Fundamentals of Financial Management

Fundamentals of Financial Management with Excel Applications is a comprehensive undergraduate textbook that covers both the theory and practice of financial decision-making. The book is built around a single unifying premise—that every financial decision must be evaluated in terms of its contribution to the maximisation of shareholder wealth—and develops this across all three domains of the finance manager's mandate: the Investment Decision, the Financing Decision, and the Dividend Decision.

Now in its 21st Edition, the book has been shaped by over four decades of the author's classroom teaching at Shri Ram College of Commerce, University of Delhi, and refined through consistent feedback from successive student batches. The result is a text that is analytically rigorous but deliberately non-intimidating in language and presentation—where abstract theory is always grounded in worked numerical illustrations, and every concept connects back to the practical reality of how a finance manager actually thinks and decides.

This book is intended for the following audience:

• B.Com. (Hons.) III Semester students, University of Delhi—the syllabus is reproduced in full and mapped chapter by chapter
• Students of Other Central & Affiliated Universities Across India following equivalent financial management courses
• Students of CA (Foundation/IPCC), CS, ICWA, MBA, M.Com., CFA, and PGDM Courses—the author is a visiting faculty member for ICAI and ICSI executive development programmes, and the text has been used at both the undergraduate and the post-graduate professional level

The Present Publication is the 21st Edition, authored by Dr R.P. Rustagi, with the following noteworthy features:

• [Consistent Eight-Part Chapter Architecture] Every chapter follows the same internal structure without exception:
• Synopsis (Chapter Plan) → Main Body → Points to Remember → Graded Illustrations (solved) → Objective Type Questions (True/False) → Multiple Choice Questions → Theoretical Assignments → Unsolved Problems with Answers
• This uniformity enables students to navigate the book predictably and use it systematically for examination preparation
• [Graded Illustrations with Working Notes] The distinguishing feature of the book is its volume and quality of solved problems. Illustrations are sequenced by complexity and accompanied by step-by-step working notes that explain not just the computation but the underlying logic—including treatment of taxes, depreciation, incremental cash flows, and salvage values in capital budgeting problems; selection of weights in WACC; arbitrage mechanics in MM models; and operating cycle calculations in working capital
• [Depth of MCQ and Objective Question Banks] The 21st Edition adds MCQs at the end of all major chapters, with answer keys. These span conceptual understanding and numerical application and are directly calibrated to Delhi University's examination pattern
• [Past Examination Papers with Suggested Answers] Appendix II reproduces complete question papers from four recent Delhi University B.Com. (Hons.) examinations—November 2022 (Semester V), December 2023 (Semester IV), December 2024 (Semester III), and December 2025 (Semester III)—together with detailed suggested answers to all practical questions. This gives students direct benchmarking against actual graded expectations
• [Excel Applications Appendix]
• Appendix I provides a systematic translation of the book's core financial calculations into Microsoft Excel, using built-in functions including PV, FV, NPV, IRR, MIRR, XIRR, XNPV, and others
• Each application is shown in full cell-level table format—both the formula structure (modelling) and the output—covering Time Value of Money (single sums, annuities, perpetuities, unequal cash flows, loan repayment schedules), Capital Budgeting (Payback Period, NPV, IRR, PI, MIRR, non-periodic cash flows), Cost of Capital (WACC computation including marginal cost scenarios), and Leverage Analysis (operating, financial, and combined leverages across multi-firm comparisons)
• Manual and Excel solutions are placed alongside each other so students can cross-verify
• [New in the 21st Edition]
• Risk Analysis in Capital Budgeting: new section covering Certainty Equivalent and Risk-Adjusted Discount Rate methods
• Modified Internal Rate of Return (MIRR): new dedicated coverage in Chapter 4
• Summary of Cash Flow Estimation Principles added to Chapter 4 as a quick-reference framework
• New practical questions added across Graded Illustrations in multiple chapters
• Additional working notes and explanatory comments inserted throughout
• Latest Delhi University examination papers (up to December 2025) incorporated with solutions

The coverage of the book is as follows:

• Part I — Background
• Chapter 1 covers the evolution of finance as a discipline—from the pre-1950 traditional phase, in which finance was episodic and descriptive, to the modern integrated phase shaped by Markowitz's Portfolio Theory (1952) and Modigliani-Miller's leverage and valuation framework (1958). The scope of the finance function is discussed in terms of the three core decisions, the role of the finance manager as intermediary between the firm and the capital market, and the objective of financial management—with a critical assessment of Profit Maximisation versus Wealth Maximisation, their respective limitations, and the rationale for the wealth maximisation criterion as the operating goal. The financial system and environment in India is also introduced
• Chapter 2 covers the Mathematics of Finance in full—compounding and discounting; future and present value of single sums; ordinary annuities and annuities due; perpetuities; sinking funds; loan repayment calculations; and applications of Time Value of Money to financial decision-making. The treatment is practical, with solved illustrations progressively covering deferred repayments, variable rates, and real decision-making scenarios
• Part II — Long-Term Investment Decisions: Capital Budgeting
• Chapter 3 establishes the conceptual foundation of capital budgeting—its features (long-term effects, substantial commitments, irreversibility, competitive implications), its difficulties (future uncertainty, time element, measurement problems), and the types of decisions it encompasses (replacement, modernisation, expansion, diversification, contingent decisions; mutually exclusive versus accept-reject situations; capital rationing). The chapter develops the crucial distinction between accounting profit and cash flows as the basis for evaluation, and systematically covers the three categories of cash flows—Initial (outflows at time zero, including tax treatment of asset disposal, working capital adjustments), Subsequent (incremental annual operating cash flows, depreciation tax shield), and Terminal (salvage value, working capital recovery). The incremental approach is central: every example is constructed around what changes, not what exists
• Chapter 4 covers the full range of evaluation techniques. Traditional (non-discounting) methods—Payback Period and Accounting Rate of Return—are covered with their assumptions, limitations, and decision rules. Discounted Cash Flow methods are covered in depth: Net Present Value, Profitability Index, Discounted Payback Period, Internal Rate of Return, and the Modified IRR (new in this edition). Capital budgeting with unequal project lives is addressed via the Equivalent Annuity Method. Risk analysis—Certainty Equivalent and Risk-Adjusted Discount Rate—is introduced in the new section added to this edition. The chapter contains over 25 graded illustrations covering replacement decisions, mutually exclusive projects, block-of-assets depreciation, computer systems, manufacturing capacity expansion, and multi-scenario sensitivity
• Part III — Financing Decision
• Chapter 5 covers Cost of Capital—its concept and significance as the minimum required rate of return and the discount rate for capital budgeting. Cost of each specific source is derived: long-term debt and bonds (pre-tax cost, post-tax cost, redemption-adjusted yield), preference shares (redeemable and irredeemable), equity (Dividend Approach and the Gordon Growth Model; Earnings Approach; CAPM), and retained earnings (opportunity cost). WACC calculation follows—covering the selection of weights (book value vs. market value), their respective arguments, and the computation of Marginal Cost of Capital for incremental financing decisions
• Chapters 6 and 7 cover Leverage Analysis and EBIT-EPS Analysis respectively. Operating leverage (Degree of Operating Leverage as contribution/EBIT) and its relationship to fixed costs are developed, followed by Financial Leverage (EBIT/PBT adjusted for preference dividend), and Combined Leverage. Chapter 7 develops EBIT-EPS analysis graphically and algebraically—constant EBIT with changing financing patterns, varying EBIT across patterns, the Financial Break-Even level, and the Indifference Point. The algebraic derivation of the indifference EBIT (including cases involving preference dividends, tax, and different share bases) is worked through with multiple illustrations. Shortfalls of EBIT-EPS analysis are also assessed
• Chapter 8 presents the major capital structure theories: Net Income Approach (capital structure matters—overall cost falls with leverage), Net Operating Income Approach (capital structure is irrelevant—WACC is constant), Traditional Approach (a practical middle ground—optimal structure exists), and the Modigliani-Miller Hypothesis (behavioural justification of NOI via the arbitrage process; with and without corporate taxes; tax shield valuation). Chapter 9 synthesises the determinants of capital structure in practice—profitability, risk, flexibility, control, and liquidity constraints—with EBIT-EPS and cash flow analysis used as planning tools
• Part IV — Dividend Decision
• Chapter 10 analyses the relationship between dividend policy and firm value through the competing schools—Relevance (Walter's Model, Gordon's Model) and Irrelevance (Residual Theory, Modigliani-Miller). Walter's Model demonstrates how the optimal dividend policy depends on the relationship between the firm's internal rate of return and the shareholders' opportunity cost. Gordon's Model adds the premium-for-certainty argument. The MM Approach proves irrelevance under perfect market assumptions, and its proof via the share issuance mechanism (new shares to fund investment when dividends are paid) is worked through numerically
• Chapter 11 covers dividend policy in practice—payout ratios, stability of dividends (constant payout ratio, steady dividend per share, steady-plus-extra), legal and procedural constraints, scrip dividends and bonus shares, and the informational content of dividend announcements and its effect on market price
• Part V — Management of Current Assets
• Chapter 12 introduces the operating cycle as the conceptual anchor of working capital—the cash-to-cash cycle through raw materials, work-in-progress, finished goods, debtors, and creditors. Working capital policy options (conservative, aggressive, moderate) and their risk-return trade-offs are analysed. The financing of current assets through permanent and temporary sources is covered, along with the Hedging Approach versus the aggressive and conservative financing strategies
• Chapter 13 covers working capital estimation—as a percentage of net sales, as a percentage of total assets, and via the operating cycle method. Multiple detailed illustrations compute the working capital requirement by building up all current asset and current liability components from basic trading data, cost sheets, and balance sheets
• Chapters 14, 15, and 16 cover the three components of current assets individually. Chapter 14 covers Cash Management—motives for holding cash (transaction, precautionary, speculative), cash budget preparation (receipts and payments method), float management, Electronic Fund Transfer, and the optimum cash balance models: Baumol's Model (treating cash management as an inventory problem with a square-root EOQ formula) and the Miller-Orr Model (stochastic control-limit approach for uncertain cash flows). Management of marketable securities is introduced as an adjunct to cash management
• Chapter 15 covers Receivables Management—the cost-benefit framework of credit (opportunity cost of investment in debtors, collection costs, bad debts, administrative costs; versus incremental revenue from sales expansion), credit policy design (credit standards via the incremental approach, credit terms including cash discount analysis, collection policy), and evaluation of proposed changes in credit policy through comparative profitability statements
• Chapter 16 covers Inventory Management—types of inventories, the costs of holding (ordering costs, carrying costs) and the hidden costs of stock-outs, ABC Analysis for selective control, Economic Order Quantity (derivation and formula), re-order level, safety stock, and the effect of quantity discounts on EOQ
• Part VI — Valuation of Securities
• Chapter 17 applies the Time Value of Money framework to valuation across all major security types. Bond valuation covers annual and semi-annual coupon bonds, YTM calculation (trial-and-error IRR method and the approximate yield formula), convertible debentures (compulsorily and optionally convertible, with the option value component), and deep discount (zero-coupon) bonds. Preference share valuation covers redeemable (present value of dividend stream plus redemption payment) and irredeemable (perpetuity) shares. Equity share valuation is developed progressively: book value and liquidation value approaches, then dividend-based models (zero growth, constant growth—Gordon's Growth Model, variable/multi-stage growth), followed by earnings-based models (Walter's Model cross-referenced, P/E ratio approach with its determinants and limitations). The chapter makes explicit the point that the constant growth formula implicitly incorporates the future selling price—a conceptual clarification that addresses a common student misconception

The 17 chapters are organised across six thematic parts, each aligned to a major area of financial decision-making:

• Part I | Background | Chapters 1–2 — Introduction, Time Value of Money
• Part II | Long-Term Investment Decisions | Chapters 3–4 — Capital Budgeting
• Part III | Financing Decision | Chapters 5–9 — Cost of Capital, Leverage, EBIT-EPS, Capital Structure Theories
• Part IV | Dividend Decision | Chapters 10–11 — Dividend Models, Policy Determinants
• Part V | Management of Current Assets — Chapters 12–16 | Working Capital, Cash, Receivables, Inventory
• Part VI | Valuation | Chapter 17 — Valuation of Bonds, Preference Shares, Equity]
• Three appendices follow:
• Appendix I — Financial Decision Making with Excel
• Appendix II — Past Year Delhi University Question Papers with Suggested Answers
• Appendix III — Mathematical Tables