1. What is the primary goal of financial management?

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• What is the primary goal of financial management?

Answer: The primary goal of financial management is to maximize the

value of the firm for its shareholders, which typically involves making decisions that increase the firm's profitability and long-term wealth.

• How does financial management contribute to a company's

strategy?

Answer: Financial management plays a critical role in implementing a

company's strategy by ensuring efficient allocation of resources, managing risk, and making investment and financing decisions that align with strategic objectives.

• What is the difference between finance and accounting?

Answer: Finance focuses on managing the flow of money and making

investment decisions, while accounting deals with recording, classifying, and summarizing financial transactions.

• Explain the concept of time value of money.

Answer: The time value of money is a financial principle that asserts that

money today is worth more than the same amount of money in the future due to its earning potential. This concept is fundamental in financial decision-making, as it influences investment, financing, and capital budgeting decisions.

• What is a balance sheet, and what does it represent?

Answer: A balance sheet is a financial statement that shows a company's

financial position at a specific point in time, listing its assets, liabilities, and shareholders' equity. It represents the company’s resources and the claims against those resources.

• What is the role of financial markets in the economy?

Answer: Financial markets facilitate the flow of capital by allowing

businesses to raise funds and investors to allocate capital. They help in price discovery, liquidity, and risk management, which are essential for economic growth. 2 / 3

• Define the term ‘capital budgeting.’

Answer: Capital budgeting is the process of planning and evaluating

long-term investments and projects to determine which ones will generate the most value for the firm. It involves assessing the expected return and risks of potential investments.

• What are the main techniques used in capital budgeting?

Answer: The main techniques used in capital budgeting include Net

Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index. These methods help assess the profitability and risks associated with potential projects.

• How does the weighted average cost of capital (WACC) affect

investment decisions?

Answer: The WACC represents the average rate of return a company

must earn on its investments to satisfy its investors (both debt and equity). A higher WACC means the company must generate higher returns to create value, while a lower WACC makes it easier to fund projects and investments.

• Explain the importance of financial ratios in financial

management.

Answer: Financial ratios are essential tools for assessing a company's

financial performance. They provide insights into profitability, liquidity, efficiency, and solvency, helping management and investors make informed decisions about the company's health and future prospects.

• What is the difference between risk and uncertainty in

financial management?

Answer: Risk refers to situations where the probabilities of outcomes are

known, while uncertainty refers to situations where these probabilities are unknown. Financial management involves identifying, measuring, and managing both risks and uncertainties.

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