Importance Of Financial Management In Business Finance
Question No 1:
Importance Of Financial Management in Business Finance
Role Of financial Management in business finance environment plays vital role to get edge ahead over its competitor. How to do resource allocation. How much be invested into asset to generate revenue for the organization. With the help of cash flow statement top management can manage the need of optimum cash. Cash flow statement shows the figure related to creditor, debtor, and inventory management. It helps organization to manage the operating, financing and investing activity. Income statement which shows how the revenue and other expenditure are varying. Net profit shows how company is earning revenue to service their debt obligation. Income statement gives true picture regarding the wealth for shareholders. Income statement shows how the investment in fixed asset and respective earning from that asset. Balance sheet shows how much short term and long term debt the company has. It also shows how much company has asset to fulfill their short term and long term obligation. So financial management plays vital element for ensuring smooth driving of operation.
Question No 2: Agency Problem
(a) Agency Problem arises due to conflict of interest between the existing shareholders, creditors and management .Agency problem arises due to differing organization goal. Agency problem is dangerous for the health of organization. If the bigger gap is arising between existing shareholders, creditors, it would deteriorate the wealth of organization. So organization must always bridge this gap, unless until organization will lost its competitive edge over its competitor. If the CEO of present organization have secret talk with rivalry firm regarding merger with that firm. If CEO is hiding the talk of merger with shareholder and creditor of the company then it can be treated as the violation of business norms, which could lead to loss of the wealth of shareholder and employees of the organization. So such type of wrong practices must be stopped and providing safeguard to interest of all stake holder of the organization.
(b):If the branch manager lays off full time experienced employee and hiring part time employee just sake of earning bonus on the generated profit . Such types of practices are unethical. If the organization lose their experienced employee then it is difficult to survive in throat cut competition environment .Because business is highly volatile and dynamic,if organization don’t prepare their business plan according to dynamic business environment then it is difficult to get edge ahead of competitors .Because experienced employee are the core competency of the organization , without them it is difficult to survive in the industry .
.Question No 3:Financial Goal Of firm In Association To Consideration To Stake Holder Demand .
Shareholders and stockholders have ownership or it can be in the form of shares of companies. In large business in corporations, shareholders are people and business institutions that simply looking for potential invest opportunity for earning future dividends and for the maximizing the value of their shares, whereas in small or micro, medium sized companies they may be the people who started the business by investing their money or who have a more personal stake in business entity it. When investors looks for potential investment opportunity by buying shares of companies, in consideration of purchasing shares they receive share certificates that say how many shares they own in the particular company . Owning stock or shares of a company often it entitles an investor is liable to get a part of the company’s earnings or profits, which is issued as a dividend income after providing preferred dividend . In addition, shareholders or stockholder are typically offered a fixed dividend or earning payout per share if the company stock or share is bought out by the stock holder or shareholder. Because they are called as partial share holders or the owners of a company, preferred shareholders or stockholders aren’t authorized to cast their vote at annual general meetings for a vital strategy to acquire another firm (such as acceptance or rejection of acquisition of firm , takeover of firm , merger with other firm strategy ), reconciliation of company‘s present financial details , and review periodic performance reports on company key performance data. If common shareholders unable to attend annual general meetings, they are permitted by mean of power of attorney to cast their vote by proxyperson voting.
Furthermore, if a company has requirement for raising capital for expansion of the business then company decides to issue more shares, current existing shareholders have an option to buy shares before they are going to offered to the public in the secondary market .
Question No 4: There is following common business structure in the NewZealand.
1.Sole Business Model :Asole business model operates it’s anenterprise onperson by own. The entrepreneur effectively controls, runs and owns the business and is liable to all earning and profits generated from business.
Entrepreneur have also personally obligation to absorb for all business related transaction taxes and outstanding debts.
2.Partnership Business Model: Partnerships are most common alliance among professional entrepreneur and business professionals. In a partnership business model two or more than two people collaborate and run and effectively control a business activity together.
3. Limited Liability business model: Company A business enterprise existence is as per law. It can be recognized as a legal object It is existence is differentiated from its shareholders or by the business tycoons who have shares or stock in that particular company).
Companies can bestarting their operation by getting certificate of incorporation. It can be done by applying online application processing through the website or it can be done by processing application through registrar of incorporation.
Question No 5. It is solved in excel sheet .
Question No 6. It is solved in excel sheet .
Question No 7. It is solved in excel sheet .
Question No 8. It is solved in excel sheet.
Question No9:
Cash flow Component Study
Cash Flow statement represents three prime business activities. These can be classified in following section.
1. Operating Activity: Operating Activity represents the information related to net income, employee benefit expense, deferred tax, non cash charges like depreciation and amortization. . It gives the clear picture of networking capital change. Networking capital is the difference between current assets – current liability. If current assets are not exceeding the current liability then company isn’t able to meet their commitment towards current obligation. It tells how organization is able to convert their debtor into cash cycle. It gives the information related to the inventory, creditor, account receivable, account payable .
2. Investing Activity: Investing activity shows how company is investing in fixed asset for generating earning for the organization. This investment can be in the form of capital expenditure for tangible asset ( property, plant , equipment ) or it can be in the form intangible asset ( patent , technology, license ,software ). It shows how company is efficient to replace their old asset with new one for generating revenue for the organization. It shows how company is utilizing their investment in capital expenditure for upgrading their technology for getting edge ahead of competitors.
3. Financing Activity: financing activity shows the financing pattern of the company. Financing can be in short term and long term .How assets are financed, how long debt are repaid. How organization is servicing the debt capacity. How organization is issuing share in the form proceeds after getting subscription of shares . How company is distributing dividend to it’s preferred shareholders and common shareholders. Financing patter gives the bird eye view to creditor about the accessing the company financing pattern .
Question No10 . It is solved in excel sheet.
Question 11:
It has been observed that, the eminent financial professionalshave analyzed that, to framework for varied analysis of risk, the businessman has required to analyzed risk return model on their investment. It can be treated as over a premium and aneffective benchmark for the establishment framework of risk measurement, which was risk-free (Treasury Security Return) . The unpredictability of the returns measurement on the investment in receiving future, the grater will be the risktaking (risk lover) and grater will be the premium expectation on the desired investment.According to underlying on this assumption measurement reasoning ( Capital Asset Pricing Model ) , it has been designed framework by the financial professionals that the risk premium on the investment can be treated as strong basis into deciding the capital budgeting investing business scenario for entrepreneur through the discount rate ( interest rate ) . If the time duration priority for invested money for earning return on the investment is to be recognized by discounting estimated future cash flows earning (DCF) .In some point in time in investment horizon risk free rate, and net present value of the investment , then, to measurement for the risk ( Risk Lover ) , of estimated future cash flows.The risk premium rate is added added to risk-free discount rate (Benchmark for comparison of return on investment by treasury security). Such a mix discount rate used for the measurement investment, It is called the risk-adjusted interest rate. It willsignificantly play vital step to analyzing return on the investment by giving priority totime horizon and varied level of risk. It will be calculated as sum of the risk-free interest rate ( Interest On Treasury Or Government Securities) and risk-premium rate shows the investors’ confidence , attitude towards taking risk (Risk Averse Or Risk Lovers ) . The risk-adjusted discount rate method is calculated as follows:
Risk-adjusted discount rate = RF+B (Rm-Rf)
Where
RF=Risk Free Rate on Treasury Security
Rm= Return On Market
B= Beta of Particular Stock
Under capital asset pricing model, the risk premium is calculated by taking the difference between the market rate of return and the risk free rate multiplied by the beta security of the desired investment. The risk adjusted discount rate take into consideration for risk measurement for thepotential investorby varied level of discount rate. It depends up on the degree of risk varied which shows confidence and attitude of the investorupon theirinvestment projects. The higher interest rate will be used in calculation for discounting the riskier projects or riskier investment. The lower rate for less varied level of risk (risk averse) projects. The net present value of investment will varied with increasing discounted risk adjusted rate (Risk lover) or risk appetite of the investor .It indicates that the varied level of risk of a project is perceived, the less likely it will be favorable case to the investor for the investment in the project . Assume therisk free rate is assumed to be 12% (Taking From Return on Government Security Or Treasury security) ,established benchmark for risk measurement rate would be clubbed to measure required rate of return on the potential investment . We can say 5%, asliable to treated as compensation for the varied level of risk of the potential investment.
Benefit of risk adjusted discount rate
• It is easier in calculation and can be easily performed and analyzed
• It shows an confidence and attitude of investor towards uncertainty in potential investment or project.
Disadvantages
• There is no easy or shortcut way to find out the method to measure the return on the investment.
• Capital asset pricing model provides a strong basis fundamental of calculating the risk adjusted discount rate on the investment.
•We can say it doesn’t include the inflation in the numerator for the cash flows that are forecast over the future years in investment horizon.
•Through it is generally true in live or practical scenario, there exists a category of risk seekers (Risk Lovers) who do not demand premium for assuming risk appetite (Risk Lover); they are willing to pay premium to take large risks.
Question No 12: Net Working Capital: Networking Capital is Current assets – Current Liability.
Networking capital consists of inventory, debtor, and creditor management. If Current assets is not exceeding to current liability which means that company is in trouble to pay its creditor. Networking capital shows the liquidity of the company, how company has current assets to meet their short-term obligation. For Credit research the networking capital to sales ratio is calculated for the creditworthiness of the company. Networking capital consists of inventory, debtor, and creditor management.
Question No 13:
References
- 1. Amihud Yakov, Christensen Bent and Mendelson Haim, 1992. Further evidence on the risk relationship. Working paper S-93-11. Salomon Brother Center for the Study of the Financial Institutions, Graduate School of Business Administration, New York University.
- 2. Brealey, R.A., and S.C. Meyers. 2002. Principles of Corporate Finance. New York: McGraw Hill.
- 3. Fama, E. F., 1991. Efficient Capital Markets II. Journal of Finance 46: 1575-1617.
- 4. Jagannathan, R. and Wang, Z. 1996. The conditional CAPM and the cross-section of expected returns. Journal of Finance 51: 3-53.
- 5. Stewart, J. and Gill, L. 1998. Econometrics. 2nd edition, London: Prentice-Hall.
- 6. Sharpe, William F. Investments. 3rd edition, London: Prentice Hall International editions.
- 7. Rosenberg B., Reid K., Lanstein R. 1985. Persuasive evidence of market inefficiency. Journal of Portfolio Management 11: 9-17.
- 8. Fama, E. and French, K. (1992) The cross-section of expected stock returns, journal of finance, June 1992, 427-466.
- 9. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of economics and statistics, 47 (1), 13-37.
10 . Tobin, James (1958). Liquidity preference as behaviour towards risk, The
review of economic studies, 25.
11. Treynor, J. L. (1961). Market value, time, and risk, unpublished manuscript .
12. Sharpe, William F. (1964). Capital asset prices: A theory of market
equilibrium under conditions of risk, Journal of finance, 19 (3), 425-442.
13. Mossin, Jan. (1966). Equilibrium in a capital asset market, Econometrica,
34, 768-783.
14. Lintner, J. (1965). The valuation of risk assets and the selection of risky
investments in stock portfolios and capital budgets, Review of economics
and statistics, 47 (1), 13-37
15 . Black, F., Jensen, M., and Scholes, M The capital asset pricing model:
some empirical tests, in M. Jensen ed., studies in the theory of capital
markets. (1972)
GI25
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Importance Of Financial Management In Business Finance
Question No 1:
Importance Of Financial Management in Business Finance
Role Of financial Management in business finance environment plays vital role to get edge ahead over its competitor. How to do resource allocation. How much be invested into asset to generate revenue for the organization. With the help of cash flow statement top management can manage the need of optimum cash. Cash flow statement shows the figure related to creditor, debtor, and inventory management. It helps organization to manage the operating, financing and investing activity. Income statement which shows how the revenue and other expenditure are varying. Net profit shows how company is earning revenue to service their debt obligation. Income statement gives true picture regarding the wealth for shareholders. Income statement shows how the investment in fixed asset and respective earning from that asset. Balance sheet shows how much short term and long term debt the company has. It also shows how much company has asset to fulfill their short term and long term obligation. So financial management plays vital element for ensuring smooth driving of operation.
Question No 2: Agency Problem
(a) Agency Problem arises due to conflict of interest between the existing shareholders, creditors and management .Agency problem arises due to differing organization goal. Agency problem is dangerous for the health of organization. If the bigger gap is arising between existing shareholders, creditors, it would deteriorate the wealth of organization. So organization must always bridge this gap, unless until organization will lost its competitive edge over its competitor. If the CEO of present organization have secret talk with rivalry firm regarding merger with that firm. If CEO is hiding the talk of merger with shareholder and creditor of the company then it can be treated as the violation of business norms, which could lead to loss of the wealth of shareholder and employees of the organization. So such type of wrong practices must be stopped and providing safeguard to interest of all stake holder of the organization.
(b):If the branch manager lays off full time experienced employee and hiring part time employee just sake of earning bonus on the generated profit . Such types of practices are unethical. If the organization lose their experienced employee then it is difficult to survive in throat cut competition environment .Because business is highly volatile and dynamic,if organization don’t prepare their business plan according to dynamic business environment then it is difficult to get edge ahead of competitors .Because experienced employee are the core competency of the organization , without them it is difficult to survive in the industry .
.
Question No 3:Financial Goal Of firm In Association To Consideration To Stake Holder Demand .
Shareholders and stockholders have ownership or it can be in the form of shares of companies. In large business in corporations, shareholders are people and business institutions that simply looking for potential invest opportunity for earning future dividends and for the maximizing the value of their shares, whereas in small or micro, medium sized companies they may be the people who started the business by investing their money or who have a more personal stake in business entity it. When investors looks for potential investment opportunity by buying shares of companies, in consideration of purchasing shares they receive share certificates that say how many shares they own in the particular company . Owning stock or shares of a company often it entitles an investor is liable to get a part of the company’s earnings or profits, which is issued as a dividend income after providing preferred dividend . In addition, shareholders or stockholder are typically offered a fixed dividend or earning payout per share if the company stock or share is bought out by the stock holder or shareholder. Because they are called as partial share holders or the owners of a company, preferred shareholders or stockholders aren’t authorized to cast their vote at annual general meetings for a vital strategy to acquire another firm (such as acceptance or rejection of acquisition of firm , takeover of firm , merger with other firm strategy ), reconciliation of company‘s present financial details , and review periodic performance reports on company key performance data. If common shareholders unable to attend annual general meetings, they are permitted by mean of power of attorney to cast their vote by proxyperson voting.
Furthermore, if a company has requirement for raising capital for expansion of the business then company decides to issue more shares, current existing shareholders have an option to buy shares before they are going to offered to the public in the secondary market .
Question No 4: There is following common business structure in the NewZealand.
1.Sole Business Model :Asole business model operates it’s anenterprise onperson by own. The entrepreneur effectively controls, runs and owns the business and is liable to all earning and profits generated from business.
Entrepreneur have also personally obligation to absorb for all business related transaction taxes and outstanding debts.
2.Partnership Business Model: Partnerships are most common alliance among professional entrepreneur and business professionals. In a partnership business model two or more than two people collaborate and run and effectively control a business activity together.
3. Limited Liability business model: Company A business enterprise existence is as per law. It can be recognized as a legal object It is existence is differentiated from its shareholders or by the business tycoons who have shares or stock in that particular company).
Companies can bestarting their operation by getting certificate of incorporation. It can be done by applying online application processing through the website or it can be done by processing application through registrar of incorporation.
Question No 5. It is solved in excel sheet .
Question No 6. It is solved in excel sheet .
Question No 7. It is solved in excel sheet .
Question No 8. It is solved in excel sheet.
Question No9:
Cash flow Component Study
Cash Flow statement represents three prime business activities. These can be classified in following section.
1. Operating Activity: Operating Activity represents the information related to net income, employee benefit expense, deferred tax, non cash charges like depreciation and amortization. . It gives the clear picture of networking capital change. Networking capital is the difference between current assets – current liability. If current assets are not exceeding the current liability then company isn’t able to meet their commitment towards current obligation. It tells how organization is able to convert their debtor into cash cycle. It gives the information related to the inventory, creditor, account receivable, account payable .
2. Investing Activity: Investing activity shows how company is investing in fixed asset for generating earning for the organization. This investment can be in the form of capital expenditure for tangible asset ( property, plant , equipment ) or it can be in the form intangible asset ( patent , technology, license ,software ). It shows how company is efficient to replace their old asset with new one for generating revenue for the organization. It shows how company is utilizing their investment in capital expenditure for upgrading their technology for getting edge ahead of competitors.
3. Financing Activity: financing activity shows the financing pattern of the company. Financing can be in short term and long term .How assets are financed, how long debt are repaid. How organization is servicing the debt capacity. How organization is issuing share in the form proceeds after getting subscription of shares . How company is distributing dividend to it’s preferred shareholders and common shareholders. Financing patter gives the bird eye view to creditor about the accessing the company financing pattern .
Question No10 . It is solved in excel sheet.
Question 11:
It has been observed that, the eminent financial professionalshave analyzed that, to framework for varied analysis of risk, the businessman has required to analyzed risk return model on their investment. It can be treated as over a premium and aneffective benchmark for the establishment framework of risk measurement, which was risk-free (Treasury Security Return) . The unpredictability of the returns measurement on the investment in receiving future, the grater will be the risktaking (risk lover) and grater will be the premium expectation on the desired investment.According to underlying on this assumption measurement reasoning ( Capital Asset Pricing Model ) , it has been designed framework by the financial professionals that the risk premium on the investment can be treated as strong basis into deciding the capital budgeting investing business scenario for entrepreneur through the discount rate ( interest rate ) . If the time duration priority for invested money for earning return on the investment is to be recognized by discounting estimated future cash flows earning (DCF) .In some point in time in investment horizon risk free rate, and net present value of the investment , then, to measurement for the risk ( Risk Lover ) , of estimated future cash flows.The risk premium rate is added added to risk-free discount rate (Benchmark for comparison of return on investment by treasury security). Such a mix discount rate used for the measurement investment, It is called the risk-adjusted interest rate. It willsignificantly play vital step to analyzing return on the investment by giving priority totime horizon and varied level of risk. It will be calculated as sum of the risk-free interest rate ( Interest On Treasury Or Government Securities) and risk-premium rate shows the investors’ confidence , attitude towards taking risk (Risk Averse Or Risk Lovers ) . The risk-adjusted discount rate method is calculated as follows:
Risk-adjusted discount rate = RF+B (Rm-Rf)
Where
RF=Risk Free Rate on Treasury Security
Rm= Return On Market
B= Beta of Particular Stock
Under capital asset pricing model, the risk premium is calculated by taking the difference between the market rate of return and the risk free rate multiplied by the beta security of the desired investment. The risk adjusted discount rate take into consideration for risk measurement for thepotential investorby varied level of discount rate. It depends up on the degree of risk varied which shows confidence and attitude of the investorupon theirinvestment projects. The higher interest rate will be used in calculation for discounting the riskier projects or riskier investment. The lower rate for less varied level of risk (risk averse) projects. The net present value of investment will varied with increasing discounted risk adjusted rate (Risk lover) or risk appetite of the investor .It indicates that the varied level of risk of a project is perceived, the less likely it will be favorable case to the investor for the investment in the project . Assume therisk free rate is assumed to be 12% (Taking From Return on Government Security Or Treasury security) ,established benchmark for risk measurement rate would be clubbed to measure required rate of return on the potential investment . We can say 5%, asliable to treated as compensation for the varied level of risk of the potential investment.
Benefit of risk adjusted discount rate
• It is easier in calculation and can be easily performed and analyzed
• It shows an confidence and attitude of investor towards uncertainty in potential investment or project.
Disadvantages
• There is no easy or shortcut way to find out the method to measure the return on the investment.
• Capital asset pricing model provides a strong basis fundamental of calculating the risk adjusted discount rate on the investment.
•We can say it doesn’t include the inflation in the numerator for the cash flows that are forecast over the future years in investment horizon.
•Through it is generally true in live or practical scenario, there exists a category of risk seekers (Risk Lovers) who do not demand premium for assuming risk appetite (Risk Lover); they are willing to pay premium to take large risks.
Question No 12: Net Working Capital: Networking Capital is Current assets – Current Liability.
Networking capital consists of inventory, debtor, and creditor management. If Current assets is not exceeding to current liability which means that company is in trouble to pay its creditor. Networking capital shows the liquidity of the company, how company has current assets to meet their short-term obligation. For Credit research the networking capital to sales ratio is calculated for the creditworthiness of the company. Networking capital consists of inventory, debtor, and creditor management.
Question No 13:
References
1. Amihud Yakov, Christensen Bent and Mendelson Haim, 1992. Further evidence on the risk relationship. Working paper S-93-11. Salomon Brother Center for the Study of the Financial Institutions, Graduate School of Business Administration, New York University.
2. Brealey, R.A., and S.C. Meyers. 2002. Principles of Corporate Finance. New York: McGraw Hill.
3. Fama, E. F., 1991. Efficient Capital Markets II. Journal of Finance 46: 1575-1617.
4. Jagannathan, R. and Wang, Z. 1996. The conditional CAPM and the cross-section of expected returns. Journal of Finance 51: 3-53.
5. Stewart, J. and Gill, L. 1998. Econometrics. 2nd edition, London: Prentice-Hall.
6. Sharpe, William F. Investments. 3rd edition, London: Prentice Hall International editions.
7. Rosenberg B., Reid K., Lanstein R. 1985. Persuasive evidence of market inefficiency. Journal of Portfolio Management 11: 9-17.
8. Fama, E. and French, K. (1992) The cross-section of expected stock returns, journal of finance, June 1992, 427-466.
9. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of economics and statistics, 47 (1), 13-37.
10 . Tobin, James (1958). Liquidity preference as behaviour towards risk, The
review of economic studies, 25.
11. Treynor, J. L. (1961). Market value, time, and risk, unpublished manuscript .
12. Sharpe, William F. (1964). Capital asset prices: A theory of market
equilibrium under conditions of risk, Journal of finance, 19 (3), 425-442.
13. Mossin, Jan. (1966). Equilibrium in a capital asset market, Econometrica,
34, 768-783.
14. Lintner, J. (1965). The valuation of risk assets and the selection of risky
investments in stock portfolios and capital budgets, Review of economics
and statistics, 47 (1), 13-37
15 . Black, F., Jensen, M., and Scholes, M The capital asset pricing model:
some empirical tests, in M. Jensen ed., studies in the theory of capital
markets. (1972)
