Question 1 :

Explain briefly, how financial policy is linked to Strategic Management?

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Answer : 

The success of any business is measured in financial terms. Maximising value to the shareholders is the ultimate objective. For this to happen, at every stage of its operations including policymaking, the firm should be taking strategic steps with value-maximization objective. This is the basis of financial policy being linked to strategic management.  The linkage can be clearly seen in respect of many business decisions.

For example:

(i) Manner of raising capital as source of finance and capital structure are the most important dimensions of strategic plan.

(ii) Cut-off rate (opportunity cost of capital) for acceptance of investment decisions.

(iii) Investment and fund allocation is another important dimension of interface of strategic management and financial policy.

(iv) Foreign Exchange exposure and risk management.

(v) Liquidity management

(vi) A dividend policy decision deals with the extent of earnings to be distributed and a close interface is needed to frame the policy so that the policy should be beneficial for all.

(vii) Issue of bonus share is another dimension involving the strategic decision. 

*Thus, from above discussions it can be said that financial policy of a company cannot be worked out in isolation to other functional policies. It has a wider appeal and closer link with the overall organizational performance and direction of growth

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Question 2 :

Define Value-At-Risk (Var).

 

Answer : 

(1)VAR is a measure of risk of investment .

(2) Given the normal market condition in a set of period, say, one day it estimates how much an investment might lose.

(3)VAR answers two basic questions 

• What is worst case scenario?

•  What will be loss?

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