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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.
