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Unit I: Financial Management

The document provides an overview of key concepts in financial management including: [1] Definitions of financial management, the scope and objectives of financial management, and the functions and goals of a finance manager. [2] An analysis of the differences between profit maximization and wealth maximization as goals of financial management. [3] The roles and responsibilities of a finance manager in activities like raising funds, allocating funds, profit planning, and understanding capital markets.

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Mehak Singh
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105 views38 pages

Unit I: Financial Management

The document provides an overview of key concepts in financial management including: [1] Definitions of financial management, the scope and objectives of financial management, and the functions and goals of a finance manager. [2] An analysis of the differences between profit maximization and wealth maximization as goals of financial management. [3] The roles and responsibilities of a finance manager in activities like raising funds, allocating funds, profit planning, and understanding capital markets.

Uploaded by

Mehak Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT I

Financial Management
Outcomes
 Understand financial management and scope of
financial management.

 Know about finance function and role of finance


manager.
 Analysis financial goal profit maximization vs wealth
maximization.
News of the Day
Definition of Financial Management

“Financial management is the activity concerned with planning,


raising, controlling and administering of funds used in the
business.” – Guthman and Dougal

“Financial management is the operational activity of a business


that is responsible for obtaining and effectively utilizing the funds
necessary for efficient operations.”- Massie
Scope of Financial Management
Objectives of Financial Management

1) To ensure regular and adequate supply of funds to the


concern.

2) To ensure adequate returns to the shareholders.

3) To ensure optimum funds utilization.

4) To ensure safety on investment.

5) To plan a sound capital structure.


Functions of Financial Management

1) Estimation of capital requirements

2) Determination of capital composition

3) Investment of funds

4) Disposal of surplus

5) Management of cash

6) Financial controls
Goals of Financial Management

A. Profit Maximisation

B. Wealth Maximisation
Profit Maximization

Profit Maximization is the capability of the firm in producing


maximum output with the limited input, or it uses minimum
input for producing stated output. It is essential for the success,
survival, and growth of the company. Profit is a long term
objective, but it has a short-term perspective i.e. one financial
year.
Wealth Maximisation

Wealth maximization is the ability of a company to increase the


market value of its common stock over time. The market value of
the firm is based on many factors like their goodwill, sales,
services, quality of products, etc. This will help the firm to
increase their share in the market, attain leadership, maintain
consumer satisfaction and many other benefits are also there.
Wealth maximisation Vs Profit Maximisation
BASIS FOR COMPARISON PROFIT MAXIMIZATION WEALTH MAXIMIZATION
Concept The main objective of a The ultimate goal of the
concern is to earn a larger concern is to improve the
amount of profit. market value of its shares.

Emphasizes on Achieving short term Achieving long term


objectives. objectives.

Consideration of Risks and No Yes


Uncertainty

Advantage Acts as a yardstick for Gaining a large market


computing the operational share.
efficiency of the entity.

Recognition of Time No Yes


Pattern of Returns
Role of Finance Manager

 Raising of Funds

 Allocation of Funds

 Profit Planning

 Understanding Capital Markets


News of the Day
Sources of Finance
MCQs
Que. 1 Financial management is primarily concerned
with……………..

a) All aspects of acquiring of funds and utilization of


financial resources for firm activities.

b) Arrangements of funds

c) Efficient management of every business

d) Profit maximization
Answer: Option A

Financial Management is mainly concerned with all


aspects of acquiring and utilizing financial resources for
firms activities. Financial Management is the application of
general principles of management to the financial
possessions of an enterprise.
Que2. The primary goal of financial management is………

a) To maximize the return

b) To minimize the return

c) To maximize the wealth of owners

d) To maximize profit
Answer: Option C

The primary goal of the financial management is to


maximize the wealth of owners. All businesses aim to
maximize their profits, minimize their expenses and
maximize their market share.
Que3. In his traditional role the finance manager is
responsible for…………….

a) Proper utilization of funds

b) Arrangement of financial resources

c) Acquiring capital assets of the organization

d) Efficient management of capital


Answer: Option B

In his traditional role the finance manager is responsible for


arrangement of financial resources. Financial managers are
responsible for the financial health of an organization. They
produce financial reports, direct investment activities, and
develop strategies and plans for the long-term financial goals of
their organization.
Que4. most of investors are risk averse which
means……………..

a) They will assume more risk only if they are compensated with
higher expected return.

b) They will always invest in the investment with lowest possible risk.

c) They will always invest in the investment with highest possible risk.

d) They avoid the stock market due to higher risk.


Answer: Option D

Most investors are risk averse which means they avoid the stock
market due to the high degree of risk. A risk-averse investor, on
the other hand, dislikes risk and, thus, stays away from high-risk
stocks or investments and is prepared to forego higher rates of
return.
Que5. A company may raise capital from the primary
market through………………….

a) Public issue

b) Rights issue

c) Bought out deals

d) All of the above


Answer: Option D

A company may raise capital from the primary market


through Public issue, Rights issue and Bought out deals.
Que6. A fixed rate of……………………is payable on
debenture.

a) Dividend

b) Commission

c) Interest

d) Brokerage
Answer: Option C

A fixed rate of Interest is payable on debentures. Debentures are


a debt instrument used by companies and government to issue
the loan. The loan is issued to corporates based on their
reputation at a fixed rate of interest.
Que 7. Ownership securities are represented by…………

a) Stock

b) Loan

c) Debt

d) Debentures
Answer: Option A

Ownership securities consist of equity stock and preferred stock.


The term 'ownership securities,' also known as 'capital stock'
represents shares. Shares are the most universal form of raising
long-term funds from the market. Every company, except a
company limited by guarantee, has a statutory right to issue
shares.
Que 8. The long run objective of financial management
is………

a) Maximize earning per share

b) Maximize the value of firm’s common stock

c) Maximize retune on investment

d) Maximize market share


Answer: Option B

The long-run objective of financial management is to


maximize the value of the firm's common stock. Financial
Management is the application of general principles of
management to the financial possessions of an enterprise.
Que 9. The use of preference share capital as against debt
finance.

a) Reduces degree of leverage

b) Increases degree of leverage

c) Increases financial risk

d) Both a & b
Answer: Option A

The use of preference share capital as against debt finance


reduces DFL. A degree of financial leverage (DFL) is a leverage
ratio that measures the sensitivity of a company's earnings per
share (EPS) to fluctuations in its operating income, as a result of
changes in its capital structure.
Que 10. Investment banker perform the following
role…………
a) Market new stock and bond issues for the firm.
b) Provide advice to the firm as to market condition, price
etc.
c) Design securities with desirable properties.
d) All of the above.
Answer: Option D

Investment bankers perform the following role market new stock and
bond issues for firms B. provide advice to the firms as to market
conditions, price, etc C. design securities with desirable properties. An
investment banker is an individual who often works as part of a
financial institution and is primarily concerned with raising capital for
corporations, governments, or other entities.
Que 11. Which of the following short term securities is
inappropriate for an individual, desiring funds for
financial emergencies?
a) Treasury bills
b) Certificate of deposit
c) Financial futures
d) Saving accounts
Answer: Option C

Financial futures short term securities is inappropriate for an individual,


desiring funds for financial emergencies. Futures contract to buy or sell a
specific financial instrument (such as treasury bills, certificates of
deposit, or foreign currencies) at a specific future date and at a specified
price. The market value of these contracts generally moves in a direction
opposite to that of the interest rates.

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