BBA502 - Financial Management

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DRIVE SPRING 2017

PROGRAM Bachelor of Business Administration – BBA

SEMESTER V

SUBJECT CODE &

NAME

BBA502 - Financial Management

1 Write short notes on Profit Maximization and Risk-Return Trade-Off.

Profit Maximization

Risk-Return Trade-Off

Answer: The firm’s investment and financing decisions are continuous. In order to make them rational the firm must have a goal. It is generally agreed in theory that the financial goal of the firm should be shareholders’ wealth maximization (SWM), as reflected in the market value of the firm’s shares. Firms, producing goods and services, may function in a market economy, or in a government-controlled

2 Explain Capital Asset Pricing Model (CAPM) thereby explaining the Systematic and Unsystematic Risk

Elaborate Capital Asset Pricing Model (CAPM)

Systematic and Unsystematic Risk

Answer: Capital Asset Pricing Model

The expected rate of return on equity or the cost of equity can be measured as the risk-free rate plus risk premium. What is a risk-free rate of return? How is risk premium determined? Various types of securities may have different degrees of risk. One can think of a security, such as the government bond or the treasury bill as a risk-free security. For such security, the risk of default is zero and, therefore, investors expect compensation for time only. In India, the risk-free rate can be assumed to be about 9 per

3 Write short notes on Net Income Approach and Traditional Approach.

Net Income Approach

Traditional Approach

Answer: Net Income Approach

A firm that finances its assets by equity and debt is called a levered firm. On the other hand, a firm that uses no debt and finances its assets entirely by equity is called an unlevered firm. Suppose firm L is a levered firm and it has financed its assets by equity and debt. It has perpetual expected EBIT or Net Operating Income (NOI) of `1,000 and the interest payment of `300. The firm’s cost of equity (or equity capitalization rate), ke, is 9.33

4 What do you mean by Lease Financing? What are the various advantages and disadvantages of Lease Financing?

Explain Lease Financing

Explain the various advantages and disadvantages of Lease Financing

Answer: Lease is a contract between a lessor, the owner of the asset, and a lessee, the user of the asset. Under the contract, the owner gives the right to use the asset to the user over an agreed period of time for a consideration called the lease rental. The lessee pays the rental to the lessor as regular fixed payments over a period of time at the beginning or at the end of a month, quarter, half-year, or a year. Although

5 What do you mean by Working Capital? What are the various factors that influence in determining the Working Capital of a firm?

Explain Working Capital

Explain the various factors that determine the Working Capital of a firm

Answer: There are two concepts of working capital—gross and net.

• Gross working capital refers to the firm’s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory).

• Net working capital refers to the difference between current assets and current liabilities.

Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting

6 What do you mean by Economic Order Quantity (EOQ)? Also explain Just-In- Time (JIT) Systems.

Explain Economic Order Quantity (EOQ)

Explain Just-In-Time (JIT) Systems

Answer: Economic Order Quantity (EOQ)

One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide the lots in which it has to be purchased on replenishment. If the firm is planning a production run, the issue is how much production to schedule (or how much to make). These problems are called order quantity problems, and the tas

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