MB0045 - FINANCIAL MANAGEMENT

FALL-2017

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Master of Business Administration - MBA Semester 2

MB0045 - FINANCIAL MANAGEMENT

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

Answer: Wealth 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 comparison of

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

Answer: Doubling period

Doubling period is the period which makes the investment as "Doubled", that is the amount invested fetches 100% return.

1. Rule of 72

The

3 Write short notes on:

a) Irredeemable bonds

b) Zero coupon bonds

c) Valuation of Shares

Answer: Irredeemable 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 these bonds, the terminal value or maturity value does not exist because they are not redeemable. The face value is

4 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

Answer: Factors 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

5 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

Answer: Capital budgeting process

After the screening of proposals for potential involvement is over, the company should take up the following aspects of

6 Explain the concepts of working capital. Explain the determinants of working capital.

Explanation of concepts of working capital

Explanation of determinants of working capital

Answer: Concepts of Working Capital

Gross working capital: Gross working capital refers to the amounts invested in various components of current assets. It basically refers to

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