Financial Management Essay
Finance may be defined as that administrative area which is concerned with arrangement of cash and credit effectively.
* Business finance:-
Business finance is the process of determining the required amount of fund, finding available sources of fund, calculating the nominal and effective cost of each sources of fund, conservating the collected funds properly and allocate the optimally in order to achieve the goal of an organization or a business firm.
* Financial management:-
Financial management is concerned with the effective use of an economic resource, namely, capital funds. In other words, financial management is that administrative area or set of function which relates to the …show more content…
Here the expected cash flows are reduced to account for risk. The higher the risk, the lower the risk – adjusted, or certainty equivalent, cash flows.
* Risk adjusted discount rate (RADR) approach:-
Here the discount rate rather than the cash flows are adjusted for risk. The higher the risk, the higher the discount rate.
* Opportunity cost:-
Opportunity cost is the cost of sacrificing one alternative for another best alternative. There are some factors that affect the opportunity cost of a given potential investment. They are: * The riskiness of the flow * The prevailing level of rates of return * The timing of cash flows.
* Capital Asset Pricing Model (CAPM):-
CAPM is an important tool used to analyze the relationship between risk and return. It was developed by Harry Markowitz & William Sharpe. CAPM is a model based on the proposition that any stocks required rates of return is equal to the risk free rate of return plus a risk premium that reflects only the risks remaining after diversification.
According to the CAPM the required rate of return is given by the following relationships: Ri = Rf + (Rm – Rf) β
Ri = Required rate of return
Rf = risk free rate of return