Before beginning any verbal exchange on Finance to begin with we need to understand what is the meaning of Finance is. Actually at some time period the term Finance came from French language. in the eighteenth century the word Finance became typically used as the dealing with of money or assets, until then this phrase diagnosed its very own that means in this world. This word is not just utilized in control however also carried out as an educational subject with the higher importance which our online service provide help with.
Finance is likewise identified as procurement of budget and accurate a part of the available assets in a powerful way to increase the gain. The very name - Finance is likewise exchanged by way of the word changed like exchange of assets. The range of Finance isn't simply surrounded about the control or change of money or goods but barter technique is likewise a type of Finance. Finance is referred to as the beginning of the financial activities. Finance assignment is likewise concerned with coins this means every business transaction involves with coins indirectly without delay.
The main branches of Finance:
- Time Value of Money;
- Risk and Return;
- Cost of Capital;
- Working Capital Management;
- Cash Management;
- Inventory Management;
- Dividend Decisions;
- Foreign Exchange Market (FOREX);
- Portfolio Management.
The time value of money
It is the value of money figuring in a given amount of interest earned over a given amount of time. For example, 100 dollars of today's money invested for one year and earning 5 percent interest will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars.
The method also allows the valuation of a likely stream of income in the future, in such a way that the annual incomes are discounted and then added together, thus providing a lump-sum "present value" of the entire income stream.
Risk and Return
The risk-return spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken.
Investment Objective and its Meaning: An investment objective mostly comes in the form of a survey which contains client information like risk aversion, current liquid and net worth, income and expense levels and time frame for investment.
The ultimate investment objective is to maximize the value of the investors’ portfolio. The risk and return on investments are directly related and so it is not appropriate for an investor to say that the investment objective is to ‘accumulate a lot of wealth’. Rather he/she should state that the objective is to increase wealth while recognizing that there are possibilities of incurring losses.
Cost of Capital
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholders required return on a portfolio of all the company's existing securities". It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company.
The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company's average business activities it is reasonable to use the company's average cost of capital as a basis for the evaluation. A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital. However, a rate of return greater than the cost of capital is usually required.
The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modelled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous.
Almost every thing we do in today's business world involves a risk of some kind:customer habits change,new competitors appear,factors outside our control could delay our project.But formal risk analysis and risk management can help you to assess these risks and decide what actions to take to minimize disruptions to our plans.They will also help you to decide whether the strategies you could use to control risk and cost-effective.
When we use the word "RISK" we mean either an event which leads to a variation from the most likely outcome in either direction or the probability of occurrence of such an event. In order to deal with the risk inherent in a given activity, we first need to identify them, by estimating the frequency of occurrence and the consequences if they occur. The analysis of risks aims to ascertain the frequency of occurrence and the consequences if the risk event occurs. In order to judge the financial consequences of each risk, the expected net present value for each risk can be calculated.
Working Capital Management
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities.
As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital investment decisions, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital.
The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital See Economic value added (EVA).
Cash Management, or treasury management, is a marketing term for certain services offered primarily to larger business customers. It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is more often used to describe specific services such as cash concentration, zero balance accounting, and automated clearing house facilities. Sometimes, private banking customers are given cash management services.
The following is a list of services generally offered by banks and utilised by larger businesses and corporations:
- Account Reconcilement Services,
- Advanced Web Services,
- Armored Car Services (Cash Collection Services),
- Automated Clearing House,
- Balance Reporting Services,
- Cash Concentration Services,
- Lockbox - Retail services,
- Lockbox - Wholesale services,
- Positive Pay,
- Reverse Positive Pay,
- Sweep accounts,
- Zero Balance Accounting,
- Wire Transfer,
- Controlled Disbursement.
Cash management services can be costly but usually the cost to a company is outweighed by the benefits: cost savings, accuracy, efficiencies, etc.
Inventory Management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an ongoing process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs.
The Dividend Decision is a decision made by the directors of a company. It relates to the amount and timing of any cash payments made to the company's stockholders. The decision is an important one for the firm as it may influence its capital structure and stock price. In addition, the decision may determine the amount of taxation that stockholders pay.
There are three main factors that may influence a firm's dividend decision:
- Free-cash flow
- Dividend clienteles
- Information signalling
Under this theory, the dividend decision is very simple. The firm simply pays out as dividends, any cash that is surplus after it invests in all available positive net present value projects.
Foreign Exchange Market (FOREX)
The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency.
Portfolio Management may refer to:
- Investment management - the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate) in order to meet specified investment goals for the benefit of the investors.
- IT portfolio management - the application of systematic management to large classes of items managed by enterprise Information Technology (IT) capabilities.
- Project management - the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project goals and objectives.
- Project portfolio management (PPM) - a term used by project managers and project management (PM) organizations, (or PMOs), to describe methods for analyzing and collectively managing a group of current or proposed projects based on numerous key characteristics.
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