AN INTRODUCTION TO BUSINESS FINANCE

Question 1

What are the broad functions of finance?

Answer 1

There are two broad functions of finance, one is controlling and the second is treasury.

Question 2

What does finance deal with?

Answer 2

Finance deals with money acquisition, investment, funding, cost of goods production, loan, budgeting, payments etc.

Question 3

What is the scope of finance?

Answer 3

The scope of the finance covers both financial services and financial management.

Question 4

What are financial services dealing with?

Answer 4

Financial services are dealing with the designing of financial instruments and delivering of advice related purchase and sale.

Question 5

What is financial management?

Answer 5

Whereas the branch of management sciences dealing with the planning, arranging, allocating, and controlling of financial resources is termed as “Financial Management”.

Question 6

The basic objectives of “Financial Management” are to:

Answer 6

Ensure the supply of funds for the business’s operations.
Manage returns to shareholders
Make effective investment decisions.
Plan future money requirements for business operations.
Take measures to control the inflow and outflow of money.

Question 7

What is the scope of financial management?

Answer 7

The scope of financial management broadly covers three important dimensions including finance, investment and asset management.

Question 8

What are investment decisions in financial management?

Answer 8

it is one of the important dimensions of “financial management”
It starts with the investment required for the assets to be held by the business both fixed as well as current assets.

Question 9

What are “capital budgeting” and “working capital” in financial management?

Answer 9

“Capital budgeting” is about decisions regarding fixed assets/Non-current assets and
“Working Capital” is about investment decisions about current assets.

Question 10

What are financing decisions in financial management?

Answer 10

This dimension deals with “raising financial resources” for the business.
It is termed liabilities, common stocks, preferred stocks, etc.
“Dividend policy” is an important component of financing decisions it addresses the “dividend rate” to be paid to stockholders and “Retained Earning”.

Question 11

What is Asset Managementin financial management?

Answer 11

Decision regarding assets acquisition, allocation and efficient use of fixed and current assets.

Question 12

In the scope of financial management, What do financial analysts do?

Answer 12

It includes preparing financial plans, budgets, forecasting, financial comparison and accounting-related responsibilities.

Question 13

In the scope of financial management, What does a project finance manager do?

Answer 13

This career opportunity deals with the arrangement of asset’s investment, consultation and coordination with investors and investment bankers and financial institutes.

Question 14

In the scope of financial management, What does a capital expenditure manager do?

Answer 14

Mainly related to evaluation and recommendations for asset investment.

Question 15

In the scope of financial management, What does a credit analyst do?

Answer 15

in this domain, a credit analyst has to evaluate, monitor and implement the credit policy.

Question 16

In the scope of financial management, What does a cash manager do?

Answer 16

mainly dealing with the firm’s daily cash inflows and outflows.

Question 17

In the scope of financial management, what does a foreign exchange manager do?

Answer 17

At this position, managers are supposed to manage finances involved in foreign operations. Observing fluctuations in exchange rate, money value etc.

Question 18

In the scope of financial management, what does a Pension Funds Manager do?

Answer 18

it involves monitoring and overseeing the pensions-related decisions etc.

Question 19

What are the operations of financial management?

Answer 19

Financial operations are divided into two categories and are named “controller and “treasurer”.

Question 20

What is the nature/scope of financial operations performed by “controller and “treasurer”?

Answer 20

The responsibilities of “controller” are mostly accounting in nature, whereas the responsibilities of “treasurer” are related to decision-making and are associated with “financial management.”.

Question 21

What are the financial operations performed by the “controller”?

Answer 21

The controller performs the following function:
Cost Accounting
Financial data processing
Cost Management
Internal Controls
Government Reporting
Preparing Ledgers
Preparing Financial Statements
Preparing Budgets
Preparing forecasts

Question 22

What are the financial operations performed by the “treasurer”?

Answer 22

The treasurer performs the following function:
Capital Budgeting
Commercial Banking
Credit Management
Cash Management
Dividend Policy
Investors’ relations
financial analysis
Risk Management
Mergers Analysis
Tax planning
Pensions management

Question 23

Who heads the financial functions collectively?

Answer 23

Financial functions, which are collectively headed by the Chief Financial Officer” (CFO).

Question 24

What is the Agency Problem in corporations?

Answer 24

The separation of “ownership” and “management” in corporations resulted in conflicts of interest, this situation is known in financial management as “Agency Problem”

Question 25

How can the agency problem be resolved in corporations?

Answer 25

“Agency Problem” can be addressed by aligning the interests of both groups. This can be done by involving managers in ownership.  Secondly, strict monitoring of management, such as audits of financial statements, limits the scope of decision-making power.

Question 26

In an agent-principal relationship, How do you describe each party's interest in corporations?

Answer 26

"AGENTS" perform in the best interest of shareholders; shareholders are termed "PRINCIPAL”. Shareholder’s Interests: Maximization of profit, increase in earnings per share, increase in dividend value. Agent’s Interests: High salary, bonuses, perks and benefits, trips, rewards etc.

Question 27

What do the financial markets mean?

Answer 27

The platforms facilitate transactions between suppliers of securities, funds, derivatives, and currencies and demanders of securities, funds, derivatives, and currencies.

Question 28

What is the function of financial institutions?

Answer 28

Financial institutions are the intermediaries that accept money from savers and use this money to provide loans and funds for investments at some cost (interest)

Question 29

Why are financial markets established?

Answer 29

To serve the following purposes: Financial markets facilitate the interactions between lender and borrower. It enables the flow of money from savers to users. It enables the efficient use of surplus savings. It tries to manage a balanced economy.

Question 30

What are the key customers of financial institutions?

Answer 30

Key customers of financial institutions range from individuals to large business firms and the government. They are all customers as well as providers of money to financial institutions.

Question 31

Which market facilitates the short-term needs of customers?

Answer 31

The financial market that facilitates the trade (buying and selling) of short-term financial instruments is known as the “Money Market”. Securities that mature in less than one year are termed as short-term securities or financial instruments. These are the securities that individuals, governments, businesses, and financial institutions want to sell or buy to earn interest and to temporarily fulfil seasonal needs, respectively.

Question 32

Which financial instruments are traded in money markets?

Answer 32

Treasury Bills, Commercial Papers, Banker’s Acceptance, Bill of Exchange, and Certificate of Deposit.

Question 33

What is meant by Treasury Bills?

Answer 33

Treasury Bills: these are the financial instruments issued by the government to raise funds to finance government spending.

Question 34

What is meant by Commercial Papers?

Answer 34

Commercial Papers: these are the bonds issued by large corporations to support short-term debt issues, backed by the guarantee of banks to pay the amount on maturity to the buyers. These instruments mature after 270 days.

Question 35

What is meant by a Banker’s Acceptance?

Answer 35

Banker’s Acceptance: This is a kind of financial instrument backed by the banks with a promise to pay a written amount on maturity to the buyers.

Question 36

What is meant by the Bill of Exchange?

Answer 36

Bill of Exchange: it is a written document with the name of a person who will pay a negotiable amount on maturity.

Question 37

What does a Certificate of Deposit mean?

Answer 37

Certificates of Deposit are a type of financial product that banks and credit institutions issue with the promise to pay customers premium interest on an untouched deposit lump sum amount. All these instruments have different maturity times, ranging from 6 months to 12 months. Some other money market instruments are purchase agreements, mortgage funds, etc.

Question 38

Which market facilitates the long-term needs of customers?

Answer 38

The financial market that facilitates the transaction of “long-term” financial instruments is known as the capital market. Financial instruments traded in this market have a maturity of over 1-years. Pakistan Stock Exchange is a capital market that exists physically, and Forex, trading online globally, exists virtually.

Question 39

Which market is classified as a primary market or a secondary market?

Answer 39

Capital markets are further categorised as “primary markets” and “secondary markets." Primary Markets: The markets facilitating the transactions of new financial instruments are named as primary markets. Secondary Markets: The markets that facilitate the trade of existing financial securities are named as secondary markets.