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DRIVE-SPRING 2014
PROGRAM-MBADS/ MBAFLEX/ MBAHCSN3/
MBAN2/ PGDBAN2
SEMESTER-II
SUBJECT CODE & NAME-MB0045 FINANCIAL
MANAGEMENT
BK ID-B1628
CREDIT-4
MARKS-60
Q1. When a firm follows wealth
maximization goal, it achieves maximization of market value of a share. Do you
agree? Substantiate your arguments.
(Explain Wealth maximization) 10
marks
Answer.
Wealth maximization
Maximisation of economic welfare
means maximisation of wealth of its shareholders. Shareholder’s wealth
maximisation is reflected in the market value of the firm’s shares. Experts
believe that, the goal of financial management is attained when it maximises
the market value of shares.
Wealth maximisation is also known
as value maximisation or net present worth maximisation. This
Q2. A) If you deposit Rs 10000
today in a bank that offers 8% interest, how many years will the amount take to
double?
(Problem) 5 marks
B) What is the future value of a
regular annuity of Re 1.00 earning a rate of 12% interest p.a. for 5 years?
(Problem) 5 marks
Solution.
A)
B
Q3. The concept of financial
leverage is a significant, as it has direct relation with capital structure. Do
you agree? If so, substantiate your arguments.
(Relation between Financial
leverage and the capital structure) 10 marks
Answer.
Relation
between Financial leverage and the capital structure
Financial leverage refers to a
firm's use of fixed-charge securities like debentures and preference shares
(though the latter is not always included in debt) in its plan of financing the
assets. The concept of financial leverage is a significant one because it has
direct relation with capital structure management. It determines the
relationship that could exist between the debt and equity securities. A firm
which does not issue fixed-charge securities has an equity capital structure
and does not have any financial leverage. However, it is common for firms to
issue some debt
Q4. A project requires an initial
outlay of Rs. 1,00,000. It is expected to generate the cash inflows shown in
table
What is the IRR of the project?
(Compute IRR) 10 marks
Answer.
Internal rate of return (IRR)
Internal rate of return (IRR) is
the rate (i.e. discount rate) which makes the NPV of any project equal to zero.
IRR is the rate of interest which equates the PV of cash inflows with the PV of
cash outflows. IRR is also called as yield on investment, managerial efficiency
of capital, marginal productivity of capital, rate of return and time adjusted
rate of
Q5. Below Table gives the
complete details of sales and costs of the goods produced by XYZ ltd for the
year 31.03.12.
What is the length of the
operating cycle? What is the cash cycle?
Assume 365 days in a year.
a) length of the operating cycle
b) cash cycle
(length of the operating cycle, cash
cycle) 5,5 marks
Answer.
length
of the operating cycle and cash cycle
Operating Cycle = Inventory
Conversion Period + Accounts Receivables Conversion Period
From
Q6. Facebook bought WhatsApp on
Feb, 19, 2014 for $19 billion. This was split between $4 billion in cash, $12
billion worth of Facebook shares, and $3 billion in restricted stock units to
be paid in four years. Do you think the market capitalization has played a
significant role in pricing the valuation. Discuss the Walter’s model
assumptions in this context.
(Walter’s model assumptions) 10 marks
Answer.
Walter’s model assumptions
Prof. James E. Walter considers
that dividend pay-outs are relevant and have a bearing on the share prices of
the firm. He further states that investment policies of a firm cannot be
separated from its dividend policy and both are inter-linked. The choice of an
appropriate dividend policy affects the value of the firm. Walter model clearly establishes a
relationship between the firm’s rate of return “r” and its cost of capital “k”
to give a dividend policy that maximizes shareholders’ wealth. The firm would have
the optimum dividend policy that enhances the value of the firm.
please frwd me the answers for the problems in finanicial management
ReplyDeleteAnswer:
ReplyDeleteThere are 2 ways of answering this question:
1. One way is to answer it by a rule known as ‘rule of 72’. This rule states that the period within which the amount doubles is obtained by dividing 72 by the rate of interest.
That is , 72/8=8 years.
2. A much accurate way of calculating doubling period is by using the rule known as ‘rule of 69’. By this method,
Doubling Period = 0.35+69/Interest rate
That is, {0.35+69/8}=8.975 years.
Q2. B.
What is the future value of a regular annuity of Re 1.00 earning a rate of 12% interest p.a. for 5 years?
Answer:
Future Value Interest Factor for Annuity (FVIFA)= [(1+ i)n -1] / i
This represents the accumulation of Re.1 invested at the end of every year for “n” number of years at “i” rate of interest.
n=5
i=12
So FVIFA =[(1+0.12)5-1]/0.12
=[1.97-1]/0.12
=0.97/0.12
=8.083
So the future value of a regular annuity of Re 1.00 will be =1*8.083, that is Re. 8.083
Q3. The concept of financial leverage is a significant, as it has direct relation with capital structure. Do you agree? If so, substantiate your arguments.
ReplyDelete(Relation between Financial leverage and the capital structure) 10 marks
Answer:
Relation between Financial leverage and the capital structure:
Financial leverage refers to a firm's use of fixed-charge securities like debentures and preference shares (though the latter is not always included in debt) in its plan of financing the assets. The concept of financial leverage is a significant one because it has direct relation with capital structure management. It determines the relationship that could exist between the debt and equity securities. A firm which does not issue fixed-charge securities has an equity capital structure and does not have any financial leverage. However, it is common for firms to issue come debt securities, in which case, the leverage is either favourable or unfavourable. Financial leverage is a process of using debt capital to increase the rate of return on equity. For this reason, it is also referred to as trading on equity.
Borrowing is done by a company because of the financial advantage that is expected from it. The use of borrowings for the purpose of such advantage for residual shareholders is also called ‘trading on equity’ or ‘leverage’.
Thus, financial leverage refers to the mix of debt and equity in the capital structure of the firm. This results from the presence of fixed financial charges in the company’s income stream. Such expenses have nothing to do with the firm’s performance and earnings and should be paid off regardless of the amount of EBIT.
It is the firm’s ability to use fixed financial charges to increase the effects of changes in EBIT on the EPS. It is the use of funds obtained at fixed costs which increase the returns on shareholders.
Capital structure refers to the permanent long-term financing of a company represented by a mix of long-term debt, preference shares, and net worth (which included paid-up capital, reserves, and surplus).
Financial leverage and its effects are a crucial consideration in planning and designing capital structures.
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ReplyDeletePlease sir solve question no.5 in financial management of assignment
ReplyDelete