MB0045 FINANCIAL MANAGEMENT – Summer 2016
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Summer 2016
PROGRAM MBA
SEMESTER II
SUBJECT CODE &
NAME
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 projects. The risks that are associated with cash flow are adequately reflected when present
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.
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
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
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 capital budgeting process:
- A
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
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