[1] What is meant by financial management? Explain briefly the decisions to be made by financial managers,
support your answer with one example each for each type of decision.
Financial manager: Job description and activities
On this page…
1. Job description
2. Typical work activities
Job description
A financial manager is responsible for providing financial advice and support to clients and colleagues to enable them to
make sound business decisions. This work takes place in both the private and public sector. Specific settings vary
Financial considerations are at the root of all major business decisions. Clear budgetary planning is essential to be able to
plan for the future, both short and long term; companies need to know the financial implications of any decision before
Financial managers may also be known as financial analysts or business analysts.
Typical work activities
The roles of financial managers may vary slightly, depending on the size of the organisation: in larger companies, the role is m
with strategic analysis; in smaller organisations, a financial manager may be responsible for the collection and preparation of
well as the interpretation of them. Many companies operate multifunctional teams where the financial manager is responsib
particular division or function; in others, financial managers look after a range of departments and/or functions.
Typical activities include:
providing and interpreting financial information;
business modelling and forecasting;
monitoring performance and efficiency;
analysing change and conducting risk assessment;
participating in strategic planning, and formulating long-term business plans;
researching and reporting on factors influencing business performance;
pricing and competitor analysis;
developing complex finance models;
assessing the financial implications of new or existing ventures;
conducting reviews and evaluations for cost-reduction opportunities;
preparing accounts and reconciling balance sheets;
overseeing budgetary control;
monitoring cash flow;
leading, or working on, projects;
liaising with other members of the team and across the business;
supervising other staff.
[2] If the present value of €167 paid in a year is €146, what is the discount factor? What is the discount rate?
PV 146 Discount Factor 1/(1+r)
CF after a year 167 Discount rate (r ) Future CF/PV - 1
Discount factor 0.874251497
Discount rate 14.38%
[3] There are four different investments opportunities with following cash flows. The opportunity cost of capital is 20
Investment Initial Cash Flow Cash Flow in Year 1NPV ROR
1- 10,000.00 € 18,000.00 € 5,000.00 € 80%
2- 5,000.00 € 9,000.00 € 2,500.00 € 80%
3- 5,000.00 € 5,700.00 € - 250.00 € 14%
4- 2,000.00 € 4,000.00 € 1,333.33 € 100%
a- Calculate the NPV and rate of return for each of the above investments.
b- Which investment is most valuable?
Fourth investment is the most valuable since it has the biggest rate of return
c- Suppose each investment would require use of same parcel of land. Therefore, you can take only one investme
First investment would be my choice because it has the biggest NPV
[4] Peter and Helena are thinking to buy a boat after five years. The cost of the boat is €20,000 and Nordea Bank Plc i
interest of 8% per year. How much do they need to put aside every year in order to buy the boat at the end of 5th
Cost of boat 20000 20000.05696
Cost of loan 0.08
Time period 5
Annual savings 3156.61
Cost of boat=annual saving*(1+r)^5+annual saving*(1+r)^4+annual saving*(1+r)^3+annual saving*(1+r)^2+annual
[5] An investment project costs €800,000. You reckon that it will produce an inflow after operating costs of €170,000
for 10 years. If the opportunity cost of capital is 14%, then
a-What is the net present value of the investment project?
b- What will be the worth of the project at the end of 5 years?
Investment 1 2 3
800,000.00 € 170,000.00 € 170,000.00 € 170,000.00 €
PV 149,122.81 € 130,809.48 € 114,745.16 €
5 6 7 8 9
170,000.00 € 170,000.00 € 170,000.00 € 170,000.00 € 170,000.00 €
88,292.67 € 77,449.71 € 67,938.34 € 59,595.04 € 52,276.35 €
NPV 86,739.66 €
NPV (5 years) - 216,376.24 €
[6] Mr. Erkki is retired and depends on his investments for his income. Mr. Teemu is a young executive who wants to
Both are stockholders in ABC Corp., which is building SpaceShipOne to take commercial passengers into space.
This investment’s payoff is many years away. Assume it has positive NPV for Mr. Teemu. Explain why its investme
also makes sense for Mr. Erkki.
[7] Tallink is considering to purchase a new ship for Helsinki-Riga route for €12 million. The forecasted revenues are €
year with operating cost of €4 million per year. A major renovation will be required after every 5 years at the cos
After 15 years, the ship is expected to be sold for scrap at €2.4 million. The discount rate of this investment is 8%.
What is the NPV of the ship?
Investment 12,000,000 €
Annual inflow 6,500,000 €
Oper. Cost 4,000,000 €
renovation 5 y. 2,200,000 €
Selling after 15 years 2,400,000 €
Discount rate 8%
year Investment Annual inflow Oper. Cost
0- 12,000,000 €
1 6,500,000 € - 4,000,000 €
2 6,500,000 € - 4,000,000 €
3 6,500,000 € - 4,000,000 €
4 6,500,000 € - 4,000,000 €
5 6,500,000 € - 4,000,000 €
6 6,500,000 € - 4,000,000 €
7 6,500,000 € - 4,000,000 €
8 6,500,000 € - 4,000,000 €
9 6,500,000 € - 4,000,000 €
10 6,500,000 € - 4,000,000 €
11 6,500,000 € - 4,000,000 €
12 6,500,000 € - 4,000,000 €
13 6,500,000 € - 4,000,000 €
14 6,500,000 € - 4,000,000 €
15 6,500,000 € - 4,000,000 €
NPV
[8] What is meant by diversification? Keeping in mind the notion “higher future returns are associated with higher ris
how can you minimize the risk of your investments while achieving maximum increase in your current wealth thro
[9] Describe briefly the international aspects of financial markets. What kinds of risks are involved in making across
the border investments? (your answer must not increase from 6 lines)
[10] You have €100,000 to invest. A project in Finland guarantees a rate of return of 7% per annum. You also know one
US that promises to increase your current wealth by 5% in a year. The exchange rate today is 1.29 $/€.
The exchange rate after one year is expected to be at 1.25 $/€. Will you invest in Finland or US?
[Hint: calculate the difference between the future value of each investment project]
€ $
investment 100,000.00 € $129,000.00 current exch. rate 1.29
Return rate 7% 5% future exch. Rate 1.25
FV 107,000.00 € $ 135,450.00
FV in Euros 107,000.00 € 108,360.00 €
e by financial managers,
tivities
leagues to enable them to
pecific settings vary
ing is essential to be able to
ons of any decision before
n larger companies, the role is more concerned
he collection and preparation of accounts, as
e financial manager is responsible for a
s and/or functions.
hat is the discount rate?
opportunity cost of capital is 20% for all four investments.
r= 20%
NPV=FCF/(1+r)^year - Initial investment
ROR=(FCF-Investment)/investment
you can take only one investment. Which one?
s €20,000 and Nordea Bank Plc is offering an
o buy the boat at the end of 5th year.
3+annual saving*(1+r)^2+annual saving*(1+r)
ter operating costs of €170,000 a year
r 0.14
4
170,000.00 €
100,653.65 €
10
170,000.00 €
45,856.45 €
a young executive who wants to save for the future.
ercial passengers into space.
eemu. Explain why its investment
n. The forecasted revenues are €6.5 million a
ed after every 5 years at the cost of €2.2 million.
nt rate of this investment is 8%.
renovation 5 y. PV
Selling after 15 years
- 12,000,000 €
2,314,815 €
2,143,347 €
1,984,581 €
1,837,575 €
- 2,200,000 € 204,175 €
1,575,424 €
1,458,726 €
1,350,672 €
1,250,622 €
- 2,200,000 € 138,958 €
1,072,207 €
992,784 €
919,245 €
851,153 €
2,400,000 € 1,544,684 €
7,638,968 €
ns are associated with higher risks",
ease in your current wealth through diversification?
are involved in making across
% per annum. You also know one project in
ate today is 1.29 $/€.
Finland or US?