MB0045 - FINANCIAL MANAGEMENT

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ASSIGNMENT

DRIVE SUMMER	2014
PROGRAM	MBADS / MBAN2 / MBAHCSN3 / PGDBAN2 / MBAFLEX
SEMESTER	II
SUBJECT CODE & NAME	MB0045 FINANCIAL MANAGEMENT
BK ID	MB0045
CREDITS	4
MARKS	60

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.

1. TCS has emerged as India's most admired company ahead of Hindustan Unilever, ITC, and Infosys, says global management consultancy Hay Group. TCS replaced last year's winner group company Tata Steel by scoring highest on parameters such as corporate governance, financial soundness, and talent management. Two criteria in particular, Leadership, and Creating Shareholder Value separated the winners.

How do you think effective interaction between HR and finance department of a firm helps in achieving its skills?

Do you think that TCS has preferred the profit maximization approach over the wealth maximization approach?

Answer : Interaction between HR and finance functions

Finance departments today are under enormous pressure to change. Much of the work they've traditionally done has been outsourced, commoditized or automated. Now they're expected to partner with the business, helping their organizations achieve their strategic goals while using data in innovative ways to deliver more value-added services. Yet many finance leaders find themselves stuck, unable to draw in the type of talent they need and unsure of how to get there.

Does all this sound familiar?

Finance and HR are both finding that the roles they've traditionally played are becoming obsolete. Both functions need new skill sets and capabilities to meet the more strategic responsibilities that today's companies are placing before them.

2. A) The current price of an Ashok Leyland share is Rs. 30. The company is expected to pay a dividend of Rs. 2.50 per share which goes up annually at 6%. If an investor’s required rate of return is 11%, should he or she buy this share or not?

Answer :

Interest payable rate =  6%

Principal repayment is Rs. 30

Required rate of return is 11%.

P0 = D1/(1+Ke)

B) A bond with a face value of Rs. 100 provides an annual return of 8% and pays Rs. 125 at the time of maturity, which is 10 years from now. If the investor’s required rate of return is 12%, what should be the price of the bond?

Answer : Formula used to calculate desired amount is :

V0=I*PVIFA(kd, n) + F*PVIF(kd, n)

Here ,

I = interest payable

PVIFA = present value interest factor of annuity

PVIF = present value interest factor

kd = Required rate

3.a) How do you think the trend of capital structure across the Indian corporates affect the economy as a whole?

Answer : The financing pattern of capital structure is becoming more and more important in the changing world of modern business. There are very strong pressures from the stakeholders to maximize their returns in the short-run and long-run. Thus the capital structure of company has emerged as a debatable global issue among the finance and accounting professionals and research scholars to fulfill the need of harmonization of corporate equity financing throughout the world. After the liberalization of Indian

b) What proportion of debt and equity should be taken up in the capital structure of a firm?

Answer : Modigliani and Miller's Capital-Structure Irrelevance Proposition

The M&M capital-structure irrelevance proposition assumes no taxes and no bankruptcy costs. In this simplified view, the weighted average cost of capital (WACC) should remain constant with changes in the company's capital structure. For example, no matter how the firm borrows, there will be no tax benefit from interest

c) Discuss the theories that are propounded to understand the relationship between financial leverage and value of the firm.

Answer :

Modigliani and Miller's Trade off Theory of Leverage:

The trade off theory assumes that there are benefits to leverage within a capital structure up until the optimal capital structure is reached. The theory recognizes the tax benefit from interest payments - that is, because interest paid on debt is tax deductible, issuing bonds effectively reduces a company's tax liability. Paying

4.HPCL was established in 1952, operates from 500 different locations, including refineries, terminals, LPG plants, aviation service facilities, etc. They developed a Lotus Notes workflow tool and deployed it across the organisation so that any capital investment proposal from any operating location in the country can be routed to relevant reviewers and approving authorities. With the implementation of the new online system, the total cost savings as a result of reduced man-hours amounts to about Rs 25 lakh per annum.

1. What do you think would have been the complexities involved in implementing this new project at HPCL?

Answer : The implementation of new projects like Lotus notes workflow tool has many advantages as it has helped in increasing the profit of the company. It has many complexities that hinder its implementation properly. An online venture may experience higher product returns because its customers did not get the product they wanted or there was damage during shipment. Product returns reduce net sales, which can

2. What are the various phases in the capital budgeting process? To what extent do you believe that automation can ease out the process?

Answer :

1: Identification - Identify which types of capital expenditure projects are necessary to achieve the organization's goals, objectives, and strategies.

2: Search - Explore several different capital expenditure investment alternatives that have the capacity to achieve the organizational objectives and strategies.

5.A) Indicate whether the operating cycle in the following industries is short (less than 30 days), medium (less than 6 months) or long (more than 6 months)

Steel, rice, vegetables, fruits, jewellery, processed food, furniture, mining, flowers and textiles

Answer :  An operating cycle is the length of time between the acquisition of inventory and the sale of that inventory and subsequent generation of a profit. The shorter it is, the faster a business gets a return on investment (ROI) for the inventory it stocks.

Vegetables , fruits , flowers

b) Companies with the shortest working capital cycles have current ratios much lower

than the firms with longer cycles. What is your view on this statement? How do you think the operating cycle affects operating profit margins?

Answer :  When a business buys inventory, it ties up money in the inventory until it can be sold. This money may be borrowed or paid up front, but in either case, once the business has purchased inventory, those funds are not available for other uses. The business views this as an acceptable trade off because the inventory is an investment that will hopefully generate returns, but keeping the operating cycle short is still a goal for most businesses so they can keep their liquidity high.

There are cases where

c) Discuss the relationship between working capital management and market performance of a company? Do you think the kind of relationship varies depending on the type of industry?

Answer : WCM is among the most important decisions taken by the financial manger. It directly affects the profitability and is considered one of the most important parts of financial decision making . Net working capital is the excess of current assets over current liabilities of a firm. It determines the strength of the business and its liquidity position means more the working capital more the liquidity of the firm.

Implementing an effective working capital management system is an excellent way for many companies to improve their

6.Nirma acquired Core Healthcare Ltd. in FY 2007. To bring about improvement in terms of liquidity in the script of the Company , it has gone for a stock split because it hasn’t had any buyback in the recent past. Nirma paid Interim dividend in 2007 to avoid the higher dividend tax announced in that year’s budget.

Henkel, on the other hand, has a very weak Dividend Policy. The major reason being that the company has weak operations and low margins. There is no record of Stock Splits and Buybacks by Henkel India in the past.

Discuss the dividend polices of these two companies.

Answer : Dividend is a payment made by a company to its shareholders usually as a distribution of profits. When a company makes profit it can either re-invest it in the business or it distribute it to its shareholders by way of dividends. The dividend payout ratio is the amount of dividends paid to shareholders relative to the amount of total net profit of a company.

Dividend policy of Nirma :

Nirma has had a healthy dividend policy (since 1994). In the last few years, Nirma has tried to maintain a Dividend/ Share of (arou

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