ICSI Financial Treasury and Forex Management Solved Question Paper 2013
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Chapter - 1 Nature and Scope of Financial Management 2013 - June 1 C i Y The term liquidity refers to the firm s ability to honour its future obligation. Y It calls for striking a proper balance between the receivables and payables. Y Liquidity management requires arrangement of receivables in such a manner that they are realised before the maturity of payables. Y A finance manager should determine the need of liquid assets, well in advance, and should arrange them in such a way that there is no scarcity of funds. Y On the other hand the term profitability means effective utilisation of funds in such a manner that they yield the highest return. Y Thus, the two prime goal which every finance manager has in priority being liquidity and profitability often seem to be competitive in nature. Their contradictory nature is on account of the fact that for survival of business it is essential to have adequate amount of cash. But at the same time having excess cash may result in blocking of cash and there by acting as a hindrance in the path of profitability. Y To conclude, a finance manager needs to strike out a proper balance between the goals of liquidity and profitability. 2013 - June 4 i Profit maximisation Profit maximisation is one of the objective of financial management since profit acts as a reward for taking risk and is also an icon of business performance. Evaluation of profit maximisation as one of the objectives of financial management -
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Advantages of Profit Maximisation Y The ultimate objective of each business is profit maximisation. Y Profit acts as a reward for taking risk. Y It helps to counteract with the future uncertainties. Y Profit is also an icon of business performance. Y Last but not the least, profit is the measuring rod which measures the financial soundness of any organisation. Disadvantages of profit Maximisation Reasons as to why profit maximisation is not an objective of financial management Y Profit maximisation is a narrow approach. Y Profit is a vague term since different persons have different perspective for the very same term. Y It ignores the timing of return. Y Does not take into account the risk factor. Y Lastly, it is a short term concept only. Wealth Maximisation It is a long term objectives of financial management whereby the business strives to increase the wealth of the shareholders i.e. the stockholding of individual shareholder by maximising the market price per share. Advantages of Wealth Maximisation Y As against the profit maximisation, the approach of wealth maximisation is long term in nature. Y It does consider the timing impact.