### I.

Short Answer Type Questions:

1. **Define Finance.**

- Finance refers to the management of money, including activities such as investing,

borrowing, lending, budgeting, saving, and forecasting.

2. **What are the functions of Finance?**

- The key functions of finance include:

- Investment decision-making

- Financing decisions (debt vs equity)

- Dividend decisions

- Risk management

- Working capital management

3. **Define Financial Management.**

- Financial management is the process of planning, organizing, controlling, and

monitoring financial resources to achieve organizational objectives efficiently and
effectively.

4. **What do you mean by Profit Maximization?**

- Profit maximization is the process of increasing a company’s earnings as much as

possible, without considering the risks or sustainability in the long term.

5. **What do you mean by Wealth Maximization?**

- Wealth maximization focuses on increasing the value of the shareholders' equity in the
long term. It takes into account risks, the time value of money, and sustainable growth.
6. **Define Cost of Capital.**

- Cost of capital is the return required by the providers of capital (both debt and equity) to
compensate them for their risk.

7. **What do you understand by Shareholders’ Wealth?**

- Shareholders’ wealth refers to the total value of shares held by shareholders. It is

typically measured by the market price of the company’s shares and is a key goal of
financial management.

8. **Define Agency Problem.**

- The agency problem arises when the interests of the managers (agents) do not align with
those of the shareholders (principals), leading to potential conflicts in decision-making.

9. **What are Agency Costs?**

- Agency costs are the costs incurred to resolve conflicts between managers and
shareholders. These costs may include monitoring costs, bonding costs, and residual loss.

10. **Who is the Finance Manager?**

- A finance manager is responsible for managing a company’s financial health. Their

duties include managing investments, budgeting, financial planning, and overseeing
financial operations.

11. **What are the functions of a Finance Manager?**

- Functions of a finance manager include:

- Making investment decisions

- Deciding on the capital structure

- Managing working capital

- Ensuring liquidity
 - Conducting financial analysis and forecasting

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### II. Long Answer Type Questions:

1. **What do you mean by Financial Management? Discuss in detail the scope of the
Financial Management.**

**Answer:**

Financial management refers to managing a company’s financial resources to achieve its

goals and objectives. Its scope covers the following areas:

- **Investment Decisions**: Choosing where and how much to invest in projects and
assets.

- **Financing Decisions**: Deciding the best mix of debt and equity for raising capital.

- **Dividend Decisions**: Determining how much profit should be distributed to

shareholders versus retained for growth.

- **Liquidity Management**: Ensuring the company has enough cash flow to meet short-
term obligations.

- **Risk Management**: Managing financial risks like interest rates, exchange rates, and
credit risks.

2. **Trace out the origin and development of Financial Management.**

**Answer:**

Financial management evolved from simple bookkeeping and accounting in the early 20th
century to a highly strategic field focusing on value creation and risk management. Early
financial management emphasized profit maximization, but with the growth of
corporations and the stock market, the focus shifted to wealth maximization, shareholder
value, and long-term financial sustainability. Key developments include the rise of modern
portfolio theory, capital asset pricing models, and corporate governance structures aimed
at addressing agency problems.

3. **Explain the scope of Finance function in the modern corporate world.**

**Answer:**

The finance function in the modern corporate world goes beyond managing cash flows. It
encompasses:

- **Strategic Financial Planning**: Aligning financial strategies with overall corporate

strategies.

- **Investment and Capital Allocation**: Assessing and selecting investment projects

based on risk, returns, and alignment with business goals.

- **Risk Management**: Identifying financial risks and implementing strategies like

hedging, diversification, and insurance.

- **Corporate Governance**: Ensuring that financial decisions are made in the best
interests of shareholders.

- **Sustainability**: Managing finances in a way that considers environmental, social,

and governance (ESG) factors.

4. **In what respect is the objective of wealth maximization superior to profit

maximization?**

**Answer:**

Wealth maximization is considered superior because it focuses on increasing the long-

term value of the firm, considering both risk and the time value of money. It aligns with
shareholder interests by maximizing share price and ensuring sustainability. Profit
maximization, on the other hand, focuses only on short-term earnings, often ignoring the
risks and potential long-term consequences of decisions. Wealth maximization also takes
into account the cost of capital and the potential for future growth, while profit
maximization may lead to decisions that could harm the firm’s future prospects.
5. **“Profit maximization is not an operationally feasible criterion.” Do you agree?**

**Answer:**

Yes, profit maximization is not a practical criterion because it does not account for the
risks associated with financial decisions or the time value of money. It is a short-term
approach that focuses only on immediate gains and ignores the long-term financial health
of the company. Moreover, it can lead to reckless decision-making, such as cutting
essential costs like research and development or neglecting environmental and social
responsibilities, which could harm the firm in the long run. Wealth maximization, however,
provides a more comprehensive view of success by balancing profits, risk, and long-term
value creation.

6. **“Investment, Financing, and Dividend decisions are all inter-related.” Comment.**

**Answer:**

Investment, financing, and dividend decisions are closely related and cannot be made in
isolation:

- **Investment Decisions**: Impact future profits and cash flows, influencing the
company’s need for financing.

- **Financing Decisions**: Involve choosing between debt and equity, which affects the
company’s capital structure and its ability to make future investments.

- **Dividend Decisions**: Determine how much profit is paid out to shareholders versus
reinvested in the company. A company that retains more earnings has more internal funds
for investment, reducing the need for external financing.

These decisions must be coordinated to ensure the optimal balance between growth,
risk, and shareholder returns.

7. **Explain what is meant by Agency Relationships and Agency Costs. How can agency
costs be mitigated?**
 **Answer:**

An **agency relationship** exists when one party (the agent) makes decisions on behalf
of another party (the principal). In financial management, this refers to the relationship
between shareholders (principals) and managers (agents). **Agency costs** arise when
there are conflicts of interest between the two, leading to inefficiencies such as excessive
spending or risky projects that benefit managers more than shareholders.

**Mitigating Agency Costs**:

- **Incentive Systems**: Aligning managerial compensation with shareholder goals

through stock options, bonuses tied to performance, etc.

- **Corporate Governance**: Establishing a strong board of directors to oversee

management decisions.

- **Shareholder Activism**: Allowing shareholders to have a voice in major decisions

through voting rights.

8. **Bring out the emerging role of the financial manager in the era of a changing business
environment.**

**Answer:**

In today’s dynamic business environment, the role of the financial manager has evolved
significantly. Instead of just focusing on accounting and record-keeping, financial
managers now play a key role in strategic decision-making. Their responsibilities include:

- **Strategic Planning**: Financial managers now help shape the company’s long-term
strategies, identifying profitable ventures and ensuring the efficient allocation of resources.

- **Risk Management**: As globalization and market volatility increase, managing

financial risk has become a key function.

- **Technological Integration**: With advancements in financial technologies (FinTech),

financial managers need to integrate data analytics, automation, and AI into decision-
making.
 - **Sustainability and ESG**: Financial managers are also responsible for ensuring the
company’s financial policies are in line with environmental, social, and governance goals.