Question

Discuss the hostorical perspectives of finance and examine its main attributes from a theoretical and practical perspective

Answer 1

The term Finance refers to all the aspects related to acquiring, managing and allocating money or funds. There are three major branches of finances namely, Personal finance which relates to an individual's own spendings and savings and management of funds on personal basis, Corporate finance which relates to a company's capital structure, investments in various projects, maximising shareholders' wealth etc. and Financial Institutions and markets which act as an intermediary for surplus and deficit funds.

Finances have been managed since long back even during times when people did not have banking systems or did not have financial literacy. During earlier centuries, Before Christ, people used to deposit their valuables like gold, silver or grains in temples, churches and palaces to safeguard their valuables. This is how the concept of Banks came into being and soon banks were established where people used to save or store their valuables. Gradually, with issuance of currencies and industrialisation, more and more industries began to set up and started managing their funds. Soon with more people gaining knowledge about finance, there arouse a need for Financial markets where investors and borrowers( individuals, corporations and government) would find a common place to exchange their funds.

Attributes of Finance

Financial attributes are the characteristics or parameters through which the financial soundness or strength of an individual or firm can be measured.

Personal finance attributes may include the returns from all the investments of an individual, be it securities, gold and bullions,index and mutual funds etc. and the risks associated with such investments. Investors calculate the risk and returns on their investments and portfolios and always try to maximise returns with minimum risk.

The return on Portfolio can be measured as:

Rp = Wa*Ra + Wb*Rb

where,

Rp = Return on portfolio

Wa = Weight of security a

Ra = Return on security a

Wb = Weight of security b

Rb = Return on security b

The risk of Portfolio can be measured as:

where,

= Risk of portfolio

wa = weight of security a

= Standard deviation of security a

wb = weight of security b

= Standard deviation of security b

= correlation between security a and b

Corporate finance attributes, on the other hand include:

1. Earnings per share which is the amount earned by a company per share outstanding. It is calculated by deducting the dividends of a firm from its Earnings and dividing it by the number of outstanding shares.

2. Return on Investment(ROI) which measures a firm's profitability.

It is calculated as:

Net profits/ Total investment*100

3. Financial Ratios are another important financial attribute that helps determine the performance of a firm. There are different financial ratios for example, activity ratios, profitability ratios, capital gearing ratio, Interest coverage ratio etc.