MB0045 – FINANCIAL MANAGEMENT – Fall 2016

ASSIGNMENT

 

 

 

DRIVE         FALL 2016

PROGRAM  MBADS/ MBAFLEX/ MBAHCSN3/ MBAN2/ PGDBAN2

SUBJECT CODE & NAME        

MB0045 – FINANCIAL MANAGEMENT

SEMESTER  2

BK ID          B1628

CREDITS    4

MARKS       60

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Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

 

 

 

Q1 Explain the differences between wealth maximization and profit maximization.

 

Explain relation between finance and accounting

 

Differences between wealth maximization and profit maximization

 

Explanation of relation between finance and accounting

 

 

 

Answer: Wealth maximisation vs. profit maximisation

 

Wealth maximisation is based on cash flow. It is

 

 

 

 

 

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Q2 Explain about the doubling period and future value. Solve the below given problem:

 

Under the ABC Bank’s Cash Multiplier Scheme, deposits can be made for periods ranging from 3 months to 5 years and for every quarter, interest is added to the principal. The applicable rate of interest is 9% for deposits less than 23 months and 10% for periods more than 24 months. What will be the amount of Rs. 1000 after 2 years?

 

 

 

Explanation of doubling period

 

Solving the problem

 

Explanation of future value

 

 

 

Answer: Doubling period

 

Doubling period is the period which makes the investment as “Doubled”, that is the amount invested fetches 100% return.

 

Rule of 72

The initial amount of investment gets Doubled within which 72/I

 

Where, I = Interest Rate of the investment.

 

 

 

Rule of 69

The amount method is found to crude logic in determining the doubling period which has its own limitations. The rule of 69 eliminates the bottleneck

 

 

 

 

 

 

 

 

 

Q3 Write short notes on:

 

  1. a) Irredeemable bonds

 

 

Answer: Irredeemable bonds or perpetual bonds

 

Bonds which will never mature are known as irredeemable or perpetual bonds. Indian Companies Act restricts the issue of such bonds and therefore, these are very rarely issued by corporates these days. In case of these bonds, the terminal value or maturity value does not exist because they are not redeemable. The face

 

 

 

 

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  1. b) Zero coupon bonds

 

 

Zero coupon bonds

 

In India, zero coupon bonds are alternatively known as Deep Discount Bonds (DDBs). These bonds became very popular in India for over a decade because of issuance of such bonds at regular intervals by IDBI and ICICI. Zero coupon bonds have no coupon rate, that is, there is no interest to be paid out. Instead, these bonds are issued at a

 

 

 

 

 

 

 

  1. c) Valuation of Shares

 

 

Valuation of Shares

 

A company’s shares can be categorised into:

 

Ordinary or equity shares

Preference shares

The returns the shareholders receive in return are called dividends. Preference shareholders get a preferential treatment as to the payment of dividend and repayment of capital in the event of winding up. Such holders are

 

 

 

 

 

 

 

 

 

Q4 Explain the factors affecting Capital Structure. Solve the below given problem:

 

Given below are two firms, A and B, which are identical in all aspects except the degree of leverage, employed by them. What is the average cost of capital of both firms?

 

Details of Firms A and B

  Firm A Firm B
Net operating income EBIT Rs. 1, 00, 000 Rs. 1, 00, 000
Interest on debentures I Nil Rs.25,000
Equity earnings E Rs.1,00,000 Rs.75,000
Cost of equity Ke 15% 15%
Cost of debentures Kd 10% 10%
Market value of equity S = E/Ke Rs. 6, 66, 667 Rs.5,00,000
Market value of debt B Nil Rs.2,50,000
Total value of firm V Rs. 6, 66, 667 Rs,7,50,000

 

Explanation of factors affecting capital structure

 

Solution for the problem

 

Interpretation

 

 

 

Answer: Factors Affecting Capital Structure

 

Leverage: The use of sources of funds that have a fixed cost attached to them, such as preference shares, loans from banks and financial institutions, and debentures in the capital structure, is known as “trading on equity” or “financial leverage”. If the assets financed by debt yield a return greater than the cost of the debt, the EPS will increase without an increase in the owner’s investment. Similarly, the EPS will also increase if preference share capital is used to acquire assets. But the leverage impact is felt more in case of debt because of the following reasons:

 

 

 

 

 

 

 

Q5 Explain the capital Budgeting process and its appraisals

 

Solve the below given problem:

 

Given below are the details on the cash flows of two projects A and B. Compute payback period for A and B.

 

Cash flows of A and B

 

Year   Project A cash flows (Rs.)         Project B cash flows (Rs.)

0        (4,00,000)  (5,00,000)

1        2,00,000     1,00,000

2        1,75,000     2,00,000

3        25,000        3,00,000

4        2,00,000     4,00,000

5        1,50,000     2,00,000

Explanation of capital budgeting process and its appraisals.

 

Solution for the problem

 

 

 

Answer: Capital budgeting process

 

After the screening of proposals for potential involvement is over, the company should take up the following aspects of capital budgeting process:

 

A proposal should be commercially viable. The following aspects are examined to ascertain the commercial viability of any investment proposal:

Market for the product

Availability of raw materials

Sources of raw materials

 

 

 

 

 

 

Q6 Explain the concepts of working capital. Explain the determinants of working capital.

 

Explanation of concepts of working capital

 

Explanation of determinants of working capital

 

 

 

Answer: Concepts of Working Capital

 

Gross working capital: Gross working capital refers to the amounts invested in various components of current assets. It basically refers to the current assets. This concept has the following practical relevance:

 

Management of current assets is the crucial aspect of working capital management

Gross working capital helps in the fixation of various areas of financial responsibility

Gross working capital is an important component of operating capital.

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