MB0045-Financial Management

SUMMER-2015

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Master of Business Administration- MBA Semester 2

MB0045-Financial Management-4 Credits

(Book ID: B1628)

Assignment (60 Marks)

Note: Answer all questions within 400 words each. Each Question carries 10 marks 6 X 10=60

Q1. Critically analyze the four broad areas of strategic financing decision.

Answer. Strategic financing decision:

An important decision which finance manager has to take is deciding source of finance. A company can raise finance from various sources such as by issue of shares, debentures or by taking loan and advances. Deciding how much to raise from which source is concern of financing decision. Mainly sources of finance can be divided into two categories:

1. Owners fund.

2. Borrowed fund.

Share capital and retained earnings constitute owners’ fund and debentures, loans, bonds, etc. constitute borrowed fund.

The main concern of finance manager is to decide how much to raise from owners’ fund and how much to rise from borrowed fund.

While taking this decision the finance manager compares the advantages and disadvantages of different sources of finance. The borrowed funds have to be paid back and involve some degree of risk whereas in owners’ fund there is no fix commitment of repayment and there is no risk involved. But finance manager prefers a mix of both types. Under financing decision finance manager fixes a ratio of owner fund and borrowed fund in the capital structure of the company.

Factors Affecting Financing Decisions:

While taking financing decisions the finance manager keeps in mind the following factors:

1. Cost:

The cost of raising finance from various sources is different and finance managers always prefer the source with minimum cost.

2. Risk:

More risk is associated with borrowed fund as compared to owner’s fund securities. Finance manager compares the risk with the cost involved and prefers securities with moderate risk factor.

3. Cash Flow Position:

The cash flow position of the company also helps in selecting the securities. With smooth and steady cash flow companies can easily afford borrowed fund securities but when companies have shortage of cash flow, then they must go for owner’s fund securities only.

4. Control Considerations:

If existing shareholders want to retain the complete control of business then they prefer borrowed fund securities to raise further fund. On the other hand if they do not mind to lose the control then they may go for owner’s fund securities.

5. Floatation Cost:

It refers to cost involved in issue of securities such as broker’s commission, underwriters fees, expenses on prospectus, etc. Firm prefers securities which involve least floatation cost.

6. Fixed Operating Cost:

If a company is having high fixed operating cost then they must prefer owner’s fund because due to high fixed operational cost, the company may not be able to pay interest on debt securities which can cause serious troubles for company.

7. State of Capital Market:

The conditions in capital market also help in deciding the type of securities to be raised. During boom period it is easy to sell equity shares as people are ready to take risk whereas during depression period there is more demand for debt securities in capital market.

Q2. What is FVIFA? Is it different from Sinking fund factor?

A finance company offers to pay Rs. 44,650 after five years to investors who deposit annually Rs. 6,000 for five years. Calculate the rate of interest implicit in this offer.

Answer.

Q3. A firm owns a machine furnishes the following information:

The firm follows straight line method of depreciation (permitted by the Income-tax authorities). The management of the company is now considering selling of the machine. If it does so, the total operating costs to perform the work, now done by the machine, will increase by Rs. 40,000 p.a.

Answer. Cash Inflows (if machine is sold)

Q4. How will you compute the cost of equity capital using CAPM?

The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a long-run level of future earnings of Rs. 7 per share. The current market price of Xavier’s share is Rs. 55.45. Floatation costs for the sale of new equity shares would average about 10 % of the price of the shares. What is the cost of new equity capital to Xavier Corporation?

Answer. The cost of equity capital using CAPM:-

This model establishes a relationship between the required rate of return of a security and its systematic

Q5. Jharkhand Mining ltd. has to select one of the two alternative projects whose particulars are furnished below:

The company can arrange necessary funds @ 8 %. Compute the NPV and IRR of each project and comment on the results. Is there any contradiction in the results? If so, state the reason for such contradictions. How would you propose to resolve the contradictions?

Answer.

Q6. Premier Steel Ltd. has a present annual sales turnover of Rs. 40, 00,000. The unit sale price is Rs. 20. The variable costs are Rs. 12 per unit and fixed costs amount to Rs. 5, 00,000 per annum. The present credit period of 1 month is proposed to be extended to either 2 or 3 months whichever is profitable. The following additional information is available:

Fixed costs will increase by Rs. 75,000 when sales increase by 30 %. The company requires a pre-tax return on investment of 20 %. Evaluate the profitability of the proposals and recommend the best credit period for the company.

Answer.

SUMMER-2015

Get solved assignments at nominal price of Rs.120 each.

Mail us at: subjects4u@gmail.com or contact at

09882243490