MB0045 - FINANCIAL MANAGEMENT

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ASSIGNMENT

DRIVE	SPRING 2014
PROGRAM	MBADS/ MBAFLEX/ MBAHCSN3/ MBAN2/ PGDBAN2
SEMESTER	II
SUBJECT CODE & NAME	MB0045 - FINANCIAL MANAGEMENT
BK ID	B1628
CREDIT	4
MARKS	60

1 When a firm follows wealth maximization goal, it achieves maximization of market value of a share. Do you agree? Substantiate your arguments.

Answer:-Explain Wealth maximization

The term wealth means shareholder’s wealth or the wealth of the personsthose who are involved in the business concern. Wealth maximisation isalso known as value maximisation or net present worth maximisation. Thisobjective is an universally accepted concept in the field of business.

Wealth maximisation is possible only when the company pursues policies that would increase the market value of shares of the company. It has beenaccepted by the finance managers as it overcomes the limitations of profit maximisation.

2 A) If you deposit Rs 10000 today in a bank that offers 8% interest, how many years will the amount take to double?

Solution :-9 years (using rule of

B) What is the future value of a regular annuity of Re 1.00 earning a rate of 12% interest p.a. for 5 years?

Solution: FVAn= A *

3 The concept of financial leverage is a significant, as it has direct relation with capital structure. Do you agree? If so, substantiate your arguments.

Answer:-Financial leverage relates to the financing activities of a firm and measuresthe effect of EBIT on Earnings Per Share (EPS) of the company.A company’s sources of funds fall under two categories:

·         Those which carry fixed financial charges

·          

·         4 A project requires an initial outlay of Rs. 1,00,000. It is expected to generate the cash inflows shown in table

Table: Cash Inflows Year	Cash inflows
1	50,000
2	50,000
3	30,000
4	40,000

Solution:-

Step 1: The average of annual cash inflows is computed as shown in table 8.16.

Year	Cash flows

5 Below Table gives the complete details of sales and costs of the goods produced by XYZ ltd for the year 31.03.12.Table -Sales and Costs Produced by XYZ Ltd.

Sales	80,000	Inventory
Cost of goods	56,000	31.03.07 31.03.08 Accounts Receivables 31.03.07 31.03.08 Accounts Payable 31.03.07 7,000 31.03.08	9,000 12,000 12,000 16,000 7,000 10,000

What is the length of the operating cycle? What is the cash cycle?

Assume 365 days in a year.

a) length of the operating cycle

b) cash cycle

Solution

Operating Cycle = Inventory Conversion Period + Accounts ReceivablesConversion Period

From the above formula we need

6 Facebook bought WhatsApp on Feb, 19, 2014 for $19 billion. This was split between $4 billion in cash, $12 billion worth of Facebook shares, and $3 billion in restricted stock units to be paid in four years. Do you think the market capitalization has played a significant role in pricing the valuation. Discuss the Walter’s model assumptions in this context.

 Answer:-Prof. James E. Walter considers that dividend pay-outs are relevant andhave a bearing on the share prices of the firm. He further states thatinvestment policies of a firm cannot be separated from its dividend policyand both are inter-linked. The choice of an appropriate dividend policyaffects the value of the firm.

Walter model clearly establishes a relationship between the firm’s rate ofreturn “r” and its cost of capital “k” to give a dividend policy that maximizes

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