6th semester Financial Management (3201)

8 * Why should a financial manager concentrate primarily on wealth maximization instead of profit maximization as a goal of the corporation? Explain logically? (2010, 2008):

Wealth maximization's are considered as a better approach the profit maximization because Wealth maximization's objective’s is a widely recognized criterion with which the performance a business enterprise is evaluated. It has also some advantage such as

1. Wealth maximization's is a clear term. Here the present value of cash flow is taken into consideration. The net effect of investment and benefits can be measured clearly.(Quantitatively)

2. The present values of cash inflow and outflows helps the management to achieve the overall objectives of a company.

 

3. The concept of Wealth maximization's is universally accepted because, it takes care of interest of financial institutions, owners, employees and society at large.

4. Wealth maximization's guide the management in framing consistent strong dividend policy, to earn maximum return the equity holders.

5.The concept of Wealth maximization's considers the impact of risk factor, while calculating the Net Present Value or NPV at a particular discount rate, adjustment is made to cover the risk that as associated with the investment.

9 * What are the major financial managers?(2010):

Role of financial manager in the various functional areas are

1. Raising Funds:  In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can rise funds by the equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity

2. Allocation of Funds: Once the funds are raised through different channel next important function is to allocate the funds. The funds should be allocated in a such manner the following point must be considered.

3. Profit Planning: Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm.

4. Understanding Capital Market:  Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear Understanding Capital Market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved.

10 * How does the notion of risk & reward govern the behavior of Financial managers (2010):

In competitive and efficient marks, greater rewards can only be achieved with grater risk. The financial manager is constantly involved in decisions involving a trade-off between the two. For a company it is important that it does well what it knows well. If it gets into a new area where it has no expertise there is little reason to believe that the rewards will be commensurate with the risk that is involved.

 11 * What is CAPM?(2010,2009,2007):

 In finance the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversified risk. The model task into account the asset’s sensitivity to non-diverifiable risk (also known as systematic risk or market risk), often represented by the quantity beta(B) in the financial industry.

12 * What are the basic assumption of it(CAPM)?(2010,2009):

1. The model aims to maximize economic utilities.

2. The results are risk-averse and rational.

3. The results are price takers. This implies that they cannot influence prices.

4. The model can lend and borrow unlimited amounts under the risk free rate of interest .

5. The model presumes that all into is available at the sane time to all investors.

13 * What do you mean by portfolio?/ What is a Portfolio assets?(2010,2008):

A grouping of financial assets such as stocks, bonds and cash equivalents as well as their mutual, exchange-traded and closed-fund counterparts. Portfolio are held directly by investors and or managed by financial professionals.

14 * Differentiate between portfolio risk and stand-alone risk? (2010):

In portfolio management, standalone risk measures that undiversified risk of an individual asset. So for example, by investing just in Microsoft stock, you would subject portfolio to standalone risk ( and standard deviation of returns)of a single company and industry sector (high technology).

Portfolio risk is the diversified risk of a whole portfolio of assets. So, if your investment portfolio held 50% large company stock, 25% international company stocks,15% small cap stocks and 10% bonds, your portfolio would have an expected risk ( standard deviation of returns) to it vs. A different portfolio that had a different makeup of investments.

15 * What do you mean by capital budgeting?(2010):

Capital budgeting (or investment appraisal) is the planning process used to determine whether a firm’s long term investments such as new machinery, replacement machinery new plants , new products and research development project are worth pursuing> It is budget for major capital, or investment expenditures.

16 * Write down the basics steps to be followed in capital budgeting process? (2010):

1.Identify Potential Opportunities: The first step in the capital budgeting process is to identify the opportunity that you have. Many times, there is more then one available path that your company could take.

2.Evaluate Opportunities: Once you have identified that reasonable opportunities, you need determine which ones are the best. Look at them in relation to your overall business strategy and mission.

3.Cash Flow: Next you need to determine how much cash flow it would take to implement a given project. You also need to estimate how much cash would be brought in by such a project.

4.Select Project: After you look at all of the possible project separately on there own merits. You need to come up with the right combination of project that will work for your company immediately.

5. Implementation: Once the decisions have been made, it is time to implement the project. Implementation is not really a budgeting issue, but you will have to oversee everything to be sure it is done correctly.