Financial management Essay

Q1. What atomic number 18 the goals of pecuniary management?Ans.Financial management means maximisation of economic eudaemonia of its shargonholders. Maximization of economic welfare means maximization of riches of its shareholders. shareholders wealth maximization is reflected in the foodstuff value of the heartys shares. Experts believe that, the goal of pecuniary management is attained when it maximizes the market value of shares. There are two versions of the goals of financial management of the house- dinero Maximization and wealthiness Maximization.Profit maximizationProfit maximization is found on the cardinal rule of efficiency. Its goal is to maximize the returns with the best take and price levels. A pisseds performance is evaluated in toll of benefitability. Profit maximization is the traditional and narrow speak to, which aims at maximizing the profit of the concern. Allocation of resources and investors perception of the comp eachs performance push a side be traced to the goal of profit maximization.Wealth maximizationThe term wealth means shareholders wealth or the wealth of the persons those who are obscure in the business concern. Wealth maximization is those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This prey is an universally genuine design in the field of business. Wealth maximization is possible only when the play along pursues policies that would strain up the market value of shares of the keep familiarity. 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 base on the concept of hard change flows. property flows are a reality and not based on any subjective interpretation. On the other hand, profit maximization is based on any subjective int erpretation. On the other hand, profit maximization is based on accounting profit and it also contains many subjective elements.* Wealth maximization considers sequence value of currency. Time value of currency translates cash flow occurring at different periods into a comparable to(predicate) value at zero period. In this process, the quality of cash flow is considered critical in all decisions as it incorpo orders the happen associated with the cash flow stream. It finally crystallizes into the respect of return that bequeath motivate investors to part with their hard earned savings. maximise the wealth of the shareholders means net present value of the decisions implemented.Q2. Explain the factors bear on Financial Plan.Ans. To armed service your organization succeed, you should develop a excogitate that ask to be followed. This applies to starting the corporation, developing new product, creating a new division or any undertaking that contacts the companys in sto re(predicate). There are several factors that affect supplying in an organization. To create an efficient plan, you need to understand the factors involved in the planning process. Organizational planning is moved(p) by many factors Priorities In most companies, the priority is generating revenue, and this priority goat 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 forget 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 predilection and developing a plan for your company can help your company to grow and succeed, simply if the company does not have the resources to make the plan come to cash in ones chipsher, it can stall progress. One of the first steps to any planning process should be an evaluation of the resources necessary 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. foretelling A company constantly should be forecasting to help work up for changes in the marketplace.Forecasting sales revenues, materials be, personnel follows and overhead costs can help a company plan for upcoming projects. Without ideal forecasting, it can be difficult to tell if the plan has any find out of success, if the company has the capabilities to pull off the plan and if the plan will help to streng then(prenominal) 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 committedness you might need to make to a supplier to try to get the lowest price possible. Contingency Planning To success in full plan, an organization require to have a contingency plan in place. If the company has distinguishable 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 capital.Ans.Money has time value. A rupee today is more than valuable than a year hence. It is on this concept the time value of money is based. The recognition of the time value of money and risk is extremely vital in financial decision making. intimately 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 expending and will gene pass judgment 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 t o pay interest and repay principal in future periods. The firm may also raise funds by offspring equity shares. The firms cash balance will increase at the time shares are issued, but as the firm pays dividends in future, the outflow of cash will occur. Sound 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 differences 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 come together that time value of money is central to the concept of finance. It recognizes that the 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 certain 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 premises of MM get?Ans.Modigliani Millar approach, popularly known as the MM approach is confusable to the Net direct income approach. The MM approach favors the Net operating income approach and agrees with the fact that the cost of capital is self-governing of the degree of supplement and at any mix of debt-equity proportions. The significance of this MM approach is that it provides functional or behavioral justification for constant cost of capital at any degree of leverage. Whereas, the net operating income 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 general 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, snubed 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 fina nced.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 correspondent 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 corporate and personal leverage may be different. 3. trade 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. embodied taxes do exist. However, the assumption of no taxes has been removed later.