay-back investor a higher return but also would reduce the value of the company (as number of shares in the market for a company increases i.e. supply increases the demand for the shares falls down hence the value of firm).
Beware not all company are fundamentally strong that is why while analyzing we typically look at the percentage of shares held by its promoters we can find it in the shareholding pattern by stock listing exchange. We can’t deny the fact that there were, are and will be companies and promoters who’s intentions are not in the best of interest of their shareholders and they would typically raise money only through equity capital.
A mix of debt and equity is preferred by all corporates, depending upon the business they are in ideally lower the business risk higher financial risk a company can afford to take. Businesses such as Power generation, Oil refinery etc. which can have a steady flow of income can have a higher Debt in their balance, while businesses such as IT would typically have lower debt capital. 

Getting Started!!!!

To make things simpler and understandable I have split the financial world into 4 different pieces this will not only help us all understand it well but also keep things sorted out. This will also help us track our topic of interest with ease.
I have Divided Finance as a subject in the following manner
• Corporate Finance 
• Accounting
• Capital Market
• Valuation of a firm/ Equity analysis
Each of these topics would be addressed in separate blogs which can be viewed from my home page. Apart from these one of the basic and most important aspects when talking about financial world is Economics which to me financial world is a part of. This section given the fact that is endless would obviously have to be dealt separately. I would try my level best to justify my action and at times might have to direct you to some of the other internet pages, keeping the originality of interpretation intact.

Welcome!!

Welcome one and all, guess we are here with an objective of making this all so complicated field of Finance simple, all said and done this is not very simple we need to start from very basic, split all complicated parts into pieces, understand each of them and then try to put them back together. I shall update this and other blogs on a regular basis but would require a fair amount of time to justify my commitment. Further we all are here with a mutual objective of learning, any comments, questions, explanation, sarcasm are welcome as long as they are productive.

How is this blog goanna be different and worth the time? Well we can find endless data on this subject all over internet but there interpretation and application is where very few justify. I will try my level best to keep the interpretation and use of it original and of very basic nature. Hope it will help us all. This blog is not only to share what i know with you but also for myself, So as to retain and expand my understanding about this Industry (it's not that bad to be selfish to some extent).

So folks treat it as your own blog and let’s make this journey productive for all!!! Cheers!!