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Global Academy Of Technology

Financial Management Assignment

Name: Chandan . P Sem: 2 nd

Usn : 1GA19MBA21 Dept : MBA

Financial management

1.Distinguish between Preference and

Equity share.
Ans.
Basis of EQUITY SHARE PREFRENCE SHARE
Comparison

Meaning Equity shares are the ordinary Preference shares are the shares that
shares of the company carry preferential rights on the matters of
representing the part ownership payment of dividend and repayment of
of the shareholder in the capital.
company.

Payment of The dividend is paid after the Priority in payment of dividend over equity
dividend payment of all liabilities. shareholders.
Repayment In the event of winding up of the In the event of winding up of the company,
of capital company, equity shares are preference shares are repaid before equity
repaid at the end. shares.
Rate of Fluctuating Fixed
dividend

Redemption No Yes
Voting rights Equity shares carry voting rights. Normally, preference shares do not carry
voting rights. However, in special
circumstances, they get voting rights.

Convertibility Equity shares can never be Preference shares can be converted into
converted. equity shares.
Arrears of Equity shareholders have no Preference shareholders generally get the
Dividend rights to get arrears of the arrears of dividend along with the present
dividend for the previous years. year's dividend, if not paid in the last
previous year, except in the case of non-
cumulative preference shares.

Ownership They are the owners They are not the owners

Types of Suitable for those who are Suitable for those who are less
investor and adventurous and involves in high adventurous and it involves less risk as
risk involved risk compared to equity share.

Financial Dividend payment is optional. Payment of dividend for preference share is

burden Depends on profit earned by the a fixed financial commitment.
company. No fixed financial
burden.

2.Explain the role of financial manager in

current volatile environment.
Ans.
i. Estimating the Requirements of Funds: A business requires funds for long
term purposes i.e. investment in fixed assets and so on. A careful estimate of
such funds is required to be made. An assessment has to be made regarding
requirements of working capital involving, estimation of amount of funds
blocked in current assets and that likely to be generated for short periods
through current liabilities. Forecasting the requirements of funds is done by use
of techniques of budgetary control and long range planning.

ii. Decision Regarding Capital Structure: Once the requirements of funds is

estimated, a decision regarding various sources from where the funds would be
 raised is to be taken. A proper mix of the various sources is to be worked out,
each source of funds involves different issues for consideration. The finance
manager has to carefully look into the existing capital structure and see how
the various proposals of raising funds will affect it. He is to maintain a proper
balance between long and short term funds.

iii. Investment Decision: Funds procured from different sources have to be

invested in various kinds of assets. Long term funds are used in a project for
fixed and also current assets. The investment of funds in a project is to be made
after careful assessment of various projects through capital budgeting. A part
of long term funds is also to be kept for financing working capital requirements.
Asset management policies are to be laid down regarding various items of
current assets, inventory policy is to be determined by the production and
finance manager, while keeping in mind the requirement of production and
future price estimates of raw materials and availability of funds.

iv. Dividend Decision: The finance manager is concerned with the decision to pay
or declare dividend. He is to assist the top management in deciding as to what
amount of dividend should be paid to the shareholders and what amount be
retained by the company, it involves a large number of considerations. The
principal function of a finance manager relates to decisions regarding
procurement, investment and dividends.

v. Supply of Funds to all Parts of the Organization or Cash Management: The

finance manager has to ensure that all sections i.e. branches, factories, units or
departments of the organization are supplied with adequate funds. An
adequate supply of cash at all points of time is absolutely essential for the
 smooth flow of business operations. Even if one of the many branches is short
of funds, the whole business may be in danger.

vi. Evaluating Financial Performance: Management control systems are usually

based on financial analysis, e.g. ROI (return on investment) system of divisional
control. A finance manager has to constantly review the financial performance
of various units of the organization. Analysis of the financial performance
helps the management for assessing how the funds are utilized in various
divisions and what can be done to improve it.

vii. Financial Negotiations: Finance manager's major time is utilized in carrying out
negotiations with financial institutions, banks and public depositors. He has to
furnish a lot of information to these institutions and persons in order to ensure
that raising of funds is within the statutes. Negotiations for outside financing
often requires specialized skills.

viii. Keeping in Touch with Stock Exchange Quotations and Behavior of Share
Prices: It involves analysis of major trends in the stock market and judging their
impact on share prices of the company's shares.

3.Briefly explain different types of debentures.

Ans.
i. Secured Debentures: These are debentures that are secured against an asset
/assets of the company. This means a charge is created on such an asset in case of
default in repayment of such debentures. So in case, the company does
 not have enough funds to repay such debentures, the said asset will be sold
to pay such a loan. The charge may be fixed, i.e. against a specific
assets/assets or floating, i.e. against all assets of the firm.

ii. Unsecured Debentures: These are not secured by any charge against the
assets of the company, neither fixed nor floating. Normally such kinds of
debentures are not issued by companies in India.

iii. Redeemable Debentures: These debentures are payable at the expiry of their
term. Which means at the end of a specified period they are payable, either in
the lump sum or in installments over a time period. Such debentures can be
redeemable at par, premium or at a discount.

iv. Irredeemable Debentures: Such debentures are perpetual in nature. There is

no fixed date at which they become payable. They are redeemable when the
company goes into the liquidation process. Or they can be redeemable after
an unspecified long time interval.

v. Fully Convertible Debentures: These shares can be converted to equity shares

at the option of the debenture holder. So if he wishes then after a specified
time interval all his shares will be converted to equity share and he will become
a shareholder.

vi. Partly Convertible Debentures: Here the holders of such debentures are given
the option to partially convert their debentures to shares. If he opts for the
conversion, he will be both a creditor and a shareholder of the company.

vii. Non-Convertible Debentures: As the name suggests such debentures do not

have an option to be converted to shares or any kind of equity. These
debentures will remain so till their maturity, no conversion will take place.
These are the most common type of debentures.
viii. Registered Debentures:Registered debentures are registered with the
company. These debentures can be transferred only by a transfer deed.
 Debenture interest is paid only to those names appearing in the register of the
company.

ix. Bearer Debentures:Bearer Debentures are not recorded in the register of a

company. As the name suggests, Bearer Debentures are transferable by
delivery and don’t require a transfer deed. The holder or the bearers of these
Debentures are entitled to get the interest.

4.Explain how wealth maximization is better than

profit maximization for any business today.
Ans.
The goal of Wealth maximization A company has the ability to increase the market
value of its general stock over time. The market value of the firm is based on many
factors like their services, sales, goodwill, quality of products, etc.

This is a versatile goal of wealth maximization of the company and recommended

criterion for evaluating the performance of a business organization. This will help
the firm to increase its stake in the market, gain leadership, maintain consumer
satisfaction and also have many other benefits.
Profit maximization vs wealth maximization is given in the points given below:

1. Through which process the company is able to increase the earning potential, it is
known as profit maximization. On the other hand, the company’s ability to
increase the value of its stock in the market is known as the maximum amount of
money.

2. Profit maximization ignores risk and uncertainty. Unlike Wealth

Maximization, which considers both.
3. Profit maximization is a short term objective of the firm whereas the long-term
objective is money maximization.
4. Profit maximization avoids the time value of money, but Wealth
Maximization recognizes it.
5. Advantage maximization is essential for the survival and development of the
enterprise. On the contrary, Goal Of Wealth Maximization accelerates the growth
rate of the enterprise and its objective is to achieve the maximum market share of
the economy.

6. Risk management – Under profit maximization, management minimizes

expenditure, so it is less likely to pay for hedges which can reduce the risk profile of
the organization. A wealth-focused company works on risk mitigation, so the risk
of its loss is reduced.

7. Pricing strategy – When the management wants to maximize profits, then the
maximum price is given to the products to increase the margin. To make a
market share, in the long run, a wealth-oriented company can reverse, to reduce
prices.

8. capacity planning – A profit-oriented business will spend enough on its

productive capacity to handle current sales levels and perhaps short-term sales
forecasts. A wealth-oriented business will spend more heavily on the capacity to
meet its long-term sales estimates.

Advantages of wealth maximization.

Wealth Maximization means promoting fame, goodwill, prestige by emphasizing

the consumer preference and wealth of society. Providing importance to the
consumer’s priority organization, the questions related to the product are
received, so the customer needs to change the product with this reaction which is
innovative, after-sales services activities, etc. have been implemented. Below, I’m
giving some advantages of wealth maximization.

Wealth Maximization model is a better model because it eliminates all the

shortcomings of profit maximization as the goal of financial decision. Advantages
of wealth maximization –

1. The maximum utilization of funds is based on cash flows and not on profits. Unlike
profits, cash flow is accurate and definite and therefore avoid any ambiguity
associated with accounting profit. Benefits can be easily manipulated, if there is any
 change in accounting perception/policy, then profit is changed. The method of
depreciation changes, the profit changes. This is not the case with cash-flows.

2. Profit maximization offers lower term view than wealth maximization. Short-term
profit maximization can be achieved by managers at the expense of long-term
sustainability of the business.

3. The maximum use of money considers the time value of money. This is important
because we all know that there is not a single dollar and a year later dollars equal
value. In the goal of wealth maximization, future cash flows are exempted at a
reasonable discounted rate to represent their current value. Let’s say that two
projects are A and B, Project A is more profitable, but it is going to generate
profit in the long term, while Project B is less profitable, but it is capable of
generating returns in shorter periods. In case of uncertainty, Project B can be
better. So, the timing of returns is ignored by profit maximization, it is considered
in funding maximization.

4. Considering the risk-and-uncertainty factors while considering the maximization

criteria, the discount rate. The discount rate reflects both time and
risk. The uncertainty is high, the discount rate is high and vice versa.
Thus wealth maximization is better than profit maximization for any business today.

5.What are the objectives of financial

management.
Ans.
i. Profit maximization: the finance manager tries to earn maximum profit for the
company in long term and short term business is uncertain he cant guarantee
long term profits. However a company can earn profits even in long-term if
a)The finance manager takes proper financial decisions.

b) He uses finance of company properly.

ii. Wealth maximization: it is also a main objective of financial management .it
means to earn maximum wealth for shareholders.so the financial manager
gives maximum dividend for the shareholders.he also tries to increase the
market value of shares which depends on the performance of the company.

iii. Proper estimation of financial requirements:the financial manager must

estimate the total finance required by the company.he must find out how much
finance is required to start and run the company.he must also find the fixed
capital and working capital required by the company.if the estimation isn't
correct there will be shortage or surplus of finance. He must also consider
factors such as type of technology used by company,number of employed,scale
of operation,legal requirements.

iv. Proper mobilization:collection of fund is important after estimation of the

required finance the financial manager should decide about the source of
finance. He can collect from various source such as shares,loans from bank
and financial institution,debentures etc.

v. Proper utilization of fund: the funds should be used in a optimum way.finance

manager should use finance profitably. Finance should not be wasted.it must
be invested in profitable projects. Finance should not be wasted just on
inventories.short credit period has to be followed.

vi. Maintaining proper cash flow: it is a short term objective.company should

have proper cash flow to maintain day to day expenses such as purchase of raw
materials,payment of wages and salaries,rent etc. If company has a good cash-
flow it can take advantage of many opportunities such as getting discounts on
purchase,giving credit to customers,large scale purchasing. A healthy cash flow
improves the chance of survival and success of the company .

vii. Survival of the company:the company must survive in this competitive

world.correct financial decisions should be made .one wrong decision can
make the company sick which will lead to close down of the company.
viii. Creating reserves:the company must not distribute the full profit as dividend
to shareholders . a part of profits should be kept aside as reserve. Reserves can
be used for expansion and growth. It can also be used in ti,e of emergencies
and contingencies in future.

ix. Proper coordination: financial management should have proper coordination

between the financial departments and other departments of the company.

x. Create goodwill: goodwill improves the image and reputation of the

company.goodwill helps the company to survive in short-term and succeed in
long term. So, financial management should try to create goodwill.

xi. Increase efficiency: financial management also tries to increase the efficiency
of the departments of the company. Proper distribution of finance to all
departments will ensure the increase in efficiency of the entire company.

xii. Reduce cost of capital: financial management tries to reduce the cost of capital
by trying to borrow money at low interest rate.the financial manager must plan
the structure of capital in such a way that the cost of capital is minimized.

xiii. Reduce operation risk: financial management tries to minimize operation risk
by avoiding high risk project and by taking proper insurance.there are many
risk and uncertainties in business.the finance manager must take steps to
reduce risk .

xiv. Prepare capital structure: Financial management also prepares capital

structure. It decides the ratio between the owned finance and borrowed
finance.it brings proper balance between different sources of capital.the
balance is very much necessary for liquidity, economy, flexibility and stability.

xv. Financial discipline: financial management tries to create a financial discipline.

Financial discipline means :-

a) to invest finance only in productive areas as it will bring high returns to

the company
b) b)to avoid wastage and misuse of finance.