Important Questions and Answers
Financial Management and Services - Unit 1
1. What is Financial Management?
Answer: Financial management is the process of planning, organizing, directing, and
controlling financial activities such as procurement and utilization of funds. It helps
businesses in making financial decisions to maximize wealth and profitability.
2. What are the main objectives of Financial Management?
Answer:
Profit Maximization: Focuses on earning the highest possible profit.
Wealth Maximization: Ensures long-term financial growth and shareholder value.
Risk Minimization: Reduces financial risks by making strategic decisions.
Efficient Resource Allocation: Ensures funds are used effectively.
Financial Stability: Maintains a healthy balance between debt and equity.
3. What are the key functions of Financial Management?
Answer:
1. Financing Decision: Choosing the right capital structure (mix of debt and equity).
2. Investment Decision: Selecting the best projects to invest in.
3. Working Capital Management: Managing short-term assets and liabilities.
4. Dividend Distribution: Deciding how much profit to distribute and how much to
retain.
4. What is the difference between Profit Maximization and Wealth Maximization?
Answer:
Profit Maximization: Short-term goal focused on increasing immediate profits.
Wealth Maximization: Long-term goal focused on increasing shareholder value and
sustainability.
5. What is the Time Value of Money?
Answer: Time Value of Money (TVM) means that a certain amount of money today is worth
more than the same amount in the future due to its potential earning capacity.
6. What are the two common methods of adjusting cash flows for Time Value of Money?
Answer:
Compounding: Calculating future values of cash flows.
Discounting: Calculating present values of cash flows.
7. What is Future Value (FV)?
Answer: Future value is the amount that an investment will grow to over time when interest
is applied. It is calculated using compound interest.
8. What is Present Value (PV)?
Answer: Present value is the current worth of a future sum of money, calculated using a
discount rate.
9. What is the formula for calculating Future Value?
Answer: FV = PV (1 + i)^n, where:
FV = Future Value
PV = Present Value
i = Interest Rate
n = Number of Periods
10. What is an Annuity?
Answer: An annuity is a fixed payment or receipt occurring annually for a specified number
of years.
11. What is Perpetuity?
Answer: Perpetuity is a type of annuity that continues indefinitely.
12. What is the relationship between Finance and other functions?
Answer:
Marketing & Finance: Pricing, credit policy, advertising budget.
Production & Finance: Cost control, equipment investment.
Economics & Finance: Economic policies affecting financial decisions.
Accounting & Finance: Cash flow management and financial reporting.
Financial Management and Services - Unit 1
Question: 1
Mrs. Mehta deposits ₹ 20,00,000 in a bank A/c with the interest rate 8% per
annum, compounded annually. How much amount will she get after 10 years?
Answer:
To calculate the amount Mrs. Mehta will get after 10 years, we use the
compound interest formula:
(
A=P+ 1+
r
100 )
t
Where:
A= Final amount
P= Principal amount = ₹ 20,00,000
r= Interest rate per annum = 8%
t= Time in years = 10
Now, let's calculate:
( )
10
8
A=20,00,000× 1+ 100
A=20,00,000× (1.08)10
A=20,00,000×2.1589
A≈43,17,800
Mrs. Mehta will get approximately ₹ 43,17,800 after 10 years.
Question 2:
Mrs. Shah deposits ₹3,00,000 in a bank account, which gives 12% interest per
annum compounded annually. If the number of years is 9 years, then what
amount will he get at the time of maturity?
Given Data:
Principal (PV) = ₹3,00,000
Rate of Interest (r) = 12% per annum
Time (n) = 9 years
Answer:
Formula for Compound Interest:
FV =PV +¿
3,00,000¿
3,00,000¿
3,00,000× 2.7731
8,31,930
Future Value Single Amount Formula:
FV=PV (1+ i ¿n
Multi-Period Compounding:
Semi-Annually → 2 times in a year
Quarterly → 4 times in a year
Question 3:
Mr. Shah invested ₹40,000 in a bank A/c, which gives 8% interest rate per
annum, compounding semi-annually. What amount will he get after 4 years?
Answer:
( )
m× n
I
fv=PV + 1+
m
( )
2 ×4
0.08
fv=40,000+ 1+
2
=40,000× (1.04)8
=40,000×1.3686
=₹54,744
So, the final answer remains ₹54,744
