What is financial management all about?

Ans. Financial management is related to all the financial activities in the organization. It includes controlling, directing, planning and organizing activities like utilization of funds and procurement in the organization. Different management principles are going to apply on the financial resources to generate better results. Elements of the financial management are; dividend decision, financial decision and investment decision within the organization. Functions of financial management are financial controls, management of cash, disposal of surplus, investment of funds, selection of source of funds according to business requirement, capital composition and its utilization and measure the capital need in the organization to run its all operations.

a.      Differentiate the objectives of maximizing earning with that of maximizing wealth?

Ans. From the perspective of the organization some differences are occur between the earning maximization and wealth maximization. In wealth maximization, management want to increase the value of financial resources for the shareholders whereas in earning maximization management want to increase the value of financial resources to generate more profit. In wealth maximization value of shareholders enhance for long terms and in earning maximization the profit of the organization increase for short term.  Wealth maximization involves the risk of uncertainty but earning maximization does not involve risk of any kind. Wealth maximization helps in obtaining the large value of company and whereas earning maximization increases the efficiency of organization through its operations.

b.      What are the three major functions of the financial manager? How are they related?

Ans. Three major functions of the financial managers related to organization are; financial manager has to develop operational analysis for all the data to provide all the information for making better decision, financial manager also deal with the monthly cost of goods  that help in annual budgeting and also save the money of organization by securing goods and materials for production  and the main function of financial manager is to develop a financial future of the organization that give the profit to organization in long terms. It also develops financial forecasts based on statics and information of company.

c.       Should the managers of a company have sizeable amount of common stock in the company? What are the pros and cons?

Ans. The managers is going to be more accountable for the performance of the company if manager has sizeable amount of shares in the same company. Because if the manager’s action provide benefit to the company and its performance then it also obtain some benefit in the form of stock valuation appreciation or dividends. And if the performance of the company going down then losses also face by the manager due to reasonable share. A form of pressure also imposes on the manager and on its performance because in case of loss he also has to face a major share of loss. Matter of concern for the managers also affected because its unfair practice provide a poor picture of performance of the company.

d.      What is the corporate governance? What role does a corporation’s board of directors play in corporate governance?

Ans. For long term success of the company, the corporate governance provides better facilities related to prudent, entrepreneurial and effective management. It is a complete set of systems that controlled and directed the companies. Board of directors play important role because they are responsible for the corporate governance of the company. They set the strategic aims of the company, guidance to run the strategic decision and supervise the management related to better results and also affect the performance of the company.

Module 2:

Question 1. a) Calculate the future sum of $5000, given that it will be held in a bank 5 years at an annual interest rate of 6% compound annually.

Ans. Present value= $5000

n= 5 years, i= 6%

Future value(FV)= PV*(FV factor of n and i) = 5000*(5,6%)= 5000*1.3382= $6691

b) Recalculate the part (a) using simple interest, what would be the amount of interest received?

Ans. Simple interest= FV-PV= 6691-5000= $1691

c) recalculate part (a) using compound period that are i) semiannually ii) quarterly

Ans. I) semiannually: Present value= $5000

n= 10, i= 3%

Future value(FV)= PV*(FV factor of n and i)= 5000*(10, 3%)= 5000* 1.3439= $6719.5

ii) Quarterly:

Present value= $5000

n= 20, i= 1.5%

Future value(FV)= PV*(FV factor of n and i)= 5000*(20,1.5)=5000*1.3530=$6765

d) recalculate part (a) and (b)  for 12% annual interest rate.

Ans. Present value= $5000

n= 5 years, i= 12%

Future value(FV)= PV*(FV factor of n and i)= 5000*(5,12%)= 5000*1.7623= $8811

Simple interest= FV-PV= 8811-5000= $3811

e) recalculate part (a) using a time horizon of 12 years .

Ans. Present value= $5000

n= 12 years, i= 6%

Future value (FV) = PV*(FV factor of n and i) = 5000*(12,6%)=5000*2.0122=$10061

f) Conclusion between part (a,b) and part (c,d)

Ans. As compare to results of a,b and c,d, we can conclude that when the number of periods(n) going to increase and when the interest rate (i) going to increase then the future value is also going to increase and enhance the total interest rate.

Question 2.

 A magazine publisher offers its customers three options on subscription: option A: $50 today for three years, Option B:  a two year rate of $38 paid immediately, followed by a one year rate of $17 paid at the beginning of the third year, Option C: $17 paid at the beginning of each of the three years.

a)      From the perspective of the company, which option is best if the company opportunity cost of funds is 8% ? explain

Ans. Company is going to select option B because the total subscription is become $55 for three years and the company is going to save 85 opportunity cost of funds which is $4.4 which is higher as compare to other options.

b)      From the perspective of the subscriber, which option is best in term of minimizing the cost of subscription of the subscriber’s opportunity cost of funds is 5%? Explain

Ans. According to subscriber, the subscribers are going to select Option A because it has minimum opportunity cost of 5%.

Question 3:

Bart Simpson, now age 10, wants to be able to buy a really cool new acre when he turns to 16.his really cool car costs $15000 today and its cost is expected to increase by 3% annually. Bart wants to make one deposit today into an account paying 8%annulayy in order to buy his dream car. How much will the Bart’s car cost? And how much does Bart have to save today in order to buy this car at the age 16?

Ans. Cost of car today=$15000

Annual increase =3%

Annual increase till 6 years= 3%*15000= 450

Increase of 6 years= 450*6= $2700

Cost of car after 6 years= 15000+2700= $17700

Annual payment to bank=8%

Annual payment in cash= 17700*8%= 1416

6 years payment in account= $8496

Remaining amount= 17700-8496= $9204

So Bart have to deposit now $9204 to generate the $17700 after 6 years at the age of 16 to purchase the car.

Question 4:

Lisa Simpson is planning to attend college when she graduates from the high school 7 years from now. She anticipates that she will need an amount of $35770.97 for her 4 year college tp pay for tuition and fees. And have some spending money. Lisa has made an agreement with her father to do the house hold chores if her dad deposits $3500 at the end of each year for the next 7 years in a bank account paying 8 percent interest, will there be enough money in the account for Lisa to pay her college expenses.  

Ans. Actual required amount by Lisa= $35770.97

 Therefore, the results explain that at the end of 7 year Lisa has not enough money to pay its all tuition and fees to attend the graduate from high school.