Modern approach of finance function Modern approach of finance function The traditional approach outlived its utility in the changed business circumstances since the mid 1950s. A number of factors such as technological innovations,
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Modern approach of finance function<br>
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Modern approach of finance function The traditional approach outlived its utility in the changed business circumstances since the mid 1950's. A number of factors such as technological innovations, increasing size of business enterprises, intense competition etc. necessitated efficient and effective utilisation of firm's financial resources. As a result, the scope of financial management also changed and the modern approach was developed.<br>
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Significant contribution to the development of modern theory of financial management are: 1. Theory of portfolio management developed by Harry Markowitz in 1950, which deals with portfolio selection with risky investments. This theory uses statistical concepts to quantify the risk-return characteristics of holding a group or portfolio of security, investments or assets. A significant contribution of this theory is that the risk of one investor is viewed in its totality rather than evaluating the risk of one security only. This theory at a later stage lead to the development of Capital Asset Pricing Model which deals with pricing of risky assets and the relationship between rest and return.<br>
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Significant contribution to the development of modern theory of financial management are: 2. The theory of leverage and valuation of form developed by Modigliani and Miller in 1958. They have shown by introducing analytical approach as to how the financial decision making in any firm be oriented towards maximization of the value of firm and the maximization of the shareholders wealth.<br>
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According to this approach the Financial Management is concerned with the solution of three major problems relating to finance:
1.What is the total volume of funds and enterprise should commit?
2.How should the funds required be raised?
3.In what specific acids the enterprise should invest its funds?<br>
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The three problems posed above cover the major financial problems of enterprises. Thus, in the modern approach the financial management is responsible for taking the three decisions;
The Financing decision
The Investment decision and
The Dividend decision<br>
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Characteristics of Modern approach: 1. Financial Management is an essential part of top management
2. Less descriptive and more analytical
3. Containers function
4. Different from Accounting function
5. Wide scope
6. Centralised nature
7. Measurement of performance
8. Inseparable relationship between finance and other activities
9. Applicable to all types of organisations.<br>
