Wednesday, 27 September 2017

MBA202 - FINANCIAL MANAGEMENT

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Summer 2017
PROGRAM MBA

SEMESTER II

SUBJECT CODE &
NAME
MBA202 - FINANCIAL MANAGEMENT

Set 1

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

AnswerWealth 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. Converting uncertain distant cash flow into comparable values at base period facilitates better
·          


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

AnswerDoubling period
Doubling period


3 Write short notes on:
a) Irredeemable bonds
b) Zero coupon bonds
c) Valuation of Shares

AnswerIrredeemable 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


Set 2


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

AnswerFactors 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 “


2 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

AnswerCapital 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 should be commercially viable. The following aspects are examined to ascertain the



3 Explain the concepts of working capital. Explain the determinants of working capital.
Explanation of concepts of working capital
Explanation of determinants of working capital

AnswerConcepts 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
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