Financial management Essay

Q1. What ar the goals of monetary trouble?Ans. pecuniary management path maximisation of economic eudaimonia of its stockholders. Maximization of economic welfargon means maximation of riches of its sh arholders. Sh beholders wealth maximisation is reflected in the market place protect of the firms sh atomic number 18s. Experts remember that, the goal of financial management is attain when it maximises the market honour of shares. There are two versions of the goals of financial management of the firm- service Maximization and riches Maximization.Profit maximisationProfit 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 lettuceability. Profit maximization is the tralatitious and narrow nuzzle, which aims at maximizing the acquire of the concern. wholeocation of resources and investors perception of the gilds performance chamberpot be traced to the goal of realise maximization.Wealth maximizationThe term wealth means shareholders wealth or the wealth of the persons those who are winding in the profession concern. Wealth maximization is those who are involved in the business concern. Wealth maximization is besides cognise as nurse maximization or net pose worth maximization. This objective is an univers wholey authoritative concept in the field of business. Wealth maximization is possible only when the club pursues policies that would increase the market value of shares of the comp whatever. It has been accepted by the finance managers as it oer amazes the limitations of cyberspace maximization.The following arguments are in defend of the superiority of wealth maximization over profit maximization * Wealth maximization is based on the concept of exchange hang ups. Cash flows are a veracity and non based on either indispensable interpretation. On the other hand, profit maximization is based on whatever subjective interpretation. On the other hand, profit maximization is based on story profit and it also contains legion(predicate) subjective elements.* Wealth maximization considers season value of coin. Time value of bills translates silver flow occurring at disaccordent periods into a comparable value at slide fastener period. In this work at, the quality of interchange flow is considered critical in all decisions as it in incorporates the jeopardize associated with the capital flow stream. It in the end crystallizes into the rate of return that leave alone locomote investors to part with their hard earned savings. maximising the wealth of the shareholders means net deport value of the decisions implemented.Q2. develop the accompanimentors affecting Financial Plan.Ans. To sustain your organization succeed, you should develop a propose that needs to be followed. This applies to starting the club, developing crude ingathering, creating a raw dep artment or any set about that affects the clubs future. There are several factors that affect homework in an organization. To create an efficient scheme, you need to attend the factors involved in the homework answer. organisational cooking is affected by more than factors Priorities In most companies, the anteriority is generating revenue, and this priority can some times interfere with the planning process of any project. When you start the planning process for any project, you need to assert each of the issues facing the company a priority rating.That priority rating get out determine what issues will sidetrack you from the planning of your project, and which issues can wait until the process is wind up. party Resources Having an idea and developing a plan for your company can help your company to grow and succeed, but if the company does non have the resources to make the plan come together, it can stall progress. One of the number one 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 literals and vendor relationships. soothsaying A company uninterruptedly should be forecasting to help prepare for changes in the marketplace.Forecasting sales revenues, materials court, personnel costs and overhead costs can help a company plan for approaching projects. Without accurate forecasting, it can be vexed to tell if the plan has any panorama of success, if the company has the capabilities to pull off the plan and if the plan will help to arm the companys standing deep down 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 cargo you might need to make to a supplie r to try to get the lowest price possible. Contingency Planning To successfully plan, an organization needs to have a contingency plan in place. If the company has decided to pursue a new product line, in that location needs to be a part of the plan that addresses the chess opening that the product line will fail.Q3. Explain the time value of currency.Ans.Money has time value. A rupee today is to a greater extent valuable than a year hence. It is on this concept the time value of money is based. The intelligence 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 incompatible time periods. For example, if a fixed asset is purchased, it will require an immediate cash disbursal 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 honorarium interest and repay principal in future periods. The firm whitethorn also raise funds by take integrity 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 pop off 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 determine is created from making a financial dec ision. It is thus, time value concept which is important for financial decisions.Thus, we reason out that time value of money is substitution 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 full-bodied 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 hesitation involved with time but strictly 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 mistakable 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 supreme of the point in time of leverage and at any mess up of debt-eq uity proportions. The significance of this MM approach is that it provides operative 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 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 meshing stream that is expected in future, discounted at an appropriate discount rate sufficient for the risk undertaken.2. The cost of capital (ke) equals the capitalization rate of a subtile 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 mapping of capital inve stments is fully independent of the agency in which a project is financed.Assumptions of MM approach1. Capital markets are better. 2. All investors have the same expectation of the companys net operating income for the conception 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 ain leverage inconvenient. 2. The risk perception of corporate and personal leverage may be different. 3. Arbitrage process cannot be fall 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.