Assignment

Subject: Financial Management

Submitted To:
Mam Marium Shabbir

Submitted By:
Mehran Riaz (17232720-016 )
Department:
Faculty of Management & Administrative Sciences.

Degree:
MBA 3.5 Years (6th Semester)

Date:
6 June ,2020

Questions no:1
What do we understand by Financial Management ?
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 is defined as dealing with and analyzing money and investments
for a person or a business to help make business decisions.
 An example of financial management is the work done by an accounting department for a
company.

Questions no:2
What is time value of money ?
The time value of money (TVM) is the concept that money you have now is worth more than the
identical sum in the future due to its potential earning capacity. This core principle of finance
holds that provided money can earn interest, any amount of money is worth more the sooner it is
received.

Examples:
Now, let's look at time value of money examples. If you invest $100 (the present value) for 1
year at a 5% interest rate (the discount rate), then at the end of the year, you would have $105
(the future value). So, according to this example, $100 today is worth $105 a year from today

Time Value of Money Formula

FV = the future value of money.

PV = the present value.
i = the interest rate or other return that can be earned on the money.
t = the number of years to take into consideration.
n = the number of compounding periods of interest per year.

Questions no:3
Why is it important to distinguish long term and short term financing?
Because short-term financing is for smaller amounts, you pay them back more quickly at a
higher interest rate and there's a shorter approval process. As long-
term business financing options are for larger amounts, there's a longer, more rigorous approval
process and it takes more time to pay them back.

Short-term finance

Short term finance is required for a short-period up to one year. It refers to funds needed to meet
day-to-day requirements and for holding stocks of raw materials, spare parts, etc. to be used for
current operations. Short-term finance is often called working capital or short-term capital, or
circulating capital.

Long-term finance

Long term finance can be defined as any financial instrument with maturity exceeding one year
(such as bank loans, bonds, leasing and other forms of debt finance), and public and private
equity instruments.

Questions no:4
Why do you companies take risk and what is the concept of portfolio in
investment?

Investment Risk

Definition of 'Investment Risk' Definition: Investment risk can be defined as the probability or

likelihood of occurrence of losses relative to the expected return on any particular investment.
However, the thumb rule is the higher the risk, the better the return.

Portfolio in investment
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and
cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and
closed funds. A portfolio can also consist of non-publicly tradable securities, like real estate, art,
and private investments.

Risk of managed portfolio

Underperforming investments While investing in managed fund gives you access to different
asset classes and industry sectors, there is always the risk that the fund's investments may
underperform or decline in value, affecting your return.

Questions no:5
What are the types of financing?
There are two main types of finance that include
Debt finance money borrowed from external lenders, such as a bank.

DEBT FINANCING:
Most people are familiar with debt as a form of financing because they have car loans
or mortgages. Debt is also a common form of financing for new businesses. Debt financing must
be repaid, and lenders want to be paid a rate of interest  in exchange for the use of their money.

Some lenders require collateral. For example, assume the owner of the grocery store also
decides that they need a new truck and must take out a loan for $40,000. The truck can serve as
collateral against the loan, and the grocery store owner agrees to pay 8% interest to the lender
until the loan is paid off in five years.

Debt is easier to obtain for small amounts of cash needed for specific assets, especially if the
asset can be used as collateral. While debt must be paid back even in difficult times, the
company retains ownership and control over business operations.
 Advantages of debt financing
 Maintaining ownership - unlike equity financing, debt financing gives you complete
control over your business. ...
 Tax deductions - unlike private loans, interest fees and charges on a business loan are tax
deductible.

Disadvantages of debt financing

 Qualification requirements. You need a good enough credit rating to receive financing.

 Discipline. You’ll need to have the financial discipline to make repayments on time.
Exercise restraint and use good financial judgment when you use debt. A business that is
overly dependent on debt could be seen as ‘high risk’ by potential investors, and that
could limit access to equity financing at some point.
 Collateral. By agreeing to provide collateral to the lender, you could put some business
assets at potential risk. You might also be asked to personally guarantee the loan,
potentially putting your own assets at risk.

EQUITY FINANCING:

Equity finance investing your own money, or funds from other stakeholders, in exchange for

partial ownership.
Equity is another word for ownership in a company. For example, the owner of a grocery store
chain needs to grow operations. Instead of debt, the owner would like to sell a 10% stake in the
company for $100,000, valuing the firm at $1 million. Companies like to sell equity because the
investor bears all the risk; if the business fails, the investor gets nothing.

At the same time, giving up equity is giving up some control. Equity investors want to have a say
in how the company is operated, especially in difficult times, and are often entitled to votes
based on the number of shares held. So, in exchange for ownership, an investor gives his money
to a company and receives some claim on future earnings.
 Advantages of equity financing
 Freedom from debt - unlike debt finance, you don't make repayments on investments.
 Business experience and contacts - as well as funds, investors often bring valuable
experience, managerial or technical skills, contacts or networks, and credibility to the business.

Disadvantages of Equity Financing 
 Share profit. Your investors will expect – and deserve – a piece of your profits. ...
 Loss of control. The price to pay for equity financing and all of its potential advantages is
that you need to share control of the company.
 Potential conflict.