Financial Management: Definition, Objectives and Applications

Financial management as the name suggests, deals with managing the financing
activities of the companies, that involves, analysis of various ratios, determining the
debt and equity mix for the businesses and also deciding on the sources of
financing, keeping in view the cost of each source of funds and effective weighted
average cost of capital for the business as a whole. The objective of financial
management is to maximize the shareholders’ wealth and the decisions taken by
the financial managers are taken, keeping in view this ultimate objective of
shareholders’ wealth maximization.
Financial management can also be used in personal finances, involving
identification of best avenues for investing money and computation of amount that
the individual will receive in future from each source, or vice versa, I.e. in
computing the amount that an individual needs to invest today, in order to get a
specific amount of money in the future.
(Ref: Eugene F. Brigham and Michael C. Ehrhardt, (2013))
For question -1:
The given case study deals with evaluation of a capital budgeting proposal for
National Brewing Inc., who is considering the acquisition of a new still. It involves
computation and analysis of the cash flows from the new still over its useful life and
a comparison of the present value of those cash flows based on the cost of capital
of the company, to determine, whether or not the project is financially viable, based
on the NPV of the project.
As per the computation given above, the NPV of the project is negative, hence, it is
not advisable to purchase the equipment.
For question: 2
It deals with computation of variance and standard deviation of returns of Euro
flop’s stock over the period of last 5 years. Variance refers to the expected
deviation that the return might face from the mean return of the security, i.e. Euro
flop’s shares in this case.
Standard deviation is used to measure the amount of variation or dispersion of
values from the mean. A high standard deviation implies that values are spread out
over a wider range, whereas on the other hand, a low standard deviation implies
that the values are closer to the mean value.
In the given problem, variance is 412.5 and the standard deviation is 20.31%
For question: 3
It involves computing the amount of each monthly payment for the loan of $ 15,999
and preparation of the loan amortization schedule, showing the reducing interest
component, after each installment being repaid.
In the given problem, the interest amount that the client paid in the first installment
was $199.99, which reduced gradually, with each installment being repaid and the
interest component on the last installment was $ 6.85. This is majorly due to the
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