Kushland College

Master of Business Administration

Course Title: Finance Managemen
The Due date of this assignment will be one week before Final Exam date. Please send it(Only MS
WORD) Viamy email: gamme8012@gmail.com

1. Your material must be based on evidences and reputable journals only.

2. Copying from each other leads to cancellations of your mark.
3. You are expected to send MS word of your assignments via my email address

PART I:Individual Assignment1: Discussion Questions (Subject Wise Broad Questions) (Maximum
5 Pages)
1. Discuss what you understand about Finance, why we need finance and how finance becomes
essential requirement of every organization and in our daily life of social, political and
economic arenas?Furthermore, discuss what financial management means and why it is
required in the personal and business arenas. What are major components of financial
management and what decisions are made by financial managers?
2. Differentiate profit maximization from wealth maximization? Which one of them comes first
and discuss how the managers negotiate the conflicts among them.
3. Discuss what you know about risk and return issues, differentiate systematic risk from
unsystematic risk. Furthermore, discuss the measurement of risk and return of the single
investment and a portfolio as well as systematic risk (beta coefficient) measurement.
4. Compare and contrast the Capital Asset Pricing Model with that of Arbitrage Pricing Theory.
Which model is broad, inclusive and appropriate way of measuring risk and return of assets?
5. What is time value of money? How future value and present values are measured under the
assumptions of time value of money as well as used for business decision?
6. Clearly discuss the issues of capital budgeting, justify why we need capital budgeting and
discuss the reason why it becomes very critical on doing capital budgeting issues. Compare
and contrast the capital budgeting evaluation appraisals.
7. Discuss briefly what financial securities mean; how they are valuated
1. Finance refers to the management of money, assets, and other financial resources. It plays a
crucial role in both personal and business settings. At its core, finance involves the allocation,
acquisition, and utilization of funds to maximize value.

In a broader sense, finance is vital because it helps individuals, organizations, and governments
make informed decisions about their money. It enables individuals to manage their personal
finances effectively, make investments, plan for retirement, and protect themselves against
unforeseen financialchallenges.

In the context of organizations, finance becomes an essential requirement as it involves

managing funds for their operations, growth, and profitability. It includes activities like financial
planning, budgeting, investment analysis, capital raising, and risk management. Without proper
financial management, organizations may struggle to make strategic decisions, fund projects, pay
employees, and ultimately, stay competitive.

Financial management, both in personal and business arenas, refers to the process of planning,
organizing, controlling, and monitoring financial resources to achieve specific objectives. It
involves managing financial assets, liabilities, cash flow, risk, and capital structure.
The major components of financial management include:
1. Financial Planning: Creating a roadmap for allocating financial resources to meet goals and
objectives.
2. Budgeting: Developing a detailed plan of income and expenses to ensure efficient use of
funds.
3. Investment Management: Evaluating investment options and making decisions to generate
returns and manage risk.
4. Financing: Deciding on the optimal capital structure and acquiring funds from various sources,
such as equity or debt.
5. Risk Management: Identifying, assessing, and mitigating financial risks to protect assets and
investments.
6. Financial Analysis: Analyzing financial statements, performance metrics, and economic
factors to make informed decisions.
Financial managers are responsible for making key financial decisions within an organization.
They analyze data, assess risks, and make recommendations regarding investment opportunities,
cost control, capital structure, budget allocation, and financial strategies. Their decisions impact
the profitability, growth, and overall financial well-being of the organization.
2.Profit maximization and wealth maximization are two different financial objectives pursued
by firms.

Profit maximization focuses on maximizing the short-term profitability of a company. It

emphasizes generating the highest possible profits in a given period, typically through cost
reduction, revenue maximization, and efficiency enhancement. The primary goal is to increase
profits and ensure a positive bottom line.

Wealth maximization, on the other hand, takes a long-term perspective and aims to maximize the
overall value of the firm and its shareholders' wealth. It considers various factors apart from just
profits, such as increase in share price, market value of assets, and overall financial health. It
prioritizes sustainable growth and creating long-term value for the shareholders.

While profit maximization aims for short-term gains, wealth maximization takes a broader and
more comprehensive approach considering long-term sustainability and growth potential.

In terms of priority, wealth maximization is often considered superior to profit maximization.

This is because profit maximization may lead to short-term decisions that could compromise
long-term growth and sustainability. By focusing on wealth maximization, a company can create
sustainable value over time.

Managers may face conflicts while making decisions that align with both profit maximization
and wealth maximization goals. In such situations, effective communication, strategic planning,
and compromise are required to negotiate these conflicts. Managers need to consider the long-
term impact of their decisions on the financial health and value creation of the company while
also ensuring short-term profitability. Balancing both objectives often involves weighing the
trade-offs and making decisions that strike a reasonable balance between maximizing profits and
creating sustainable long-term wealth.

3
Risk and return are crucial concepts in the field of finance that help investors assess the potential
outcomes of their investment decisions.

Risk refers to the uncertainty or potential variability of returns from an investment. It can be
categorized into systematic risk and unsystematic risk.

Systematic risk, also known as market risk, is the risk that affects the overall market or a
particular industry. It arises due to factors like economic conditions, political events, interest rate
fluctuations, inflation, or market volatility. Systematic risk cannot be reduced through
diversification because it affects the entire market.

Unsystematic risk, on the other hand, is also known as specific risk or diversifiable risk. It is
associated with individual securities or a particular company and can be reduced through
diversification. Unsystematic risk includes factors like management issues, labor strikes,
industry-specific changes, or company-specific events.
The measurement of risk and return for a single investment is typically done using statistical
measures such as variance and standard deviation. Variance calculates the dispersion of actual
returns from the expected return, while standard deviation represents the square root of variance.
A higher standard deviation indicates greater volatility and risk.

When it comes to measuring risk and return for a portfolio, the calculations become more
complex. In addition to individual investments' risk and return measures, the correlation or
covariance between different assets in the portfolio is considered. Correlation helps determine
how assets move in relation to each other, while covariance measures their joint variability.

Systematic risk is often assessed using the beta coefficient. Beta measures the sensitivity of an
investment's returns to the overall market returns, representing the asset's systematic risk. A beta
of 1 indicates that the investment moves in line with the market, while a beta greater than 1
suggests higher volatility in relation to the market. A beta less than 1 indicates lower volatility
compared to the market.

Professionals and investors use these risk and return measures to evaluate investment
opportunities, construct portfolios, manage risk, and make informed decisions based on their risk
tolerance and desired returns.
4. Both the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) are used
to measure the risk and return of assets. Here's a comparison and contrast between the two:

1. Concept:
- CAPM: CAPM assumes that the return of an asset is driven by a single factor, namely the
market return.
- APT: APT assumes that the return of an asset is influenced by multiple factors, which can
include macroeconomic variables, interest rates, and industry-specific factors.

2. Risk measurement:
- CAPM: CAPM calculates the expected return of an asset based on its beta, which measures its
sensitivity to market movements.
- APT: APT takes a broader approach by considering a set of factors and their respective risk
premia to determine the expected return of an asset.

3. Assumptions:
- CAPM: CAPM assumes a linear relationship between an asset's expected return and its beta,
assuming efficient markets and rational investors.
- APT: APT does not make specific assumptions about investor behavior or market efficiency
but rather focuses on identifying and measuring relevant risk factors.

4. Applicability:
- CAPM: CAPM is widely used due to its simplicity and ease of application. It is suitable for
analyzing assets within a well-diversified portfolio.
- APT: APT is more flexible and can accommodate a broader range of assets and factors. It is
often used in situations where the factors affecting asset returns are less clear or well-defined.
Regarding which model is a more broad, inclusive, and appropriate way of measuring risk and
return, it depends on the specific context and assumptions. CAPM provides a simplified
framework that is widely used, especially in analyzing large, well-established markets. APT, on
the other hand, offers more flexibility and can be adapted to various situations where multiple
factors influence asset returns. Ultimately, the choice between the two models would depend on
the specific characteristics of the assets being analyzed and the preferences of the analyst or
investor.
5. The time value of money (TVM) is a financial concept that states that the value of money
changes over time due to factors such as inflation, interest rates, and the opportunity cost of
investing.

Future value (FV) is a measurement that calculates the value of an investment or cash flow at a
specified point in the future, based on the assumption that it earns a certain interest rate or rate of
return. It helps in determining how much an investment is expected to grow over time.

Present value (PV) is a measurement that calculates the current value of a future sum of money,
discounted at a specific interest rate. It takes into account that money received in the future is
worth less than the same amount received today, due to the time value of money.

These concepts are used in business decision-making by enabling companies to evaluate

investment opportunities, compare different projects or investments, and assess the financial
viability of potential ventures. By discounting future cash flows to their present value, businesses
can determine the profitability and attractiveness of an investment, helping them make informed
decisions.

In summary, the time value of money helps in measuring the future and present values of cash
flows, considering the effects of interest rates and the concept of money's changing worth over
time. These measurements are crucial for businesses to evaluate investments and make well-
informed financial decisions.
6. Capital budgeting refers to the process of planning, evaluating, and selecting long-term
investment projects or expenditures that involve significant monetary resources. The main
objective of capital budgeting is to determine which investment opportunities are worthwhile and
will generate profitable returns for a company.

There are several issues associated with capital budgeting:

1. Project Evaluation: One of the challenges is accurately estimating the future cash flows and
determining the appropriate discount rate for evaluating projects. Forecasts may be subject to
errors and uncertainties, leading to incorrect investment decisions.

2. Capital Rationing: Companies often have limited financial resources, and capital budgeting
helps in making decisions about the allocation of those resources among various investment
options. Choosing the most profitable projects while considering budget constraints can be a
complex task.
3. Risk Analysis: Investment projects involve varying degrees of risk and uncertainty. Assessing
and analyzing the risks associated with investments is crucial to ensure that potential losses and
adverse outcomes are minimized.

4. Time Value of Money: Capital budgeting takes into account the time value of money by
considering the present value of future cash flows. This involves discounting future cash flows to
determine their current value, as money received earlier is more valuable than money received in
the future.

The importance of capital budgeting lies in the following justifications:

1. Long-Term Focus: Capital budgeting helps companies evaluate potential investments that
have long-term implications for their financial well-being. It provides a systematic approach to
assessing the profitability and viability of projects over an extended period.

2. Resource Allocation: Capital budgeting enables efficient allocation of limited financial

resources. By evaluating and selecting projects that offer the highest potential returns, companies
can make strategic decisions about resource allocation and achieve their long-term business
objectives.

3. Risk Management: Through thorough evaluation and analysis, capital budgeting helps in
identifying and managing risks associated with investments. It allows companies to assess the
risk-return tradeoff and make informed decisions aligned with their risk appetite.

4. Strategic Decision Making: Capital budgeting supports strategic decision-making by helping

companies invest in projects that align with their overall business strategy. It ensures that
investment decisions are consistent with the company's growth plans, competitive advantage, and
market position.

Comparing capital budgeting evaluation appraisals, there are several methods commonly used:

1. Payback Period: This method focuses on the time required to recover the initial investment.
Projects with shorter payback periods are considered more favorable. However, it ignores cash
flows beyond the payback period and does not consider the time value of money.

2. Net Present Value (NPV): NPV calculates the present value of cash inflows and outflows
associated with an investment. It considers the time value of money, accounts for project
duration, and helps determine the profitability of an investment. A positive NPV indicates a
profitable project.

3. Internal Rate of Return (IRR): IRR is the discount rate at which the NPV of cash flows
becomes zero. It represents the project's rate of return and helps determine the feasibility of an
investment. Projects with an IRR higher than the required rate of return are considered favorable.
Both NPV and IRR are widely used and provide valuable insights into investment decisions.
While NPV focuses on absolute profitability, IRR reflects the relative efficiency of investment
options. It is important to note that both methods have their strengths and weaknesses, and using
them together provides a more comprehensive evaluation of capital budgeting decisions.
7. Financial securities refer to tradable financial instruments that represent ownership or debt
obligations of an entity. These securities can be bought, sold, or traded on various financial
markets. They are used by individuals, corporations, and governments to raise capital and
manage investment risks.

Valuation of financial securities involves determining their worth or value in the market. There
are different approaches to valuing securities, and the methods employed depend on the type of
security. Here are a few common valuation methods:

1. Market-based valuation: Securities like stocks and bonds are often valued based on their
market prices. Supply and demand dynamics, along with other market factors, determine the
prices of these securities.

2. Intrinsic valuation: This method estimates the inherent value of a security by analyzing its
fundamental factors such as company financials, earnings potential, growth prospects, and
industry trends. Techniques such as discounted cash flow analysis or relative valuation ratios
(e.g., price-to-earnings ratio) are used.

3. Option pricing models: These models are used to value options and derivatives. They consider
factors like the underlying asset's price, volatility, time to expiration, and risk-free interest rates
to derive the value of the option or derivative.

4. Credit ratings: Debt securities, like bonds, are also valued based on their credit ratings.
Independent credit rating agencies assess the creditworthiness of the issuing entity and assign
ratings that reflect the risk associated with investing in the bonds.

Valuation of financial securities is essential for investors to make informed investment decisions.
However, it can be subjective and influenced by market sentiment, economic conditions, and
individual perspectives.