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FIN625 Credit & Risk Management GDB Spring 2020 Solution & Discussion

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Answer of question no 1

1 Financing Leads to More Spending

Many people spend more money by purchasing unneeded or overly expensive items when they pay with credit instead of cash. This is psychological because buying a laptop or smartphone on credit do not seem like a life change if you just sign a receipt and don't have to think about paying for a month.

On the other hand, you can physically feel if you pay with cash, giving you a better sense of how much those items cost and how much money you have left in your now-lighter wallet. To a lesser extent, this can also apply if you pay by check and immediately record the purchase in a checkbook that shows the impact on your account balance.

2 Can Lead to Bankruptcy

If you go on several spending sprees without a plan to pay them off, or if your plan goes awry because you lose your job or get hit with medical bills, you may find yourself hopelessly in debt. Declaring bankruptcy will scar your credit history for up to 10 years and when the report finally goes away, you have to build good credit all over again. 

Answer of question no 2

 The objective of financial management is to maximize the shareholders wealth in the present terms. This can be achieved by using the discounting and the net present value techniques while calculating the feasibility of the projects and investing in more feasible projects so that the wealth of the shareholders may increase and through credit control by using own resources and by least using loans for investment purposes in different projects.

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