MBA202 – FINANCIAL MANAGEMENT

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Assignment Set -1

DRIVE	FALL 2017
PROGRAM	MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER	II
SUBJECT CODE & NAME	MBA202 – FINANCIAL MANAGEMENT
CREDITS	2, 4 CREDITS
MARKS	30

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.

Question1. Financial planning means deciding in advance the financial activities to be carried on to achieve the basic objective of the firm. Explain the factors that affect financial planning.

Factors affecting Financial Plan

Answer: Factors Affecting Financial Plan

Ø  Nature of the industry – The first factor affecting the financial plan is the nature of the industry. Here, we must check whether the industry is a capital-intensive or labour-intensive industry. This will have a major impact on the total assets that a firm owns.

Ø  Size of the company – The size of the company greatly influences the availability of funds from different sources. A small company normally finds it difficult to raise funds from long-term sources at competitive terms. On

Question 2. “Book value is an accounting concept”. Explain the factors of this concept.

Calculate the worth of the value of one share from the below details of Company ABC :

Current dividend is Rs. 10.

It expects to have a supernormal growth period running to 6 years during which the growth rate would be 30%. The company expects normal growth rate of 10% after the period of supernormal growth period. The investor’s required rate of return is 18%.

Factors explaining the concept of book value

Solution to the problem

Answer: Book value is an accounting concept. Value is what an asset is worth today in terms of its potential benefits. Assets are recorded at historical cost and these are depreciated over years. Book value may include intangible assets at acquisition cost minus amortised value. The book value of a debt is stated at an outstanding amount. Book value of a share is calculated by dividing the net worth by the number of outstanding shares.

37 + Rs. 245.85 = Rs.331.22

Question 3. Explain the Cash Flow Estimation Principles.

Cash Flow Estimation Principles.

Answer: Principles of Cash Flow Estimation

Separation principle: The essence of this principle is the necessity to treat investment element of the project separately (i.e. independently) from that of financing element. The financing cost is computed by the cost of capital. Cost of capital is the cut off rate and rate of return expected on implementation of the project. Therefore, we separately compute cost of funds for execution of project through the financing mode. The rate of

Assignment Set -2

Question1. Explain EOQ and Re – order point.

A manufacturing company has an expected usage of 1,00,000 units of a certain product during the next year. The cost of processing an order is Rs 200 and the carrying cost per unit per annum is Rs 2. Lead-time for an order is five days and the company will keep a reserve of two days usage.

Calculate EOQ and Re – order point. Assume 250 days in a year.

Explanation of EOQ and Re – order point

Calculation of EOQ and Re – order point

Answer: Economic order quantity (EOQ)

Economic order quantity (EOQ) refers to the optimal order size that will result in the lowest ordering and carrying costs for an item of inventory based on its expected usage, carrying costs and ordering cost. EOQ model answers the following key quantum of inventory management.

Ø  What should be the quantity ordered for each replenishment of stock?

Ø  How many orders are to be placed in a year

Ø   

Question 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 pay-back period for A and B.

Year	Project A cash flows (Rs.)	Project B cash flows (Rs.)
0	(4,50,000)	(5,50,000)
1	3,00,000	2,00,000
2	1,50,000	2,50,000
3	50,000	3,00,000
4	2,00,000	3,50,000
5	1,00,000	2,00,000

Explanation of capital budgeting process and its appraisals.

Solution for the problem

Answer: Capital Budgeting Process

Ø  A proposal should be commercially viable. The following aspects are examined to ascertain the commercial viability of any investment proposal:

·       Market for the product

·       Availability of raw materials

·       Sources of raw materials

Question 3. From the below details, show the effect of the dividend policy on the market price of company XYZ Ltd. shares using the Walter’s Model.

Equity capitalisation rate Ke is 10%

Earnings per share is given as Rs. 10

ROI (r) may be assumed as follows: 10% and 15%

Show the effect of the dividend policies on the share value of the firm for three different levels of r, taking the DP ratios as 20%, 40%, 60%, 80% and 100%.

Explanation of concepts of working capital

Answer: K Ke 10%, EPS 10, r 10%, DPS=20

Case I r >k (r = 10%, Ke = 10%)

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