BBA502 – FINANCIAL MANAGEMENT

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PROGRAM

BACHELOR OF BUSINESS ADMINISTRATION (BBA)

SEMESTER

V

SUBJECT CODE & NAME

BBA502 – FINANCIAL MANAGEMENT

Qus:1 Explain the limitations of Profit Maximization. What is Risk-return Trade-off and Risk-free rate?

Answer: It suffers from the following limitations:

• It is vague

• It ignores the timing of returns

• It ignores risk

It is vague: The precise meaning of the profit maximization objective is unclear. The definition of the term profit is ambiguous. Does it mean short- or long-term profit? Does it refer to profit before or after tax? Total profits or

Qus:2 Write short notes on:

a) Budgeting and forecasting

b) Financial Budgets

c) Cost Centre

Answer: a) Budgeting and forecasting

A budget is not the same thing as a forecast. A forecast is the likelihood of events happening, given the past data and expected changes. There is no assumption regarding the commitment of management for realizing the forecast.

A budget is an expression of the management’s intentions of achieving forecasts through positive and conscious actions and influencing the events. It embodies the managerial commitment of ensuring the attainment of stated objectives. It involves a process of negotiation, approval and review.

Qus:3 Explain cost of Internal Equity and cost of External Equity.

Answer: Cost of Internal Equity: Dividend-growth Model

A firm’s internal equity consists of its retained earnings. The opportunity cost of the retained earnings is the rate of return foregone by equity shareholders. The shareholders generally expect dividend and capital gain from their investment.

The required rate of return of shareholders can be determined from the dividend valuation model.

Constant-Growth Model and the Cost of Equity

Qus:4

Solve the problem:
Determine the degree of operating leverage from the following data:
S Ltd		R Ltd
Sales	2,50,000		3,00,000
Fixed costs	75,000		1,50,000
Variable expenses is 50% of sales for firm S and 25% for firm R.

Answer:

VC = Variable cost

Qus:5 Explain the phases of Capital Investment Planning and Control. Why is Net Present Value (NPV) important?

Answer: Capital Investment Planning and Control

There are five phases of capital expenditure planning and control, which are:

1. Identification (or origination) of investment opportunities

2. Development of forecasts of benefits and costs

3. Evaluation of the net benefits

Qus:6 Explain the Advantages and Disadvantages of Leasing.

Answer: Disadvantages of Leasing

We can now examine the disadvantages of leasing. Leasing does not provide 100 per cent financing: One misconception about leasing is that it provides 100 per cent financing for the asset as the lessee can avoid payment for acquiring the asset. The lessee, it is assumed, can preserve his liquid resources for other purposes. When a firm borrows to buy an asset, cash increases with borrowing and decreases by the same

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