Q1. What are the goals of financial management? Ans.

Financial Management means maximisation of economic welfare of its shareholders. Maximisation of economic welfare means maximisation of wealth of its shareholders. Shareholders wealth maximisation is reflected in the market value of the firms shares. Experts believe that, the goal of the financial management is attained when it maximises its value. There are two versions of the goals of financial management of the firm !rofit Maximisation and "ealth Maximisation. !rofit maximisation is based on the cardinal rule of efficienc#. $ts goal is to maximise the returns, with the best output and price levels. %llocation of resources and investors perception of the compan#s performance can be traced to the goal of profit maximisation. !rofit maximisation has been criticised on man# accounts& 1. 'ifferences in interpretation on the concept of profit expose the weakness of profit maximisation. 2. !rofit maximisation ignores time value of mone#. $t does not differentiate between profits of current #ear with the profit to be earned in later #ears. 3. The concept of profit maximisation fails to consider the fluctuations in profits earned from #ear to #ear. Fluctuations ma# be attributed to the business risk of the firm. 4. The concept of profit maximisation apprehends to be either accounting profit or economic normal profit or economic supernormal profit. !rofit maximisation fails to meet the standards stipulated in an operational and a feasible criterion for maximising shareholders wealth, because of the deficiencies explained above. "ealth maximisation means maximising the net wealth of a compan#s shareholders."ealth maximisation is possible onl# when the compan# pursues policies that would increase the market value of shares of the compan#. The following arguments are in support of the superiorit# of wealth maximisation over profit maximisation "ealth maximisation is based on the concept of cash flows. (ash flows are a realit# and not based on an# sub)ective interpretation. *n the other hand, profit maximisation is based on accounting profit and it also contains man# sub)ective elements. "ealth maximisation considers time value of mone#. Time value of mone# translates cash flows occurring at different periods into a comparable value at +ero period. $n this process, the ,ualit# of cash flows is considered criticall# in all decisions as it incorporates the risk associated with the cash flow stream. Maximising the wealth of the shareholders means positive net present value of the decisions implemented.

Q2. Explain the factors affecting Financial Plan. Ans. % strong financial plan should be broken down into three focused sections. These sections should be titled. /alance sheet. $ncome statement . (ashflow statement"ithin these sections a financial plan should be specific and focus on the matter of that particular section. Balance sheet "ithin the balance sheet section, #ou should give an overview of #our current financial situation, current income, current expenditure and how the finances look at this particular moment in time. This will be a good lead into the financial plan as it will give the reader a good grasp of wh# #ou have formulated the financial plan. This balance sheet should also contain pro)ected figures for the next few #ears as well as #our actual figures for the last few #ears, if #ou have an#. These figures should come from both the income and cashflow sections.This balance sheet section should be looked at as a mixture of a summar# of the plan and also the introduction where #ou introduce the potential that #ou will consider in more detail in the other two sections. Some people find that the balance sheet is the last part of the financial plan to be finished, even if it is the first section to be started. ncome statement The income statement should include all income, profits, investments, savings and how these will be utili+ed. This will explain how profitable the business is and also, if #ou are expecting investments or loans, how much #ou are expecting and how much will be needed to have the desired effect. There should also be pro)ected figures within this section for the next three to five #ears. !ashflo" statement $n the cashflow statement, all of the outgoings should be identified. This should show what #ou intend to spend overall and should also show pro)ected figures for the next few #ears. Ensure that #our figures do add up. % document with incorrect figures does not make a viable financial plan.

Q3. Explain the time #al$e of mone%. Ans. The time preference for mone# is generall# expressed b# an interest ratewhich remains positive even in the absence of an# risk. $t is called the riskfree rate.For example, if an individuals time preference is 01, it implies that he or she is willing to forego 2s. 344 toda# to receive 2s. 340 after a period of one #ear. Thus he or she considers 2s. 344 and 2s. 340 as e,uivalent in value. $n realit# though, this is not the onl# factor he or she considers. 5e or she re,uires another rate for compensating him or her for the amount of risk involved in such an investment. This risk is called the risk premium. &e'$ire( rate of ret$rn ) &is*+free rate , &is* premi$m There are two methods b# which the time value of mone# can be calculated& (ompounding techni,ue 'iscounting techni,ue

a. !ompo$n(ing techni'$e $n the compounding techni,ue, the future values of all cash inflow at the end of the time hori+on at a particular rate of interest are calculated. The amount earned on an initial deposit becomes part of the principal at the end of the first compounding period.The compounding of interest can be calculated b# the following e,uation& "here, A ) Amo$nt at the en( of the perio(- P ) Principal at the en( of the %ear- i ) &ate of interest-n ) .$m/er of %ears /. 0isco$nting techni'$e $n the discounting techni,ue, the present value of the future amount is determined. Time value of mone# at time +ero on the time line is calculated. This techni,ue is in contrast to the compounding approach where we convert the present amounts into future amounts. "here, P+ is the present #al$e for the f$t$re s$m to /e recei#e(A+ is the s$m to /e recei#e( in f$t$rei+ is the interest rate- an( n+ is the n$m/er of %ears.

Q4. 123 n(ia 4t(5s share is expecte( to to$ch &s. 467 one %ear from no". 8he compan% is expecte( to (eclare a (i#i(en( of &s. 26 per share. What is the price at "hich an in#estor "o$l( /e "illing to /$% if his or her re'$ire( rate of ret$rn is 169? Ans. 678 $ndia 9td. share is expected to touch 2s.:;4 one #ear from now.The compan# is expected to declare a dividend of 2s. <; per share."hat is the price at which an investor would be willing to bu# if hisre,uired rate of return is 3;1= Solution ! 4 > '3?@3ABeC A !3 ?@3ABeC> D<;?@3A4.3;CE A D:;4?@3A4.3;CE > <3.F: A GH3.G4 > 2s. :3G.4: %n investor would be willing to bu# the share at 2s.? :3G.4:

Q6. Belo" 8a/le (epicts the statistics of a firm an( its sales re'$irements. !omp$te the 0:4 accor(ing to the #al$es gi#en in the ta/le.

Ans.

Q;. What are the ass$mptions of << approach?

Ans. The MM approach to irrelevance of dividend is based on the following assumptions& The capital markets are perfect and the investors behave rationall#.%ll information is freel# available to all the investors.There is no transaction cost.Securities are divisible and can be split into an# fraction. Io investor can affect the market price.There are no taxes and no flotation cost.The firm has a defined investment polic# and the future profits are known with certaint#. The implication is that the investment decisions are unaffected b# the dividend decision and the operating cash flows are same no matter which dividend polic# is adopted. The modelJnder the assumptions stated above, MM argue that neither the firm pa#ing dividends nor the shareholders receiving the dividends will be adversel# affected b# firms pa#ing either too little or too much dividends. The# have used the arbitrage process to show that the division of profits between dividends and retained earnings is irrelevant from the point of view of the shareholders. The# have shown that given the investment opportunities, a firm will finance these either b# ploughing back profits of if pa#s dividends, then will raise an e,ual amount of new share capital externall# b# selling new shares. The amount of dividends paid to existing shareholders will be replaced b# new share capital raised externall#.$n order to satisf# their model, MM has started with the following valuation model. P7) 1= >01,P1?@ >1,*e? WhereP7 ) Present mar*et price of the share Ae ) !ost of e'$it% share capital 01 ) Expecte( (i#i(en( at the en( of %ear 1P1 ) Expecte( mar*et price of the share at the en( of %ear 1 "ith the help of this valuation model we will create a arbitrage process, i.e., replacement of amount paid as dividend b# the issue of fresh capital. The arbitrage process involves two simultaneous actions. "ith reference to dividend polic# the two actions are& !a#ment of dividend b# the firm 2ising of fresh capital. "ith the help of arbitrage process, MM have shown that the dividend pa#ment will not have an# effect on the value of the firm. Even if the firm pa#s dividends, resulting in a increase in market value of the share, the effect on the value of the firm will be neutralised b# the decrease in terminal value of the share.