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Gauhati University BCom 4th Semester Fundamental of Financial Management Notes

GU FOFM Unit: 1 Introduction Important Notes 2025 [Gauhati University BCom 4th Semester NEP FYUGP]

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Gauhati University BCom 4th Sem.
Fundamental of Financial Management
Self Study Notes By The Treasure Notes

FOFM - UNIT 1: INTRODUCTION

Section 1: MCQs, True/False, Fill-in-the-Blanks (1 mark each)

(1). Key financial functions of a firm do not include:
a) Investment decision
b) Dividend decision
c) Buying decision
d) Financing decision (GU BCom 2018)

Answer: c) Buying decision

(2). Every financial decision should be based on cost-benefit analysis. (True/False)  (GU BCom 2022)

Answer: True

(3). Investment decisions are outside the purview of financial decisions. (True/False)  (GU BCom 2023)

Answer: False

(4). The primary objective of financial management is to maximize shareholder wealth. (True/False)

Answer: True

(5). Profit maximization ignores:
a) Wealth
b) Time value of money
c) Net value
d) None of the above  (GU BCom 2017, 2024)

Answer: b) Time value of money

(6). The time value of money concept recognizes that a rupee today is worth more than a rupee tomorrow. (True/False)

Answer: True

(7). The Capital Asset Pricing Model (CAPM) assumes that investors are risk-averse. (True/False)

Answer: True

(8). Risk in financial management refers to the uncertainty of expected returns. (True/False)

Answer: True

(9). Market capitalization is a measure of:
a) Wealth created by equity
b) Share price indicator of the equity
c) Market price indicator of the securities
d) Cost of equity as compared to market price of the equity  (GU BCom 2024)

Answer: c) Market price indicator of the securities

(10). The valuation of bonds depends on the interest rate and maturity period. (True/False)

Answer: True

Section 2: 2-mark Questions

(1). What is financial management? (GU BCom 2023)

Answer: Financial management refers to the process of planning, organizing, directing, and controlling financial activities such as procurement and utilization of funds in an organization to achieve its financial goals.

(2). What are the objectives of financial management?

Answer: The main objectives of financial management are:

  1. Maximization of shareholder wealth

  2. Ensuring the availability of sufficient funds

  3. Optimal utilization of financial resources

  4. Minimization of cost of capital

  5. Ensuring financial stability and growth

(3). State the objectives of wealth maximization. (GU BCom 2024)

Answer: The objectives of wealth maximization are:

  1. Increasing the market value of shares

  2. Enhancing shareholder returns

  3. Ensuring long-term financial stability

  4. Balancing risk and return for sustainable growth

(4). Define the concept of time value of money.

Answer: The time value of money (TVM) is the principle that a sum of money today is worth more than the same sum in the future due to its potential earning capacity. This concept is essential in financial decision-making, such as investment and loan evaluations.

(5). What is the importance of the time value of money in financial decisions?

Answer: The time value of money is important because:

  1. It helps in investment appraisal and capital budgeting

  2. It assists in comparing cash flows occurring at different time periods

  3. It is used in calculating present and future values of money

  4. It plays a crucial role in loan and credit management

(6). State the meaning of 'risk' in financial management. (GU BCom 2016)

Answer: In financial management, risk refers to the uncertainty of expected returns on an investment. It indicates the possibility of financial loss due to market fluctuations, economic changes, or other external factors.

(7). What is the relationship between risk and return?

Answer: Risk and return are directly related; higher risk is associated with higher potential returns, while lower risk typically offers lower returns. Investors must balance risk and return based on their financial goals and risk tolerance.

(8). What is meant by valuation of securities?

Answer: Valuation of securities refers to the process of determining the fair market value of financial instruments such as stocks and bonds, based on factors like earnings, dividends, market conditions, and future growth potential.

(9). What factors influence the valuation of equities?

Answer: The key factors influencing equity valuation include:

  1. Earnings per share (EPS) and profitability

  2. Market demand and supply conditions

  3. Economic and industry trends

  4. Interest rates and inflation

  5. Company performance and management decisions

Section 3: 5-mark Questions

(1). State the nature of financial management. (GU BCom 2023)

Answer:  Financial management is an essential function in any business that deals with planning, organizing, and controlling financial activities. The following are the key points explaining its nature:

  1. Decision-Making Process: Financial management helps in making important decisions related to investments, financing, and profit distribution.

  2. Continuous Activity: It is not a one-time process but an ongoing function that ensures financial stability.

  3. Wealth Maximization: The primary goal of financial management is to increase the value of the business and shareholders' wealth.

  4. Risk and Return Management: It focuses on balancing risk and return to ensure business growth.

  5. Multi-Disciplinary Approach: It combines knowledge from accounting, economics, and business management to optimize financial resources.

Thus, financial management plays a crucial role in the long-term success of a business.

(2). Describe the various perspectives of financial goals. (GU BCom 2016)

Answer: Financial goals refer to the objectives a business aims to achieve through financial management. The following are the different perspectives of financial goals:

  1. Profit Maximization: The company aims to earn the highest possible profit in the shortest time.

  2. Wealth Maximization: The focus is on increasing the overall value of the business and shareholders' equity.

  3. Liquidity Management: Ensuring the business has enough cash to meet short-term expenses and obligations.

  4. Cost Efficiency: Controlling unnecessary expenses to improve the financial position of the company.

  5. Risk Reduction: Making financial decisions that minimize the chances of losses and ensure stable returns.

A business must consider all these perspectives to achieve financial stability and growth.

(3). What are the key features of the scope of financial management?

Answer:
Financial management covers various aspects of handling finances in a business. The following are its key features:

  1. Investment Decisions: Deciding where and how to invest money to get maximum returns.

  2. Financing Decisions: Choosing the right sources of funds, such as loans, shares, or retained earnings.

  3. Dividend Decisions: Deciding how much profit should be distributed as dividends and how much should be reinvested in the business.

  4. Working Capital Management: Managing short-term assets and liabilities to ensure smooth daily operations.

  5. Risk Management: Identifying and reducing financial risks to protect the company’s financial health.

Financial management plays a vital role in ensuring the effective use of financial resources for long-term success.

(4). Why is the wealth maximization objective considered superior to the profit maximization objective? Write five reasons. (GU BCom 2022)

Answer:
Wealth maximization is considered a better objective than profit maximization. The following are five reasons why:

  1. Long-Term Focus: Wealth maximization considers the long-term growth of a company, while profit maximization focuses only on short-term earnings.

  2. Time Value of Money: It takes into account the concept that money today is worth more than money in the future, whereas profit maximization ignores this.

  3. Risk Consideration: Wealth maximization evaluates risks associated with financial decisions, while profit maximization does not.

  4. Shareholder Value: It aims to increase the market value of shares, benefiting shareholders in the long run.

  5. Overall Growth: Wealth maximization focuses on sustainable growth, reinvestment, and business expansion, whereas profit maximization only aims at immediate financial gain.

Thus, wealth maximization ensures the financial stability and success of a business.

(5). Why is wealth maximization a more viable goal of financial function? Explain. (GU BCom 2017)

Answer:
Wealth maximization is considered a more viable financial goal because it focuses on the long-term financial health of a company. The following points explain why:

  1. Sustainable Growth: It helps businesses grow steadily by making sound financial decisions.

  2. Improves Market Value: It increases the market value of shares, benefiting shareholders.

  3. Considers Risk Factor: Unlike profit maximization, it considers financial risks and uncertainty in decision-making.

  4. Encourages Investment: Investors are more likely to invest in companies that focus on long-term wealth rather than short-term profits.

  5. Balanced Decision-Making: It helps businesses reinvest earnings for expansion and long-term success instead of just focusing on immediate profits.

Thus, wealth maximization ensures financial stability and long-term benefits for both businesses and shareholders.

(6). What is the wealth or value maximization goal of a corporate entity? (GU BCom 2018)

Answer:
Wealth maximization is the financial goal of a company that focuses on increasing the overall value of the business. The following points explain its importance:

  1. Enhances Shareholder Wealth: It aims to maximize the value of shares in the stock market.

  2. Ensures Long-Term Growth: The company focuses on sustainable growth rather than short-term profits.

  3. Risk Management: It considers financial risks while making investment and financing decisions.

  4. Better Decision-Making: Helps businesses make financial decisions that contribute to long-term stability.

  5. Encourages Investment: Investors prefer companies that prioritize wealth maximization as it ensures better returns over time.

Thus, wealth maximization is the ultimate goal of a corporate entity to ensure financial success.

(7). Explain the significance of the time value of money in financial decision-making.

Answer:
The time value of money (TVM) is an important concept in financial management that recognizes that money today is worth more than the same amount in the future. The following points explain its significance:

  1. Investment Decisions: Helps businesses decide where to invest money for better future returns.

  2. Loan and Credit Management: Used to determine interest rates and repayment schedules.

  3. Capital Budgeting: Helps in evaluating long-term investment projects by comparing present and future cash flows.

  4. Risk Management: Helps in analyzing the impact of inflation and financial risks on investments.

  5. Better Financial Planning: Ensures that financial decisions are made with future value considerations in mind.

Thus, understanding the time value of money helps in making informed financial decisions.

(8). Discuss the basic principles underlying the time value of money.

Answer:
The time value of money is based on the following key principles:

  1. Present Value and Future Value: Money received today is worth more than the same amount in the future due to earning potential.

  2. Discounting and Compounding: Discounting finds the present value of future money, while compounding calculates its future value.

  3. Inflation Effect: Over time, money loses value due to inflation, making early investments more valuable.

  4. Risk and Return: Investors prefer immediate returns over delayed ones due to uncertainty.

  5. Opportunity Cost: Money invested today can generate returns that would be lost if kept idle.

These principles help businesses and individuals make sound financial decisions.

(9). Discuss the basic assumptions of the Capital Asset Pricing Model (CAPM).

Answer:
The Capital Asset Pricing Model (CAPM) is based on the following assumptions:

  1. Investors are Rational: All investors aim to maximize returns while minimizing risk.

  2. Risk-Free Rate Exists: There is an asset with no risk, usually government bonds.

  3. Perfect Market Conditions: There are no transaction costs or taxes in the market.

  4. Diversified Portfolios: Investors hold diversified portfolios to reduce risk.

  5. Systematic Risk Matters: Only market risk affects returns, not individual stock risks.

These assumptions help in calculating expected returns on investments.

(10). Explain the concept of risk and return in financial management.

Answer:
Risk and return are two key concepts in financial management. Risk refers to uncertainty in financial gains, while return is the profit earned from an investment. The following points explain their relationship:

  1. Higher Risk, Higher Return: Investments with high risk usually offer high potential returns.

  2. Types of Risk: Includes market risk, credit risk, and operational risk.

  3. Diversification: Reducing risk by investing in different assets.

  4. Expected Return Calculation: Investors use models like CAPM to estimate returns.

  5. Investment Decisions: Risk and return analysis helps in making informed financial choices.

Thus, managing risk and return is essential for financial success. 

Section 4: 10-mark Questions

(1). Discuss the scope and objectives of financial management. (GU BCom 2023, 2024)

Answer:

Financial management is the process of planning, organizing, and controlling financial activities to achieve business goals. It ensures the proper use of financial resources for the growth and success of a business.

Scope of Financial Management:

The scope of financial management covers all major financial activities of a business. The following are the key areas:

  1. Investment Decisions: It involves selecting the best investment options to earn maximum returns. Businesses decide where to invest their funds, such as in assets, new projects, or expansion.

  2. Financing Decisions: It includes deciding the sources of funds, such as loans, issuing shares, or retained earnings, to meet business needs.

  3. Dividend Decisions: It involves deciding how much profit should be given to shareholders as dividends and how much should be reinvested.

  4. Working Capital Management: It ensures smooth day-to-day business operations by managing short-term assets and liabilities.

  5. Risk Management: Financial management helps in identifying and reducing financial risks to protect the company's financial stability.

Objectives of Financial Management:

The main objectives of financial management are:

  1. Wealth Maximization: The primary goal is to increase the value of the company and shareholders’ wealth.

  2. Profit Maximization: It aims to generate higher profits while keeping costs low.

  3. Ensuring Liquidity: It ensures that a business has enough cash to meet its short-term financial obligations.

  4. Risk Reduction: Managing financial risks helps the business avoid losses.

  5. Efficient Resource Utilization: It ensures the proper use of financial resources for long-term growth.

Thus, financial management is essential for business success as it helps in making the right financial decisions to ensure growth, stability, and profitability.

(2). What is meant by financial management? Explain the importance of financial management. (GU BCom 2013)

Answer:

Meaning of Financial Management:

Financial management refers to the process of planning, organizing, controlling, and monitoring financial resources to achieve business objectives. It involves making decisions related to investment, financing, and profit distribution to ensure business growth and stability.

Importance of Financial Management:

Financial management plays a key role in the success of a business. The following points explain its importance:

  1. Ensures Proper Utilization of Funds: It helps in using financial resources efficiently to achieve maximum benefits.

  2. Helps in Investment Decisions: Financial management guides businesses in choosing the best investment opportunities.

  3. Increases Profitability: Proper financial planning helps in increasing profits by reducing unnecessary expenses.

  4. Maintains Liquidity: It ensures that a business has enough cash to meet its daily expenses and short-term obligations.

  5. Supports Business Growth: A strong financial strategy helps businesses expand and enter new markets.

  6. Reduces Financial Risks: Financial management helps in identifying risks and making decisions to avoid financial losses.

  7. Ensures Stability: Good financial management keeps a business financially stable even in difficult situations.

  8. Enhances Shareholder Value: By making smart financial decisions, the company increases the value of shares, benefiting investors.

  9. Facilitates Long-Term Planning: Financial management helps in setting long-term financial goals and achieving them.

  10. Improves Decision-Making: It provides data and analysis that help managers make better financial decisions.

In conclusion, financial management is crucial for every business as it ensures financial stability, profitability, and long-term success.

(3). Describe the scope and functions of financial management. (GU BCom 2016, 2018)

Answer:

Financial management involves handling financial activities to ensure the proper use of funds and achieve business success. It plays a key role in decision-making and helps businesses grow.

Scope of Financial Management:

The following are the key areas covered under financial management:

  1. Investment Decisions: Businesses must decide where to invest their funds to earn maximum returns. Investment in assets, projects, or new ventures is an important financial decision.

  2. Financing Decisions: Companies need to determine the best sources of funds, such as equity, debt, or retained earnings. This ensures the business has enough capital for its operations.

  3. Dividend Decisions: A company must decide how much of its profit should be distributed as dividends and how much should be reinvested for future growth.

  4. Working Capital Management: Managing short-term assets and liabilities to ensure smooth day-to-day business operations is essential for financial stability.

  5. Risk Management: Businesses face financial risks such as market fluctuations and economic downturns. Financial management helps in identifying and reducing these risks.

Functions of Financial Management:

Financial management performs several functions to ensure the effective use of financial resources. The following are its major functions:

  1. Financial Planning: It involves preparing a financial plan to ensure the availability of funds when needed.

  2. Budgeting and Forecasting: Financial management helps in creating budgets and forecasting future financial needs.

  3. Fund Allocation: It ensures that funds are allocated efficiently to different departments and projects.

  4. Cost Control: Controlling costs helps businesses increase profitability and reduce unnecessary expenses.

  5. Profit Management: Ensuring that profits are maximized while maintaining business stability.

  6. Liquidity Management: Maintaining sufficient cash flow to meet short-term financial obligations.

  7. Investment Evaluation: Analyzing investment options and selecting the best ones to achieve financial goals.

  8. Risk Assessment: Identifying financial risks and taking measures to minimize them.

  9. Financial Reporting: Keeping accurate financial records and preparing financial statements for better decision-making.

  10. Decision-Making Support: Providing financial data and analysis to help management make informed decisions.

In conclusion, financial management plays a vital role in ensuring the efficient use of financial resources and helps businesses achieve growth, profitability, and financial stability.

(4) Discuss the role and responsibilities of a finance manager in a modern business organization. (GU BCom 2022)

Answer:

A finance manager plays a key role in managing the financial activities of a business. In a modern business organization, financial management is essential for ensuring profitability, stability, and growth. The finance manager is responsible for making financial decisions that help the company achieve its objectives.

Role of a Finance Manager:

  1. Financial Planning: The finance manager prepares financial plans and strategies to ensure smooth business operations.

  2. Investment Management: He decides where to invest funds for the best returns and business growth.

  3. Financing Decisions: The finance manager determines the best sources of finance, such as loans, equity, or retained earnings.

  4. Dividend Decisions: He decides how much profit should be distributed as dividends and how much should be reinvested.

  5. Risk Management: The finance manager identifies financial risks and takes measures to minimize them.

  6. Liquidity Management: Ensuring the company has enough cash to meet short-term obligations.

  7. Budgeting and Cost Control: Preparing budgets and controlling costs to improve profitability.

  8. Financial Reporting: Ensuring that financial statements are accurate and comply with regulations.

Responsibilities of a Finance Manager:

  1. Ensuring Financial Stability: Managing cash flow and financial resources efficiently.

  2. Maximizing Profitability: Making decisions that help the company earn profits.

  3. Wealth Maximization: Increasing the value of shares to benefit investors.

  4. Legal Compliance: Ensuring the company follows financial laws and regulations.

  5. Supporting Business Growth: Making financial decisions that support business expansion.

In conclusion, a finance manager plays a vital role in planning, decision-making, and ensuring the financial success of a business.

(5) Elaborate the various finance functions discharged by a finance manager. (GU BCom 2014)

Answer:

A finance manager performs several important functions to ensure the financial stability and growth of a company. The following are the key finance functions:

  1. Investment Function:
    A finance manager decides where to invest the company’s funds to earn maximum returns. He evaluates various investment opportunities and selects the most profitable and risk-free options.

  2. Financing Function:
    He determines the best sources of finance for the company, such as issuing shares, taking loans, or using retained earnings. The finance manager ensures that the cost of financing is minimized and funds are available when needed.

  3. Dividend Decision:
    A finance manager decides how much profit should be distributed as dividends to shareholders and how much should be reinvested in the business. A proper balance is maintained between rewarding investors and funding future growth.

  4. Working Capital Management:
    He ensures that the company has enough short-term assets to meet its daily operational expenses. This includes managing cash, receivables, inventory, and short-term liabilities effectively.

  5. Risk Management:
    A finance manager identifies financial risks such as market fluctuations, interest rate changes, and inflation. He takes necessary steps to minimize these risks to protect the company’s financial health.

  6. Liquidity Management:
    He ensures that the company has sufficient cash or liquid assets to meet short-term obligations. Proper liquidity management helps avoid financial crises and ensures smooth business operations.

  7. Budgeting and Cost Control:
    A finance manager prepares financial budgets and controls costs to improve profitability. He ensures that unnecessary expenses are reduced, and resources are used efficiently.

  8. Financial Reporting and Compliance:
    He prepares financial statements and ensures they follow legal and regulatory requirements. Accurate financial reporting helps stakeholders understand the financial position of the company.

  9. Capital Structure Management:
    The finance manager decides the right mix of debt and equity financing. A proper balance between these sources reduces financial risks and enhances profitability.

  10. Planning for Business Growth:
    He plans long-term financial strategies to support business expansion. This includes analyzing market conditions, forecasting future trends, and making financial decisions to promote growth.

A finance manager plays a crucial role in ensuring that the company’s financial resources are managed efficiently, leading to business success and sustainability.

6. "Financial management is concerned with the solution of three major decisions—financing, investment, and dividend." Explain the statement highlighting the interrelationship amongst these three decisions. (GU BCom 2017)

Answer:
Financial management is mainly concerned with managing a company’s money effectively. It involves three major decisions:

  1. Financing Decision: This refers to how a company raises money for its business activities. The company can get funds from sources like loans, issuing shares, or retained earnings. The right financing choice helps in reducing costs and risks.

  2. Investment Decision: This is about how the company uses its funds to generate profits. The business must choose where to invest its money, such as in new projects, assets, or expansion. A good investment decision ensures higher returns.

  3. Dividend Decision: This involves deciding how much of the company’s profit should be distributed to shareholders as dividends and how much should be retained for future growth.

Interrelationship Among These Decisions:

  • The financing decision determines how much money is available for investment.

  • The investment decision affects the company’s ability to earn profits, which in turn impacts the dividend decision.

  • If more profit is given as dividends, less money is available for investment, and the company might need external financing.

  • If the company retains more profits for investment, it may reduce the need for external financing but offer lower dividends.

Thus, financial management ensures a balance among these three decisions for the company’s growth and stability.

7. Explain the interrelationship among financing, investment, and dividend distribution decisions of financial management. (GU BCom 2019)

Answer:
Financial management involves making key financial decisions that impact the growth and profitability of a business. The three major decisions are:

  1. Financing Decision: This decision involves choosing the best way to raise funds, such as borrowing from banks, issuing shares, or using retained earnings. The goal is to get funds at the lowest cost.

  2. Investment Decision: This decision focuses on where the company should invest its money to earn maximum returns. Proper investment decisions lead to long-term business success.

  3. Dividend Distribution Decision: This decision is about how much profit should be given to shareholders as dividends and how much should be retained for future investment.

Interrelationship Among These Decisions:

  • The financing decision impacts the investment decision because the company needs funds to invest in profitable opportunities.

  • The investment decision affects the dividend decision, as higher investments may leave less profit for dividends.

  • The dividend decision influences the financing decision because retaining more profit reduces the need for external funding, while paying higher dividends may require borrowing more funds.

Since these three decisions are interconnected, financial managers must make a balanced choice to ensure business growth, profitability, and shareholder satisfaction.

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