Financial Management Essay

3112 words - 13 pages

Financial Management

Part Two:

1. What do you understand by wealth maximization?

Ans : A process that increases the current net value of business or shareholder capital gains, with the objective of bringing in the highest possible return. The wealth maximization strategy generally involves making sound financial investment decisions which take into consideration any risk factors that would compromise or outweigh the anticipated benefits.

2. Discuss the concept of factoring.

Factoring is a financial option for the management of receivables. In simple definition it is the conversion of credit sales into cash. In factoring, a financial institution buys the accounts ...view middle of the document...

An annuity is a series of periodic cash flows (payments or receipt\pts) of equal amounts. The premium payment of a life insurance policy, for example, is an annuity.

4. What is the Difference between NPV and IRR?

Net present value (NPV) is an investment measure that tells an investor whether the investment is achieving a target yield at a given initial investment. NPV also quantifies the adjustment to the initial investment needed to achieve the target yield assuming everything else remains the same.
Internal rate of return (IRR) for an investment is the percentage rate earned on the money invested for each period it is invested. IRR is also another term people use for interest. Ultimately, IRR gives an investor the means to compare alternative investments based on their yield.
The NPV formula solves for the present value of a stream of cash flows, given a discount rate. The IRR on the other hand, solves for a rate of return when setting the NPV equal to zero (0)
The IRR answers the question “what rate of return will anybody achieve, given the following stream of cash flows?”, while the NPV answers the question “what is the following stream of cash flows worth at a particular discount rate, in today’s cash flow?

Section B: Case lets
Caselet 1 Case1: Credit Decision - Agarwal Case On August 30, 2006, Agarwal Cast Company Inc., applied for a $200,000 loan from the main office of the National bank of New York. The application was forwarded to the bank's commercial loan department. Gupta, the President and Principal Stockholder of Agarwal cast, applied for the loan in person. He told the loan officer that he had been in business since February 1976, but that he had considerable prior experience in flooring and carpets since he had worked as an individual contractor for the past 20 year. Most of this time, he had worked in Frankfert and Michigan. He finally decided to "work for himself" and he formed the company with Berry Hook, a former co-worker. This information seemed to be consistent with the Dun and Bradstreet report obtained by the bank According to Gupta, the purpose of the loan was to assist him in carrying his receivables until they could be collected. He explained that the flooring business required him to spend considerable cash to purchase materials but his customers would not pay until the job was done. Since he was relatively new in the business, he did not feel that he could compete if he had to require a sizeable deposit or payment in advance. Instead, he could quote for higher profits, if he were willing to wait until completion of the job for payment. To show that his operation was sound, he included a list of customers and projects with his loan application. He also included a list of current receivables. Gupta told the loan officer that he had monitored his firm's financial status closely and that he had financial reports prepared every six months. He said that the would send a copy to the bank. In addition, he...

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