The Finance Function Short Answer Type Questions

Question 1.
State the aims of finance functions.
Answer:
The aims of finances functions can be summarized as follows:
1. Acquiring Sufficient and Suitable Funds: The crucial aim of finance function is to assess the needs of the enterprise, properly and procure funds in time. Time is an important element in meeting the needs of the organization. It is necessary that the funds should be, reasonably, adequate to the demands of the firm.

2. Proper Utilization of Funds: Raising funds is important more than that is its proper utilization. If proper utilization of funds were not made, there would be no revenue generation. Benefits should always exceed cost of funds so that the organization can be profitable.

3. Increasing Profitability: Profitability is necessary for every organization, the planning and control functions of finance aim at increasing profitability of the. firm. To achieve profitability, the cost of funds should be low. Idle funds do not yield any return, but incur cost.

4. Maximizing Firm’s Value: The ultimate aim of finance function is maximizing the value of the firm, which is reflected in wealth maximization Of shareholders. The market value of the equity shares is an indicator of the wealth maximization.

Question 2.
Explain the functions of financial management system.
Answer:
The functions of financial management are as follow:

Estimation of financial requirements of a firm
Selection of right and appropriate source of funds for raising the funds.
After selecting the right source, raising the funds required by the firm.
After accumulating, proper allocation of funds to different profitable avenues becomes essential.
After the investment of funds, proper analysis and interpretation is required to ensure profitable investment in order to increase the yield.
Effective working capital management to ensure smooth running of business.
The financial management also ensure fulfilling social obligation of business.
Proper financial management protects the interest of creditors, shareholders and employees.

Question 3.
State the criticisms laid against ‘Profit Maximisation”.
Answer:
Profit maximisation Advantages:

The efficiency level of an organisation can be ensured only through profits.
The interest of shareholders creditors, employees, banks financial institutions etc., can be protected and their welfare can be ensured only through profits.
The profits enable a concern to take up expansion and diversification programs.
Profits increase the demand for the shares of the company.
Profits ensure the survival of the concern.

Disadvantages:

Profit maximisation objective does not consider the element of risk.
Profit maximisation unnecessarily invites competition for the concern.
There is unnecessary government intervention because of profit maximisation.
Huge profits invite problems from workers.
Huge profits unnecessarily create doubts in the minds of customers that, they are cheated.

Question 4.
State and explain in. brief the different goals of financial management? State the advantages of wealth maximisation?
Answer:
The goals can be divided into:
(a) Specific Goals:

Profit Maximisation
Wealth Maximisation

(b) Other Goals:

Maintaining balanced asset structure
Ensuring efficiency in business operations
Ensuring financial discipline
Planning judicious utilisation of funds
Maintaining liquidity of funds

The advantages of wealth maximisation are:

Wealth maximisation includes the concept of time value of money.
The concept of wealth maximisation is universally accepted as it takes into account the interest of financial institutions, owners, employees and society.
The concept of wealth maxmisation considers the impact of risk factor.
Wealth maximisation concept guides the management of the firm in framing effective dividend policy to give maximum returns to equity shareholders.

Question 5.
Difference between profit maximation and wealth maximisation.
Answer:
Difference between profit maximation and wealth maximisation are:

Profit Maximization	Wealth Maximization
1. Emphasizes short-term returns	Emphasizes long term returns.
2. Easy to determine the link between financial decisions and profits.	Offers no clear relationship between between financial decisions and stock price.
3. Ignores risk or uncertainty.	Recognizes risk or uncertainty.
4. Ignores the timing of returns.	Recognizes the timing of returns.
5. Does not consider stockholders	Considers stockholders return.
6. Objective to make profits	Objective to maximise earnings per share

Question 6.
What are the decisions of financial management?
Answer:
The functions of finance involve three important decisions:
1. Investment decisions: This decision includes all activities involved in deciding the pattern of investment. This decision involves both short term and long term investments which in other words means both capital assets and current assets. This decision involves allocation of huge financial resources.

2. Financing Decisions: This decision involves selecting appropriate sources of funds for raising money. It is a major challenge for a financial executive, because the source selected should aim in maximising returns of the investors. The different alternative sources available for mobilising funds are a) Equity b) Equity and Debentures c) Equity, debenture and preference shares d) Equity, debentures, preference shares and long term loans.

3. Dividend Decision: The .primary objective of any organisation is to fulfill the desire of the investors by promising a good percentage of dividend on their investments. A finance manager should also keep in mind the objective of retained earnings at the time of promising dividends to the investors.

Question 7.
State the role of financial markets.
Answer:
Role played by financial market is as follows:

Growth in Income: Financial markets allow lenders earn interest/dividend on their surplus investable funds, thus contributing to the growth in their income.
Productive Usage: Financial markets allow for the productive use of the funds used in financial system thus enhancing the income and the gross national production.
Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.
Price Discovery: Financial markets allow for the determination of the price of the traded financial asset through the interaction of different set of participants..
Sale Mechanism: Financial markets provide a mechanism for selling of a financial .asset by an investor so as to offer the benefits of marketability and liquidity of such assets.
Information Availability: The information generated in financial market is useful to various parties taking part in financial market.

Question 8.
Discuss the features of primary market.
Answer:
Features Of Primary Market are:

New long term capital: This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM).
Issued by the company directly : In a primary issue, the securities are issued by the company directly to investors.
Issue new-security certificates : The company receives the money and issue new security certificates to the investors.
Setting up new business: Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
Facilitating capital formation: The primary market performs the crucial function of facilitating capital formation in the economy.
Converting private capital into public capital: The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as going public.

Question 9.
Explain functions of primary market.
Answer:
Functions of primary market are as follows:
1. Facilitate capital growth: The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments.

2. Issue new stocks: It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations.

3. Raise funds from the public : It provides a channel for . the government to raise funds from the public to finance public sector projects.

4. Issuance of new securities by corporations: Unlike the secondary market, such as the stock market which trades listed shares between buyers and sellers, the primary market exists for the issuance of new securities by corporations and the government directly to investors.

5. Methods of issuing securities: Methods of issuing securities in the Primary Market

Initial Public Offer or IPO
Rights Issue (For existing Companies); and
Preferential Issue.

Question 10.
What are the functions of Capital Market?
Answer:
The functions of capital market are:

Allocation functions: Capital market helps the investors to invest their savings into various productive avenues. Capital market attracts new investors who are willing to make new funds available to business.
Liquidity functions: It helps to buyers and sellers can exchange securities at mutual satisfactory prices. This allows better liquidity for the securities that are trade.
Indicative function: It act as a barometer showing the progress of a company and also economy as a whole through share price movements.
Savings and investment functions: It helps quickly converting long-term investment into liquid funds. This creates confidence among investors.
Transfer function: It helps for transfer of existing assets among individual units or groups.
Merger function: It encourages for voluntary or coercive take over mechanism to put the management of inefficient companies to more competent hands.

Question 11.
Explain features of money market.
Answer:
The features of money market are:
(i) Short term financing: It helps for providing short term financino. Money market meets working capital requirements of industry, trade and commerce.

(ii) No fixed place: For conduct of their operations, there is no fixed place and even transactions can be conducted over the phone.

(iii) Liquidity adjustment: It serves as a medium of exchange between the holders of temporary cash surplus and temporary cash deficits. The short-term financial assets are converted into money with speed, without loss and with minimum transaction cost.

(iv) Existence of sub-markets: In a developed money market, the various sub-markets existed and functioned smoothly. That is the money market will have a developed sub-market, such as bill markets, call money market acceptance market, discount market, buillion market, central bank, co-opratives bank etc.

(v) Prevalence of healthy competition: In each sub-market, there should be a reasonable and healthy competition. That is a developed money market, there are a large numbers of borrowers, lenders and dealers.

(vi) Highly developed industrial system: The money market will function smoothly and can fulfil the basic purpose of its existance only when there is a highly developed industrial system.

(vii) International attraction: Well developed money markets attract funds from foreign countries also. The dealers, borrowers and lenders of foreign countries are eagerly coming forward to participants in the activities of developed money market.

(viii) Uniformity of interest rate: Prevalence of uniformity in interest rates in different parts of the country is the important characteristic feature of money market.

(ix) Highly organised banking system: As there are many dealers in short-term funds, the commercial banks are considered as the nervous system of the money market. Therefore a well-developed money market will have a highly organised and developed commercial banking system.

Question 12.
Distinguish between capital market and money market.
Answer:
The distinction between capital market and money market is shown below:

Capital Market	Money Market
1. It is a market for long term funds	1. It is a market for short term funds
2. This market deals in instruments like shares, debentures, bond etc.	2. This market deals with bills of exchange, treasury bills, commercial papers, certificate of deposits etc.
3. Development banks and insurance companies are primary players in capital market.	3. Central Bank and commercial banks are the major players in money market.
4. The instruments of capital market generally have secondary market.	4. The instruments of money market do not have a secondary market
5. Authorised dealers are the mediators.	5. There are no brokers involved in who conduct the capital market transactions money market transactions.

Question 13.
Explain any three financial institution.
Answer:
Financial institutions are the firms that provide financial services and advice to their clients. The financial institutions are generally regulated by the financial laws of the government authority.
1. Commercial Banks Institutions:
A commercial bank can be defined as a type of financial institution which provides a wide range of services such as mortgage lending, giving business and auto loans and accepting deposits. The commercial bank also deals with basic investment products such as savings accounts and certificates of deposit.

The traditional commercial banks come with, all facilities such as safe deposit boxes, bank tellers, ATMs and vaults. However, there are some commercial banks that do not have any physical branches. Here the customer is required to undertake all transactions either through the Internet or by phone.

2. Credit Unions Institutions:
The Credit Union is known by various names across the world and is a member-owned, not-for-profit financial cooperative. Unlike other banks and financial institutions, the Credit Unions are. established and operated by the members. In the Credit Union, the profits are shared amongst the members. There is no set standard for the Credit Union. It can range from an organization – with just a few members to a large one where there are thousands of people.

In the Credit Union the members pool their money in the bank so that they can provide loan money to each other. Further, the profits that are achieved , are employed to fund projects and services for the overall benefit of the community. Some of the services offered by the Credit Unions are online banking, share accounts (savings accounts), share draft accounts (checking accounts), credit cards and share term certificates (certificates of deposit).

3. Stock Brokerage Firms institutions:
The stock brokerage firm is responsible for facilitating buying and selling of financial securities between a buyer and a seller. A brokerage firm serves a clientele of investors and employs a number of stockbrokers through whom they trade public stocks and other securities.

Once a transaction has been successfully completed the brokerage company receives compensation, which is by means of a commission. Full-service brokerages offer estate planning services, tax advice and consultations. A discount brokerage charges less money than the i traditional brokerage and here clients conduct trades via computerized trading systems. In online brokerages, the investor is offered a website to conduct his h or her transactions.