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winter
2016
PROGRAM
MBA
SEMESTER
II
SUBJECT
CODE &
NAME
MB0045
FINANCIAL
MANAGEMENT
1
Explain the differences between wealth maximization and profit maximization.
Explain
relation between finance and accounting
Differences between
wealth maximization and profit maximization
Explanation of
relation between finance and accounting
Answer: Wealth
maximisation vs. profit maximisation
·
Wealth maximisation is based on cash flow. It is not
based on the accounting profit as in the case of profit maximisation.
·
Through the process of discounting, wealth
maximisation takes care of the quality of cash flow.
·
2 Explain about the doubling
period and future value. Solve the below given problem:
Under
the ABC Bank’s Cash Multiplier Scheme, deposits can be made for periods ranging
from 3 months to 5 years and for every quarter, interest is added to the
principal. The applicable rate of interest is 9% for deposits less than 23
months and 10% for periods more than 24 months. What will be the amount of Rs.
1000 after 2 years?
Explanation of
doubling period
Solving the problem
Explanation of future
value
Answer: Doubling period
Doubling period is
the period which makes the investment as "Doubled", that is the
amount invested fetches 100% return.
1.
Rule of 72
The initial amount
of investment
3
Write short notes on:
a)
Irredeemable bonds
b)
Zero coupon bonds
c)
Valuation of Shares
Answer: Irredeemable
bonds or perpetual bonds
Bonds which will never mature are known as
irredeemable or perpetual bonds. Indian Companies Act restricts the issue of
such bonds and therefore, these are very rarely issued by corporates these
days. In case of these bonds, the terminal value or maturity value does not
exist because they are not redeemable. The face value is known, and the
interest received on such bonds is constant and received at regular intervals
and hence,
4 Explain the factors affecting Capital
Structure. Solve the below given problem:
Given
below are two firms, A and B, which are identical in all aspects except the
degree of leverage, employed by them. What is the average cost of capital of
both firms?
Details
of Firms A and B
|
|
Firm A
|
Firm B
|
|
Net operating income EBIT
|
Rs. 1, 00, 000
|
Rs. 1, 00, 000
|
|
Interest on debentures I
|
Nil
|
Rs.25,000
|
|
Equity earnings E
|
Rs.1,00,000
|
Rs.75,000
|
|
Cost of equity Ke
|
15%
|
15%
|
|
Cost of debentures Kd
|
10%
|
10%
|
|
Market value of equity S = E/Ke
|
Rs. 6, 66, 667
|
Rs.5,00,000
|
|
Market value of debt B
|
Nil
|
Rs.2,50,000
|
|
Total value of firm V
|
Rs. 6, 66, 667
|
Rs,7,50,000
|
Explanation of
factors affecting capital structure
Solution for the
problem
Interpretation
Answer: Factors Affecting Capital Structure
Leverage: The use of sources of funds
that have a fixed cost attached to them, such as preference shares, loans from
banks and financial institutions, and debentures in the capital structure, is
known as “trading on equity” or “financial leverage”. If the assets financed by
debt yield a return greater than the cost of the debt, the EPS will
5
Explain the capital Budgeting process and its appraisals
Solve
the below given problem:
Given
below are the details on the cash flows of two projects A and B. Compute
payback period for A and B.
Cash
flows of A and B
|
Year
|
Project A cash flows (Rs.)
|
Project B cash flows (Rs.)
|
|
0
|
(4,00,000)
|
(5,00,000)
|
|
1
|
2,00,000
|
1,00,000
|
|
2
|
1,75,000
|
2,00,000
|
|
3
|
25,000
|
3,00,000
|
|
4
|
2,00,000
|
4,00,000
|
|
5
|
1,50,000
|
2,00,000
|
Explanation
of capital budgeting process and its appraisals.
Solution
for the problem
Answer: Capital budgeting process
After the screening of proposals for potential
involvement is over, the company should take up the following aspects of
capital budgeting process:
·
A proposal
6
Explain the concepts of working capital. Explain the determinants of working
capital.
Explanation of
concepts of working capital
Explanation of
determinants of working capital
Answer: Concepts
of Working Capital
Gross working capital: Gross
working capital refers to the amounts invested in various components of current
assets. It basically refers to the current assets. This concept has the
following practical relevance:
·
Management of current assets is the crucial aspect of
working capital management
·
Gross
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