MB0045 - FINANCIAL MANAGEMENT

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ASSIGNMENT

DRIVE	SUMMER 2015
PROGRAM	MBA/ MBADS/ MBAFLEX/ MBAHCSN3/ PGDBAN2
SEMESTER	II
SUBJECT CODE & NAME	MB0045 - FINANCIAL MANAGEMENT
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.

Q. 1. Critically analyze the four broad areas of strategic financing decision.

Answer:Any person, corporation, or nation should know who or where they are, where they want to be, and how to get there. The strategic-planning process utilizes analytical models that provide a realistic picture of the individual, corporation, or nation at its “consciously incompetent” level, creating the necessary motivation for the development of a strategic plan. The process requires five distinct steps outlined below and the selected strategy must be sufficiently robust to enable the firm to perform activities differently from its rivals or to perform similar activities in a more efficient manner.

Q. 2. What is FVIFA ? Is it different from Sinking fund factor ?

A finance company offers to pay Rs. 44,650 after five years to investors who deposit annually Rs. 6,000 for five years. Calculate the rate of interest implicit in this offer.

Answer:FVIFA:The expression  is called the Future Value Interest Factor for Annuity (FVIFA). This represents the accumulation of Re.1 invested at the end of every year for n number of years at “i” rate.

FVIFA is a factor which can be used to calculate the future value of a series of annuities.

Q. 3. A firm owns a machine furnishes the following information :

Rs.

Book value of the machine

1,10,000

Current market value

80,000

Expected salvage value after the end of five years of remaining useful life

NIL

Annual cash operating costs

36,000

The firm’s cost of capital

15 %

Corporate tax rate

35 %

The firm follows straight line method of depreciation (permitted by the Income-tax authorities).

The management of the company is now considering selling of the machine. If it does so, the total operating costs to perform the work, now done by the machine, will increase by Rs. 40,000 p.a.

Advise the management.

Answer:Cash Inflows(if machine is sold)

Selling price of the old machine                                                                 Rs. 80,000

Add Tax service (0.35xRs 30,000, short-term capital loss)               10500

                                                                                                                                                -------------------

                                                                                                                                                90,500

Present value of cash outflows saved if machine is not sold(PV of keeping machine)

Q. 4. How will you compute the cost of equity capital using CAPM ?

The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a long-run level of future earnings of Rs. 7 per share. The current market price of Xavier’s share is Rs. 55.45. Floatation costs for the sale of new equity shares would average about 10 % of the price of the shares. What is the cost of new equity capital to Xavier Corporation ?

Answer:Capital Asset Pricing Model – CAPM:

This model establishes a relationship between the required rate of return of a security and its

systematic risks expressed as “β”. According to this model, it determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as

Q. 5. Jharkhand Mining ltd. has to select one of the two alternative projects whose particulars are furnished below :

Project E		Project F
Rajrappa, Hazaribagh		Tatisilwai, Ranchi
Rs.		Rs.
Initial Outlay	11,87,200		10,06,700
Net Cash Inflow :
End of year 1	10,00,000		1,00,000
2	2,00,000		1,00,000
3	1,00,000		2,00,000
4	1,00,000		10,00,000

The company can arrange necessary funds @ 8 %. Compute the NPV and IRR of each project and comment on the results.

Is there any contradiction in the results ? If so, state the reason for such contradictions. How would you propose to resolve the contradictions ?

Answer:The PV of Re. 1, to be received at the end of each year, at different cost of capital, is the following:

YEAR      8%          10%        12%        14%

1              0.926     0.909     0.893     0.877

Q. 6. Premier Steel Ltd. has a present annual sales turnover of Rs. 40,00,000. The unit sale price is Rs. 20. The variable costs are Rs. 12 per unit and fixed costs amount to Rs. 5,00,000 per annum. The present credit period of 1 month is proposed to be extended to either 2 or 3 months whichever is profitable. The following additional information is available :

Credit period	1 month	2 months	3 months
Increase in sales by	--	10 %	30 %
Bad debts on sales	1 %	2 %	5 %

Fixed costs will increase by Rs. 75,000 when sales increase by 30 %. The company requires a pre-tax return on investment of 20 %.

Evaluate the profitability of the proposals and recommend the best credit period for the company.

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