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MB0045_MBA_Sem2_Fall/August 2012
Master of Business Administration – MBA Semester 2
MB0045 –Financial Management – 4 Credits
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Considering the following information, what is the price of the share as per Gordon’s Model?
Details of the Company
| Net sales | Rs.120 lakhs |
| Net profit margin | 12.5% |
| Outstanding preference shares | Rs.50 lakhs@ 12% dividend |
| No. of equity shares | 25, 000 |
| Cost of equity shares | 12% |
| Retention ratio | 40% |
| Rate of interest (ROI) | 16% |
Answer : GORDON’S MODEL:
Q.2 Examine the components of working capital & also explain the concepts of working capital.
Answer : There are two important concepts of Working Capital – gross and net
Gross Working Capital:
Q.3 Internal capital rationing is used by firms for exercising financial control. How does a firm achieve this?
Answer : Capital budgeting decisions involve huge outlay of funds. Funds available for projects may be limited. Therefore, a firm has to prioritize the projects on the basis of availability of funds and economic compulsion of the firm. It is not possible for a company to take up all the projects at a time. There is the need to rank them on the basis of strategic compulsion and funds availability. Since companies will have to choose one from among many competing investment proposal the need to develop criteria for Capital rationing cannot be ignored. The companies may have many profitable
Q.4 What are the objectives of working capital management? Briefly explain the various elements of operating cycle.
Answer : Aim of Working Capital Management
Working Capital Management:
Working Capital Management refers to the planning, execution and control of investment in and financing of
Q.5 Define risk. Examine the need for assessing the risks in a project.
Answer : Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called “risks”. Almost any human endeavour carries some risk, but some are much more risky than others.
Q.6 Briefly examine the significance of identification of investment opportunities in capital budgeting process
Answer : The extent to which the capital budgeting process needs to be formalized and systematic procedures established depends on the size of the organization, number of projects to be considered, direct financial benefit of each project considered by itself, the composition of the firm’s existing assets and management’s desire to change that composition, timing of expenditures associated with the that are finally accepted.
1. Planning
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MB0045_MBA_Sem2_Fall/August 2012
Master of Business Administration – MBA Semester 2
MB0045 – Financial Management – 4 Credits
Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Examine the reasons for holding inventories by a firm & also discuss the techniques of inventory control.
Answer : Whether a business is in retailing or manufacturing, there are several cogent reasons for holding inventory. Businesses may hold stocks of raw materials, spare parts for machinery, work in progress or finished goods. Given that there are costs involved with purchases, orders and carriage inwards, a firm might want to minimize its order costs and utilize storage space efficiently. While a business would incur holding costs when storing inventory, these costs can be offset if there are good business reasons for so doing.
Q.2 a.) A bond of Rs. 1000 value carries a coupon rate of 10% and has a maturity period of 6 years. Interest is payable semi-annually. If the required rate of return is 12%, calculate the value of the bond. ( 5marks)
Answer : PVIFA(Kd,n)
b.) A bond whose par value is Rs. 500 bearing a coupon rate of 10% and has a maturity of 3 years. The required rate of return is 8%. What should be the price of the bond? ( 5marks)
Answer : solution
{I+ (F
Q.3 Examine the features & evaluation of decision-tree approaches.
Answer : Decision-tree Approach
The Decision-tree Approach (DT) is another useful alternative for evaluating risky investment proposals. The outstanding feature of this method is that it takes into account the impact of all probabilistic estimates of potential outcomes. In other words, every possible outcome is weighed in probabilistic terms and then evaluated. The DT approach is especially useful for situations in which decisions at one point of time also affect the decisions of the firm at some later date. Another useful application of the DT approach is for projects which require decisions to be made in sequential parts.
Q.4 If the EPS is Rs.5, dividend pay-out ratio is 50%, cost of equity is 20% and growth rate in the ROI is 15%. What is the value of the stock as per Gordon’s Dividend Equalisation Model?
Answer : Hint: Apply the
Q.5 Critically examine the pay-back period as a technique of approval of projects.
Answer : Definition: An investment’s payback period in years is equal to the net investment amount divided by the average annual cash flow from the investment.
Q.6 Two companies are identical in all aspects except in the debt-equity profile. Company X has 14% debentures worth Rs. 25,00,000 whereas company Y does not have any debt. Both companies earn 20% before interest and taxes on their total assets of Rs. 50,00,000. Assuming a tax rate of 40% and cost of equity capital to be 22%, find out the value of the companies X and Y using NOI approach.
Answer:
Solution
S= 1000
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