Course: Corporate Finance

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NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Corporate Finance

Internal Assignment Applicable for December 2015 Examination

Assignment Marks: 30

Instructions:

·       All Questions carry equal marks.

·       All Questions are compulsory

·       All answers to be explained in not more than 1000 words for question 1 and 2 and for question 3 in not more than 500 words for each subsection. Use relevant examples, illustrations as far as possible.

·       All answers to be written individually. Discussion and group work is not advisable.

·       Students are free to refer to any books/reference material/website/internet for attempting their assignments, but are not allowed to copy the matter as it is from the source of reference.

·       Students should write the assignment in their own words. Copying of assignments from other students is not allowed.

Question. 1. “Leverage being defined as the relationship between two financial variables”. Why the study of leverages is an important concept in finance? (10 marks)

Answer: Leverage is defined as the relationship between two financial variables. Leverage means the use of fixed cost in most efficient manner which will allow you to increase the overall level of profitability in your firm. In simple words, leverage has the capability of levelling of tax earning of company which makes it perfect evaluator of company’s risk value and return.

The leverage is important due to several reasons which include:

Operating risk measurement: When operating leverage is at its peak and when it is rising then this can be one of the most efficient way but when the sales is falling down then this could be really very risky.

Question. 2. You being the finance manager of AB Ltd. The management is interested in CVP analysis which helps in forecasting profits, in analyzing the changes in profit happens because of changes in sales volume and cost. Discuss such CVP techniques you will use to satisfy the management. (10 marks)

Answer: The finance manager of any firm is a task of responsibility and AB Ltd requires proper CVP analysis for their business to get profit forecasts of the cost and sales value changes. This is a task that requires efficiency. It is always necessary to understand the CPV techniques before proceeding any further so that the CVP analysis accuracy

Question. 3. a) Given the following as cash flow from a project, calculate the NPV. The required rate of return is 9 %

year	Cash flow
0	-150000
1	25000
2	35000
3	45000
4	45000
5	55000

Whether the company should accept the project or not ? (5 Marks)

Answer

b) Given the following financial statement data, calculate the net operating cycle.

Credit sales	250000
Cost of goods sold	200000
Accounts receivable	25000
Inventory closing balance	23000
Inventory opening balance	20000
Accounts payable	17000

Answer:

Days Sales Outstanding (DSO): 35.0

Days Payable Outstanding (DPO): 33.8

Cash

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