SKILL BASED TRAINING

ASSIGNMENT ON INTRODUCTION TO FINANCIAL

MANAGEMENT

Submitted for partial fulfillment for the award of the Degree of

BACHELOR OF BUSINESS ADMINISTRATION

Under the Supervision of

(Ms.TINU ANAND)
Submitted by : MUSKAN SRIVASTAVA

ENROLEMENT NO-40619101718

BBA(G)-4B

Batch (2018-2021)

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

( Affiliated to Guru Gobind Singh Indraprastha University )

Madhuban Chowk, ROHINI, DELHI – 110085.

 Fundamentals of financial Management
NAME: Muskan srivastava

CLASS: BBA-M4B

ROLL NO: 40619101718

Q1. What do you mean by financial management? Elaborate the objectives of

financial Management.

Ans. Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of
funds of the enterprise. It means applying general management principles
to financial resources of the enterprise. Financial management can be defined
as the management of flow of funds. All business decisions have financial
implications and therefore financial management is inevitably related to almost
every aspect of business operations. Broadly speaking, the financial management
includes any decision made by a business/investor that affects its finances. 

Objectives are as follows:

 Profit maximization
    Profit is the main concern of the business. Every entrepreneur makes his best effort
to increase the profits. This approach favors that every effort which will increase
the absolute profit will be appreciated and every effort which will decrease the
profits will be avoided. So the profit is the pivot point around which financial
management works.
    Arguments in favor of profit maximization:
1. Profit is the main source of finance for the growth of a business, so a business
should aim at maximization of profits for enabling its growth and development. 
2.Profitability is a good indicator for measuring efficiency and economic
prosperity of a business enterprise so the profit maximization is justified approach.
3. Huge amount of profits helps a business unit to survive in adverse situation
also. Huge profits give assistance to promote socio-economic welfare.
4. Profits provide motivation to work harder and more efficiently.
5. Profits maximization shows efficient use of available resources.
 Arguments for Profit Maximization:
1. Ambiguity of the term profit:The meaning of profit is vague. Different
people take the term profit in different ways. There may be short or long
term profit or it can be profit after tax or before tax. There can be total profit
or profit per share or operating or net profit. So there is no clear meaning of
the term profit.
2. No consideration for dividend: This approach totally ignores the impact of
dividend policy on the market price of share. A firm will not pay dividend ,if
its objective is maximization, because dividend declaration will reduce the
profits.
3. It ignores time value of money:This approach does not considers the
magnitude and timings of earning. It gives equal weightage to the earnings
occurring in different periods.
Wealth maximization
    Maximization of shareholder’s wealth is the main objective of financial
management. This objective is generally expressed in terms of maximization of the
value of a share of a firm. It is necessary to know and determine as to how the
maximization of shareholder’s wealth is to be measured. 
   Advantages of wealth maximization
1. Ambiguity of profit
2. Time value of money
3. Risk Factor
       This approach is universally accepted as it removes all the limitations of profit
maximization approach.

Q2.”Objective of financial Management is Wealth Maximization”. Comment

Ans. Wealth maximization is a modern approach to financial management.
Maximization of profit used to be the main aim of a business and
financial management till the concept of wealth maximization came
into being. It is a superior goal compared to profit maximization as it
takes broader arena into consideration. Wealth or Value of a business
is defined as the market price of the capital invested by shareholders
. The wealth maximization objective is almost universally accepted goal of a firm.
According to this objective, the managers should take decisions that
maximize the shareholders' wealth. In other words, it is to make the
 shareholders as rich as possible. Shareholders' wealth is maximized when a
decision generates net present value. The net present value is the difference
between present value of the benefits of a project and present value of its
costs. A decision that has a positive net present value creates wealth for
shareholders and a decision that has a negative net present value destroys
wealth of shareholders. Therefore, only those projects which have positive
net present value should be accepted. For example, suppose a firm invests $
10,000 in a project that generates net cash flow $ 3,000 each year for five
years. If the firm requires 10% return on its capital, the net present value of
the project is $ 1,372. Project like this should be accepted because the net
present value accruing from the project belongs to shareholders, hence
increases their wealth. Investors pay higher price for shares of a company
which undertakes projects with positive net present value. As a result,
wealth maximization is reflected in the market price of shares. Based on
this logic, stock price maximization is equivalent to shareholders wealth
maximization. It is because, market price of firm's stock takes into account
present and expected earnings per share; the timing, duration, and risk of
these earnings; the dividend policy of the firm; and other factors that bear
on the market price of the stock. Stock price maximization is considered
superior goal to profit maximization goal.

Q3. What do you understand by Financial Planning?

Ans. Financial planning is the task of determining how a business will afford to
achieve its strategic goals and objectives. Usually, a company creates a
Financial Plan immediately after the vision and objectives have been set.
The Financial Plan describes each of the activities, resources, equipment
and materials that are needed to achieve these objectives, as well as the
timeframes involved.
Financial Planning is process of framing objectives, policies, procedures,
programmes and budgets regarding the financial activities of a concern.
This ensures effective and adequate financial and investment policies. The
importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily
investing in companies which exercise financial planning.
 4. Financial Planning helps in making growth and expansion
programmes which helps in long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing
market trends which can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a
hindrance to growth of the company. This helps in ensuring stability
and profitability in concern.

Steps involved in financial Planning are as follows:

 Step 1 - Defining and agreeing your financial objectives and goals. ...
 Step 2 – Gathering your financial and personal information. ...
 Step 3 – Analyzing your financial and personal information. ...
 Step 4 – Development and presentation of the financial plan. ...
 Step 5 – Implementation and review of the financial plan.

Q4. What do you mean by optimum Capitalization?

Ans.The optimal capital structure of a firm is the best mix of debt and equity
financing that maximizes a company’s market value while minimizing its
cost of capital. In theory, debt financing offers the lowest cost of capital due
to its tax deductibility. However, too much debt increases the financial risk
to shareholders and the return on equity that they require. Thus, companies
have to find the optimal point at which the marginal benefit of debt equals
the marginal cost.

 An optimal capital structure is the best mix of debt and equity

financing that maximizes a company’s market value while minimizing
its cost of capital.
 Minimizing the weighted average cost of capital (WACC) is one way
to optimize for the lowest cost mix of financing.
 According to some economists, in the absence of taxes, bankruptcy
costs, agency costs, and asymmetric information, in an efficient
market, the value of a firm is unaffected by its capital structure.

Optimal Capital Structure and WACC

  The cost of debt is less expensive than equity because it is less risky.
The required return needed to compensate debt investors is less than
the required return needed to compensate equity investors, because
interest payments have priority over dividends, and debt holders
receive priority in the event of a liquidation. Debt is also cheaper than
equity because companies get tax relief on interest, while dividend
payments are paid out of after-tax income.
 However, there is a limit to the amount of debt a company should
have because an excessive amount of debt increases interest
payments, the volatility of earnings, and the risk of bankruptcy. This
increase in the financial risk to shareholders means that they will
require a greater return to compensate them, which increases the
WACC—and lowers the market value of a business. The optimal
structure involves using enough equity to mitigate the risk of being
unable to pay back the debt—taking into account the variability of the
business’s cash flow.
 Companies with consistent cash flows can tolerate a much larger
debt load and will have a much higher percentage of debt in their
optimal capital structure. Conversely, a company with volatile cash
flows will have little debt and a large amount of equity.

BASIS FOR OPERATING FINANCIAL

COMPARISON LEVERAGE LEVERAGE

Meaning Use of such assets in the Use of debt in a

company's operations for
which it has to pay fixed
costs is known as
Operating Leverage.
company's capital
structure for which it has
to pay interest expenses is
known as Financial
Leverage.

Measures Effect of Fixed operating Effect of Interest

costs. expenses

Relates Sales and EBIT EBIT and EPS

Ascertained by Company's Cost Structure Company's Capital

 BASIS FOR OPERATING FINANCIAL
COMPARISON LEVERAGE LEVERAGE

Structure

Preferable Low High, only when ROCE is

higher

Formula DOL = Contribution / DFL = EBIT / EBT

EBIT

Risk It give rise to business It give rise to financial

risk. risk.

Q5. Explain the concept of financial leverage. Examine the effect of

financial leverage of EPS. Does the financial leverage always increase the
EPS.

Ans. Financial leverage is the use of debt to buy more assets. Leverage is
employed to increase the return on equity. However, an excessive amount
of financial leverage increases the risk of failure, since it becomes more
difficult to repay debt.

The financial leverage formula is measured as the ratio of total debt to

total assets. As the proportion of debt to assets increases, so too does the
amount of financial leverage. Financial leverage is favorable when the
uses to which debt can be put generate returns greater than the interest
expense associated with the debt. Many companies use financial leverage
rather than acquiring more equity capital, which could reduce the earnings
per share of existing shareholders.

Financial leverage has two primary advantages:

 Enhanced earnings. Financial leverage may allow an entity to earn a
disproportionate amount on its assets.
 Favorable tax treatment. In many tax jurisdictions, interest expense
is tax deductible, which reduces its net cost to the borrower.
Fundamental analysis uses the  financial leverage  to determine the
sensitivity of a company's earnings per share (EPS) when there is a
change in its earnings before interest and taxes (EBIT). When a company
has a high FL, it generally has high interest payments. The high level of
interest payments negatively affects EPS. 
Impact of financial leverage on EPS:

Financial leverage acts as a lever to magnify the influence of fluctuations.

Any fluctuation in earnings before interest and taxes

(EBIT) is magnified on the earnings per share (EPS) by operation of

leverage.The greater the degree of leverage, the wider the variation in EPS
given any variation in EBIT.

No, financial leverage leads toOver exposure of equity financing which

could lead to a fall in earnings per share (EPS). Debt, on the other
hand, helps a firm enjoy the benefits of financial leverage, which can also
help improve the return on equity (ROE) for shareholders. ... If ROI equals
the cost of debt, the effects are neutral.