FINANCIAL MANAGEMENT
UNIT I
Two Marks
1. Define Financial Management.
According to archer and ambrosio,” Financial Management is the application
of the planning and control functions to the finance function.”
2. What is portfolio return?
A portfolio is a combination of securities. The return of a portfolio is weighted
average of returns of the individual securities. The weights are the proportion of each
security in the total inverstment.changing the proportion of investment in each
security can change the expected return on a portfolio.
3. What is time value of money?
The concept “Time value of money” is based on fact that the money has a time
value, i.e., a rupee today is, much more valuable than a rupee that is received tomorrow.
4. Name the objective of conventional and modern approach in financial
management.
Conventional approach-profit maximization approach
Modern approach-wealth maximization approach.
5. What is included under scope of financial management? (or) “Modern view of
financial management”
a) Estimation of requirements of finance.
b) Arrangement of funds from financial institutions
c) Arrangement of funds through financial instruments.
d) Effective and judicious utilization of funds.
6. What are the objective of FM?(goals)
Two important objectives:
1. Profit maximization.
2. Wealth maximization.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT
7. What is Rule of 72?
Rule of 72 states that how many years principal get doubled. It can be
calculated by using the following formula:
Year=72/rate of interest
8. Define future value of money.
The context of savings or investment account ,the future value of your money
in the account after a specified time period.
9. How is term finance more comprehensive than money management?
Finance can be defined as the art and science of managing money virtually all
individuals and organizations earn or raise money and spend or invest money.
Finance is concerned with the process, institutions, markets, and instruments
involved in the transfer of money among and between individuals ,businesses
and governments.
10. How would you have a fresh look at finance function in business? (Or) Comment
on emerging role of finance manager in India?
Finance functions can be grouped as outline below:

Financial planning

Financial control

Financing decisions

Investment decision

Management of income and dividend decision

Incidental functions.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT
16 MARKS
1. What are the basic financial decisions? How do they involve risk-return trade
off?
Definition:
According to archer and ambrosio,” Financial Management is the application
of the planning and control functions to the finance function.”
 Financial decisions are decisions concerning the financial matters of a Firm. The
financial decisions are grouped into three categories.
1. Investment decisions.
2. Financing decisions.
3. Dividend decisions.
 Investment decisions:
It is concerned with deciding the total amount of assets to be held in the firm and
their composition.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT
Investment decisions are two types.
 Long –term investment decision :

It is decision refers to the capital expenditure decision. it involves the evaluation
of various capital expenditure proposals in terms of their cost,revenve,profits and
risks..
 Short term investment decision:
It is concerned with the management of working capital. it is also known as liquidity
decision.
It involves decisions regarding investment in current assets, allocation of funds among
cash, receivables inventories etc.
Financing decision:
 Debt
 Equity
Dividend decision:
Payout decision.
Risk –return trade off:
The financial decisions are interrelated and affect the risk and return of the firm. They have
a combined effect on its market value. if a financial decision increases the risk ,the market
value will be adversely affected ,even though there may be chances of a higher return.
2. Briefly describe the reasons why profit/EPS maximization tail to be consistent
with wealth maximization?
Definition -financial management:
According to archer and ambrosio,” Financial Management is the application of the
planning and control functions to the finance function.”
Financial Management is a function which is concerned with the management of funds. It
includes
 Financing planning
 Raising of financial resources.
 Management of financial resources.
 Control of financial resources.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT
 OBJECTIVES OF FINANCIAL MANAGEMENT
 Two important objectives –
 Profit maximization.
 Wealth maximization.
 Profit maximization:
Profit maximization refers to the maximization of income or earnings of a firm.
Objectives:
1.
Natural Goal: profit is aim of any business. Naturally, the goal of financial
management should be profit maximization.
2. Measure of Efficiency: profit is a measure of efficiency. Higher profits imply greater
efficiency.
3. Internal generation of funds: profits lead to internal generation of funds. It helps to
finance the growth of the business.
4. Protection against Risks: profits provide protection against risks. When a company is
faced with unfavorable conditions.
5. Fulfillment of social obligations: profits are essential for fulfilling social obligations of
the business.
Arguments:
1. Profit is vague. Profit may refer long term profits or long term profits.
2. The objective of profit maximisation neglects time value of money.
3. Some projects are risky than the others though the earnings may be equal.
 Wealth maximization

Wealth maximization, as an objective of financial management, refers to the
maximization wealth of the shareholders. it involves maximization of the net present
value of an investment .NPV of an investment is the difference between present value
of its inflows(benefits) and outflows costs).
Advantages of wealth maximization:

Clarity: It is a clear concept. It represents the net present worth.

Time Value of Money: It takes into account the time value of money, by discounting
the future cash inflows.

Recognizes risk factor: the risk factor is recognized. For proposal with a greater
degree of risk, high discount rate is used.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT

Universal acceptance: It is universally accepted. It takes care of the shareholders,
financial institutions, employees and society.
3. Discuss the functions of finance manager in an organization.
FINANCIAL MANAGEMENT is concerned with the raising of funds and
their effective utilization. The firm has to procure the funds at the minimum possible
cost and use them efficiency. For this purpose, the following decisions are to be
made.

INVESTMENT DECISIONS.

FINANCING DECISIONS.

DIVIDEND DECISIONS.
Functions of financial management:
a. Estimating Financing Needs: An important function of the finance manager
is to provide adequate and timely finance. It is necessary to estimate the fixed
as well as working capital requirements in advance.
b. Identification of sources of funds: Many sources are available to raising
funds. Equity shares, preference shares, institutional loans, debentures are the
popular sources of long –term funds. Cash credit and bank overdraft are
important sources of short term funds.
c. Developing an optimum capital structure: Capital structure decision is very
important. It involves deciding the proportion of debt and equity as the
sources of finance.
d. Capital budgeting: capital expenditure decisions relate to effective utilization
of capital. They commit funds in long term assets and influence the firm
wealth, determine its size and affect its risk.
e. Working capital management: it refers to the funds required for financing to
the day-to-day operations. It includes cash management, receivables
management, and inventory management.
f. Dividend policy: An important function of the finance manager is to
formulate the dividend policy of the company. Shareholders may prefer high
dividends. But retention of profits strengthens the internal generation of funds.
g. Mergers and acquisitions(M&A):
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT
Acquisition refers to the purchase of a business .mergers is a process by which
one company is merged into the order.
h. Financial Analysis: Analysis of financial performance is an integral part of
financial management. It helps in the assessment of strengthen and
weaknesses of the company in respect of liquidity, solvency, profitability,
operating efficiency.
i. Cost volume profit analysis: profit depends on the efficient management of
costs which in turn, depend on the volume of output.
j. Financial control: it is a control function of financial management .its object
to ensure that the performance is according to the plans.
Aims of Finance function :
1. Procurement of Funds
2. Efficient Utilization of Funds.
3. Increasing Profitability
4. Maximizing Firm Value
Functions of treasurer:

Provision of finance.
Functions of controller:

Investor relations.


Insurance.
 Reporting & interpreting.

Receivables
 Tax administration.
management:
 Reporting to government.

Cash management:
 Protection to government.

Investments:
 Protection of assets.
Planning &control.
 Economic appraisal.
RISK AND RETURN
Types of investment:
1. Govt. Securities (treasury bills, commercial paper).
2. Bank deposits.
3. Debentures.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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4. Preference shares.
5. Equity shares.
TYPES OF RISK:
 Capital risk: It involving a capital loss due to fall in the price.
 Income risk: The risk that varies from the return.
 Default risk: The payment of interest or repayment of principal.
 Liquity risk: The securities that is easily bought or sold.
1. Systematic risk.
2. Unsystematic risk:
 Market risk: It affects all prices of all securities. (Ex: political
uncertainty, war, changes in interest rates, tax, and recession.)
 Unique risk: It is specific to company or security.(Ex:
strike,competitor,loss in big contract.)
Explain “Non-diversifiable risk” and “security market line”
Security market line are used

To evaluate the portfolio performance on a risk adjusted basis,

To create index finds to track the performance of the specific market series over time.

To examine factors that affect aggregate market movements.
Non-diversifiable risk
The part of total risk which cannot be eliminated by diversification .it is also referred to a
market risk or systematic risk. The market risk of a stock represents that portion of its risk
which is attributable to economy-wide factors like the growth rate of GDP, the level of
government spending, money supply, interest rate structure and inflation rate. The factor
affects all firms to a greater or lesser degree; investors cannot avoid the risk arising from
them.
Value of bonds:
Concepts of value:
 Book value: The value that is recorded in the book or in the balance sheet of the
company.
 Market value: The value that can be bought or sold out in the market.
 Liquidation value: The value may be sale value or realised value or termination
value.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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FINANCIAL MANAGEMENT
 Going concern value: The value that is realised if the firm is sold as an operating
business.
 Replacement value method: the amount required to replace the existing asset.
Features of bonds:
1. Face value.
2. Interest rate.
3. Maturity value.
4. Redemption value.
5. Market value.
Three categories of bonds:
1.
Bonds with maturity.
2.
Pure discount bonds.
3.
Perpectual bonds.
Mr.M.Arivazhagan, Asst.Prof, Shivani School of Business Management, Trichy-9.
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