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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 task of the firm is to determine the optimum or economic order quantity (or
economic
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