Financial management Essay Example for Free

Financial management EssayQ1. What ar the goals of monetary management?Ans.Financial management means maximization of economical welf atomic number 18 of its sh arholders. maximation of economic welfare means maximization of riches of its shareholders. Shareholders wealth maximization is reflected in the market valuate of the upstandings shares. Experts believe that, the goal of financial management is attained when it maximizes the market care for of shares. There are two versions of the goals of financial management of the firm- Profit Maximization and wealth Maximization. Profit maximizationProfit maximization is based on the cardinal rule of efficiency. Its goal is to maximize the returns with the best output and price levels. A firms performance is evaluated in terms of profitability. Profit maximization is the traditional and narrow approach, which aims at maximizing the profit of the concern. Allocation of resources and investors perception of the comp eithers per formance notify be traced to the goal of profit maximization.Wealth maximizationThe term wealth means shareholders wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is those who are involved in the business concern. Wealth maximization is likewise known as value maximization or net present worth maximization. This objective is an univers eachy accepted concept in the field of business. Wealth maximization is possible only when the compevery pursues policies that would increase the market value of shares of the comp either. It has been accepted by the finance managers as it overcomes the limitations of profit maximization.The following arguments are in support of the superiority of wealth maximization over profit maximization * Wealth maximization is based on the concept of notes flows. Cash flows are a reality and not based on any inherent interpretation. On the other hand, profit maximization is based on any subjective inter pretation. On the other hand, profit maximization is based on accounting profit and it also contains many subjective elements.* Wealth maximization considers m value of money. Time value of money translates cash flow occurring at different periods into a comparable value at zero period. In this process, the quality of cash flow is considered critical in all decisions as it incorpo judges the risk associated with the cash flow stream. It finally crystallizes into the rate of return that go forth motivate investors to part with their secure earned savings. Maximizing the wealth of the shareholders means net present value of the decisions implemented.Q2. Explain the factors scratching Financial Plan.Ans. To service your organization succeed, you should develop a jut out that needs to be followed. This applies to starting the company, developing new result, creating a new department or any undertaking that changes the companys future. There are several factors that affect planni ng in an organization. To create an efficient plan, you need to understand the factors involved in the planning process. Organizational planning is affected by many factors Priorities In most companies, the priority is generating revenue, and this priority can sometimes interfere with the planning process of any project. When you start the planning process for any project, you need to assign each of the issues facing the company a priority rating.That priority rating will determine what issues will sidetrack you from the planning of your project, and which issues can wait until the process is complete. Company Resources Having an idea and developing a plan for your company can help your company to grow and succeed, but if the company does not have the resources to maintain the plan come together, it can stall progress. One of the first steps to any planning process should be an evaluation of the resources unavoidable to complete the project, compared to the resources the company has available. Some of the resources to consider are finances, personnel, space requirements, access to materials and vendor relationships. Forecasting A company constantly should be forecasting to help prepare for changes in the marketplace.Forecasting sales revenues, materials costs, personnel costs and overhead costs can help a company plan for upcoming projects. Without dead-on(prenominal) forecasting, it can be difficult to tell if the plan has any chance of success, if the company has the capabilities to pull off the plan and if the plan will help to chant the companys standing within the industry. For example, if your forecasting for the cost of goods has changed due to a sudden increase in material costs, then that can affect elements of your product roll-out plan, including projected profit and the long-term commitment you might need to make to a supplier to try to get the lowest price possible. fortuity Planning To successfully plan, an organization needs to have a c ontingency plan in place. If the company has decided to pursue a new product line, there needs to be a part of the plan that addresses the possibility that the product line will fail.Q3. Explain the time value of money.Ans.Money has time value. A rupee today is more valuable than a year hence. It is on this concept the time value of money is based. The erudition of the time value of money and risk is extremely vital in financial decision making. Most financial decisions such as the purchase of assets or procurement of funds, affect the firms cash flows in different time periods. For example, if a fixed asset is purchased, it will require an immediate cash outlay and will generate cash flows during many future periods. Similarly if the firm borrows funds from a bank or from any other source, it receives cash and commits an obligation to establish interest and repay principal in future periods. The firm may also raise funds by issuing equity shares. The firms cash balance will incr ease at the time shares are issued, but as the firm pays dividends in future, the outflow of cash will occur. beneficial decision-making requires that the cash flows which a firm is expected to give up over period should be logically comparable. In fact, the absolute cash flows which differ in timing and risk are not directly comparable.Cash flows become logically comparable when they are appropriately adjusted for their rests in timing and risk. The recognition of the time value of money and risk is extremely vital in financial decision-making. If the timing and risk of cash flows is not considered, the firm may make decisions which may allow it to miss its objective of maximizing the owners welfare. The welfare of owners would be maximized when Net Present Value is created from making a financial decision. It is thus, time value concept which is important for financial decisions.Thus, we conclude that time value of money is central to the concept of finance. It recognizes that t he value of money is different at different points a of time. Since money can be put to productive use, its value is different depending upon when it is received or paid. In simpler terms, the value of a indisputable amount of money today is more valuable than its value tomorrow. It is not because of the uncertainty involved with time but purely on account of timing. The difference in the value of money today and tomorrow is referred as time value of money.Q6. What are the assumptions of MM approach?Ans.Modigliani Millar approach, popularly known as the MM approach is similar to the Net operating income approach. The MM approach favors the Net operating income approach and agrees with the fact that the cost of capital is independent of the degree of supplement and at any mix of debt-equity proportions. The significance of this MM approach is that it provides operational or behavioral justification for constant cost of capital at any degree of leverage. Whereas, the net operating i ncome approach does not provide operational justification for independence of the companys cost of capital.Basic Propositions of MM approach1. At any degree of leverage, the companys overall cost of capital (ko) and the Value of the firm (V) remains constant. This means that it is independent of the capital structure. The total value can be obtained by capitalizing the operating earnings stream that is expected in future, discounted at an appropriate discount rate suitable for the risk undertaken.2. The cost of capital (ke) equals the capitalization rate of a pure equity stream and a premium for financial risk. This is equal to the difference between the pure equity capitalization rate and ki times the debt-equity ratio.3. The minimum cut-off rate for the purpose of capital investments is fully independent of the way in which a project is financed.Assumptions of MM approach1. Capital markets are perfect. 2. All investors have the same expectation of the companys net operating income for the purpose of evaluating the value of the firm. 3. Within similar operating environments, the business risk is equal among all firms. 4. 100% dividend payout ratio. 5. An assumption of no taxes was there earlier, which has been removed.Limitations of MM hypothesis1. Investors would find the personal leverage inconvenient. 2. The risk perception of corporal and personal leverage may be different. 3. Arbitrage process cannot be smooth due the institutional restrictions. 4. Arbitrage process would also be affected by the transaction costs. 5. The corporate leverage and personal leverage are not perfect substitutes. 6. Corporate taxes do exist. However, the assumption of no taxes has been removed later.