MB0045 - Financial Management

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Summer 2013

Master of Business Administration - MBA Semester 2

MB0045 - Financial Management - 4 Credits

(Book ID: B1628)

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

Q1. Analyze the financial requirements of a FMCG company.

(explanation of FMCG- 2 marks, explanation of the financial requirements of a firm- 8 marks) 10 marks

Answer :  Explanation of FMCG:

FMCG companies are those companies that produce Fast Moving Consumer Goods (FMCG). Fast Moving Consumer Goods are the sorts of products generally sold in a supermarket, but can also include things like cheap electronics and over-the-counter medicines. They are 'fast moving' because they are purchased frequently and consumed quickly, as distinct from more durable goods such as appliances, which are generally replaced only every few years.

Q2. If you are an investor and are interested in finding out the value of an amount of Rs 10,000 to be received after 15 years, when the interest offered by bank is 9%, how would you calculate?

(Formula- 3 marks; calculation of present value-6 marks; Summary-1 mark) 10 marks

Answer :Formula to calculate present value :

Calculation Using the PV Formula:

The present value formula for a single amount is:

PV = FV (1 + i)^-n       (or)       PV = FV x [ 1 ÷ (1 + i)ⁿ ]

Here PV = present value = To be calculated

Here FV = Future value

            i  =  interest rate

           n = Time period

Q3. Explain how NPV leads to better investment decisions rather than other criteria.

(explanation of NPV- 5 marks; explanation of difference of other techniques- 5marks) 10 marks

Answer :  Explanation of NPV:

In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.

In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV).

Q4. List out the various risks that Tata Nano project has faced.

(explanation of sources of risk in capital budgeting- 5marks; explanation of risks faced by Nano-5 marks) 10 marks

Answer :  Tata Nano Project has faced various risks including the risk in capital budgeting , which is faced by most of the organisations. It is described below :

Sources of risk in capital budgeting:

A project's required rate of return is the combination of your cost of capital plus any additional return for the riskiness of the project. Riskier projects need a higher rate of return to be deemed profitable.

Q5. Discuss how a firm can maintain adequate working capital.

(explanation of components of working capital- 3 marks, concepts of working capital-4 marks; objectives and need of working capital –3marks;) 10 marks

Answer : Components of working capital :

1. Cash:

Cash is one of the most liquid and important components of working capital. Holding cash involves cost because the worth of cash held, after a year will be less than the value of cash as on today.

2. Marketable Securities:

These securities also don't give much yield to the business because of two reasons,

Q6. Annual consumption of raw materials is 40,000 units. Cost per unit is Rs 16 along with a carrying cost of 15% per annum. The cost of placing an order is given as Rs 480. Calculate the EOQ.

(formula- 2 marks; Calculation of EOQ- 6marks; interpretation-2 marks) 10 Marks

Answer :  Formula to calculate EOQ :

Economic Order Quantity is the optimal order size to minimize all inventory costs.

Variables:

C= Carrying cost * Cost per unit =Carrying cost per unit per year

F=Fixed cost per order

D=Demand in units per year

               

So Economic Order Quantity (EOQ) Formula:

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