(Gitman, 2011) Finance is often defined as the art of managing financial resources, which includes activities such as arranging these resources in the least expensive manner and, investing any surplus resources in order to reap extra margins. (Gitman, 2012) Moreover, it also includes the understanding of the basic operations in order to ensure the best management of the funds that are available to the manager. Finance also helps in assessing the financial strength of the company through the use of ratio analysis that helps one understanding various aspects of the firm such as liquidity, efficiency, profitability and leverage, while the most important principle of finance is based upon discounting the value of financial resources such as money, bonds and expected cash-flows with respect to time. (Brigham, 1998) The collapse of Lehman Brothers on 15th September 2008 had devastating impact on the confidence of the general investor throughout the world that led many financial managers to question the rules and regulation that dictate the environment of the business (The Guardian, 2011) Financial crisis have hardly known to be isolated to themselves, in fact they spread like any contagious disease that often triggers the collapse throughout the world. ...
However, the scope of financial environment is not limited to technical institutions only as it also includes various other organizations with which one may enter in any kind of financial transaction, as financing and investment activities are never limited to the listed companies only. (Gitman, 2012) TIME VALUE OF MONEY Suppose that Mr. B borrowed an amount of ?100 from Mr. A in the year 1987. Today, Mr. B came back and returned that ?100 to A and exclaimed that he had finally paid off all his old debts. Would one consider the act of Mr. B as just and sound? The answer would be negative as the same amount of money is more worth than it would tomorrow. (Van Horne, 2008) Thus the concept of time value of money is based on the fact that money loses its worth every second due to factors such as inflation and reinvestment risk, therefore a ?1 of today is lesser worth of ?1 of yesterday. (Brigham, 1998) Future Value of a Sum As we already mentioned above about the reinvestment risk, it is the rate at which money can be reinvested for a specific period of time. (Brigham, 1998) Therefore, future value is the nominal amount of money that one will possess after a certain period at a given reinvestment rate, usually an interest rate. To illustrate with an example, consider that A invests ?100 at 10% interest rate for two years. In the first year A will earn ?10 on ?100, however at the start of the second year, the balance in A’s account will be ?110, therefore the interest that A will earn in the 2nd year will be on ?110 which should come out as 11. Thus A’s account balance at the end of the 2nd year will be ?121. This nominal value of ?121 is the future value of ?100 at the interest of 10% after the period of 2 ...
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