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Course : Masters in Business Administration (MBA 4 Sem)

Subject : Financial Management

Answer the following question.

Q1. How are financial trades made in an over the counter market?
Discuss the role of a dealer in the OTC market.(10 marks)
Answer: A decentralized market, without a central physical location, where market participants
trade with one another through various communication modes such as the telephone, email and
proprietary electronic trading systems. An over-the-counter (OTC) market and an exchange market
are the two basic ways of organizing financial markets. In an OTC market, dealers act as market
makers by quoting prices at which they will buy and sell a security or currency. A trade can be
executed between two participants in an OTC market without others being aware of the price at
which the transaction was effected. In general, OTC markets are therefore less transparent than
exchanges and are also subject to fewer regulations.

OTC markets are primarily used to trade bonds,

Q2. What is the basic goal of a business? (10marks)

Answer: Your business objectives are the results you hope to achieve as you run and grow your
business. As an entrepreneur, you are concerned with every aspect of your business and need to
have clear goals in mind for your company if you are to stay on track. Having a comprehensive list of
business objectives creates the guidelines that become the foundation for your business planning.

1. Getting and Staying Profitable

Maintaining profitability means making sure

Q3. What is meant by ‘Financial management’ Explain its

importance.. (10marks)
Answer: Financial management is an essential action for any organization to manage financial
resources. A financial manager conducts some activity like financial planning, organizing, directing
and controlling organizational funds. Financial management is what financial manager do to achieve
organizational goals and objectives. It is important to know the financial management functions of a
financial manager to manage resources. It helps you to take a decision about financial planning and
management using business resources. A good manager is a good planner, organizer, director and
controller of inflow and outflow of funds. The ultimate objectives of a financial manager are to
maximize organizational value.
It includes three important decisions which are investment decisions, financing decision and
dividend decision for a specified period
Q4. Every Manager has to take three major decisions while
performing the finance function’ briefly explain them. (10 marks)
Answer: The three main financial decisions which are generally taken by a finance manager are as
under:

(i) Investment Decision: It refers to the selection of assets in which funds will be invested by the
business. Assets which are obtained by the business are of two types, i.e., long-term assets and
short-term assets. On this basis, investment decision is also divided into two parts:

(a) Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It
relates to the investment in long-term assets. For example, buying a new machine. For the
same purpose, the finance manager has to make a comparative study

Q5. To avoid the problem of shortage and surplus of funds, what is

required in Financial management? Name the concept and explain
four points of importance. (10 marks)
Answer: Financial Planning is required to avoid shortage or surplus of finance.
Importance of financial planning is:
1- by planning utilization of finance, it reduces waste ,duplication of efforts and gaps in the planning.

2- it helps in coordinating the various business activities such as sales,purchases, production, finance
etc.

Q6. State the decisions involved in Financial management.

(10marks)
Answer: Financial Management is concerned with the acquisition and utilization of capital funds in
meeting the financial needs and overall objectives of a business enterprise. Thus the primary
function of finance is to acquire capital funds and put them for proper utilization, with which the
firm’s objectives are fulfilled. The firm should be able to procure sufficient funds on reasonable
terms and conditions and should exercise proper control in applying them in order to earn a good
rate of return, which in turn allows the firm to reward the sources of funds reasonably, and leaves
the firm with good surplus to grow further.

Q7. What are Strike Price and Option Price? (10marks)

Answer: A stock option gives you the option to buy shares of a given company at a certain price, the
strike price, at a later date.

If the stock price (say, $1) rises above the strike price (say, $0.75), you can exercise your option to
buy shares at the strike price, and then turn around and sell those shares at the stock price, making
$0.25 a share.

If the option is currently underwater (i.e. the

Q8. Why we use WACC? (10marks)
Answer: A company is raising funds from different sources of finance and doing business with those
funds. The company has a responsibility to give a return to its funding providers. If a company has
only one source of financing, then it is the rate at which it is required to earn from the business.
However, the company may have raised funds from more than one source of finance, in which case
WACC (Weighted Average Cost of Capital) must be found, which indicates the minimum rate at
which the company should earn from the business in order to give a return to its finance providers,
as per their expectations. The importance and usefulness of the weighted average cost of capital
(WACC) as a financial tool for both investors

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