Assignment No 01

Spring Semester 2022

Course Title Financial Management (FIN 501)

Submitted by
Student Name
ID
Department
Major

Submitted To
Md. FakirTaijul Islam
Head in-charge & Assistant Professor
South Asia School of Business
University of South Asia
Bangladesh
Mob: 01715-663550
Q.1 Explain in brief meaning of the Term "Finance" and "Financial Management"

# Finance: Finance is the life blood of business. Finance is called science of money. Finance is the arts and
science of managing money. Finance is a collection of tools and techniques for managing usage and
source of money. finance may be called as capital, investment, fund etc. Increasing the profit is the main
aim of any kind of economic activity.

# What are the key areas of Finance? & Explain.

I. Raising of Funds : Based on the total requirements of capital/funds for use in fixed assets, current
assets as well as intangible assets like goodwill, patent, trade mark, brand etc. crucial decision are.-When
to raise (time),-Sources from which to raise, -How much (quantum of money),-In which form (debt or
equity),-Cost of raising funds.

II. Investment of funds: Funds raised need to he allocated/ invested in:

a) Fixed assets - also known as capital assets or capital budgeting decision. These decisions are based
upon cost and return analysis through various techniques.

b) Current assets - also known on working capital management. These are assets for day today running
the business like cash, receivables, inventory, short form investments etc. Decisions about investment of
funds are taken keeping in view two important aspects ie.-Profitability, Liquidity.

III. Distribution of funds - Profit earned need to be distributed in the form of dividend. Higher the rates of
dividend, higher world be the price of shares in market. Another crucial decision under it would be the
quantum of profit to be retained. The retained profit is cost free money to the organization.

# What is Financial management? Financial Management is planning organizing coordinating controlling

of raising of funds investment of funds and distribution of funds for achieving goals of organization .

Howard and Upton : Financial management “as an application of general managerial principles to the
area of financial decision-making.

Weston and Brigham : Financial management “is an area of financial decision-making, harmonizing
individual motives and enterprise goals.

Financial Management is mainly concerned with the effective funds management in the business. In
simple words, Financial Management as practiced by business firms can be called as Corporation Finance
or Business Finance.

Q.2 What is the key objectives or goals of Financial Management? or Why shareholders wealth
maximization /value maximization is considered as better objective of financial management
instead of profit maximization?
# There two objectives of financial management viz.
(a) Profit maximization income/profit/sales maximization. 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. Profit maximization is also the traditional and narrow
approach, which aims at, maximizes the profit of the concern. Profit Maximization consists of the
following important features.

(b) share holders wealth maximization earnings share , share price, net asset value maximization. Wealth
maximization is one of the modern approaches, which involves latest innovations and improvements in
the field of the business concern. The term wealth means shareholder wealth or the wealth of the
persons those who are involved in the business concern. Wealth maximization is also known as value
maximization or net present worth maximization. This objective is an universally accepted concept in the
field of business

# What are the criticisms of profit maximization as a goal of financial management? Explain.
Modem thinkers criticize the profit maximization objective on the following grounds.

(a) Profit is an ambiguous concept : Profit can be long term or short term, profit before tax or after tax,
profit can be operating profit or gross profit etc. The economists concept of profit is different than
accountants concept of profit.

(b) Profit moto may lead to exploitation of customers, workers, employees and ignore ethical trade
practices.

(c) Profit moto also ignores social considerations or corporate social responsibility or general public
welfare.

(d) Profit always go hand- to hand with risk. The owners of business will not like to earn more and more
profit by accepting more risk.

(e) The profit maximization was taken as objective when business was self financed and self controlled.

# Why wealth maximization is superior than profit maximization as a goal of financial

management? Explain.
Modem thinkers consider wealth maximization as key objective of financial management. This is also
known as ralue maximization or net present worth maximizations. This shareholders wealth maximization
is evident from increase in the price of shares in the market They are of the view that wealth
maximization is supposed to be superion over profit maximization due to following reasons.

(a) This uses the concept of future expected cash flows rather than ambiguous term of profit.

(b) In takes in to accent time value of money.

(c) It also takes care of risk factors associated with project as the discount rate used for calculating
present ralue is generally a risk adjusted discount rate.
(d) it is consistent with the objective of maximizing owners welfare. Equity shares of a company are
traded in stock market and stock market quotation of a share serves as an index of performance of the
company. The wealth of equity share holders in maximized only when market value of equity share of the
company is maximized. In this context, the term wealth maximization is redefined as value maximization.

2.1 An investor deposits Rs 100 in a bank account for 5 years at 8 per cent profit. Find out the amount
which he will have in his account if profit is compounded (a) annually (b) semiannually (6-monthly), (c)
quarterly and (d) continuously.

100 @ 8% FV = ?
PV (annually) 1 2 3 4 5 147
Semiannuall 1 2 34 56 78 9 10 148
y
Quarterly 1234 5678 9101112 13141516 17181920 148.6

(a)Future value of a single payments = PV × (1+i)n

Here, PV = 100; i = 8% or 0.08; n=5

Then, FV5 = 100 × (1+0.08)5= 100 x 1.085 = 100 x 1.47 =147

(b) Semiannually (6-monthly)

( )
nxm
i
Future value of a single payments = PV x 1+
m

Here, PV = 100; I = 8% or 0.08; n=5, m = 2

( ) ( ) =100×1.04 =100×1.48=148
5×2 10
0.08 0.08
FV5 = 100× 1+ =100× 1+ 10
2 2

(c) quarterly

Here, PV = 100; I = 8% or 0.08; n=5 x 4 = 20

( ) =100×1.02 =148.6
20
0.08
Then, FV5 = 100× 1+ 20
4

(d)continuously

Future value of continuous compounding = PV x (e)n x i

Then, FVcc = PV x (e)n x i = 100 x (e)5 x 0.08 = 100 x e0.4 = 100 x (2.72)0.4 = 100 x 1.492 =149.2

2.2 If the discount/required rate is 10 per cent, compute the present value of the cash flow
streams detailed below: (a) Tk 100 at end of year 1; (b) Tk 100 at the end of year 4; (c) Rs 100 at
the end of (i) year 3 and (ii) year 5; (d) Rs 100 for the next 10 years (for years 1 through 10).
1
Pv of single payment = FV x
( 1+i )n
Hare,FV=100,i=10% or 0.10, n=1
1
(a) Pv of single payment = 100 x
( 1+ 0.10 )1
=100×0.9090
=90.90
(b) Pv of single payment
Hare,FV=100,i=10% or 0.10, n=4
1
100 x
( 1+ 0.10 )4
=100×0.681
=68.10

(c) Tk. 100 at the end of (i) year 3 and (ii) year 5

1
(i) PV of single payment = = FV x
( 1+i )n

[here, FV=100; i=10% or 0.10; n=3]

1
=100 x
( 1+ 0.10 )3

=100×0.7513

=75.13

1
(i) PV of single payment = = FV x
( 1+i )n

[here, FV=100; i=10% or 0.10; n=5]

1
=100 x
( 1+ 0.10 )5
=100×0.620

=62.09

(d) Rs 100 for the next 10 years (for years 1 through 10)

PV 1 2 3 4 5 6 7 8 9 10 FV
??? 100 100 100 100 100 100 100 100 100 100
Series of equal payment, we should treat it as an annuity

Formula for computing Future value of an annuity (a series of equal cash flow) FVFA:

( )
1
1−
PV of an annuity =PMT× ( 1+ I )n =PMT×PVIFA
i

Here, PMT=100, i=10% or 0.10,n=10

( ) ( ) ( )
1 1 1
1− n
1− 10
1− 0.61445
= PMT× ( 1+ I ) =100× ( 1+ 0.1O ) =100× ( 1.10 )10 =100× =100×6.1445=614
0.10
i 0.10 0.10

Formula for computing Future value of an annuity (a series of equal cash flow) FVFA:

FVIFA=PMT× ( i )
( 1+i )n−1
=PMT×FVIFA

Here, PMT=100,I=10% or 0.10,n=10

100× ( ( 1+0.10 )10−1

0.10 )
=100×
2.593−1
0.10
=100×
1.593
0.10
=100×15.93=1593

2.3 Compute the present/discounted value of the following future cash inflows, assuming a
required rate of 10 per cent: (a) Rs 100 a year for years 5 through 10 and (b) Rs 100 a year for
years 1 through 3, nil in years 4 through 5 and Rs 100 a year for years 6 through 10.

1 2 3 4 5 6 7 8 9 10

A(present 100 100 100 100 100 100 100 100 100 100
Value)
A(present 100 100 100 100 100 100 100 100
Value)

(a) Rs 100 a year for years 5 through 10

1
1−
For present value of an annuity , the formula=payment × (1+i )n
i
As per requirement , we can get the present value by deducting PVA 4 from PVA 10
=100× PVIFA 10 % ,10 -100× PVIFA 10 % , 4
=100×6.1446-100×3.1699
=614.46-316.99
=297.47
(b)
=100× PVIFA 10 % ,10 +100× PVIFA 10 % ,03 -100× PVIFA 10 % ,05
= (100×6.1446) + (100×2.4869)-(100×3.7908)
=614.46+248.69-379.08
=863.15-379.08
=484.07
P.2.5 Compute the present value of perpetuity of Rs 100 per year if the discount rate is 10 per
cent
A
Formula for computing the present value of perpetuity =
i
When, A payment in each period e.g. year and i=periodic interest rate
Here ,A=100 and i=10% or o.10
100
Then, the present value of this perpetuity =
0.10
=1000
2.7 ABC Ltd has borrowed Rs 30,00,000 from Can bank Home Finance Ltd to finance the
purchase of a house for 15 years. The rate of interest on such loans is 24 per cent per annum.
Compute the amount of annual payment/installment.
PV 1 2 …………… 12 13 14 15
(i=24%)
30,00,000
We know, using table value

PV of annuity =PMT× PVIFA 24 % , 15

30,00,000=PMT×4.0013

30,00,000
PMT=
4.0013

PMT=7,49,756.33

2-A.6 (p.2.26): The lease rentals for a 5-year contract are Rs 300/Rs 1,000 payable annually in arrears.
Assuming no salvage value, compute the rate of interest implied by the contract and develop a lease
amortization schedule. – Home task

Year-01 Year-02 Year-03 Year-04 Year-05

Present Value 300 300 300 300 300
1000

Then, PV of annuity =PMT×PVIFA

Or,1000=300×PVIFA?
1000
PVIFA= =¿3.33
300
PVIFA=3.33

As per the PVIFA table for year = 5 and PVIFA=3.33, we may take 15% as the value of i. Lease
amortization schedule.

Year Beginning Payment Interest content of (15% Principle content Ending value (BV-
value BV) (Payment – IC) PC)
1 1000 300 =100 x 0.15=150 = 300-150 =150 =1000-150 =850
2 850 300 =850 x 0.15 =127.5 =300-127.5 =172.5 =850-172.5=677.5
3 677.5 300 =677.5 x =300-101.625=198.375 =677.5-198.375=479.125
0.15=101.625
4 479.125 300 =479.125 x =300-71.86=228.13 =479.125-228.13=250.99
0.15=71.86
5 250.99 300 =250.99 x 0.15=37.64 =300-37.64=262.35 =250.99-262.35= -11.36
P.2.6 ABC Ltd has Rs 10 crore bonds outstanding. Bank deposits earn 10 per cent per annum. The bonds
will be redeemed after 15 years for which purpose ABC Ltd wishes to create a sinking fund. How much
amount should be deposited to the sinking fund each year so that ABC Ltd would have in the sinking fund
Rs 10 crore to retire its entire issue of bonds?

1 2 ………….. 13 14 15 FV
PV 10cr 10crore

Using table,

FVA=PMT× FVIFA 10 %,15

100,000,000=PMT×31.7725

100,000,000
PMT= =31,47,375.88
31.7725

PVA=PMT× PVIFA 10 % ,15

100,000,000
PMT= =13147342
7.6061