Financial Management

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AMITY (Assignment)
MBA
Semester 2

Financial Management
Financial Management Sem 2 all blocks solved Assignment

1st Block Assessment

CASE STUDY
Financial Management is concerned with efficient acquisition (financing) and allocation (investment in assets, working capital etc.) of funds. In the modern times, the financial management includes besides procurement of funds, the three different kinds of decisions as well namely investment, financing and dividend. Out of the two objectives, profit maximization and wealth maximization, in today’s real world situations which is uncertain and multi-period in nature, wealth maximization is a better objective. Today the role of chief financial officer, or CFO, is no longer confined to accounting, financial reporting and risk management. It’s about being a strategic business partner of the chief executive officer. The relationship between financial management and accounting are closely related to the extent that accounting is an important input in financial decision making.
There are several sources of finance/funds available to any company.
All the financial needs of a business may be grouped into the long term or short term financial needs. There are different sources of funds available to meet long term financial needs of the business. These sources may be broadly classified into share capital (both equity and
preference) and debt.
Another important source of long term finance is venture capital financing. It refers to financing of new high risky venture promoted by qualified entrepreneurs who lack experience and funds to give shape to their ideas. Securitization is another important source of finance and it is a process in which illiquid assets are pooled into marketable securities that can be sold to investors.
Leasing is a very popular source to finance equipment. it is a contract between the owner and user of the asset over a specified period of time in which the asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (lessee company) who pays a specified rent at periodical intervals. Some of the short terms sources of funding are trade credit, advances from customers, commercial paper, and bank advances etc.

Question 1
Management of all matters related to an organisation s finances is called:
Cash inflows and outflows
Allocation of resources
Financial management
Finance

Question 2
Which of the following is not an element of financial management?
Allocation of resources
Financial Planning
Financial Decision-making
Financial control

Question 3
The most important goal of financial management is:
Profit maximisation
Matching income and expenditure
Using business assets effectively
Wealth maximisation

Question 4
“To achieve wealth maximization, the finance manager has to take careful
decision in respect of:”
Investment
Financing
Dividend
All the above.

Question 5
Equity shares :
“Have an unlimited life, and voting rights and receive dividends”
“Have a limited life, with no voting rights but receive dividends”
“Have a limited life, and voting rights and receive dividends”
“Have an unlimited life, and voting rights but receive no dividends”

Question 6
External sources of finance do not include:
Debentures
Retained earnings
Overdrafts
Leasing

Question 7
Internal sources of finance do not include:
Better management of working capital
Ordinary shares
Retained earnings
Trade credit

Question 8
The most popular source of short-term funding is:
Factoring.
Trade credit.
Family and friends
Commercial banks.

Question 9
Debt capital refers to:
Money raised through the sale of shares.
Funds raised by borrowing that must be repaid.
Factoring accounts receivable
Inventory loans

Question 10
A debenture:
Is a long-term loan
Does not require security
Is a short-term loan
Receives dividend payments

Quiz Score: 100 out of 100

2nd Block Assessment

CASE STUDY
Cost of capital refers to the discount rate that is used in determining the present value of the estimated future cash proceeds of the business/new project and eventually deciding whether the business/new project is worth undertaking or now. It is also the minimum rate of return that a firm must earn on its investment which will maintain the market value of share at its current level. It can also be stated as the opportunity cost of an investment, i.e. the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected.
In order to calculate the specific cost of each type of capital, recognition should be given to the explicit and the implicit cost. The cost of capital can be either explicit or implicit. The explicit cost of any source of capital may be defined as the discount rate that equals that present value of the cash inflows that are incremental to the taking of financing opportunity with the present value of its incremental cash outflows. Implicit cost is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be foregone if the project presently under consideration by the firm was accepted.
Calculate the WACC using the following data by using:
(a) Book value weights
(b) Market value weights
The capital structure of the company is as under:
INR.
Debentures (`INR. 100 per debenture) 5,00,000
Preference shares (INR. 100 per share) 5,00,000
Equity shares (INR. 10 per share) 10,00,000
20,00,000
The market prices of these securities are:
Debentures INR` 105 per debenture
Preference shares INR` 110 per preference share
Equity shares INR` 24 each.
Additional information:
(1) INR. 100 per debenture redeemable at par, 10% coupon rate, 4% floatation costs, 10
year maturity.
(2) INR. 100 per preference share redeemable at par, 5% coupon rate, 2% floatation cost
and 10 year maturity.
(3) Equity shares has INR. 4 floatation cost and market price INR. 24 per share.
The next year expected dividend is INR` 1 with annual growth of 5%. The firm has practice of paying all earnings in the form of dividend.
Corporate tax rate is 50%.

Question 1
Which of the following sources of funds is related to Implicit Cost of Capital?
Equity Share Capital
Preference Share Capital
Debentures
Retained earnings

Question 2
Which of the following cost of capital require to adjust tax?
Cost of Equity Shares
Cost of Preference Shares
Cost of Debentures
Cost of Retained Earnings

Question 3
“In order to calculate Weighted Average Cost of Capital, weights may be
based on:”
Market Values
Target Values
Book Values
Anyone

Question 4
Firm s Cost of Capital is the average cost of :
All sources of finance
All Borrowings
All share capital
All Bonds & Debentures

Question 5
What is the cost of equity (Ke)
0.25 or 25%
0.1 or 10%
0.20 or 20%
0.15 or 15%

Question 6
What is the cost of Debt (Kd)
0.055 (approx.)
0.060 (approx.)
0.070 (approx.)
0.040 (approx.)

Question 7
What is the cost of preference shares (Kp)
0.043 (approx.)
0.063 (approx.)
0.053 (approx.)
0.073 (approx.)

Question 8
What is the WACC using book value weights
0.0968 or 9.68%
0.0456 or 4.56%
5%
0.0769 or 7.69%

Question 9
What is the WACC using market value weights
0.085 or 8.5%
0.0968 or 9.68%
0.0769 or 7.69%
none of these

Question 10
Total value of Equity shares as per the Market price is
“10,00,000”
“20,00,000”
“24,00,000”
“25,00,000”

Quiz Score: 100 out of 100

3rd Block Assessment

CASE STUDY
Capital structure refers to the mix of a firm’s capitalization (i.e. mix of long term sources of funds such as debentures, preference share capital, equity share capital and retained earnings for meeting total capital requirement). While choosing a suitable financing pattern, certain factors like cost, risk, control, flexibility and other considerations like nature of industry, competition in the industry etc. should be considered.
The basic objective of financial management is to design an appropriate capital structure which can provide the highest earnings per share (EPS) over the firm’s expected range of earnings before interest and taxes (EBIT). EPS measures a firm’s performance for the investors. The level of EBIT varies from year to year and represents the success of a firm’s operations. EBIT-EPS analysis is a vital tool for designing the optimal capital structure of a firm. The objective of this analysis is to find the EBIT level that will equate
EPS regardless of the financing plan.
Best of Luck Ltd., a profit making company, has a paid-up capital of INR. 100 lakhs consisting of 10 lakhs ordinary shares of INR.10 each. Currently, it is earning an annual pre-tax profit of INR. 60 lakhs. The company’s shares are listed and are quoted in the range of INR.50 to 80. The management wants to diversify production and has approved a project which will cost INR. 50 lakhs and which is expected to yield a pre-tax income of INR. 40 lakhs per annum. To raise this additional capital, the following options are under consideration of the management:
(a) To issue equity share capital for the entire additional amount. It is expected that the new shares (face value of INR. 10) can be sold at a premium of INR. 15.
(b) To issue 16% non-convertible debentures of INR. 100 each for the entire amount.
(c) To issue equity capital for INR. 25 lakhs (face value of INR. 10) and 16% nonconvertible debentures for the balance amount. In this case, the company can issue shares at a premium of INR. 40 each. raised, keeping in mind that the management wants to maximise the earnings per share to maintain its goodwill. The company is paying income tax at 50%.

Question 1
Which of the following statements is false in the context of explaining the concept of capital structure of a firm:
It resembles the arrangements of the various parts of a capital
It represents the relation between fixed assets and current assets
Combinations of various long-terms sources
The relation between equity and debt

Question 2
Financial Structure refer to
All Financial resources
“Short-term funds,”
Long-term funds
None of these.

Question 3
The term capital structure means
“Long-term debt, preferred stock, and equity shares.”
Current assets and current liabilities
Net working capital
Shareholders equity

Question 4
A firm s optimal capital structure:
Is the debt-equity ratio that results in the minimum possible weighted average cost of capital.
40 percent debt and 60 percent equity.
When the debt-equity ratio is .50.
When Cost of equity is minimum

Question 5
What is the amount of Profit before tax under option B (Issue 16%
Debentures only )
“86,00,000”
“92,00,000”
“95,00,000”
“96,00,000”

Question 6
What is the amount of Profit before tax under option C (Issue Equity Shares
and 16% Debentures of equal amount)
“75,00,000”
“96,00,000”
“90,00,000”
“92,00,000”

Question 7
Earnings per share under the option A is .
3.5
4.9
4.17
5.7

Question 8
Earnings per share under the option B is .
4.1
4.6
5.2
5.9

Question 9
Earnings per share under the option C is .
3.5
6.7
4.57
3.57

Question 10
“Which option is most suitable for the firm to raise additional capital for diversification, keeping in mind that the management wants to maximize the earnings per share to maintain its goodwill? ”
Option A
Option C
Option B
none of these.

Quiz Score: 100 out of 100
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4th Block Assessment

CASE STUDY

Capital budgeting is the process of evaluating and selecting long-term investments that are in line with the goal of investor’s wealth maximization.
The capital budgeting decisions are important, crucial and critical business decisions due to substantial expenditure involved; long period for the recovery of benefits; irreversibility of decisions and the complexity involved in capital investment decisions. One of the most important tasks in capital budgeting is estimating future cash flows for a project. The final decision we make at the end of the capital budgeting process is no better than the accuracy of our cash-flow estimates. Tax payments like other payments must be properly deducted in deriving the cash flows. That is, cash flows must be defined in post-tax
terms.
There are a number of capital budgeting techniques available for appraisal of investment proposals and can be classified as traditional (non-discounted) and time-adjusted (discounted).
The net present value technique is a discounted cash flow method that considers the time value of money in evaluating capital investments. An investment has cash flows throughout its life, and it is assumed that a regular of cash flow in the early years of an investment is worth more than a irregular of cash flow in a later year.
The internal rate of return method considers the time value of money, the initial cash investment, and all cash flows from the investment. But unlike the net present value method, the internal rate of return method does not use the desired rate of return but estimates the discount rate that makes the present value of subsequent net cash flows equal to the initial investment. This discount rate is called IRR.

Question 1
“A capital budgeting technique which does not require the computation of
cost of capital for decision making purposes is,”
Net Present Value metho
Internal Rate of Return method
Modified Internal Rate of Return method
Pay back

Question 2
“If two alternative proposals are such that the acceptance of one shall exclude the possibility of the acceptance of another then such decision making will lead to,”
Mutually exclusive decisions
Accept reject decisions
Contingent decisions
None of the above

Question 3
“In case a company considers a discounting factor higher than the cost of capital for arriving at present values, the present values of cash inflows will be”
Less than those computed on the basis of cost of capital
More than those computed on the basis of cost of capital
Equal to those computed on the basis of the cost of capital
None of the above

Question 4
The pay back technique is specially useful during times
When the value of money is turbulent
When there is no inflation
When the economy is growing at a steady rate coupled with minimal inflation.
None of the above

Question 5
“While evaluating capital investment proposals, time value of money is used in which of the following techniques,”
Payback method
Accounting rate of return
Net present value
None of the above

Question 6
“IRR would favour project proposals which have,”
Heavy cash inflows in the early stages of the project.
Evenly distributed cash inflows throughout the project.
Heavy cash inflows at the later stages of the project
None of the above.

Question 7
“Depreciation is included as a cost in which of the following techniques,”
Accounting rate of return
Net present value
Internal rate of return
None of the above

Question 8
“Management is considering a INR. 1,00,000 investment in a project with a 5 year life and no residual value . If the total income from the project is expected to be INR 60,000 and recognition is given to the effect of straight line depreciation on the investment, the average rate of return is:”
12%
24%
60%
75%

Question 9
“Assume cash outflow equals INR 1,20,000 followed by cash inflows of INR 25,000 per year for 8 years and a cost of capital of 11%. What is the Net present value?”
“(INR. 38,214)”
INR. 9653
“INR. 8,653”
INR. 38214

Question 10
“What is the internal rate of return for a project having cash flows of INR.
40,000 per year for 10 years and a cost of INR. 2,26,009?”
8%
9%
10%
12%

CASE STUDY
Financial management is the process of making financial decisions. Financial decision
broadly covers three areas:
1. Financing decision
2. Investment decision
iii. Dividend decision
Dividend decision is one of the most important areas of management decisions. It is easy to understand but difficult to implement. Let’s understand this with the help of an example,
suppose a company, say X limited, which is continuously paying the dividend at a normal growth rate, earns huge profits this year. Now the management has to decide whether continue to pay dividend at normal rate or to pay at an increasing rate? Why this dilemma? The reason is that, if the management decides to pay higher dividend, then it might be possible that next year, the company will not achieve such higher growth rate, resulting the next year’s dividend will be low as compared. However, if the company decides to stay on the normal rate of dividend then surplus amount of retained earnings would remain idle which will result in over capitalization, if no opportunity existing to utilize the funds. Also there are more factors which will affect the dividend decision. Generally, the dividend can be in the form of Cash Dividend and Stock Dividend. Dividend policy is generally governed by long term financing decision and wealth maximization decision. Some other factors also play major role in this decision like growth opportunities, expectation of shareholders, trend of the industry, legal constraints etc.
The three major theories of dividend decision are classified under irrelevance (M.M. Hypothesis) and relevance category (Walter model & Gordon Model). However, few other theories are Graham & Dodd model, Linter model, and residual payment policy.
A firm had been paid dividend at INR. 2 per share last year. The estimated growth of the dividends from the company is estimated to be 5% p.a. Determine the estimated market price of the equity share if the estimated growth rate of dividends (i) rises to 8%, and (ii) falls to 3%. Also find out the present market price of the share, given that the required rate of return of the equity investors is 15.5%.

Question 1
Which one of the following is the assumption of Gordon Model:
Ke > g
“Retention ratio(b),once decide upon, is constant”
Firm is an all equity firm
All of the above

Question 2
“What should be the optimum Dividend pay-out ratio, when r = 15% & Ke =
12%:”
100%
50%
Zero
None of the above

Question 3
Which of the following is the irrelevance theory?
Walter model
Gordon model
M.M. hypothesis
Linter s model

Question 4
“If the company s D/P ratio is 60% & ROI is 16%, what should be the growth rate:”
5%
7%
6.40%
9.60%

Question 5
“If the shareholders prefer regular income, how does this affect the dividend decision:”
It will lead to payment of dividend
It is the indicator to retain more earnings
It has no impact on dividend decision
Can t say

Question 6
“Mature companies having few investment opportunities will show high payout ratios, this statement is:”
FALSE
TRUE
Partial true
None of these

Question 7
“According to the present situation, What is the current Market price per share (MPS)”
INR. 20
INR. 25
INR. 30
INR. 15

Question 8
What would be the estimated market price of the equity share if the
estimated growth rate of dividends rises to 8%?
INR. 30.05
INR. 25.45
INR. 26.00
INR. 28.80

Question 9
What would be the estimated market price of the equity share if the
estimated growth rate of dividends falls to 3%.?
INR. 12.48
INR. 20.05
INR. 16.48
INR. 19.05

Question 10
A firm had been paid dividend at share last year
INR. 2
INR. 3
INR. 1
INR. 4

CASE STUDY

On 1st January, the Managing Director of ‘N’ Ltd. wishes to know the amount of working capital that will be required during the year. From the following information prepare the working capital
requirements forecast (Statement of Working Capital) #
• Production during the previous year was 60,000 units. It is planned that this level of activity
would be maintained during the present year.
• The expected ratios of the cost to selling prices are Raw materials 60%, direct wages 10% and Overheads 20%.
• Raw materials are expected to remain in store for an average of 2 months before issue to production.
• Each unit is expected to be in process for one month, the raw materials being fed into the pipeline immediately and the labour and overhead costs accruing evenly during the month.
• Finished goods will stay in the warehouse awaiting dispatch to customers for approximately 3 months.
• Credit allowed by creditors is 2 months from the date of delivery of raw material.
• Credit allowed to debtors is 3 months from the date of dispatch.
• Selling price is INR. 5 per unit.
• There is a regular production and sales cycle.
• Wages and overheads are paid on the 1st of each month for the previous month.
• The company normally keeps cash in hand to the extent of INR. 20,000.

Question 1
What is the value of Raw materials inventory?
“30,000”
“40,000”
“50,000”
“35,000”

Question 2
Value of Working in-process is
“20,000”
“18,750”
“15,750”
“21,500”

Question 3
Value of Finished goods inventory is ..
“69,500”
“67,500”
“75,000”
“65,000”

Question 4
Value of Debtors is .
“66,000”
“69,000”
“67,500”
“63,000”

Question 5
Cash in hand is ..
“21,000”
“20,500”
“19,500”
“20,000”

Question 6
What is the value of Creditors
“30,000”
“32,000”
“28,000”
“35,000”

Question 7
Amount of Direct wages payable is
“4,000”
“3,300”
“2,500”
“2,200”

Question 8
Amount of Overheads payable is .
“5,000”
“10,000”
“7,000”
“3,000”

Question 9
What is the value of total current assets?
“2,03,750”
“2,10,000”
“2,05,550”
“2,00,550”

Question 10
What is the estimated working capital requirements?
“1,70,500”
“1,63,400”
“1,68,000”
“1,66,250”

Question 1
The long-run objective of financial management is to
Maximize earnings per share
Maximize the value of the firm’s common stock
Maximize return on investment
Maximize market share

Question 2
Finance functions are
Planning for funds
Raising of funds
Allocation of Resources
All of the above

Question 3
Time value of money indicates that
A unit of money obtained today is worth more than a unit of money obtained in future
A unit of money obtained today is worth less than a unit of money obtained in future
There is no difference in the value of money obtained today and tomorrow
None of the above

Question 4
Firms Cost of Capital is the average cost of
All sources of finance
All Borrowings
All share capital
All Bonds & Debentures

Question 5
Which of the following cost of capital require to adjust tax?
Cost of Equity Shares
Cost of Preference Shares
Cost of Debentures
Cost of Retained Earnings

Question 6
If the Present Value of Cash Inflows are greater than the Present Value of Cash Outflows, the project would be
Accepted
Rejected with condition
Rejected with approval
Rejected

Question 7
Financial Structure refer to
All Financial resources
Short-term funds
Long-term funds
None of these

Question 8
A firms optimal capital structure
40 percent debt and 60 percent equity.
Is the debt-equity ratio that results in the minimum possible weighted average cost of capital
When the debt-equity ratio is .50.
When Cost of equity is minimum

Question 9
The term capital structure means
Long-term debt, preferred stock, and equity shares
Current assets and current liabilities
Net working capital
Shareholders equity

Question 10
If two alternative proposals are such that the acceptance of one shall exclude
The possibility of the acceptance of another then such decision making will lead to,
Contingent decisions
Accept reject decisions
Mutually exclusive decisions
None of the above

Question 11
While evaluating capital investment proposals, time value of money is used
in
which of the following techniques,
Payback method
Accounting rate of return
Net present value
None of the above

Question 12
Assume cash outflow equals INR. 1,20,000 followed by cash inflows of INR.
25,000 per
year for 8 years and a cost of capital of 11%. What is the Net present value?
-38,214
8,653
9,653
38,214

Question 13
What is the Internal rate of return for a project having cash flows of INR.
40,000 per
year for 10 years and a cost of INR. 2,26,009?
8%
9%
10%
12%

Question 14
If the shareholders prefer regular income, how does this affect the dividend
decision:
It will lead to payment of dividend
It is the indicator to retain more earnings
It has no impact on dividend decision
Cant say

Question 15
Which of the following is the irrelevance theory?
Walter model
Gordon model
M.M. hypothesis
Linters model

Quiz Score: 150 out of 150
Contact www.kimsharma.co.in for best and lowest cost solution or
Email: amitymbaassignment@gmail.com
Call: +91 82907-72200 (Call/WhatsApp) or +91 88003-52777 (WhatsApp Only)
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