s

UNIT-I
Nature and Scope of Financial Management

1.(a) Fill in the blanks (1 mark each)

Finanu is defined as the art and science of managing money.

The two basic objectives of Financial Management are_ and
ii) means maximizing the upee income offirms.
v) means maximising the net present value.
The three important financial decision ofa fim are_ &
and
vi) refers to that part of managerial activity, which is concerned with procurement
utilization of funds for businesspurpose.
(vii) Wealth maximisation is also knownas
Wealth
Ans: )Finance i) Profit maximisation and wealth maximisation (i) Profit maximisation (iv)
maximisation (v) Investment decision, financing decision and dividend decision (vi) financial

management (vi) Value maximisation.

Key financial functionofafirm include the following except -[Choose the correct
(vii)
answer] [GU. 2015, 2018]
(a) Investment decision () Make or buy decision.
(c) Dividend decision (d) Financing decision

Ans: Make or buy decision.

(x) The relationship between returm and risk can be simply expressed as: [GU. 2016
Retum=Risk free rate - cost ofinvestment
(a)
(b) Risk premium -costof investment

() Returm Risk free rate +Riskpremium.

(a) Retum= Risk free rate - cost ofinvestment
Ans:
) Choose the correct option:
Proit maximisation ignores [GU. 2017]
Wealth
Time value ofmoney
Net value
iv) None ofthe above
Ans: ) Time value of money
(xi) Choose the correct option: [GU. 2017]1
Providing information to top management is of financial management
 REcurnlng l u t i u o l
()
Non-recurring function
i)
Routine function
(ii)
Advisory function
(iv)
ans: () Routine fiunction
(1 mark each)
terms
b) Give the meaning ofthe following
the time when it is required.
Every
Finance: It may be defined as the provision ofmoney at
on its operations
and to achieve its
or small needs finance to carry
enterprise. whether big, medium concerms with the applicationofskills
in the
lifcblood ofan enterprise and
targets. It is known as the
manipulation. usc and control of money.
management.
one ofthe goal or objectives of financial
i) Profit maximization: Profit maximization is can survive
maximization means increasing the rupee income ofthe business. No business
Profit
without eaming profit. Profit is a measure ofefficiency ofa business enterprise.
financial to
decisions. t relates the
i)
iii) Dividend decision: It is one ofthe decision among three major fim. The dividend decision is
to the
disbursementof profits back to investors who supplied capital shareholders. A decision has tobe
concemed with the quantum of profits to be distributed among
the profit in business or to keep part
a
the be distributed, to retain all
taken whether all profit are to
shareholders.
ofprofits in the business and distribute among are carmied
It means all such financial activitiesthat
) Recurring finance functions: [GU.2014]
t includes the follkowing-
out regularly or frequently for the efficient conduct of firm.
(a) Planning for funds-It involvestwo
activities:

Estimation offund requirements

Determination ofsources.
activities:
b) Organising of funds-It involves three
Raising of funds
Allocation offunds

Allocation of income
(c) Controlling offunds.
Write answers to the following questions in brief: (2 marks each)

a) Meaning of Financial Management. |GU. 2013]

ns: Financial Management means the application ofgeneral principles ofmanagement in the management
of financeboth in its soures,usesand control. As it is known that business finance means money
and credit employed in business. Thus, financial management means management of money and
credit employed in the businéss.
Financial Management refers to that part of the
management activity which is concerned with the
planning and controlling of fim's financial resources. It deals with finding out various sources 1or
raising funds for the fim. The sources must be suitable and economical for the needs of the business.
 The most appropriate use of such funds also forma part of financial management.
According to Soloman Ezra-"Financial Management is concerned with the efficient use ofan
important economic resource, namely capital fund".

(b) Wealth Maximisation : [GU. 2015] Wealth Maximisation is the appropriate objective of an
enterprise. Any financial action which creates wealth is desirable one and should be undertaken.
Wealth of the fim is reflected in the maximisationofthe present value ofthe fim. The term 'wealth
is reflected in the Earning Per Share (EPS) and the Market Price of Shares (MPS). The wealth of
shareholders increases only when there is increase in the price of shares in the market. The price of
shares ofthe company is affected by the earmed quantity ofprofit,dividend policy, liquidity ofassets
etc. The market value ofshares is indication ofprosperity and efficiency ofthe enterprise. So, the
objective of finanical management is to increase the wealthof thefirm.
Wealth of shareholders= Number of shares held x Market price per share.

State the objective of walth maximisation. [GU. 2016] 2 marks

Ans: The objectiveofwealth maximisation is maximizing the wealth ofthe owners ofthe fim. The wealth
it is
of the owners of a company is reflected by the market value of the company's shares. Hence,
market value of its shares.
implied that the financial objective of a firm should be to maximize the
in turn depends on the quality
The market price of the shares reflects the value ofthe shares and it,
of financial decisions taken by the management.
2 marks
2016]
(d) State the meaning of 'risk' in financial management. [GU.
Risk is a condition where there is a possibility of
Ans: 'Risk'in financial management means uncertainty.
a desired outcome that is expected.
It is related to the uncertainty of
an outcome different from

future.
financial planning? [GU.20181 2 Mark
(e) What do you m e a n by time to meet the needs of
need to ensure that enough funding is available at the right
Management
be needed to invest in equipment and stocks, pay
Ans:
the business. In the short term, funding may
be required for significant additions to the
etc. In the medium and long term funding may
employees
or to make acquisitions.
productive capacity ofthe business (5 marks each)
3. Answer the following questions:
characteristics of financial management.
Discuss the nature or
(a)
the following are the
characteristics of financial management:
Ans: According to the modern approach
management: In modern approach the financial management
Anindispensableorgan of business management and the finance manager is key
member of group of
is an important part of business financial management plays
to all business activities
As finance is linked
high level ofmanagement.
business decisions.
an impotant role in continuous process
has become a
In modern days financial management is also
Continuous process: finance is quite important. It
of business the role of manager
and for the successful running
environment
in the production and marketing
changes take place
continuous in the scnse that frequent effective as per the need of the situations.
become necessary to form an
policy
and it management
is wide. The function offinancial
The scope of financial management quite
(ii) Wide scope:
 is to find the sources for short term and long term requirements of the fund, their distributioe and
optimum use. Financial management is carried out in association with Accounts, Audit, CostAccourts
Business Budget, Management of materials, cash and credit.
(iv) Helpfulin decisionsoftop management: According to moden theory, the financial managr
helpsthe topmanagement in decision making. He presents the reports to the high level ofmanagement
on financial perfomance ofthe enterprise.
() Co-ordinationwith otherdepartments: The finance manger cannot do his work effectively
without co-ordination with other departments ofenterprise.The work ofevery department affects
the financial results. So the indifferenceofany department may stand in the way ofachieving the
expected results.

(vi) Applicable toalltypesoforganizations; Financial management is applicable in all organizations

whether it is manufacturing organization or service organization, small or big organizations. It is also
applicable to non-profit orga.izations.

(vii) Measurement of performance: In the modern times the business performance is measured on
thebasisof financial results.The finance manager performs the liquidity and profitability function by
striking a balance between the profit and riskproperly and thus get the desired levelofperformance.
What are the basic financial decision ?

Or
Mention the different types offinancial decisions and examine their mutual relationship
(GU. 2018, 20191
Ans: Financial decisions referto decisions concerning finacial matters ofabusines firm. These decisions
can be classified into 3
categories
Investment decision; Investment decision relates to the determination oftotal amount of assets
to be held in the fim, the composition ofthese assets and the business risk complexions ofthe fim
Since
as
perceived by its investors. Itis the most important financial decision. fundsinvolvecost
and are available in a limited quantity, its proper utilisation is very necessary to achievethe goal of
wealth maimisation.
The investment decision can be classified under two broad groups : (0) long term investment decision
and (l) short term investment decision. The long-term investment decision is teferred to as the
capital budgeting and the short-term investment decision as working capital management.

i) Financing Decision: Once the firm has taken the investment decision and commiteditselfto new
investment, it must decide the best means of financing these commitments. Since, firms regularly
make new investments, the needs for financing and financial decisions are on going. Hence, afim
will be continuously planning for new financial needs. The financial decision is not only concerned
with how best to finance new assets, but also concerned with the best overall mix offinancing for
the fim. A finance manager has to select such sources of funds which will make optimum capital
structure. The important thing to be decided here is the proportion of various source in the overall
capital mix of the firm. The financial manager has to strike a balance between various sources so
that the overall profitabilityof the concern imnproves.
ii) Dividend decision: The third majot financial decision relates to the disbursement of profits back

4
 to investors who supplied capital to the fim. The term dividend refers to that part of profits ofa
company which is distributed by it among its sharcholders as their reward for investments made by
them in the share capital otfthe company. The dividend decision is concemed with the quantum of
profits to be distributed among shareholders. A decision has to be taken whether all the profit are to
be distributed, to retain all the profits in business or to keep a part of profits in the business and
distrbute others amongsharcholders
What are the functions of financial management ? |GU. 2014, 16, 18
1s: Ina business enterprise, the finance manager has to perform certain important functions which are
known to be Finance Functions. Finance function is the most important of all busincess functions. It

remains a focus ofallactivities because the business will elosedown in the absenceoffinance. ne
need for money is continuous. The finance functions can be discussed under the following four

broadgroups:
Finance Functions

Recuring Non-Recuring Routine Advisory

Planning Organising of Controlling

for funds funds offunds

finance functions means all

Recurring Finance Functions: {GU. 2013] (5 marks) Recurring
such financialactivities that are carried out regularly or frequently for the efficient conductofa fim.
The contents ofrecurring finance functions are as follows
financial manager in a going concern is to
(a) Planningfor funds: The initial task ofthe
new or

fomulate plans for the company. Planning for funds involves two activities
has to estimate the financial needs of
(i) Estimation offunds requirements:A financial manager
a business. The funds or money will be needed lor purchasing fixed assets and meeting
working capital needs. He has to plan the funds needed in the future. The fund is estimated
through the preparation ofa financial plan. While detemining fiund requirements the financial
manager must keep in mind various considerations like purpose of the business, economic and
business conditions, future investment programmes etc.
i ) Determination ofsources:After estimating total fund requirments, the financial manager
decides as to how these requirments will be met. The financial manager has to decide the
various sources wherefrom the required funds are to be raised.
(b) Organisingof Funds: The next important fiunction ofthe financial manager is the organisation
or administration offunds. Three activities are involved in it:
) Raisingof lunds: 1he financial manager has to arrange the issue of prospectus for the
securities issue, in case of public limited companies. In order to ensure quick sale ofsecurities
he may approach the brokers or underwriters who deal in securities. Ifthe company decides
to borrow fund from financial institutions, the financial manager has to negotiate with the
appropriate authorities.
 (ii) Allocation of funds: The funds should be used in the best possible way. I he cost of

acquiring them and the returns should be compared. The channels which generate higher retums
should be preferred. In allocating funds, consideration must be given to the factors such as
immediate requirements, overall mgt. plans ctc. The technique ofcapital budgeting may be
helpful in sclecting a project. The objective ofmaximising profits will be achieved only when
the funds are efliciently used and they donot remain idle at any time.
(ii)Allocationofincome:Allocationofannual income is the exclusive responsibilityofthe
financial manager. Income may be retained for financing expansion of business or it may be
distributed to the owners ie, shareholders in the fom ofdividend.The financial manager must
be careful in deciding what portion ofearning should be distributed as dividend and how much
to retain for future growth or expansion.
c)Controlling offunds: Last but not the least fiunction ofthe financial manager is to control the
usage of funds in business. He is to see whether funds are raised and utilized as per plans and
budgets or there is any deviation. The financial manager can make use of different tools or
techniques to control the usage of funds such as budgetary report, ratio analysis, fund flow
statement etc.

(i) Non-Recurring Finance Funetions: Non-Recurring finance functions refer to those financial
activities that are performed by a financial manager very infrequently. These functions are not found
in the ordinary routine of the financial manager. These are to be performed by him on the occurence
of the special events.
Some non-recurring functions are:
() Preparation of financial plan at the time of promotion of the company.
(ü) Financial re-adjustments at the time of financial crisis or liquidationofa compnay.
(ii) Valuation of the fim at the time of merger, or amalgamation of two or more companies.
Routine Functions: In this category those functions are included which are of routine in nature.
These are performed by lower level employees like accountant, cashier and typist. Ordinarily these
functioninclude:
(a) Supervision of receipt of cash and its disburesment.
b) Keeping the cash balance properly and safely.
(C) Keeping the record of every transaction and the accounts safely.
(d) Management ofcredit transactions.
(e)Administration of pension and welfare schemes.
()Providing information to top management.
g)Obeying government rules and regulations.
(iv) Advisory Function: [GU. 2017] (2 marks) Normally the advice of the financial manager is
sought on important matters such as pricing, acquisition, expansion, diversification, dividend
etc. In many companies, the financial controllers often policy
combine in themselves, the secretarial functions
of the company. Therefore, quite often their advice is required on special laws and
affecting the business. legal formalities
(d) Distinguish between
) Traditional vs Modern Concept of Finance function. [GU. 2017]
Ans: Under the traditional
approach the function of financial management was simply the procurement or
 to meet their financial needs. Procurement means the whole gainsof
fnds by corporate enterprises
casted during 1920's to 1930's. It is discarded
raising funds externally. The traditional approach
now

hecause ofits limited scope.

The main shortcoming is that it does not consider the important dimension
funds as well as
ofallocation of capital. Whereas, the ModermApproach includes both raising of funds and the
conceptual and analytical framework for financial decision making. The cost raising
of
use should be calculated. The modern approach considers the three basic
returns from their
decisions and dividend decisions within
management decisions i.e., investment decisions, financing
the scope offinance function.
Profit Maximisation and Wealth Maximisation. [G.U. 2014]
Profit Maximisation Wealth Maximisation
Ans Basis
Itmeansincreasing the rupee income Itmeans maximising the net present
1. Meaning
of the business. value of a course of action. The
term wealth is reflected in
the

Earning Per Share and Market

price of shares.

the impact ofrisk factor.

2. Risk It doesnot consider the element of | It consider
risk
It is descriptive in nature. It is prescriptive in nature.
3. Nature
It is not universally accepted. It is universally accepted because
4. Acceptance
it serves the interest of all the
sections of society.

term concept and | It is a long term concept and

5. Period It is short
modern in nature.
traditional in nature.
considers the time value of
6. Time value of This concept doesnot
considers the | It
time value of money. money.
money
It is broader in scope.
7. Scope It is narrow in scope.

2013, 2019] 5 marks

management. [GU.
State thelimitations offinancial
management
Ans: Following are some ofthe limitation offinancial
I t i s difficult to know the financial
effeets decisions:
ofvarious managerial In an
organisation
So it is quite
and all their decisions have effect on finance.
there are so many areas of functions
know those effects and coordinate all
decisions.
difficult for finance manager to which takes
Time consuming: Financial management
requires a significant amount ofinfomation,
it takes time to analyze it properly and discuss
it with
time to collect. Once the data is gathered,
others involved. can be fulfilled
The objectivesoffinancial management
L a c k of knowledge of related subjects: accounting,
have knowledge about management, management
only when the financial managers have adequate knowledge, they cannot take right
decisions.
etc. If they donot
Statistics, economics has a very
financial management
information and time involved with to
Expensive: The expertise, take into account. So, the small organisations
are not
able
must
ngh price tag which the company
 able and efficient and he should pay his
cost
to the
bear the burden. The finance manager should be
fim in the form of increased profits. measurement
and performance
Based on financial records: Certain technique offinancial analysis past. So, the
(v) accounts are
concerned with the
arebased on accounting records. The financial
decisions based on those records may be faulty.
business shift constantly, based
on
financial needs and situation ofa
(vi) Revision and Attention: The therefore, is not a do-it-
intermal controls. Financial management,
market variables and the result of
must revisit it and do so
often.
and leave-it task. The financial manager
The decisions offinancial
Lack of objectivity: There is lack objectivityof in financial managment.
(vi) and when the
the personal views and feelings ofthe personal managers
management are affected by
effect is more it can lead to bad result.
2013] 5 marks
( Explain the importance or significance offinancial management. [GU.
activities ofa
because it has an impact on all the
Ans: Financial management occupies a significant place
can think of
finance function successfully. No one
fim. Its primary responsibility is to discharge the or reject
from its financial implication. The management may accept
any business activity in isolation
a business proposition on the basis ofits
financial variabilities. The concept of financial management
control. They can
are applicable to an organisation, irrespective
of its size, nature ofownership and
financial implications. It is as usefiul to a small
be applied to any activity of an organisation which has
unit. Atrading concerngets the same utility from its application as a manufacturingg
concern as to a big
unit may expect. This subject important and useful
is for all types of ownershiporganisations.
aims to utilise
Where there is a use offinance, financial management helpfül. Every management
is

itsfunds in a best and profitable way. So this subjectis acquiring a universal applicability.
possible
Financial management is important or signifiant to any organisation
as it helps in :
Financial planning and successful promotion of an enterprise.
minimum possibl
) Acquisition of funds as and when required at the
) Proper use and alocation of funds
iv) Taking sound financial decisions.
(v)Improving the profitability through financial controls.
(vi) Increasing the wealth ofthe investors and the nation; and
(vi) Promoting and mobilising individual and corporate savings.
4. Answer the following questions:[GU. 2017] (10 marks each)
(a) Discuss the role of a finance manager.
Ans: A financial manager is a person who is responsible to carry out the finance functions. The financial
manager is a key person in an organization and is part ofthe top management team. The finance
manager is responsible for shaping the fortune of an organization. Therefore, he or she needs to
have a broader and farsighted outlook. He must ensure that the funds of an organizationareutilized
in the most efficient manner. Since the finance managers actions have far reaching consequences for
the firm and thus, affect the overall value ofthe fimm. The financial manager, therefore, must have a
clear understanding and a strorg grasp ofthe nature and scope of the finance function. The finance
manager performs several important functions in close consultations with the chiefexecution officer
ofthe organization. The functions are discussed below
() Formulation ofobiective: Fomnulation offinancial objectives is the fundamental function of the
 financial manger. These objectives should be in tune with the overall objectives ofthe organization.
(ii) Forecastingand estimating.capital requirements: A financial manager has to estimate and
forecast the financial requirements of a business. He should make estimates for both shorttemand
long tem requirements of funds. Unless proper thought is given to the financial requirements of the
business, there will be either deficiency or surplus of funds. Ifa business concern has deficiency of
capital it cannot meet it commitments on time. On the other hand, ifa business concerm has excess
capital the management may become extravagant in spending. This willincrease the costofproducton
and reduce the overall profit of the firm.
C)Designingthecapitalstructure: It denotes the types and proportionofdäifferentsecurities. 1hus
and
the capital structure ofacompany is said to be the composition of equity and preference capital
debt capital. Afterestimating the financial requirements the financial manager will have to design tne
type and proportion of various sources offunds. This should be based on the analysis ofcost of capital
consideration offactors such as risk, retum and control conditions on money and capital market
of finance
(iv) Determining the suitablesources offinance: The decision to take various sourcesto determine
has
aepends upon
the sources
the
capital structure designed. On the basis ofit the finance manager
from which the funds are to be raised. The management can raise finance from various
sources such as shares, debentures, financial institutions, commercial banks and so on. The financial
decision.
manager should analyse the pros and cons ofall these sources before making fine
a

source of
Procurement offunds: After estimating the capital requirements and deciding about the
finance the financial manager has to take necessary steps to procure the funds.

(vi) Investmentoffunds: The funds procured should be prudently invested in various projects. The
investment decisions
techniqueofcapital budgeting may be helpful in selecting a project. While taking
the financial manager has to keep in mind the principles ofprofitability, liquidity and safety. The
principle of profitability should not be the only criterion of investment because if the funds are
blocked in unsafe projects, the solvency ofthe company will be in danger.
(v) Dispersalofprofits: The financial manmger has to decide how much is to be retained for inter al
use and howmuch is to be declared as dividend out of prof+ts ofthecompany. A large number of
factors like the trend of earnings of the company, the trend of market price of its shares, the
requirements offund for selffinancing, the future prospects, the cashflow position and so on should
influencethese decisions. Thus, this is an important area of financial management.
(vii) Maintainingthe properliquidity: Every organization is required to keep some liquidity for
meeting its day to day needs. Availability of cash is necessary to maintain its liquidity. Cash is
necessary to payoffcreditors, purchase stockofmaterials, to pay labours and to meet day to day
expenses. The finance manager has to decide the need for liquid assets and then arrange them in
such a way that there is no scarcity
offunds.
(ix) Understanding capital markets:Capital markets bring investors (lenders) and firms (borrowers)
together. Hence, the finance manager has to deal with capital markets. He or she should fully
nderstand the operations
ofcapital
how to cope with it in investment and
markets. He or she should know how risk is measured and
financing decisions. For e.g. if a firm uses excessive debt to
finance its growth, investors may
perceive it as risky. The value of firm's share may therefore,
decline. Similarly investors may not like the decision
of a highly profitable firm to distribute dividend.
It is through their operations in capital markets that investors continuously evaluate actions of the
financial manager.
(x Maintaining relation with outsideagencies: The financial manager should establish and maintain
 value than those earned in period two or three because of the time value
of money.
It ignores risk and uncertainity factors. The stream of benefits earned over a
period possesses
different degrees of risk and uncertainity. Returns of one firm may fluctuate when compared to
another firm. Normally, smaller but stream of surer returns will be preferred to larger but less or
uncertain future stream of retums. However, these factors considered under profit maximisation
are

objective.
Itignores social responsibility of business.Profit maximisation nomally fails to take into account the
interest ofall stockholders.
v) The goal of maximisation of profit is considered to be narrow outlook as it ignores the interest.o
the community on the one hand and that of the govt workers and other concerned persons in the

enterprise on the other hand.

( It does not take into consideration the risk of the prospective eaning stream. Some projecsare
more isky than others. The earming stream will also be risky in the former than the latter. Two fims,
more risky than the
may have some expected earnings per share, but if the earning stream ofone is
market value of its shares will be comparatively less. [GU. 2018]
value ofthe stream of
Wealth Maximisation: .Wealth may be defined as the net present worth or of
new benefits obtained from a course of action. Prof. Solomon Ezra has suggested that adoption
value
wealth maximisation is the best criterion forthe financial decision-making. The gross present
discounted at a
of a course of action is equalto the capitalized value of the flow of future benefits,
rate that reflects the certainity or uncertainity. Net present worth is the diference between the gross
achieve the flow of benefits. Any financial
present worth and the amount ofinvestment required to
taken up. In other words, if
decisions, which results in positive net worth is preferable and shall be
In short, maximisation of wealth
the course of actions results in negative net worth shall be rejected.
or net present worth may bë taken as the operating objective for financial managenment.

Advantages:
is taken into considerat on.
Wealth maximisation is a clear tem. Here the present value of cash flow
The net efect ofinvestment and benefits can be measured clearly quantitatively.
It considers the concept oftime value of money. The present value of cash inflow and outflow helps
() the management to achieve the overall objectives ofa company.
ofinterest of
) The concept of wealth maximisation is universally accepted because it takes care
financial institutions, owners, employees and society at large.

G)Wealth maximisation guides the management in taking a consistent, a strongerdividend policy to

reach maximum retum to the equity holders.
()The concept of wealth maximisalion considers the impact ofrisk factor and while calculating the net
present value al a particular discount rute, adjustment is being made to cover the risk that is associated
with the investment.
Disadvantages:
The wealth maximisation objctives has becencriticisedbycertain financial theorist mainly on following
accounts.

Itisprescriptive idea.
The objective is not descriptive ofwhat the firm actually has to do.
)
The conceptof increasing the wealth ofthe shareholders differs from one entity to another busines
entity. Italso leads to confusion and misinterpreatation offinancial policy because different yardsticks
 value than those earned in period two or three because of the time value of monev.
Itignores risk and uncertainity factors. The stream of benefits earned over a period
possesses
different degrees of risk and uncertainity. Returns of one fim may fluctuate when comparedto
another firm. Normally, smaller but stream or surer retums will be pretered to larger but less or
uncertain future stream ofretums. However, these factors are considered under profit maximisation
objective.
Itignores social responsibility ofbusiness. Profit maximisation nomally fails totakeinto account the
interest of all stockholders.
vThe goal of maximisation ofprofit is considered to be narrow outlook as it ignores the interest of
the community on the one hand and that of the govt workers and other concermed persons in the
enterprise on the other hand.
It does not take into consideration the risk ofthe prospective earning stream. Some projects are
()
more risky than others. The eaming stream willalso be risky in the fomer than the latter. Two firms,
may have some expected earnings per share, but if the earning stream of one is more risky than the
market value of its shares will be comparatively less. [GU. 2018]
Wealth Maximisation: Wealth may be defined as the net present worth or value ofthestream of
new benefits obtained from a course ofaction. Prof. Solomon Ezra has suggested that adoption of
wealth maximisation is the best criterion for the financial decision-making. The gross present value
ofa course of action is equal to the capitalized value of theflow offuture benefits, discountedata
rate that reflects the certainity oruncertainity.Net present worth is the difference between the gross
financial
present worth and the amount ofinvestment required to achieve the flow of benefits. Any
decisions, which results in positive net worth is preferable and shall be taken up. In other words, if
course ofactions results in negative net worth shall be rejected. In short, maximisation of wealth
or net present worth may bè taken as the operating objective for financial managenient.

Advantages:
Wealth maximisation is a clear tem. Here the present value of cash flow is taken into considerat on.
The net effect of investment and benefits can be measured clearly quantitatively.
It considers the concept of time value of money. The present value ofcash inflow and outflow helps
()
the management to achieve the overall objectives ofa company.
) The concept ofwealth maximisation is universally accepted because it takes care of interest of
financial institutions, owners, employees and society at large.
(v) Wealth maximisation guides the management in taking a consistent, a stronger dividend policy to
reach maximum retumto the equity holders.
()The concept ofwealth maximisation considers the impact ofrisk factor and while calculating the net
associated
present value at a particular discount rate, adjustment is being made to cover the risk that is
with the investment.
Disadvantages:
The wealth maximisation objectives has been eriticised by certain financial thecorist mainly on following
accounts.
) Itis prescriptive idea.
i) The objective is not descriptive of wlhat the firm actually has to do.
The concept ofincreasing the wealth ofthe shareholders differs from one entity to another business
entity. It also leads to confusion and misinterpreatationoffinancial policy because different yardsticks

11
 may be used for different interest in a company.
The objective of wealth maximisation is not necessarily socially desirable.
(v)
"Finance function of a business is closely related to its other functions" - Discuss,
(c)
Or
Diseribe the functions of financial management? [GU. 2018] 10 Marks
Ans: Every business activity requires money and financial management is closely related with all other areae
of management. Funds will be wasted in the absence of efficient production and in the absence of
proper marketing, the firm will not be able to engagefiunds judiciously in the business. Most importan
decisions ofabusiness enterprise are taken on the basisofavailabilityof funds, the decisions taken by
the financial manager influence the activities ofother functional departments. The relationship betweem
finance function and other business function of an enterprise is discussed below.
Finance and purchase function: Finance is closely related with purchase function. In this function
the finance manager plays a key role. The purchase manager can make purchase policies whether
in cash or credit
only after consulting the finance manager. The task of the finance manager isto
arrange cash for
meeting payment schedule or
purchase.
(i) Finance and production function: Production function occupies the dominant position in business
activities and it is a continous process. The production department is headed by a
production
manager or engineer. The production manager is responsible for decisions conceming the level of
fixed assets and current assets and the acquisition and maintenance ofassets involve finance.
a
tighter control by the finance manager on the investment in Naturally
It must be seen that there is neither productive asset becomes necessary.
over
capitalization nor under capitalization.
(ii) Finance and distribution function : As goods produced are meant for sale therefore distribution
is animportant business activity. It is more important because it provides continous inflow
meet the outflow thereof. So while choosing different of cash to
and sales promotion devices; the cost benefit distributing channels media, advertisement
criterion should be the guiding factor. As
of distribution function involves cash every aspect
outflow and every distributing
about inflow of cash, both the functions are activity is aimed at bringing
closely inter-related and hence should be carried out in
unison.
(iv) Finance and accounting function: Finance is also connected with cost and financial accounting,
the finance manager requires accurate and
information provided by the accounts managersystematic
finance records of the
is used by the finance enterprise. The
order to help the organization in achieving itsobjectives.As a matter manager to take decisions in
accounting. For example, the cost of raisingoffunds,
fact
is the result of good sournd finance management
investment of such funds, liquidity
position, forecasting of sales etc can be expected
returns on the
the finance data so recorded are reliable. effectively carried out if
intimate and the finance manager has to Hence relationship between accounting and finance is
the
depend heavily on the accuracy of the accounting data.
(v) Finance and personnel function: Personnel function has assumed
domain of a
prominent place in the
business management. No business function can be
carried
a
sound peSonnel policy backed up by efficient management out
effecientdy unless there is
and placement of
staff is the responsibility of the personnel personnel. The recruitrment and training
also responsible for
promotion, payment
department. The personnel manager is
of wages and salaries and
However, all these require fiñance and other benefits to the stai.
taken by the personnel therefore the decisions
department in isolationi.e. without regarding these aspects cannot be
(vi) consulting finance department.
Finance and marketing function: Finance is intimately related
with marketing while
formulating
12
 credit and collection policies for the firm, both finance and
marketing manager must be in connection
with each other because such policies directly affect the volume of sales
and funds. The marketing
manager can provide information as to how different prices affect the demand for the
companys
products in the market. Similarly the finance manager can supply information about costs, profit
margins etc.Application of MIS (Management Infomation System) keeps the above two functions
together.
i) Finance and researchand development function In the world of innovations and
competitiveness, expenditure on research and development is a productive investment and research
and development itself is an aid to survival and growthofthe firm. However, sometimes expenditure
on Researchand Development involves an heavier amount,disproportionate tothe financial capacity
of the fim. On the other hand heavily cutting down expenditure on Research and Development
blocks the scope of improvement and diversifjcation of the product. So there must be a balance
between the amount necessary for continuing Research and Development work and the funds
available for such a purpose. Thus, it is seen that finance is closely linked with all other areas of
management. The attitude or philosophy of other managers is largely governed by the financial
position of the firm.
Describe the scope or decision making areas of financial management. [GU. 2016, 2018)
in a
as: Scope offinancial management mean the various decisions to be taken by a financial manager
financial
corporate enterprise for achievement ofbusiness objectives. The decisions taken by a
manager may be discussed under two broadgroups
Financial Decisions

Long term decisions Short-term decisions

Fund requirement Working capital

Management decisions
Capital budgeting
Capital structure
Dividend
Long-term Decisions: Such decisions have long-term effects on the value ofthe enterprise. Long-
term financial decisions may be offourtypes:-
) Fund Requirement decsions: Finance manager hasto perform this function very carefuly
as he will have to estimate about the total funds required by the enterprise taking into account
both the fixed and working capital requirements.
() Capital Budgeting decisions: Capital budgeting decisions refer to allocation of funds or
capital in various projects. Selection ofprojectsshould be carefully done by the finance manager.
Certain capital budgeting methods are employed to judge the profitability ofthe decisions,
e.g., Payback period method, average rate of returm method, internal rate ofreturn method
etc.
(i) Capital Structure decision: The finance manager in a corporate enterprise will have to decide
about the mix of different sources from where the funds will be raised. He must decide the
proportion ofequity capital and debt capital, ie., the Debt- Equity ratio.
iv) Dividend decision: The next crucial financial decision is the dividend decision. The decision
have to be taken regarding how much amount of earmings to be distributed among the
shareholders and howmuch to be retained in the business.
B. Short term decision: The job of the financial manager is not just limited to the long term
 financial decision. He should take short-term financial decisions which includes int.
invest
decisions on current assets such as cash, inventories, debtors, receivables etc. Investme ment
stment in
current assets affects the fim's profitability, liquidity and solveney.
State the limitations of financial management.
ns: Following are the limitation of financial management:
(i) It is difficult to know the financial effects of various management decisions:
In
organisation there are so many areas of functions and all their decisions have effect on financean
So it is quite difficult for finance
manager to know those effects and coordinate all dicisions,
(i) Based on financial records: Certain
masurement are based on
techniques of financial analysis and performance
accounting records. The financial accounts are concerned with the
past. So the decisions based on those records
may be faulty.
i) Lack of knowledge of related subjects: The objectives of financial
fulfilled only when the financial management can be
managers have knowledge about
statistics, economics etc. If they donot have management, accounting
decisions. adequate knowledge, they cannot take right
(iv) Lack of objectivity: There is
financial management are affected lack of objectivity in financial
by the personal views and management. The decisions o5
and when the effect is more it
can lead to bad feelings of the personal managers
(v Expensive: It is quite expensive to build an results.
effective
business organisations are not able to bear financial management. So, the smal
and efficient and he should the burden. The finance
pay his cost to the firm in the manager should be abl-
form of increased
profits.