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[PDF] Business Finance Assignment

   

Added on  2021-02-18

13 Pages3395 Words70 Views
Business finance

Table of ContentsINTRODUCTION...........................................................................................................................1PART 1............................................................................................................................................1Concept of time value of money and its use and importance in the finance...............................1Concept of maximising the wealth of the shareholders and significance of maximising thewealth for management...............................................................................................................2Difference between effective rate of return and nominal rate. Situations when these are usedto evaluate different investment opportunities............................................................................3Method of calculating present value and future value of an annuity. Difference betweenordinary annuity and annuity due................................................................................................3PART 2............................................................................................................................................4REFERENCES..............................................................................................................................10

INTRODUCTIONBusiness finance is an economic activity that helps commercial entities and non- profitsorganizations for short- term operating needs or long term investment. It is the term thatencompasses a wide range of activities and disciplines rotating around the management ofmoney and other valuable assets. It is a financial plan for a business that helps the managers inachieving the goals with efficiency. The report describes about the time value of money and itssignificance in the finance. Further it reflects the importance of maximising the shareholders'wealth and the difference between effective and nominal rate. Evaluation present value andfuture value and the difference between ordinary and due annuity is also mentioned in the report.PART 1Concept of time value of money and its use and importance in the finance.Time value of money is one of the most important concepts in finance. It is the moneythat the firm has in its possession today is more valuable than future payments because themoney received now can be invested to earn the positive returns in the future (Muda andHasibuan, A.N., 2018). For example- A dollar on hand today is worth more than a dollar to bereceived in the future because the dollar on hand today can be invested to earn interest to yieldmore than a dollar in the probable future. This depends upon the rate of return or interest rate which can be earner on the investment. Thetime value of money compares the future value with the present value of an amount of money(Gudkov, Ignatieva, and Ziveyi, 2019). Future value is the amount to which an amount ofmoney will grow in a defined period at a specified investment rate.UsesImportanceTime value techniques are widely used inpersonal financial planning.It is used to evaluate the future value of aninvestment made today.For computing the present value of cash to bereceived at some future date time value ofmoney is considered.This tool helps in calculating the return oninvestment.The major importance of time value of moneyis required in the finance for accountingaccuracy of certain transactions such as loanamortization, lease payments, and bondinterest.In order to design systems that optimize thefirm's cash-flow, time value of money plays anessential role.For better planning about cash collections and1

Through this an individual or firm can measurethe number of periods that equates a presentvalue and a future value given an interest rate(Alikar and et.al.,2017).To value lump-sum amounts or streams ofperiodic cash-flows and to evaluate the interestrate or amount of time needed to achieve afinancial goal.disbursements in a way that will enable theentity to get the greatest value from its money.It facilitates most financial decisions involvingthe cost and benefits that are spread out overtime.Time value of money allows the comparison ofcash-flows from different periods.Concept of maximising the wealth of the shareholders and significance of maximising the wealthfor management.Concept of wealth maximisation states that creating a value of the business by increasingthe value of the shares held by the shareholders (Johari and et.al., 2018). The concept needs anefficient organisation's management team to searching continually for the highest chances ofreturns on the investments made. For example- if the company invest its funds to developintellectual property right, the investors will recognize the positive future cash-flows in relationto the property by bidding at highest price and this results in increased value of shares of thefirm.The goal of the management should be such that all the stakeholders are benefited. Afinancial action that results a positive net present value creates a wealth for the shareholders andtherefore is desirable (Couharde and et.al., 2018). The wealth will be maximised if net presentvalue criteria is followed in making the financial decisions. Wealth maximisation is the mainconcern of every business to improve the value or worth of the shareholders. It considers thecomparison of the value to cost associated with the business concern. It considers both time andrisk of the business and provides efficient allocation of resource (Cardin and Hu, 2016). Throughmaximising the wealth of the stakeholders economic interest of the society is ensured. Importance of wealth maximisation- Wealth maximisation ensure the interest of the shareholders, creditors and workers oremployees. It also ensures fair return to the shareholders, building up reserves for growth andexpansion, ensuring financial discipline in the management. It helps the firm in measuring the2

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