JAipur national university

1. INTERNALMANAGEMENT NO-1
FINANCIALMANAGEMENT
ANS-1(ii) Definemillerandorrmodel of cash management.
Definition
The Miller-Orr model of cash management is developed for businesses with uncertain cash inflows
and outflows. This approach allows lower and upper limits of cash balance to be set and determine
the return point (target cash balance). This is different from the Baumol-Tobin model, which is based
on the assumption that the cash spending rate is constant.
The Miller-Orr model of cash management can be used if the following assumptions are met:
1. The cash inflows and cash outflows are stochastic. In other words, each day a business may have
both different cash payments and different cash receipts.
2. The daily cash balance is normally distributed, i.e., it occurs randomly.
3. There is a possibility to invest idle cash in marketable securities.
4. There is a transaction fee when marketable securities are bought or sold.
Formula
The return point for the cash balance under the Miller-Orr model can be calculated as follows:
Return Point = Lower Limit + 1/3 × Spread
(iii) State the featuresof moneymarket.
Features and Objectives of Money Market
The following are the general features of a money market:
1. It is market purely for short-term funds or financial assets called near money.
2. It deals with financial assets having a maturity period up to one year only.
3. It deals with only those assets which can be converted into cash readilywithout loss and with minimum
transaction cost.
4. Generally transactions take place through phone i.e., oral communication. Relevant documents and
written communications can be exchanged subsequently.There is no formal place like stock exchange
as in the case of a capital market.
5. Transactions have to be conducted without the help of brokers.
6. The components of a money market are the Central Bank, Commercial Banks, Non-banking financial
companies, discount houses and acceptance house. Commercial banks generally play a dominant in
this market.

2. (iv) Define the significance of internationalfinance management.
Significance of international finance management
International finance isamaintool to determinethe exchangerates,getanideaaboutinvestingin
international debtsecurities,compare inflationrates,todeterminethe economicstatusof other
countries andto decide the foreignmarkets.
Exchange rateshave a great influence ininternational finance.Theyare usedtocalculate the relative
valuesof currencies.Internationalfinanceaidsincalculatingtheserates.
There are manyeconomicfactorsusedto decide international investment.Thishelpsthe investorto
determine howsafe the moneywouldbe withforeigndebtsecurities.
(V) State the relationshipbetweenBOPand national economy
There isa complete andconsistentrelationshipbetweenNational economyandBalance of Payments
(BOP).Thisisbecause BOP,alongwith Internationalinvestmentpositionsformasimportantandintegral
part of the National Accounts.
Althoughtheyare similarinconceptandclassification,the twosystemsmaydifferinthe extentof cross-
classifications.
BOP andNational Accountsare useful foridentifyingresidentproducersandconsumers.Theyinvoke
identical conceptsof economicterritoryandeconomicinterest.Also,theyadoptidentical conceptsfor
valuatingtransactionsandforaccrual accounting.
ANS-2
What do you understand byfinancial management?Discuss its significance
in business management.
Meaning of Financial Management
Financial Management means planning, organizing, directing and
controlling the financial activities such as procurementand utilization of
funds of the enterprise.It means applying general management principles
to financial resources of the enterprise.

3. Objectives of Financial Management
The financial management is generally concerned with procurement, allocation and
control of financial resources of a concern. The objectives can be-
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should
be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so
that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management
1. Estimation of capital requirements: A finance manager has to make estimation with regards to
capital requirements of the company. This will depend upon expected costs and profits and future
programmes and policies of a concern. Estimations have to be made in an adequate manner
which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis. This
will depend upon the proportion of equity capital a company is possessing and additional funds
which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices
like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of
financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can
be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like
bonus.
b. Retained profits - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment
of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of
enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but
he also has to exercise control over finances. This can be done through many techniques like
ratio analysis, financial forecasting, cost and profit control, etc.

4. 8. Financial Management is critical to any company, whether small or big. It is like
the lifeline of the business. It is also a vital activity that must be performed in any
organization.
However, financial management entails the process of planning, organizing,
monitoring and also controlling the financial resources of an organization. The
idea for doing such is to be able to achieve the vision or goals of the company at
the stipulated time frame.
9. Financial Management is a regular practice in a business environment. It involves
managing a company’s financial resources to ensure there is little or no wastage. It
controls every single thing regarding the company’s financial activities which
includes the procurement of funds, use of funds, payments, accounting, risk
assessment and other things that are related to finances.
10.And that is one of the reasons it is considered to be an integral part of the company
because, without proper use of funds, the business can go down. It might also not
have what it takes to carry out production or activities.
The general principles of management are also applied to the financial
management of the company too. But the main focus shouldn’t be to create
principles or department to manage the finances of the business.
ANS -3 what is capital budgeting?Criticallyexamine the various methods of
evaluation ofcapital budgetingproposals.
Capital Budgeting
Capital budgeting is the process a business undertakes to evaluate potential
major projects or investments. Construction of a new plant or a big investment in
an outside venture are examples of projects that would require capital budgeting
before they are approved or rejected.
As part of capital budgeting, a company might assess a prospective project's
lifetime cash inflows and outflows to determine whether the potential returns that
would be generated meet a sufficient target benchmark. The process is also
known as investment appraisal.

5. Evaluation of Capital Budgeting
Proposal
There are two broad evaluation methods for a capital
budgeting proposal:
Non-DiscountedCash Flow Methods:
These are the traditional methods and include payback period and the
accounting rate of return (ARR). Their biggest disadvantage is that
they ignore the time value of money. The payback method is skewed
towards selection of projects with the shortest payback period; it
ignores the timing of profits as well as expected profits after the
payback period.
Discounted Cash Flow (DCF Methods):
They take into account time value of money. The methods include net
present value, internal rate of return, and profitability index. All three
methods consider the time value of money, use post-tax cash flows,
and consider all cash flows over the project’s life. They are therefore
superior to traditional evaluation methods.
Overseas project proposals have to contend with changes in political
risk in the host country. For a particular proposal, a company may
consider multiple locations in several countries, each of which has
different levels of political risk. Political risk is dynamic and can alter
over the project’s life. This affects the usefulnessof a country wise ex
ante assessment.The company has to carefully deliberate on whether
or not it shouldentertain a host country as a location, and the
financial and strategic payoffs of doing so.

6. The company has to spend resources in order to make estimates of
cash flows and the riskiness of foreign direct investment in that
country. Deliberation costs vary with the political risk of the host
country. The higher the political risk, the higher are an MNC’s
deliberation costs.