Question

Making decisions with regards to an investment in an asset, the raising of financing to purchase these assets, and then the creation of cash flow to make these investments worthwhile are the main tasks of the financial manager

1. Discuss and analyse in detail the concept of financial management. (500 words)
2. Explain how the existence of the financial market helps in raising funding. (500 words)

Readings to complete for this assignment: Chapter One of the Berk & DeMarzo Corporate Finance

Answer 1

Answer(1): Financial Management- It is the process of planning, organizing, analyzing, directing and controlling the financial activities such as inflow of finance and outflow of finance. Financial management is the art of utilizing the capital in such a way so that objectives of business can be fulfilled. Financial management helps in taking business decisions in many ways.

Objective of Financial management- Are as following:

• Providing funds to the business.
• Analyzing alternatives of raising funds.
• Effective utilization of the funds.
• Minimizing the weighted average cost of capital.
• Taking business decisions.
• Achieving company's goals.

Scope of Financial management- It is ad following:

Financing decision- Financial management helps taking financing decisions, from where to raise the funds, which source of funds will be cheaper that will reduce the overall cost of capital. It includes financial planning and capital structure decisions.

Investment decision- Financial management helps management to take the short term and long term investment decisions. Long term investment decision includes purchasing the machinery, non current assets and setting up the plant etc. short term investment decision includes working capital decisions for day to day functioning of business.

Dividend decision- This is also one of the most important decisions, taken by financial management. Dividend is a part of profit and distributed out of the profits, financial management analyze the profit as well as the needs of shareholders. Whether the dividend should be given or the profit should be retained for expansion purpose. What should be the dividend payout ratio and retention ratio. These decisions are taken under financial management.

Advantage of financial management- Are as following:

• Financial management helps taking financing, investment and dividend decisions.
• Financial management analyzes the best source of finance and provides funding to business.
• It distributes the funds in different streams of business so that each and every unit of business have proper funds.
• It helps in taking financial planning and capital structure decisions.
• It always tries to reduce the cost of capital for the business so that profit can be increased.
• It manages the cash in such a ways so that there is no shortfall of the cash in the business.

Answer(2): Financial markets- These are the markets where trading of financial instruments take place such as shares, bonds, debt securities, mutual funds, currency, ETFs etc. Financial market plays a great role in raising the funds for business.

Raising funds through financial markets- These are the ways where a company can raise money through financial markets-

Issuing shares in primary market- Company can come up with Initial public offer through which, it issues shares in the primary market for the very first time. People invest into the IPO of the company and get the shares of the company, in return company gets the funding, after the IPO, company is listed on the exchange and trading starts. Share in the part of company's equity capital and people who buy company's shares are called shareholders and have voting and ownership rights.

Issuing bonds in bond market- Company can also issue bonds in the bond market and can raise the funds, bond is the debt instrument, it provides interest to the bondholders, bonds are of different types.

Further public offer- After getting listed on the exchange, if company further needs money, it can come up with FPO and can either issues new shares or can sell the existing shares to the general public.

Borrowing money from banks- Companies also can take loan from banks, loan can be long term or short term. Companies have to pay interest on loan and loan is a liability.