Assignment on Define finance. What are key functional decision areas of finance?

Ans. finance is the basic element of the business. no any business can be run without the involvement of finance. Finance simply means the proper management of money in the business that includes many different activities like saving, investing, borrowing, lending, forecasting and budgeting. There are many functional decision areas that can be appear according to management of finance and condition of business. basic areas include investment decision, financial decision , dividend and liquidity decisions related to company. Investment decision is belong to business conditions that allocate with the long term assets is this is known as capital budgeting. Financial decision must be taken with great study about the market. Dividend decision is taken according to profitability condition of business and liquidity decision taken when the company has no ability to run its operations further.

a.       What are the roles of finance manage?

Ans. in managing the finance different actions must be performed by the financial manager in the organization. It analyzes the financial information in such a way through the financial plans, and according to financial status of the firm. Finance manager manage the flow of cash in most effective way and manage the financial transaction in better way. Its basic role include financial planning, investment and financing through raising money. Preparing financial plans for the revenue, expenditures and financing needs of the company. Investment means that how to spend money in productive projects to increase the return of the company. Financing means raising money  that explain how to manage the operations and investments area  through managing the debts and equity of the company.

b.       What is relationship of finance with accounting and economics?

Ans. finance has close relationship with the accounting as finance is the maximization of value of the firm and accounting related to score keeping to determine the performance of firm, its financials conditions and make smooth its tax payment. Financial managers with accountants manage the financial matters and consider all the financial areas through proper management.

Finance also has strong link with the economics as its microeconomic theory explain the conceptual under pinning for tolls of the financial decision making and its macroeconomics explain the setting  for operation of firm.

c.       Why the study of managerial finance important within the business firm?

Ans. managerial finance is very important for the business because finance is blood for every business and managerial finance determines how to manage the finance in every area and how to utilize according to requirement. it is not an easy task to manage the finance according to firm’s requirement and manage in most effective way to generate more revenue for the business.

d.       Goal of the firm is profit maximization or wealth maximization? Justify your answer

Ans. basic goal of the firm is to maximize its profit . Profit explain that how much the company is working effectively and manage its all operations. Wealth is important but profit is the actual target of every company and every stakeholder belong to company concern about the profit which provide them a better decision about the relationship with the firm and consider its financial position.

a.       What is time value of money? What is the difference between future value and present value? Which approach is generally preferred by financial managers? Why?

Ans. Time value of Money is that concept in the financing that allows you to understand it as it has potential capacity of earning having identical sum in future having worth of being utilize in future properly as well. The sooner money received the interest the better amount of interest it can earn by holding finance of it. After a certain time period in future, present value is the cash value’s current worth and the future value is the future cash flow value utilized after a certain period of time. Managers prefer to use present value as it includes the interest and calculation as well.

b.       Define and differentiate among the four basic patterns of cash flow: (1) a single amount, (2) a mixed stream, (3) an annuity, and (4) a perpetuity. 

Ans. Single amount Cash flow that is held for future at some amount as it makes the things to be expected or held currently at some point in future in the workflow of the organization. A mixed Stream is another pattern then annuity that exhibits different pattern in cash flow as it is a different amounts cash flow in a series of cash flow. In each period these involves the outgoing or either income’s cash flow in an annuity. It’s actually the receipt of per period having equal amount in cash flow. Perpetuity determines the formula that helps to determine the cash flow amount in terminal year of operations.

c.       What effect does increasing the required return have on the present value of a future amount? Why?

Ans. In order to increase the required return on the present value of a future, it effects positively on the required return as it about to decrease the rate of interest which automatically increase the worth of the money and hence it makes the things to be more predicted and more reliable towards the betterment and enhancement of amount of interest of the future value. The same future value can be achieved by increasing less money onto the present value. This helps to achieve the targeted value of the things that allows the calculations of present value of the cash flow.

d.       What effect does compounding interest more frequently than annually have on the effective annual rate (EAR)? Why?

Ans. The rate of interest that is earned due to investment and paid loans allowing the betterment of the overall system of working of the actually earned in an investment in paid form is the loan or result that combines the workings of compounding interests over a given or specified period of time. The financial products that are going to have the concern with calculative interests for the different compound to be making the EAR periods to perform logically. The main thing is that the rates in this are usually higher than normal and they are normally compare each other financial products with each other products utilized in calculating and compounding different interests.

Based on your calculations of the following capital budgeting techniques you are required to evaluate the acceptability of this proposed investment. Also give justifications (reasons) of your decision.  

a.       The payback period and discounted payback period for the proposed investment.          

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b.       The net present value (NPV) and Profitability index (PI) for the proposed investment.            

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c.       The internal rate of return (IRR) for the proposed investment.

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d.       The modified internal rate of return (MIRR) for the proposed investment.

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e.       Which of the aforementioned techniques is the best and why?  

Ans. in the all the above techniques , NPP is the most effective and best technique to utilize in the organization because it convert the present value in future and then determine the present value of the project.                                   

f.        What are problems with IRR?                                   

Ans. there are lots of problems with the IRR that include economics of scale is ignored, increase of wealth not measured with IRR, IRR not determine with later cash flwo, different term of projects not determine with IRR , mutual projects ignored, impractical assumptions taken  and also dependent and contingent projects also ignored while using IRR.