Q.
What is Financial Management
Ans: Financial Management involves applying management principles
to plan, control, and utilize a company's financial resources effectively.
It focuses on how to raise funds, use them efficiently, and ensure their
cost-effective application for business growth and success.
Q. What are the natures and characteristics of financial
management
Ans: These are explained below-
Continuous process: Financial Management is not a one-time
task. It is a continuous and ongoing process that takes place
throughout the life of the organization. The finance manager
must continually manage and monitor finances for the company’s
success.
Efficient Utilization of Resources: Financial Management
emphasizes the optimal use of the company’s financial
resources. It avoids wastage and ensures that funds are used in
areas where they give the best possible return.
Universal Applicable: Financial management is necessary for
all organizations, whether they are manufacturing, service-based,
large, small, or even non-profit organizations. It plays a crucial
role in the success of all types of businesses.
Measurement of Performance: In today’s world, the
performance of a business is often measured by its financial
results. The finance manager’s role is crucial in balancing
profitability and risk to achieve the desired performance levels.
Helps in Financial Planning and Control: It helps in creating
a financial roadmap for the future. This includes setting financial
goals, preparing budgets, and using tools like variance analysis
to compare actual performance with planned targets.
Coordination with Other Departments: Financial
management cannot work in isolation. The finance manager
needs to coordinate with all other departments because their
activities directly impact the financial outcomes of the company.
Goal-Oriented Activity: The main goal of financial
management is to maximize the wealth of shareholders or
owners. It aims to achieve the overall objectives of the business,
such as profitability, sustainability, growth, and financial stability.
Decision-Making Function: Financial management involves
three major types of decisions: A. Investment Decisions
(Where to invest the funds),
B. Financing Decisions (from where to raise the funds), and C.
Dividend decisions (how much profit to distribute and how
much to retain).
Q. What are the functions/scope of financial management?
Ans:
Investment Decisions: Financial management involves deciding
where to invest funds to achieve maximum returns. It includes
evaluating investment opportunities, estimating potential returns,
and assessing risks to make smart investment choices.
Financial Planning: Financial planning ensures that a business has
enough funds for its operations and growth. This involves budgeting,
forecasting, and preparing strategies to meet future financial needs.
Working Capital Management: This involves managing short-
term assets and liabilities, like inventory, accounts receivable, and
account payable, to ensure smooth daily operations and maintain
liquidity.
Dividend Decisions: Financial management also involves deciding
how much profit should be distributed to shareholders as dividends
and how much should be reinvested in the business. Factors like
profitability and future growth plans are considered.
Risk Management: Managing financial risks is a key part of
financial management. This includes identifying and minimizing
risks like market fluctuations, credit issues, and operational
uncertainties to ensure business stability.
Q. Write down the objectives of Financial Management?
Ans: The Main goal of financial management is to manage an
organization’s financial resources effectively. The important objectives of
financial management are:
1. Profit Maximization: One of the primary objectives is to ensure
maximum profits for the business by reducing costs and increasing
revenue.
2. Wealth maximization: Financial management aims to maximize
shareholder wealth by increasing the market value of the
organization’s shares.
3. Ensuring liquidity: Maintaining adequate liquidity is essential to
meet day to day operational needs and avoid financial difficulties.
4. Efficient Utilization of Resources: Financial management ensures
that funds are allocated and utilized effectively for the best possible
returns.
5. Minimizing Risks: Identifying and managing financial risks, such as
market fluctuations and credit risks, is important to ensure financial
stability.
6. Ensuring financial Stability: It helps maintain a balance between
debt and equity, ensuring the organization remains financially stable
and flexible.
7. Growth and Expansion: Financial management supports the long-
term growth of the organization by planning for future investments
and expansion.
Q. Explain the concept of Time Value of Money (TVM).
Ans: The time value of money (TVM) is a financial concept that
states that money available today is worth more than the same
amount in the future due to its earning potential. This principle is
based on the idea that money can earn interest or generate returns
when invested, so its value increases over time.
Components of Time Value of Money
1. Present Value (PV): The Present Value is the current worth of
sum of money or cash flow that we expect to receive in the
future, discounted at a specific rate.
2. Future Value (FV): The Future Value is the amount of money
that an investment made today will grow to at a specified rate of
return over time.
3. Interest Rate (r): The interest rate is the rate of return or
discount rate applied to calculate the future or present value of
money. It is expressed as a percentage.
4. Time Period (n): The time period refers to the number of years,
months, or days over which the money grows or in discounted.
5. Compounding and discounting: Compounding is the process
of calculating the future value of money by applying interest over
multiple periods.
Importance of TVM
1. Investment Decision: TVM Helps in comparing the value of
investments over time
2. Loan Analysis: TVM is useful in calculating EMIs and loan
repayments.
3. Retirement Planning: TVM determines how much we need
to invest today for a desired future amount.
Q. What are the techniques of estimating time value of
money?
Ans: The techniques for estimating the time value of money
are:
1. Compounding Technique (Future Value Method): This
method converts the present value by adding interest over
time.
Interest earned on the initial deposit is reinvested, and in
subsequent periods, interest is earned on both the principal
and the accumulated interest. This process is called
compounding.
2. Discounting Technique (Present Value Method): This is
the reverse of compounding. It helps determine the present
value of a future amount by discounting it at a given rate of
interest.
Q. What is the meaning of Risk.
Ans: Risk in finance refers to the possibility of losing money or
facing financial uncertainty when making investment or business
decisions. It arises due to factors such as market fluctuations,
economic downturns, inflation, interest rate changes, and
company-specific issues.
Q. What is the meaning of return.
Ans: Return in finance refers to the profit or loss earned from an
investment over a specific period. It is usually expressed as a
percentage of the initial investment. Returns can come from
capital appreciation (increase in asset value), Interest, dividends,
or any other form of earnings.
Q. What is Capital Assets Pricing Model (CAPM).
Ans: The Capital Assets Pricing Model (CAPM) is a financial model
that helps determine the expected return on an investment based
on its risk. It shows the relationship between systematic risk
(Market Risk) and expected return, helping investors decide
whether an asset is worth investing in.
Q. What is Valuation of Securities?
Ans: Valuation of securities refers to the process of determining
the fair market value of financial instruments such as stocks,
bonds, and derivatives. It helps investors, analysts, and
businesses make informed investment decisions by estimating
the intrinsic worth of a security based on various factors like cash
flows, risk, and market conditions.
Q. What is a bond?
Ans: A bond is a financial instrument that represents a loan made
by an investor to a borrower, typically a corporation, government,
or municipality. In return, the issuer agrees to pay periodic
interest, known as coupon payments, and repay the principal
amount at maturity. Bonds are considered fixed-income securities
as they provide regular income to investors. They are widely used
for raising capital and are generally less risky than stocks.
