BBS 2nd year finance model question solution

 We have previously discussed about the Brief answer questions you can check it out from here part 1.

Inside of this article we will discuss about the model question of bbs 2nd year finance.

13 a. Describe/Explain the ratios used for analyzing short-term financial position of a firm.

Liquidity ratio is a type of financial ratio that is used to determine the short term financial position of the firm. It shows the relationship of a firm's cash and other current assets to its liabilities. This ratio (liquidity ratio) focuses on current liabilities and current assets.

I. Current Ratio 

It is the ratio between current assets to the current liability. It presents the ability to pay short term liability i.e. within one year. The ratio of 2:1 is considered as standard value which indicates current assets is double of current liability. A firm with current ratio over 2:1 may not be performing well and vice versa. 

II. Quick Ratio 

It is the ratio between quick assets to the current liabilities.  It can also be termed as acid-test ratio or liquid ratio. It is the another method of measuring the short term financial position of the firm. It is more conservative measurement than current ratio as it is quicker than current ratio. Generally ratio of 1:1 is considered as standard for quick ratio.

Quick assets is all the current assets excluding inventories and prepaid expenses.

17. Describe/Explain the wealth maximization goal of a firm. Wealth maximization a superior goal to profit maximization. Why Describe.

Wealth maximization is the difference between present value of benefit of project and present value of its costs. It is the medium of maximizing the net present value of a course of action which is also known as value maximization or net present worth maximization.

Profit maximization is a means of maximizing the income of a firm by generating excess revenue over cost. The ultimate aim of business firms is to earn profit, so profit maximization considers all the possible ways to increase the profit of a firm.

Wealth maximization goal of a firm is a superior goal to profit maximization can be elaborated on the basis of following points:

A. Considers time value of money

Wealth maximization considers the time value of money. The value of Rs 1000 in todays time may not be of same value in future years. The value of money decreases according to passage of time. Wealth maximization considers the value of time. It does so by converting all cash flows received in different period through different sources into present value.

B. Wealth maximization goal is clear:

Stock price/ wealth maximization means maximizing the net present value of course of action. The cost and benefits of every decision are measured in term of cash flow rather than in term of accounting profit. The net present value of project is the difference between present values of benefits of project to the present value of cost. As this gap increases the wealth maximization also increases which increases the dividend of the shareholder i.e. wealth.

C. Considers quality of benefits:

The better the quality, better will be cash flow. More the cash flow there is better wealth maximization. Between two projects A and B having same quantity.  If the cash flow of project A is more than that of B, then project A is said to be more qualitative than the other. Stock price maximization is qualitative and it is oriented on market price of share than Earning per share.

D. Reduce the conflict of interest among the shareholders:

Shareholders are those who have interest in firm's affair. Wealth maximization is shareholder oriented. Share holder wealth maximization is the means of increasing the market price per share. Shareholders invest in the firm hoping of getting return from that firm. The timely payment to the creditors ensures the maximization of the interest of shareholders.

E. Considers risk:

Wealth maximization considers the types of risk in any sort of investment. Investment is a risky portion of business. So before accepting any project first risk should be measured and shareholders price maximization accepts low risky project.