SUBJECT:-Financial Management

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INDIAN SCHOOL OF BUSINESS

MANAGEMENT & ADMINISTRATION

AN ISO 9001 : 2008 CERTIFIED INSTITUTION

SUBJECT:-Financial Management

MARKS :80

Course : MBA-4 Sem (Masters In Business Administration Dual

Name :

           

Answer the question in one line.

Q1. Why we use WACC? (10 marks)

Answer:A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Q2. What is Merger?Is it harmful or beneficial? Explain n Justify. (10 marks)

Answer:The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.Basically,when two companies become one. This decision is usually mutual between both firms."Merger is an act or process of purchasing equity

Q3. How negatively correlated investments behave in a market? (10 marks)

Answer:Two variables are correlated if their movements are related to each other. When given the movements in one variable, you can make an educated guess about the other, if there is a correlation. For example, the rainfall and umbrella sales in a city tend to be are correlated. If someone tells you what the weather was -- measured in inches per square-foot -- on a particular day, you can make an educated guess about umbrella sales, and that guess would be more accurate than just throwing dice to estimate umbrella sales. On the

Q4. What types of shares are available in the market? (10 marks)

Answer:Shares may be one of the simplest financial products in which to invest but there are different types of shares traded on ASX with different characteristics.It’s important to understand these distinctions because the characteristics of different types of shares can significantly affect the way you decide to invest. The different types of shares include:

Ordinary shares: Most shares traded on ASX ‘ordinary’ shares. Ordinary shares carry no special or preferred rights. Holders of ordinary shares will usually have the right to vote at a general meeting of the company, and to participate in any dividends or any

Q5. How does ‘Interest coverage ratio’ affects the capital structure. (10 marks)

Answer:The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period, often one year, divided by interest expenses for the same time period. The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. It determines how easily a company can pay interest expenses on outstanding debt.

Financial leverage ratios are of little use in isolation. To draw

Q6. Why Capital budgeting decisions are more important?. (10 marks)

Answer:In the world of business, capital budgeting is one of the most important steps that a company can take. Many in the business world do not properly understand the importance of capital budgeting. Here are the basics of capital budgeting and why it is important to businesses.

Capital budgeting is a process that attempts to determine

Q7. What is Financial risk? How does it arise? (10 marks)

Answer:Financial risk is an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss.

A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Dr. Harry Markowitz in 1952 with his article, "Portfolio Selection". In modern portfolio theory, the variance (or standard deviation) of a portfolio is used as the definition of risk.

Q8. What are the determinant of capital structure of a company? (10 marks)

Answer:It represents the total long-term investment in a business firm. It includes funds raised through ordinary and preference shares, bonds, debentures, term loans from financial institutions, etc. Any earned revenue and capital surpluses are included.

Capital Structure Planning: Decision regarding what type of capital structure a company should have is of critical importance because of its potential impact on profitability and solvency. The small companies often do not plan their capital structure. The capital structure is allowed to develop without any formal planning. These companies may do well in the short-run, however, sooner or later they face considerable difficulties. The unplan

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