Answer Key of INTERNAL ASSESMENT TEST - 1

Year/Branch: I MBA ‘A’ Date& Session: 27.02.18 FN

Subject Code/Name:BA5203 Duration: 9.15AM – 10.45 AM.

FINANCIAL MANAGEMENT

PART-A Answer all the questions (5X2=10 Marks)

1. What do you mean by Finance?

It is one of the main functions of a business organisation, which, aims at procuring and
judiciously utilizing the financial resources with a view to maximizing the value of the firm
thereby the value of the owners i.e., equity shareholders in a company is maximized.

2. Give meaning for Financial Management.

Financial management refers to that part of management activity which is concerned with the
planning and controlling of form’s financial resources. It deals with the finding out various
sources for raising funds for the firm.

3. Define Financial Management.

“Financial management is the operational activity of a business that is responsible for obtaining
and effectively utilizing the funds necessary for efficient operations”-Joseph and Massie.

“Financial management is the area of business management devoted to a judicious use of

capital and a careful selection of sources of capital in order to enable a business firm to move in
the direction of reaching its goals” – J.F Bradlery.

“Financial management is an area of financial decision making, harmonizing individual

motives and enterprise goals” – Weston and Brigham.

4. Differentiate Accounts and Finance

Finance: ‘Science of Planning and distributing of assets’
Accounts: ‘Art of Recording & reporting financial transactions ’.Both are required to
administrate the business
5. What are the aims of Finance?

Acquiring sufficient funds, Proper utilization of funds, Increasing profitability, Maximising

concern’s value
 PART-B (ANY THREE) (3X10=30 Marks)

6. a) Define Financial Management and explain the overview of

Financial Management (OR)
DEFINITIONS

“Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations”-Joseph and Massie.

“Financial management is the area of business management devoted to a judicious use of capital and a
careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its
goals” – J.F Bradlery.

“Financial management is an area of financial decision making, harmonizing individual motives and
enterprise goals” – Weston and Brigham.

OVERVIEW OF FINANCIAL MANAGEMENT:

SCOPE OF FINANCIAL MANAGEMENT

(i) Funds requirement decision

(ii) Financing Decision
(iii) Investment Decision
(iv) Dividend Decision
(v) Liquidity Decision

Fund requirement decision:-

The first and foremost decision of the finance manager in any organisation has to carefully estimate the
total funds required by the organisation. It includes both working capital and fixed capital.

Financing decision:-
 This second important decision of the finance manager, after estimation of the total fund requirement
by the finance manager has to clearly identify the sources from which the funds can be raised. And also the
finance managers try to obtain best financing mix or optimum capital structure of the firm.

Investment Decision:-

Under this aspect the finance manager has to concentrate investment decision in both capital assets and
current assets. But any how the finance manager give the special attention to the capital budgeting decisions.
Capital budgeting is the long term planning for the proposed capital outlay. It involves huge amount of capital
and also it would give benefits in some definite future period. Simply investment decision otherwise known as
capital budgeting decisions.

Dividend Decision:-

The formulation of sound dividend policy is another important decision of the finance manager. He
must very clearly decide, whether the firm should distribute all the earned profits to its shareholders or retain
certain portion and distribute the balance amount. In this respect he assess the dividend payout ratio ie
proportion of profits distributed as dividend and retention percentage.

Liquidity Decision:

Huge funds invested in current assets affect the organisations profitability and liquidity. So the finance
manager can take appropriate decision for the investment in current assets. Investment in current assets should
be managed effectively because in order to protect the firm from the risk of liquidity. Suppose the firm should
invest insufficient fund in current assets, it may become illiquid and more risky and also lose profitability. And
at the same time excess fund invested in current assets create idle current assets and it would not earn
anything. To overcome this difficulties a proper trade-off must be achieved between profitability and liquidity.

b) Explain the Organization chart for Finance Function

7. a) Explain the importance’s of Financial Management (OR)

Proper and sufficient finance is most important for the business operations. It is not only essential for the
success of the business but also expansion and long run survival of the firm. The following are the points
expose the importance of financial management

(i) Acquiring financial resources:

 It involves the organisation has to decide where to obtain fund for their business needs,. It requires
tapping the potential sources of funds and raising the funds at low cost for both short term as well long term
financial needs of the company.

(ii) Anticipation of financial needs:

Financial management of the organisation has to estimate financial needs with help of the cash flow
statements, cash budgets and other related tools. The financial needs can be assessed by forecasting expected
funds in business and analyzing its implications.

(iii) Guide to decision making:

In any financial decision make an immediate and direct effect on the business. It is also like with the
profitability. Financial management contribute valuable guidance to concern with regard to virtuous and
important financial aspects.

(iv) Allocating the funds in business:-

It indicates allocation and deployment of funds to various assets enable to achieve the maximum
return. In all the times financial manager should properly allocate funds among various projects after examine
the profitability and leverage.

(v) Analyzing financial performance:

All Entrepreneur must expect a continuous and consistent return on investment. The cost of each
financial decision and return of each must be analyzed. Where any deviations are found, necessary guidance
should be given to overcome such difficulties.

(vi) Finance for Business promotion:

Adequate finance is very much essential for the successful operation of the any business. In this
respect proper financial planning needs attention on degree of profitability and alternative plans.

(vii) Accounting and reporting:-

It indicates financial management of the concern should advise and supply information about the
financial performance to the top management and is also taking necessary steps for maintaining up to date
records to the performance of financial decisions.

b) Explain the concept of Time Value of Money

TIME VALUE OF MONEY:

CONCEPT OF TIME VALUE OF MONEY:-

The general concept of time value of money is very simple. Under this concept the value of money
received today is more than the value of same amount of money received after a certain period. Actually the
value of money received today is more than the value of the same amount receivable after 7 or 12 years. In
reality sooner the money receives is better.

REASONS FOR TIME PREFERENCE FOR MONEY:-

(1)Uncertainty and loss:-

Anything may be happen in future. Either in the individual or an organization there may a chance for
not getting the cash inflow and hence they will like to receive money immediately. Because future is
always uncertain and involves heavy risk.
(2) To satisfy present needs:

In the economics point of view people in actual life prefer to use their money for satisfying present
needs than future needs. For the purpose of purchasing clothes, television, Car and luxurious articles for their
present sophisticated life. They feel present needs are considered more urgent as compared to future needs.

(3) Investment opportunities:

Money has time value. Because more investment opportunities are available to invest money received
immediately than the future. For example Mr. Lal receives Rs. 40,000 today. But immediately he can invest
either banks or shares. It can earn some interest or appreciation. In reality he gets an interest of 12%.
Actually at the end of the first year he will have the value of Rs. 44,800. Therefore it is the opportunities for
the investor to receive Rs. 40,000 at present as it will enhance into Rs.44,800 at end of the year. If he is invest
in shares some times it may be doubted for one year also. So without investment, any investor is difficult
enhance their earnings.

Techniques of Time value of Money

The cash flows received actually differ according to the time of occurrence. It is actually adjusted to
reflect the time value of money. The following techniques employed for the determining time value of money.

A. Compounding Technique
B. Discounting or Present value Technique.

8. a) Explain the scopes of Financial Management

SCOPE OF FINANCIAL MANAGEMENT

(i) Funds requirement decision

(ii) Financing Decision
(iii) Investment Decision
(iv) Dividend Decision
(v) Liquidity Decision
Fund requirement decision:-
The first and foremost decision of the finance manager in any organisation has to carefully estimate the
total funds required by the organisation. It includes both working capital and fixed capital.
Financing decision:-
This second important decision of the finance manager, after estimation of the total fund requirement
by the finance manager has to clearly identify the sources from which the funds can be raised. And also the
finance managers try to obtain best financing mix or optimum capital structure of the firm.
Investment Decision:-
Under this aspect the finance manager has to concentrate investment decision in both capital assets and
current assets. But any how the finance manager give the special attention to the capital budgeting decisions.
Capital budgeting is the long term planning for the proposed capital outlay. It involves huge amount of capital
and also it would give benefits in some definite future period. Simply investment decision otherwise known as
capital budgeting decisions.
Dividend Decision:-
The formulation of sound dividend policy is another important decision of the finance manager. He
must very clearly decide, whether the firm should distribute all the earned profits to its shareholders or retain
certain portion and distribute the balance amount. In this respect he assess the dividend payout ratio ie
proportion of profits distributed as dividend and retention percentage.
Liquidity Decision:
Huge funds invested in current assets affect the organisations profitability and liquidity. So the finance
manager can take appropriate decision for the investment in current assets. Investment in current assets should
be managed effectively because in order to protect the firm from the risk of liquidity. Suppose the firm should
invest insufficient fund in current assets, it may become illiquid and more risky and also lose profitability. And
at the same time excess fund invested in current assets create idle current assets and it would not earn
anything. To overcome this difficulties a proper trade-off must be achieved between profitability and liquidity.
b) Explain the objectives of Financial Management

OBJECTIVES OF FINANCIAL MANAGEMENT

Objectives of financial management mainly divided into two categories.
a) Profit maximization
b) Wealth maximization
I. Profit Maximization:-
Generally higher profit is the barometer of the overall efficiency of the organization. Profit
maximization associate with fair profit. Simply fair profit means general rate of profit earned by similar type
of organization in the particular locality. The foremost aim of the financial management is to protect the
economic interest of the people who are connected with the organization. In order to discharge these social
responsibilities the firm must earn a maximum profit.
Simply the term profit maximization means a firm produces maximum output for a given amount of
raw material or effective utilization of input for producing a given output.
Objectives of Profit Maximization:-
Generally profit maximization is essential for the long run survival of the organization without profit
maximization or higher profit; the organization could not satisfy the parties connected with the business.
Simply all the business objectives can be achieved with the help of profit maximization some of the profit
maximization objectives are listed below.
Financial objectives of a firm:
 Return on Capital employed or ROI
 Value addition and profitability
 Growth in EPS and PE ratio
 Growth in MV of Share
 Growth in Dividends
 Optimum level of leverage
 Survival and growth of the firm
 Minimization of finance charges
 Effective utilization of Short, medium and long term objectives
II. Wealth Maximization:
To achieve wealth maximization, the finance manager has to take careful decision in respect of:
Types of decisions
1. Investment decisions: These decisions determine how scarce resources in terms of funds available are
committed to projects which can range from acquiring a piece of plant to the acquisition of another
company. Funds procured from different sources have to be invested in various kinds of assets. Long
 term funds are used in a project for various fixed assets and also for current assets. The investment of
funds in a project has to be made after careful assessment of the various projects through capital
budgeting.

Investment decisions
 Ascertainment of the total volume of funds, a firm can commit
 Appraisal and selection of capital investment proposals
 Measurement of risk and uncertainty in the investment proposal
 Prioritization of investment decisions
 Fund allocation and its rationing
 Determination of fixed assets to be acquired
 Determination of the level of investments and its management
 Buy or lease decisions
 Asset replacement decisions
 Restructuring, reorganization, mergers and acquisitions
 Securities analysts and portfolio management
2. Financing decisions: These decisions relate to acquiring the optimum finance to meet financial
objectives and seeing that fixed and working capital are effectively managed. The financial manager
needs to possess a good knowledge of the sources of available funds and their respective costs, and needs
to ensure that the company has a sound capital structure, i.e. a proper balance between equity capital and
debt.
Finance Decisions
 Determination of the degree or level of gearing
 Determination of the pattern of LT, MT & ST funds
 Raising of funds through various instruments
 Arrangement of funds through various institutions
 Consideration of interest burden
 Consideration of debt level changes and firm’s bankruptcy
 Taking advantage of interest and depreciation in reducing the tax liability of the firm
 Considering the various modes on improving the EPS and market value of the share.
 Consideration of cost of capital of individual component and weighted average cost of capital to the
firm
 Optimization of finance mix to improve returns
 Portfolio management
 Consideration of the impact of under capitalization and over capitalization
 Consideration for foreign exchange risk exposure
 Balance between owner’s capital and outside capital
 Evaluation of alternative use of funds
 Review of performance by analysis.
3. Dividend decisions: These decisions relate to the determination as to how much and how frequently
cash can be paid out of the profits of an organization as income for its owners/shareholders. The owner
of any profit-making organization looks for reward for his investment in two ways, the growth of the
capital invested and the cash paid out as income; for a sole trader this income would be termed as
drawings and for a limited liability company the term is dividends.
Dividend decisions
 Determination of dividend and retention policies of the firm
 Consideration of the impact of the levels of dividend and retention of earnings on the market value of
the share and the future earnings of the company
 Consideration of possible requirements of funds by the firm for expansion and diversification
proposals for financing existing business requirements
 Reconsideration of distribution and retention policies in boom and recession period
Considering the impact of legal and cash flow constraints on dividend decision

PART-C (COMPULSORY) (1X10=10 Marks)

9. a) Calculate the future value if Rs.5000 deposit today for 10 years from now at 8% of interest
Gn:
Principle- Rs.5000
Rate of Interest-8%
No.of Years -10
FV=P(1+r/100)^n
=5000(2.1589)
=10794

b) Calculate the future value for deposit Rs.500000 for 4 years at 8% value on quarterly basis
Gn:
Principle- Rs.5000000
Rate of Interest-8%= 2% (quarterly)
No.of Years -4*4=16
FV=P(1+r/100)^n*4
=5000000(1.02)^16
=6863928