MB0045 – FINANCIAL MANAGEMEN

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ASSIGNMENT

DRIVE	SUMMER 2017
PROGRAM	MBADS/ MBAFLEX/ MBAHCSN3/ MBAN2/ PGDBAN2
SUBJECT CODE & NAME	MB0045 – FINANCIAL MANAGEMEN
SEMESTER	2
BK ID	B1628
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.

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 not based on the accounting profit as in the case of profit maximisation.

·       Through the process of discounting, wealth maximisation takes care of the quality of cash flow. Converting uncertain distant cash flow into comparable values at base period facilitates better comparison of projects. The risks that are associated with cash flow are adequately reflected when present values are taken to arrive at the

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?

Answer: Doubling period

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

1. Rule of 72

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

Where, I = Interest Rate of the investment.

Q3 Write short notes on:

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 value is known, and the interest received on such bonds is constant and received at regular intervals and hence, the interest receipt

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

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

Q3. 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

Q4. 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:

Ø  Market for the product

Ø  Availability of raw materials

Ø Sources of raw materials

Q5. 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

·        

market conditions.

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