The functions of
finance in a firm are in threefold. These are:
finance in a firm are in threefold. These are:
1.
Investment functions
Investment functions
2.
Financing functions
Financing functions
3.
Dividend functions
Dividend functions
An optimal
consideration of these three functions could maximize the market value of
shareholder funds. The three functions are inter related and have joint impact
on the company
consideration of these three functions could maximize the market value of
shareholder funds. The three functions are inter related and have joint impact
on the company
Investment functions:
the responsibility of the financial manager here is to identify the various
investment opportunities available to the company, evaluate these opportunities
with under this function to manage efficiently the existing and new investments
of the firm and allocate the scarce resources of the firm prudently and efficiently
the responsibility of the financial manager here is to identify the various
investment opportunities available to the company, evaluate these opportunities
with under this function to manage efficiently the existing and new investments
of the firm and allocate the scarce resources of the firm prudently and efficiently
Financing function:
the major issue for consideration here is identifying the various source of
finance available to the firm. The characteristics and cost of each source, the
best mix of funds for the firm’s investment and matching the maturity of funds
with the tenor of investments
the major issue for consideration here is identifying the various source of
finance available to the firm. The characteristics and cost of each source, the
best mix of funds for the firm’s investment and matching the maturity of funds
with the tenor of investments
Dividend functions:
this entails determining the percentage of earnings to pay out as dividends to
shareholders and the percentage to retain in the company for further
investments. The dividend functions are the sole stimulant of investors and are
the reason why they stock preferring to curtail consumption today for greater
benefit tomorrow
this entails determining the percentage of earnings to pay out as dividends to
shareholders and the percentage to retain in the company for further
investments. The dividend functions are the sole stimulant of investors and are
the reason why they stock preferring to curtail consumption today for greater
benefit tomorrow
Mathematics of
finance and concept of time value of money investment is sacrificial,
refraining present consumption for a possible higher return. The future return
will compensate the investor for the time and risk of foregoing his present
consumption. The preference of a rational investor for a present income to the
same amount in future is known as the time preference. This is influenced by
the fact that the investor will earn a return in the present income if e
invested it for that specified period of time. The rate of return (sometimes
called interest rate1) which enables an investor to compare a present amount to
a future amount is known as time preference rate. It is the time preference
rate of the investor that makes him prefer N1 today o the same N1 tomorrow for
him to forego today’s N1 there must be an opportunity to earn an amount greater
than N1 in the future
finance and concept of time value of money investment is sacrificial,
refraining present consumption for a possible higher return. The future return
will compensate the investor for the time and risk of foregoing his present
consumption. The preference of a rational investor for a present income to the
same amount in future is known as the time preference. This is influenced by
the fact that the investor will earn a return in the present income if e
invested it for that specified period of time. The rate of return (sometimes
called interest rate1) which enables an investor to compare a present amount to
a future amount is known as time preference rate. It is the time preference
rate of the investor that makes him prefer N1 today o the same N1 tomorrow for
him to forego today’s N1 there must be an opportunity to earn an amount greater
than N1 in the future
There are two (2) types
of interest competitions, there are:
of interest competitions, there are:
1.
The simple interest computation: here interest is paid only on principal
for the duration the principal money is left with the bank i.e.
The simple interest computation: here interest is paid only on principal
for the duration the principal money is left with the bank i.e.
I = (PxRxT)/100
2.
Compound interest computation: this comprises previous period interest
i.e. interest is paid on interest and principal
Compound interest computation: this comprises previous period interest
i.e. interest is paid on interest and principal
The compound/ future
value of lump sum
value of lump sum
Given he principal
i.e. the present value of a lump sum. It is possible to calculate the future
value of the principal amount to a specified period by applying the formula
below
i.e. the present value of a lump sum. It is possible to calculate the future
value of the principal amount to a specified period by applying the formula
below
Cv = P(I + i)n
Where: P
= Principal
= Principal
I
= Interest
= Interest
n
= Number of years/ period investment
= Number of years/ period investment
Cv
= Compound value/ future value of a lump scan
= Compound value/ future value of a lump scan
Example:
How much could N5000
deposited in a saving account accumulate o in 5yrs time if interest is paid at
the rate of 10% per annum compounded annually?
deposited in a saving account accumulate o in 5yrs time if interest is paid at
the rate of 10% per annum compounded annually?
P = N5000
I = 10%
N = 5yrs
Answer
Cv = P (I + i)n
=5000 (1 + i)5
5000 (1-10)5
Present value of the
lump sum (i.e. discounting)
lump sum (i.e. discounting)
Discounting is the
opposite of compounding. It enables an investor to compare a future amount with
a present amount
opposite of compounding. It enables an investor to compare a future amount with
a present amount
Given a future
amount, the interest rates i.e. the time preference rate and the period of
investment, it is possible to calculate the present worth of the future amount
by using the formula below
amount, the interest rates i.e. the time preference rate and the period of
investment, it is possible to calculate the present worth of the future amount
by using the formula below
Example: Mr. Uzieze
has N30, 000 at hand but Manny Bank is currently offering him N43, 000 in five
years time if only he can open an account with them today. Should he take the
offer or reject it granted that his time preference is 12% for that period
has N30, 000 at hand but Manny Bank is currently offering him N43, 000 in five
years time if only he can open an account with them today. Should he take the
offer or reject it granted that his time preference is 12% for that period
Answers
Pv = Fv/(I + i)n or Pv
x (I + i)n
x (I + i)n
30, 000 x (1 + 12)5
Fv= N126, 241.35
Mr Uzieze must reject
their offer because N216,000.00 is definitely much higher than N43, 000.00 the
bank is offering
their offer because N216,000.00 is definitely much higher than N43, 000.00 the
bank is offering
