Finance deals with how money is raised, allocated, and managed to achieve goals. In business, finance is not only accounting; it focuses on decisions like investment, funding, and dividend/retention. A core idea behind many finance decisions is the time value of money (TVM): money available today is worth more than the same amount in the future because it can earn returns.
This topic creates the foundation for later chapters like capital budgeting, cost of capital, working capital, and dividend policy.
You should be able to:
Finance is the study and management of money and investments. In business context, finance is concerned with:
Simple exam definition: Finance is the art/science of managing money to achieve desired objectives.
The scope includes decisions and activities such as:
Common objectives (write any 5–6):
Exam tip: mention both profitability and liquidity and show the balance.
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Scope of finance (any three):
Any three areas with brief meaning are enough.
Three finance decisions:
These decisions are interconnected in practice.
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Finance deals with how money is raised, allocated, and managed to achieve goals. In business, finance is not only accounting; it focuses on decisions like investment, funding, and dividend/retention. A core idea behind many finance decisions is the time value of money (TVM): money available today is worth more than the same amount in the future because it can earn returns.
This topic creates the foundation for later chapters like capital budgeting, cost of capital, working capital, and dividend policy.
You should be able to:
Finance is the study and management of money and investments. In business context, finance is concerned with:
Simple exam definition: Finance is the art/science of managing money to achieve desired objectives.
The scope includes decisions and activities such as:
Common objectives (write any 5–6):
Exam tip: mention both profitability and liquidity and show the balance.
Finance is often summarised into three decisions:
These are linked: investment needs financing; dividends affect retained earnings and future financing.
TVM means: today is worth more than tomorrow because:
So we convert amounts across time using compounding (to future) and discounting (to present).
Common single-sum formulas (basic):
Where = rate per period, = number of periods.
If , per year, : Interpretation: today becomes in two years at 10%.
If , , : Interpretation: receiving after two years is equivalent to today at 10%.
Generally, higher expected return comes with higher risk. Investors demand extra return (risk premium) to accept more uncertainty.
Simple examples:
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Given: PV = ₹1,000, r = 10% (= 0.10), n = 2
Formula: FV = PV × (1 + r)^n
FV = 1000 × (1.10)^2 = 1000 × 1.21 = ₹1,210
₹1,000 today becomes ₹1,210 after 2 years at 10% compound rate.
Compounding shows growth of money over time; the interest earned over 2 years is ₹210.