AFRICA BEZA COLLEGE HAWASSA BRANCH BUSINESS MANAGEMENT DEPARTMENT Financial Mmanagement Assignment Group- E,BMz No, Name ID No, MESELE NIGATU DEKO = 381/2014 Instructor Beamilake.D 15/10/2016 E.C Hawassa, Ethiopia Financial Management Individual Assignment Page 1Africa Beza University College 1. What is Finance? Finance is the management of money and other assets. It involves activities such as investing, borrowing, lending, budgeting, saving, forecasting and managing risks. Ina business context, finance also includes activities related to raising capital, making financial decisions, and managing financial resources to achieve the organization's financial goals. There are three main types of finance: (1) personal, (2) corporate, and (3) public/ government, 1.1. Define financial management. Financial management is the process of planning, organizing, directing, and controlling an organization's financial resources. It involves making strategic decisions about how to raise capital, allocate funds, and invest in projects or assets to maximize the organization's value Financial management also encompasses activities such as budgeting, financial forecasting, risk management, and financial reporting. The goal of financial management is to ensure the efficient use of funds and to achieve the organization's financial objectives. 2. Brief describe the major areas of finance. The major areas of finance can be broadly categorized into three main areas’ 1. Comporate Finance: This area focuses on how businesses make financial decisions, including capital investment, financing, and dividend policies. Corporate finance also involves managing the company's financial resources and optimizing the capital structure to maximize shareholder value. 2. Investments: This area deals with the management of financial assets, such as stocks, bonds, and other securities. it includes portfolio management, asset allocation, security analysis, and risk management. Investment professionals aim to generate retums for investors while managing risk. 3. Financial Institutions and Markets: This area involves the study of financial institutions such as banks, credit unions, and insurance companies, as well as financial markets such as stock exchanges and bond markets. It includes topics like banking operations, financial Financial Management Individual Assignment Page 2Africa Beza University College regulation, and the functioning of capital markets. These three areas encompass a wide range of topics and activities within the field of finance, and they are essential for understanding and managing various aspects of the financial world. 3. What are the various sources of finance? There are several sources of finance available to individuals, businesses, and govemments to meet their funding needs. These sources can be broadly categorized into two main types: internal sources and external sources 1. Internal Sources of Finance: A Personal Savings: Individuals can use their personal savings to finance their needs, whether it's for personal expenses, investment in education, or starting a business. B. Retained Earnings: Businesses can reinvest their profits back into the company for expansion, acquisitions, or other investment opportunities C. Depreciation Reserves: Companies can set aside a portion of their profits to create reserves for replacing depreciating assets. 2. External Sources of Finance: A. Equity Financing: This involves raising funds by issuing shares of ownership in the company. It can come from individual investors, venture capitalists, or through an initial public offering ((PO) for publicly traded companies. B. Debt Financing: This involves borrowing funds that need to be repaid with interest over a specified period, Sources of debt financing include bank loans, bonds, debentures, and lines of credit C. Trade Credit: Businesses can obtain goods and services on credit from their suppliers, allowing them to defer payment for a certain period D. Grants and Subsidies: Governments and non-profit organizations often provide grants and subsidies to support specific projects, research, or initiatives E. Leasing: Companies can acquire assets such as equipment or property through leasing atrangements, which involve making regular payments over a defined period. F. Factoring: Businesses can sell their accounts receivable (unpaid invoices) to @ third- party financial institution at a discount to access immediate cash flow. G. Crowdfunding This involves raising funds from a large number of people, typically through online platforms, for a specific project or cause. Financial Management Individual Assignment Page 3Africa Beza University College H. Angel Investors and Private Equity: High-net-worth individuals and private equity firms provide capital in exchange for ownership equity or convertible debt in businesses. These sources of finance offer diverse options for meeting funding requirements, each with its own advantages and considerations based on factors such as cost, control, risk, and availability. Businesses and individuals often utilize 2 combination of these sources to meet their financial needs effectively. 4. Discuss the function of financial management and the role financial manager. Financial management is the process of planning, organizing, directing, and controlling the financial activities of an organization to achieve its financial goals and objectives. The primary function of financial management is to ensure the efficient and effective utilization of financial resources to maximize the value of the organization. The role of a financial manager is crucial in achieving this objective. Financial managers are responsible for overseeing the financial operations of an organization and making strategic financial decisions. Some key functions and roles of a financial manager include: 1. Financial Planning: Financial managers are involved in developing financial plans and budgets to guide the organization's financial activities. They analyze financial data, forecast future trends, and set financial goals to ensure the organization's long-term financial health. 2. Capital Budgeting: Financial managers are responsible for evaluating investment opportunities and determining the best use of the organization's capital resources. They assess the potential risks and returns of different investment projects to make informed investment decisions. 3. Financing Decisions: Financial managers are involved in determining the optimal capital structure of the organization, including the mix of debt and equity financing, They evaluate different sources of financing, such as loans, bonds, and equity, to raise capital for the organization's operations and growth. 4, Risk Management: Financial managers are responsible for identifying and managing financial risks that may impact the organization's financial performance. They develop risk management strategies, such as hedging and insurance, to protect the organization from adverse events. 5. Financial Reporting: Financial managers prepare financial reports and statements to communicate the organization's financial performance to internal and external stakeholders. They ensure compliance with accounting standards and regulations and provide accurate and timely financial information for decision-making Financial Management Individual Assignment Page 4Africa Beza University College Overall, the function of financial management and the role of a financial manager are critical in ensuring the financial success and sustainability of an organization. Financial managers play a key role in guiding strategic financial decisions, managing financial resources efficiently, and maximizing shareholder value. 5. Critically evaluate the range or extent of matters being dealt in (Scope of) financial management. The scope of financial management encompasses a wide range of matters that are crucial for the effective management of an organization's financial resources. It includes various functions, activities, and decision-making areas that are essential for achieving the organization's financial goals and objectives. The scope of financial management can be critically evaluated based on the following key areas: 1. Financial Planning: Financial management involves the development of comprehensive financial plans and budgets to guide the organizatior's financial activities. This includes forecasting future financial needs, setting financial goals, and creating strategies to achieve those goals 2. Capital Budgeting: Financial management encompasses the process of evaluating investment opportunities and making decisions regarding the allocation of capital resources to different projects. This involves assessing the potential risks and returns of investment projects to ensure optimal utilization of funds. 3. Financing Decisions: Financial management includes determining the optimel capital structure of the organization by evaluating different sources of financing, such as debt and equity. It also involves managing the organization's working capital to ensure smooth operations. 4. Risk Management: Financial management involves identifying, assessing, and managing financial risks that may impact the organization's financial performance. This includes developing risk management strategies to mitigate potential threats to the organization's financial stability. 5. Financial Reporting and Analysis: Financial management encompasses the preparation of accurate and timely financial reports and statements to communicate the organization's financial performance to stakeholders. It also involves conducting financial analysis to assess the organizations financial health and make informed decisions. 6. Cash Management: Financial management includes managing the organization's cash flow to ensure sufficient liquidity for day-to-day operations and to meet financial obligations 7. Comorate Finance: Financial management encompasses strategic financial decision- making related to mergers and acquisitions, dividend policy, capital restructuring, and other corporate finance activities. Financial Management Individual Assignment Page 5Africa Beza University College 8. International Finance: Financial management also extends to managing financial operations in an international context, including dealing with foreign exchange tisk, international investment decisions, and global financing strategies. 6. Distinguish between profit and wealth maximization as a goal of a firm in financial management. Profit maximization and wealth maximization are two distinct goals of @ firm in financial management, each with its own focus and implications. Here's a comparison between the two: 1. Profit Maximization ~ Profit maximization focuses on maximizing the absolute level of profit, such as net income or earnings per share. -Itis a short-term objective that emphasizes generating the highest possible level of profit in the immediate future. - The primary concem is to increase profitability without necessarily considering the long- term consequences or sustainability of the business. - Profit maximization does not take into account the timing of cash flows or the risk associated with achieving profits. 2. Wealth Maximization: - Wealth maximization aims to maximize the long-term value of the firm, taking into consideration both the timing and risk of cash flows - It focuses on increasing the overall wealth of the shareholders by maximizing the market value of the firm's shares - Wealth maximization considers the impact of financial decisions on the firm's ability to generate sustainable profits and create value over time. aligns with the goal of maximizing shareholders’ wealth, which encompasses not only dividends but also capital gains from stock price appreciation. In summary, while profit maximization emphasizes maximizing short-term profits without much consideration for long-term sustainability, wealth maximization focuses on increasing ‘the overall wealth of the shareholders by maximizing the market value of the firms shares through sustainable and value-creating decisions. In modern financial management, wealth maximization is generally considered a more comprehensive and appropriate goal for firms as it aligns with the interests of shareholders and takes into account the long-term sustainability and success of the business. Financial Management Individual Assignment Page 6Africa Beza University College 7. Explain the function and classification of financial markets. Financial markets play a crucial role in the economy by facilitating the exchange of financial assets, such as stocks, bonds, currencies, and derivatives, between investors and borrowers. These markets provide a platform for participants to buy and sell financial instruments, manage risk, and allocate capital efficiently. Here's an explanation of the functions and classification of financial markets: Functions of Financial Markets: 1. Price Determination: Financial markets enable the determination of prices for financial assets based on supply and demand dynamics, reflecting investors’ perceptions of value and risk, 2. Liquidity Provision: They provide liquidity by allowing investors to easily buy and sell financial essets, ensuring that investors can convert their investments into cash when needed 3. Risk Management: Financial markets offer various instruments, such as options and futures, that allow investors to hedge against or speculate on price movements, thereby managing their risk exposure 4. Capital Allocation: They facilitate the efficient allocation of capital by directing funds from savers to borrowers, enabling businesses and governments to raise capital for investment and growth. 5. Information Transmission: Financial markets serve as a mechanism for the dissemination of information about companies, economic conditions, and market expectations, influencing investment decisions. Classification of Financial Markets: Financial markets can be classified based on various criteria, including the types of financial instruments traded and the maturity of the instruments. Here are the primary classifications: 1. Money Market: The money market deals with short-term debt securities and instruments with maturities typically less than one year. It includes instruments like Treasury bills, commercial paper, certificates of deposit, and short-term government securities 2. Capital Market: The capital market focuses on longer-term securities, such as stocks and long-term bonds, which are used by businesses and governments to raise capital for investment. It can be further divided into the stock market (for equity securities) and the bond market (for debt securities) 3. Primary Market In the primary market, new securities are issued and sold for the first time by issuers to raise capital. This market allows companies to directly access funds from Financial Management Individual Assignment Page 7Africa Beza University College investors through initial public offerings (IPOs) or bond issuances. 4, Secondary Market: The secondary market involves the trading of existing securities among investors, providing liquidity and price discovery for previously issued securities Stock exchanges and over-the-counter markets are examples of secondary markets. 5. Derivatives Market: Derivatives markets involve financial contracts whose value is derived from an underlying asset or index. This includes options, futures, forwards, and swaps, which are used for hedging, speculation, and risk management Overall, financial markets play a critical role in the economy by facilitating the efficient allocation of capital, managing risk, and providing liquidity while serving es a barometer of economic conditions and investor sentiment. Financial Management Individual Assignment Page 8