With Lots of Lucks

Master of Business Administration - MBA Semester 2 MB0045 – Financial Management - 4 Credits
(Book ID: B1134) Assignment Set- 1 (60 Marks) Note: Each question carries 10 marks. Answer all the questions. Q.1 What are the 4 finance decisions taken by a finance manager. Ans. Refer 1.4 Finance Functions, Page No 7, 1.4.1 Page No 8-9 Q.2 What are the factors that affect the financial plan of a company? Ans. Refer 2.3 Factors affecting Financial plan Page No 31 & 32 Q.3 Show the relationship between required rate of return and coupon rate on the value of a bond. Ans. Refer 4.2 Valuation of bonds Page No 65 Q.4 Discuss the implication of financial leverage for a firm. Ans. Refer to 6.3 Financial leverage Page No 113 and 114. Q.5 The cash flows associated with a project are given below: Year Cash flow 0 (100,000) 1 25000 2 40000 3 50000 4 40000 5 30000 a) Calculate the payback period. b) Benefit cost ratio for 10% cost of capital Solution a).:- Table Cash Flow and Cumulative Cash Flows Year Cash flow Cumulative Cash flows 1 25000 25000 2 40000 65000 3 50000 115000 4 40000 155000 5 30000 185000 From the cumulative cash flows column. A recover the initial cash out tag of Rs. 1000,00 at the end of the third year. Therefore payback period of project is 2 years. Therefore payback period 100000 − 65000 ⇒ 2+ 50000 35000 ⇒ 2+ 50000 ⇒ 2.7 Years Solution: b). Benefit cost ratio for 10% cost of capital. www.winsofttech.org 1

With Lots of Lucks

Year 1 2 3 4 5

Cash Flow 25000 40000 50000 40000 30000

10% Pv Factor Pv of Cash flow 0.909 22725 0.826 33040 0.751 37550 0.683 27320 0.621 18630

Cumulative 22725 55765 93315 120635 139265

100000 − 93315 27320 6685 ⇒ 3+ 27320 ⇒ 3 + .244 ⇒ 3.244 ⇒ 3+
Q6. A company’s earnings and dividends are growing at the rate of 18% pa. The growth rate is expected to continue for 4 years. After 4 years, from year 5 onwards, the growth rate will be 6% forever. If the dividend per share last year was Rs. 2 and the investors required rate of return is 10% pa, what is the intrinsic price per share or the worth of one share. n = 4 Years, growth = 6 % , Ke = 10% required rate of return, D0 = 18 The Present value of this flow of dividends will be
Pn =

Ans.

(Dn+1 )

(Ke − g )

P4 = D5 / Ke − g
4

= D5 (1 + gn ) Ke − g = 15.26 / 0.07 = 16.48 / 0.07

= 5(1.25) + (1 + 0.05) / (0.15 − 0.08)

= 235.42 The intrinsic price is 235.42

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 objective of profit maximization v/s wealth maximization. Ans. (Refer 1.3.3 Wealth Maximization Vs Profit Maximization Page No 6-7) Q.2 Explain the Net operating approach to capital structure. Ans. Refer to 7.4 Page No 132-133, 135-136. Q.3 What do you understand by operating cycle. Ans. Refer to 11.6, Page No 238-239 www.winsofttech.org 2

With Lots of Lucks Q.4 What is the implication of operating leverage for a firm. Ans. Refer to 6.2 Page No 107-108 Q.5 A company is considering a capital project with the following information: The cost of the project is Rs.200 million, which consists of Rs. 150 million in plant a machinery and Rs.50 million on net working capital. The entire outlay will be incurred in the beginning. The life of the project is expected to be 5 years. At the end of 5 years, the fixed assets will fetch a net salvage value of Rs. 48 million ad the net working capital will be liquidated at par. The project will increase revenues of the firm by Rs. 250 million per year. The increase in costs will be Rs.100 million per year. The depreciation rate applicable will be 25% as per written down value method. The tax rate is 30%. If the cost of capital is 10% what is the net present value of the project.

Sol: Cost of Project 200 Million 150 Million 50 Million Pv factor (10%) .909 .826 .751 Pv of Cash inflow 181.8 123.9 37.55

Q.6 Given the following information, what will be the price per share using the Walter model. Earnings per share Rs. 40 Rate of return on investments 18% Rate of return required by shareholders 12% Payout ratio being 40%, 50%, or 60%. Ans. Walter Mode Formula D [r (E − D ) Ke] P= + Ke Ke
P is the market price per share, D is the dividend per Share, Ke is the cost of capital g is the growth rate of earnings, E is earning of share = 40, r is IRR = 18 % Dp ratio = 40 %, 50%, 60% a.

D [r (E − D ) Ke] + Ke Ke 0.4 [0.18(40 − 0.4) 0.12] 0.4 + [0.18(40 − 0.4) 0.12] 40% = + = Ke 0.12 0.12 = Rs. 498.33 P=
50% = 0.5 [0.18(40 − 0.5) 0.12] 0.5 + [0.18(40 − 0.5) 0.12] + = 0.12 0.12 0.12 = Rs. 497.91 0.6 [0.18(40 − 0.6) 0.12] 0.6 + [0.18(40 − 0.6 ) 0.12] + = 0.12 0.12 0.12 = Rs. 497.91

60% =

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