Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more ➡
Standard view
Full view
of .
×
0 of .
Results for:
P. 1
MB0045 SET2

# MB0045 SET2

Ratings: 0|Views: 466|Likes:

Categories:Types, School Work

### Availability:

See More
See less

05/03/2012

pdf

text

original

MB0045
Financial Management set-2 Page 1

MB0045
Financial Management - 4 Credits(Book ID: B1134)Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q. 1 Discuss the three broad areas of Financial Decision Making (10Marks)Q.2 What is the future value of an annuity and state the formulae for future value of an annuityQ.3 The equity stock of ABC Ltd is currently selling for Rs 30 per share. The dividendexpected next year is Rs 2.00. the investors required rate of return on this stock is 15per cent. If the constant growth model applies to ABC Ltd, What is the expectedgrowth rate? (10 Marks)Q.4 State the assumptions underlying the CAPM model and MM model (10Marks)Q.5 Write the cash flow analysis? (10Marks)Q.6 The following two projects A and B requires an investment of Rs 2, 00,000 each.The income returns after tax for these projects are as follows:(10 Marks)Year Project A Project B1 Rs. 80,000 Rs. 20,0002 Rs. 80,000 Rs. 40,0003 Rs. 40,000 Rs. 40,0004 Rs. 20,000 Rs. 40,0005 Rs. 60,0006 Rs. 60,000Using the following criteria determine which of the projects is preferable.

MB0045
Financial Management set-2 Page 2
Q.1. Discuss the three broad areas of Financial Decision Making
Ans:-Financial Decisions
Decision needs to be taken on the sources from which the funds required forthe capital investments could be obtained.There are two sources of funds - debt and equity. In what proportion the fundsare to be obtained from these sources is to be decided for formulating thefinancing plan.
Finance decisions
Financing decisions relate to the acquisition of funds at the least cost. Cost has twodimensions:
Explicit cost refers to the cost in the form of coupon rate, cost of floating and issuingthe security.
Implicit cost is not a visible cost but it may seriously affect the company’s operations
especially when it is exposed to business and financial risk
In India, if a company is unable to pay its debts, creditors of the company may uselegal means to sue the company for winding up. This risk is normally known as risk of insolvency. A company which employs debt as a means of financing normally faces thisrisk especially when its operations are exposed to high degree of business risk.In all financing decisions, a firm has to determine the proportion of equity and debt.The composition of debt and equity is called the capital structure of the firm.Debt is cheap because interest payable on loan is allowed as deductions in computingtaxable income on which the company is liable to pay income tax to the Governmentof India.Another thing notable in connection to this is that the firm cannot avoid its obligationto pay interests and loan instalments to its lenders and debentures.

MB0045
Financial Management set-2 Page 3
An investor in a company‘s shares has two objectives for investing:
It is the ability of the company to give both these incomes to its shareholders that
determines the market price of the company‘s shares.
The most important goal of financial management is maximisation of net wealth of theshareholders. Therefore, management of every company should strive hard to ensurethat its shareholders enjoy both dividend income and capital gains as per theexpectation of the market.Financing decision involves the consideration of managerial control, flexibility andlegal aspects and regulatory and managerial elements
Q.2. What is the future value of an annuity and state the formulae for future value of an annuity
Ans:-
The time preference for money is generally expressed by an interest rate, whichremains positive even in the absence of any risk. It is called the risk free rate.For example, if an individual
s time preference is 8%, it implies that he is willing toforego Rs. 100 today to receive Rs. 108 after a period of one year. Thus he considersRs. 100 and Rs. 108 as equivalent in value. In reality though this is not the only factorhe considers. He requires another rate for compensating him for the amount of riskinvolved in such an investment. This risk is called the risk premium.

## Activity (1)

### Showing

AllMost RecentReviewsAll NotesLikes