Question 1 (a)
Traditional and modern approaches to financial management
4 marks
- Time to write
- About 8 minutes
From an older CBCS paper
Question
Question 1 (a) · 4 marks"During the last few decades, financial management has expanded in its scope." Discuss the salient features of the traditional and the modern approaches to financial management, and contrast them. 4
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- DiscussTie the answer to the quoted statement: say what it means first, and come back to it at the end.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Traditional approach: scope and features 1½ marks 3 min
- 2 Modern approach: scope and features 1½ marks 2 min
- 3 Contrast 1 mark 2 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks. End with step 3 in a line or two.
Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Traditional approach. It dominated thinking from the 1920s to the early 1950s and saw finance as the procurement of funds: the capital market, the instruments through which funds are raised, and the firm's legal and accounting relationships with its sources of funds. Its features, which are also its limitations:
- an outsider-looking-in view, from the side of investors and bankers, ignoring internal decision-making;
- a focus on corporate enterprises only;
- emphasis on episodic events (promotion, merger, reorganisation), not day-to-day financial problems;
- emphasis on long-term finance, leaving out working capital management; and above all,
- no attention to the allocation of funds: the cost of capital and the returns from uses of funds were ignored.
Modern approach. It sees financial management as an integral part of overall management, covering both the acquisition and the allocation of funds. It asks: what total funds should the enterprise employ, which assets should it acquire, and how should they be financed. It provides an analytical framework for three decisions (investment, financing and dividend), with the maximisation of shareholders' wealth as the guiding objective.
Contrast. The traditional approach is narrow (raising funds), descriptive and episodic; the modern approach is broad (raising and using funds), analytical and continuous, and judges every decision by its effect on the value of the firm. That widening is the expansion of scope the statement refers to.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Traditional approach: scope and features | 1.5 |
| 2 | Modern approach: scope and features | 1.5 |
| 3 | Contrast | 1 |
| Total | 4 |
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