Question

1. Discuss the importance of finance?
2. What is the relationship between time, risk and money?
3. What is time value of money?
4. Briefly explain the following;

1. Present value of money
2. Future value of money

5. Explain the difference between management and stockholders?
6. Explain the functions of financial management?

Answer 1

1.

Finance is the driving force that assists in the formation of new businesses, and allows businesses to take advantage of opportunities to grow, employ local workers and in turn support other businesses and local, state government through the remittance of income taxes.

The importance of the finance function in a business is measureless. It forms the backbone of any organization and is responsible for the smooth running of the company.

Without there being a well established and sound finance department in any business, there is no possibility of the company meeting its objectives and growing as an organization.

2.

Financial calculation is not often a necessary skill since it is easier to use calculators, spreadsheets, and software. However, understanding the calculations is important in understanding the relationships between time, risk, opportunity cost, and value.

To do the math, you need to know

• what the future cash flows (CF) will be,
• when the future cash flows will be,
• the rate at which time affects value (e.g., the costs per time period, or the magnitude [the size or amount] of the effect of time on value).

3.

Time value of money is the economic value his or her money holding need to have in future which is called Future Value. Also, what values received in the future can maintain the present economic value of my holding called the Present Value.

The reason behind this theory is to protect ones wealth from degenerating due to inflation and other kinds of value losses or to make decisions to improve ones wealth or to create investment policies that generate certain level of economic outcomes and to design strategies to achieve such level of economic outcomes required.

4.

Present value is the value today of an amount of money to be received in the future. For example: if annual interest rate is 10%, then $90.90 is the present value of $100 received one year from now. If someone gives you $90.90 today or $100 in one year, you should be indifferent.

Future value is just another way of looking at what we said above. Future value is the value in the future of an amount you plan to invest today. For example: if annual interest rate is 20%, $120 is the future value in one year of $100 invested today. If someone gives you $100 today or $120 in one year, you should be indifferent.

5.

1. Shareholders are the providers of (equity) capital in a company. If they are also board directors, the law within the legal jurisdiction the company operates in may require that they publicly declare their financial interest in the company.
2. Managers operate the day-to-day activities of the company. They can also be shareholders but generally don't need to declare their interest.

6.

i. Estimation of capital requirements

ii. Determination of capital composition

iii. Choice of sources of funds

iv. Investment of funds

v. Disposal of surplus

vi. Management of cash

vii. Financial control