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Assignment 1: Fundamentals: of Financial Management (FIBA 201)

This document contains answers to three questions on financial management. [1] The three important decisions for a finance manager are investment, financing, and dividend decisions. [2] Both profit maximization and wealth maximization are objectives of financial management, as the goal is to maximize value for shareholders. [3] Three problems are presented on calculating present and future value of money using formulas and tables, with examples involving annuities, single deposits, and compound interest rates.

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Kshitij Negi
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105 views

Assignment 1: Fundamentals: of Financial Management (FIBA 201)

This document contains answers to three questions on financial management. [1] The three important decisions for a finance manager are investment, financing, and dividend decisions. [2] Both profit maximization and wealth maximization are objectives of financial management, as the goal is to maximize value for shareholders. [3] Three problems are presented on calculating present and future value of money using formulas and tables, with examples involving annuities, single deposits, and compound interest rates.

Uploaded by

Kshitij Negi
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment 1: Fundamentals

of Financial Management (FIBA 201)


Name: Kshitij Negi
Section: C
Roll Number: 41
Semester: 3
BBA (General)
Submitted To: DR. Priya Solomon
Question1: Explain the 3 important decision of a finance manager.

Answer1: The 3 important decision of a finance manager are:


A) Investment Decision: This decision relates to careful selection of assets in which
funds will be invested by the firms. A firm has many options to invest their funds but
firm has to select the most appropriate investment which will bring maximum benefit
for the firm and deciding or selecting most appropriate proposal is investment
decision.

B) Finance Decision: The second important decision which finance manager has to
take is deciding source of finance. A company can raise finance from various sources such as

by issue of shares, debentures or by taking loan and advances. Deciding how much to raise

from which source is concern of financing decision. Mainly sources of finance can be divided
into two categories:

1. Owners fund.

2. Borrowed fund.

B) Dividend Decision: This decision is concerned with distribution of surplus funds.


The profit of the firm is distributed among various parties such as creditors,

employees, debenture holders, shareholders, etc. Payment of interest to creditors,

debenture holders, etc. is a fixed liability of the company, so what company or finance

manager has to decide is what to do with the residual or left-over profit of the

company. The surplus profit is either distributed to equity shareholders in the form of

dividend or kept aside in the form of retained earnings. Under dividend decision the

finance manager decides how much to be distributed in the form of dividend and how

much to keep aside as retained earnings. To take this decision finance manager keeps

in mind the growth plans and investment opportunities. If more investment

opportunities are available and company has growth plans then more is kept aside as
retained earnings and less is given in the form of dividend, but if company wants to
satisfy its shareholders and has less growth plans, then more is given in the form of

dividend and less is kept aside as retained earnings. This decision is also called

residual decision because it is concerned with distribution of residual or left-over

income. Generally new and upcoming companies keep aside more of retain earning

and distribute less dividend whereas established companies prefer to give more
dividend and keep aside less profit.

Question 2: Is Profit maximisation or wealth maximisation is the objective of a


Financial management?

Answer 2: Yes, profit maximisation and wealth maximisation are the objective of a financial

management as they to maximise the value of the firm. The management of the firms

involves many stakeholders including owner, creditors and various participants in the
financial market.

a) Profit Maximisation: Main aim of any kind of economic activity is earning


profit. A business concern is also functioning mainly for the purpose of earning profit.
Profit is the measuring techniques to understand the business efficiency of the
concern. The finance manager tries to earn maximum profits for the company in the
short-term and the long-term. He cannot guarantee profits in the long term because of
business uncertainties. However, a company can earn maximum profits even in the
long-term, if:

 The Finance manager takes proper financial decisions


 He uses the finance of the company properly
b) Wealth Maximisation: Wealth maximization (shareholders’ value maximization)
is also a main objective of financial management. Wealth maximization means to earn
maximum wealth for the shareholders. So, the finance manager tries to give a
maximum dividend to the shareholders. He also tries to increase the market value of
the shares. The market value of the shares is directly related to the performance of the
company. Better the performance, higher is the market value of shares and vice-versa.
So, the finance manager must try to maximize shareholder’s value.

Question 3: Any 3 problems on Future Value of Money and Any 3


problems on Present value of Money.

Answer3: Present Value:

1.An investor wants to find the present value of Rs. 40,000 due 3 years. His interest
rate is 10 %.

Solution: = Rs. 40,000

= Rs. 40,000 (0.751)

= Rs. 30,040

[Present value of one rupee Table at 3 years for the rate of 10 % is 0.751]
2.Mr. Krishna has to receive Rs. 500 at the beginning of each year for 4 years. Calculate
present value of annuity due assuming 10 % rate of interest.

Solution: PVA4= 500 (3.170)X (1.70)

= Rs. 1,743.5

3. Mr. Ram wishes to determine the PV of the annuity consisting of cash flows of Rs.
40,000 per annum for 6 years. The rate of interest he can earn from his investment is 10
%.

SOLUTION:

=RS.40000 x PVIFA

= Rs. 4000 x 4.355 = Rs. 17,420

[Present value of annuity for 6 years at 10 % is 4.355]


Future Value:

1. Rohit makes a single deposit of Rs.5000 today. It will remain invested for 4 years at
8% per year compounded annually. What will be the future value of his single deposit
at the end of 4 years?

FV= PV x [FV Factor for n=4,i=8%]

FV= 5000x[1.360] ---> FV Factor from FV of Table 1

FV=rs.6800

2. Raj makes a single deposit today of Rs.14000. The deposit will be invested for 3 years
at an interest rate of 10% per year compounded semi-annually. What will be the future
value of Raj's account at the end of 3 years?

FV= PV x [FV Factor for n=4,i=5%]

FV= 14000x [1.340] ---> FV Factor from FV of Table 1

FV=rs.18760
3.Sheila invests a single amount of 21000 today in an account that will pay her 8% per
year compounded quarterly. Compute the future value of Sheila's account at the end of
2 years.

FV= PV x [FV Factor for n=2,i=8%]

FV= 21000x[1.172] ---> FV Factor from FV of Table 1

FV=rs.24612

At the end of 2 years, Sheila will have Rs.24,612 in her account.

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