Question 1 OR (a)
Modern approach to the scope of financial management
8 marks
- Time to write
- About 16 minutes
From an older CBCS paper
Question
Question 1 OR (a) · 8 marks"During the last few decades, Financial Management has expanded in its scope". Examine the modern approach to the scope of financial management.
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
- ExamineA statement to judge: take a stand on it in your first line, 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 and its limitations 2½ marks 4 min
- 2 Modern approach: acquisition and allocation 2½ marks 4 min
- 3 The three decisions and further features 3 marks 5 min
- Check: every ask answered, key terms underlined 2 min
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.
Try it first. About 16 minutes for 8 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.
The traditional approach. Until the early 1950s the finance function was seen narrowly as the procurement of funds: dealing with financial institutions, the instruments for raising funds in the capital market, and the legal and accounting relationship between the firm and its sources of funds. It was criticised because it took the outsider's (lender's) view, and dealt with episodic events such as incorporation, mergers and reorganisation rather than day-to-day financial decisions. It focused on long-term finance and so left out working capital. Above all, it ignored the allocation of funds.
The modern approach. It broadens the finance manager's responsibility and provides a conceptual and analytical framework for financial decision-making. The finance function covers both the acquisition and the allocation of funds: beyond raising external funds, its main concern is the efficient and wise allocation of funds to various uses, and the finance manager looks into the financial implications of every decision in the firm, as an integral part of overall management. It addresses three questions:
- What total volume of funds should the enterprise commit?
- What specific assets should it acquire?
- How should the funds required be financed?
The resulting scope: three decisions, taken with the common aim of maximising the shareholders' wealth:
| Decision | Content |
|---|---|
| Investment decision | Capital budgeting (long-term assets) and working capital management (current assets), weighing return against risk |
| Financing decision | The sources of funds and the capital structure (debt–equity mix), the cost of capital |
| Dividend decision | How much profit to distribute and how much to retain |
Further features of the modern scope: liquidity management alongside profitability; financial planning and control (budgets, ratio analysis); evaluation of risk and return; valuation of the firm; and attention to the stakeholders, agency issues and the wider economic and regulatory environment. The finance manager has become an insider taking continuous decisions, not merely an arranger of funds on special occasions.
Where the 8 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Traditional approach and its limitations | 2.5 |
| 2 | Modern approach: acquisition and allocation | 2.5 |
| 3 | The three decisions and further features | 3 |
| Total | 8 |
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