Financial Institutions Instruments and Markets 8th Edition Viney Solutions Manual

The finance is the lifeblood of an organization. Without it, it cannot exist. Business or ideas need the funds to grow. While the initial capital is provided by the various small sources such as seed capital, angel fund, venture capital, etc.

But for the larger scale, the business needs more funds and for that, they go for formal sources of financing which includes financing from the bank as a loan which is most common and traditional as well. Apart from this source, other sources can be equity financing, retained earnings, issue of hybrid instrument, etc.

Finance needs will arise for various time periods. The short term generally ranges up to 12 months. They are short term in nature. Medium-term for 12 months to 36 months. The long term for more than 36 months. However, there are inconsistencies among the various authors in the medium term and long term. Many classify only in two categories short term and long term.

The following are the principles of finance:-

1. Cash flow – This principle says that in business there should be the optimum cash

flows. The relatively higher cash flow into the business is preferred over the cash

outflow. The earlier and higher the cash inflow is better for the firm.

2. Hedge – According to this principle, there should be a matching between the

sources of finance and project needs. For example, short term financial needs

should

be provided for the shorter projects and in the same way the others.

3. Diversity – To minimize the risk associated with a particular project, the business

needs to diversify. Investing in one business can be dangerous it does not work

well. In that situation, the return of capital can become tedious.

4. Liquidity and profitability – This principle works better for investors. The

should investment into the market ready instruments. They should be quickly

liquidated in the market. Those invested avenues should be profitable enough to

make the investment worth. So, the investor must choose these two points

carefully.

5. Risk and return – It is the most common among all. The investor needs more

return if they are associating with the risky projects. So if the company is working

in a niche market or for some innovating field especially technology one, then the

cost of funds for them may be higher, If the company is working in a very generic

category like FMCG (Fast-moving consumer goods), then their cost can be

relatively low.

6. Time value – There is a time value associated with the funds. The funds received

today is much more important than the one received one year later. Therefore, the

company should try to make more cash inflow earlier in the period than the later

years.

These principles are important both for the investors and the company or the firm who needs them. For an investor, it is hard-earned money for them. Investing those funds in weaker assets without any careful consideration may be bad for them. So, they should take care of all these principles before investing.

For the company, these principles are also important. These guides them to select the sources of finance. Because, if the cost is higher then there may be difficulty in paying them. This will mark a bad impression on the company and their operations may be hampered.