2.1K views

Uploaded by Sumit Singh

Njoyyeee Free......

- MB0047 Semester II, Set 2 SMU Assignments (Winter Drive 2011-Exams May 2012)
- Smu MBA 0046 SEM 2 Assignments ---- Njoyeeeee
- Solved, MB0045 –Financial Management
- MB0044 SMU assgmt 2013 may
- MB0047(Set-2)
- MBA 46 SMU MARKETING MANAGEMENT
- MB0045 feb 2012
- MB0049
- Adoption Process
- smu objectives for second sem..
- MB0044 Spring Drive Assignment Solved)
- 2011-SMU- MB0045 –MBA 2nd (Financial Management)
- SMU MBA Semester 2 Assignments
- Smu MBA 0049 SEM 2 Assignments ---- Njoyeeeee
- Smu MBA 0048 SEM 2 Assignments ---- Njoyeeeee
- -MB0049-Set 1
- MB0047
- MB0049 SET 2
- SMU 2nd semester assignment MB0048 –Operation Research set -1 (per subject @ Rs.50 only) this is just a sample. :)
- MB0048

You are on page 1of 6

Q1. Show the relationship between required rate of return and coupon rate on the value of a bond. Ans. It is important for prospective bond buyers to know how to determine the price of a bond because it will indicate the yield received should the bond be purchased. In this section, we will run through some bond price calculations for various types of bond instruments. Bonds can be priced at a premium, discount, or at par. If the bonds price is higher than its par value, it will sell at a premium because its interest rate is higher than current prevailing rates. If the bonds price is lower than its par value, the bond will sell at a discount because its interest rate is lower than current prevailing interest rates. When you calculate the price of a bond, you are calculating the maximum price you would want to pay for the bond, given the bonds coupon rate in comparison to the average rate most investors are currently receiving in the bond market. Required yield or required rate of return is the interest rate that a security needs to offer in order to encourage investors to purchase it. Usually the required yield on a bond is equal to or greater than the current prevailing interest rates. Fundamentally, however, the price of a bond is the sum of the present values of all expected coupon payments plus the present value of the par value at maturity. Calculating bond price is simple: all we are doing is discounting the known future cash flows. Remember that to calculate present value (PV) which is based on the assumption that each payment is re-invested at some interest rate once it is receivedwe have to know the interest rate that would earn us a known future value. For bond pricing, this interest rate is the required yield. (If the concepts of present and future value are new to you or you are unfamiliar with the calculations, refer to Understanding the Time Value of Money.) Here is the formula for calculating a bonds price, which uses the basic present value (PV) formula:

The succession of coupon payments to be received in the future is referred to as an ordinary annuity, which is a series of fixed payments at set intervals over a fixed period of time. (Coupons on a straight bond are paid at ordinary annuity.) The first payment of an ordinary annuity occurs one interval from the time at which the debt security is acquired. The calculation assumes this time is the present. You may have guessed that the bond pricing formula shown above may be tedious to calculate, as it requires adding the present value of each future coupon payment. Because these payments are paid at an ordinary annuity, however, we can use the shorter PV-of-ordinary-annuity formula that is mathematically equivalent to the summation of all the PVs of future cash flows. This PVof-ordinary-annuity formula replaces the need to add all the present values of the future coupon. The following diagram illustrates how present value is calculated for an ordinary annuity:

Each full moneybag on the top right represents the fixed coupon payments (future value) received in periods one, two and three. Notice how the present value decreases for those coupon payments that are further into the future the present value of the second coupon payment is worth less than the first coupon and the third coupon is worth the lowest amount today. The farther into the future a payment is to be received, the less it is worth today is the fundamental concept for which the PV-of-ordinary-annuity formula accounts. It calculates the sum of the present values of all future cash flows, but unlike the bond-pricing formula we saw earlier, it doesnt require that we add the value of each coupon payment. (For more on calculating the time value of annuities, see Anything but Ordinary: Calculating the Present and Future Value of Annuities and Understanding the Time Value of Money. ) By incorporating the annuity model into the bond pricing formula, which requires us to also include the present value of the par value received at maturity, we arrive at the following formula: Lets go through a basic example to find the price of a plain vanilla bond. Example 1: Calculate the price of a bond with a par value of $1,000 to be paid in ten years, a coupon rate of 10%, and a required yield of 12%. In our example well assume that coupon payments are made semi-annually to bond holders and that the next coupon payment is expected in six months. Here are the steps we have to take to calculate the price: 1. Determine the Number of Coupon Payments: Because two coupon payments will be made each year for ten years, we will have a total of 20 coupon payments. 2. Determine the Value of Each Coupon Payment: Because the coupon payments are semiannual, divide the coupon rate in half. The coupon rate is the percentage off the bonds par value. As a result, each semi-annual coupon payment will be $50 ($1,000 X 0.05). 3. Determine the Semi-Annual Yield: Like the coupon rate, the required yield of 12% must be divided by two because the number of periods used in the calculation has doubled. If we left the

required yield at 12%, our bond price would be very low and inaccurate. Therefore, the required semi-annual yield is 6% (0.12/2). 4. Plug the Amounts Into the Formula:

From the above calculation, we have determined that the bond is selling at a discount; the bond price is less than its par value because the required yield of the bond is greater than the coupon rate. The bond must sell at a discount to attract investors, who could find higher interest elsewhere in the prevailing rates. In other words, because investors can make a larger return in the market, they need an extra incentive to invest in the bonds. Accounting for Different Payment Frequencies In the example above coupons were paid semi-annually, so we divided the interest rate and coupon payments in half to represent the two payments per year. You may be now wondering whether there is a formula that does not require steps two and three outlined above, which are required if the coupon payments occur more than once a year. A simple modification of the above formula will allow you to adjust interest rates and coupon payments to calculate a bond price for any payment frequency:

Notice that the only modification to the original formula is the addition of F, which represents the frequency of coupon payments, or the number of times a year the coupon is paid. Therefore, for bonds paying annual coupons, F would have a value of one. Should a bond pay quarterly payments, F would equal four, and if the bond paid semi-annual coupons, F would be two. Q2. What do you understand by operating cycle? Ans. An operating cycle is the length of time between the acquisition of inventory and the sale of that inventory and subsequent generation of a profit. The shorter the operating cycle, the faster a business gets a return on investment (ROI) for the inventory it stocks. As a general rule, companies want to keep their operating cycles short for a number of reasons, but in certain industries, a long operating cycle is actually the norm. Operating cycles are not tied to accounting periods, but are rather calculated in terms of how long goods sit in inventory before sale. When a business buys inventory, it ties up money in the inventory until it can be sold. This money may be borrowed or paid up front, but in either case, once the business has purchased inventory, those funds are not available for other uses. The business views this as an acceptable tradeoff because the inventory is an investment that will hopefully generate returns, but keeping the operating cycle short is still a goal for most businesses so they can keep their liquidity high. Keeping inventory during a long operating cycle does not just tie up funds. Inventory must be stored and this can become costly, especially with items that require special handling, such as

humidity controls or security. Furthermore, inventory can depreciate if it is kept in a store too long. In the case of perishable goods, it can even be rendered unsalable. Inventory must also be insured and managed by staff members who need to be paid, and this adds to overall operating expenses. There are cases where a long operating cycle in unavoidable. Wineries and distilleries, for example, keep inventory on hand for years before it is sold, because of the nature of the business. In these industries, the return on investment happens in the long term, rather than the short term. Such companies are usually structured in a way that allows them to borrow against existing inventory or land if funds are needed to finance short-term operations. Operating cycles can fluctuate. During periods of economic stagnation, inventory tends to sit around longer, while periods of growth may be marked by more rapid turnover. Certain products can be consistent sellers that move in and out of inventory quickly. Others, like big ticket items, may be purchased less frequently. All of these issues must be accounted for when making decisions about ordering and pricing items for inventory. Q3. What is the implication of operating leverage for a firm? Operating leverage: Operating leverage is the extent to which a firm uses fixed costs in producing its goods or offering its services. Fixed costs include advertising expenses, administrative costs, equipment and technology, depreciation, and taxes, but not interest on debt, which is part of financial leverage. By using fixed production costs, a company can increase its profits. If a company has a large percentage of fixed costs, it has a high degree of operating leverage. Automated and high-tech companies, utility companies, and airlines generally have high degrees of operating leverage. As an illustration of operating leverage, assume two firms, A and B, produce and sell widgets. Firm A uses a highly automated production process with robotic machines, whereas firm B assembles the widgets using primarily semiskilled labor. Table 1 shows both firms operating cost structures. Highly automated firm A has fixed costs of $35,000 per year and variable costs of only $1.00 per unit, whereas labor-intensive firm B has fixed costs of only $15,000 per year, but its variable cost per unit is much higher at $3.00 per unit. Both firms produce and sell 10,000 widgets per year at a price of $5.00 per widget. Firm A has a higher amount of operating leverage because of its higher fixed costs, but firm A also has a higher breakeven pointthe point at which total costs equal total sales. Nevertheless, a change of I percent in sales causes more than a I percent change in operating profits for firm A, but not for firm B. The degree of operating leverage measures this effect. The following simplified equation demonstrates the type of equation used to compute the degree of operating leverage, although to calculate this figure the equation would require several additional factors such as the quantity produced, variable cost per unit, and the price per unit, which are used to determine changes in profits and sales:

Operating leverage is a double-edged sword, however. If firm As sales decrease by I percent, its profits will decrease by more than I percent, too. Hence, the degree of operating leverage shows the responsiveness of profits to a given change in sales. Implications: Total risk can be divided into two parts: business risk and financial risk. Business risk refers to the stability of a companys assets if it uses no debt or preferred stock financing. Business risk stems from the unpredictable nature of doing business, i.e., the unpredictability of consumer demand for products and services. As a result, it also involves the uncertainty of longterm profitability. When a company uses debt or preferred stock financing, additional risk financial riskis placed on the companys common shareholders. They demand a higher expected return for assuming this additional risk, which in turn, raises a companys costs. Consequently, companies with high degrees of business risk tend to be financed with relatively low amounts of debt. The opposite also holds: companies with low amounts of business risk can afford to use more debt financing while keeping total risk at tolerable levels. Moreover, using debt as leverage is a successful tool during periods of inflation. Debt fails, however, to provide leverage during periods of deflation, such as the period during the late 1990s brought on by the Asian financial crisis. Q.2 What are the factors that affect the financial plan of a company? Ans. To help your organization succeed, you should develop a plan that needs to be followed. This applies to starting the company, developing new product, creating a new department or any undertaking that affects the companys future. There are several factors that affect planning in an organization. To create an efficient plan, you need to understand the factors involved in the planning process.

Priorities

In most companies, the priority is generating revenue, and this priority can sometimes interfere with the planning process of any project. For example, if you are in the process of planning a large expansion project and your largest customer suddenly threatens to take their business to your competitor, then you might have to shelve the expansion planning until the customer issue is resolved. When you start the planning process for any project, you need to assign each of the issues facing the company a priority rating. That priority rating will determine what issues will sidetrack you from the planning of your project, and which issues can wait until the process is complete.

Company Resources

Having an idea and developing a plan for your company can help your company to grow and succeed, but if the company does not have the resources to make the plan come together, it can stall progress. One of the first steps to any planning process should be an evaluation of the resources necessary to complete the project, compared to the resources the company has available. Some of the resources to consider are finances, personnel, space requirements, access to materials and vendor relationships.

Forecasting

A company constantly should be forecasting to help prepare for changes in the marketplace. Forecasting sales revenues, materials costs, personnel costs and overhead costs can help a company plan for upcoming projects. Without accurate forecasting, it can be difficult to tell if the plan has any chance of success, if the company has the capabilities to pull off the plan and if the plan will help to strengthen the companys standing within the industry. For example, if your forecasting for the cost of goods has changed due to a sudden increase in material costs, then that can affect elements of your product roll-out plan, including projected profit and the long-term commitment you might need to make to a supplier to try to get the lowest price possible.

Contingency Planning

To successfully plan, an organization needs to have a contingency plan in place. If the company has decided to pursue a new product line, there needs to be a part of the plan that addresses the possibility that the product line will fail. The reallocation of company resources, the acceptable financial losses and the potential public relations problems that a failed product can cause all need to be part of the organizational planning process from the beginning

Q5.An employee of a bank deposits Rs. 30000 into his PF A/c at the end of each year for 20 years. What is the amount he will accumulate in his PF at the end of 20 years, if the rate of interest given by PF authorities is 9%?

- MB0047 Semester II, Set 2 SMU Assignments (Winter Drive 2011-Exams May 2012)Uploaded bysahuja_25
- Smu MBA 0046 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh
- Solved, MB0045 –Financial ManagementUploaded byArvind K
- MB0044 SMU assgmt 2013 mayUploaded bynandinisas
- MB0047(Set-2)Uploaded byAvinash Gupta
- MBA 46 SMU MARKETING MANAGEMENTUploaded byAbdullah Azad
- MB0045 feb 2012Uploaded byKusum Ahuja
- MB0049Uploaded bysharamaplp_sanju
- Adoption ProcessUploaded byRakesh Kumar
- smu objectives for second sem..Uploaded bybijay
- MB0044 Spring Drive Assignment Solved)Uploaded byMayuresh Mulye
- 2011-SMU- MB0045 –MBA 2nd (Financial Management)Uploaded byAli Asharaf Khan
- SMU MBA Semester 2 AssignmentsUploaded byRajesh Singh
- Smu MBA 0049 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh
- Smu MBA 0048 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh
- -MB0049-Set 1Uploaded byDivya Nand
- MB0047Uploaded byShilpi Gupta Maheshwari
- MB0049 SET 2Uploaded byAhmed Barkaati
- SMU 2nd semester assignment MB0048 –Operation Research set -1 (per subject @ Rs.50 only) this is just a sample. :)Uploaded byसुवाल सेरिज़
- MB0048Uploaded bypromeoroy
- mbaUploaded bySidarth Rai
- MB0045 - SET 2 spring drive 2012 solvedUploaded byashish15666
- MBOO45 ASSIGNMENTS Answers Sem 2 BOTH SETUploaded byrajput1463
- Slm Unit 04 Mbf201Uploaded byPankaj Kumar
- MB0049-SET 2Uploaded byKrunal Cool Doshi
- MB0048 ASSIGNMENTS Answers MBA 2 BOTH SETUploaded byrajput1463
- MB0048 Assignment Winter Drive 2012Uploaded bysivaganesh1903
- Smu Mb0049 Sem 2 Assignments 2012 Set 2Uploaded bykrishsedi
- Solved-MB0049 Fall Drive AssignmentUploaded byArvind K

- Sem4 IB-0018 AssignmentUploaded bySumit Singh
- Semester 4-IB0015 AssignmentUploaded bySumit Singh
- Sem 4 MB0053 AssignmentUploaded bySumit Singh
- Sem4 MB0052 AssignmentUploaded bySumit Singh
- Smu MBA 0049 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh
- Sem 4 IB-0017 AssignmentUploaded bySumit Singh
- Sem 4 -IB0016 AssignmentsUploaded bySumit Singh
- Smu MBA 0048 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh
- Smu MBA 0047 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh
- Smu MBA 0044 SEM 2 Assignments ---- NjoyeeeeeUploaded bySumit Singh

- MBA 111-1Uploaded byniraj
- B- Industrial Dispute-Uploaded by93076
- Exception Handling in Multi-Layered SystemsUploaded byIonut Marian Bercea
- SAP-BCSUploaded bySol Sa
- E 3031 - 15Uploaded byruben carcamo
- Soal Latihan Bhs InggrisUploaded bydedy
- WHO Dosage FormsUploaded bychattambi
- Shubham KadamUploaded bySanjay Shelar
- datasheetEldarStormSerpentUploaded byALPolley
- 896393Uploaded byPramod Kumar S R
- History of Audit in IndiaUploaded bypodder
- 24kV Distribution TransformerUploaded bymrhom
- UKHSE - Location and Design of Occupied Buildings at Chemical PlantsUploaded bykhaiseah9225
- Wig Hoverwing 19xrw-RedUploaded byFloreia Sile
- Etudes for Jazz Improvisation PDFUploaded byAaron
- Unit 4Uploaded byVinoth Kumar
- 43717372-Kubota-V2203-Workshop-Manual.pdfUploaded byXavier Valencia
- guidebookassignmentsheetandrubricUploaded byapi-263452051
- Fundamentals of Teleprotection SystemsUploaded byMohammedSaadaniHassani
- Harris v ClearlakeUploaded byHoward Friedman
- TB746-93-1 Color, Markings and Camouflage 1964Uploaded bydieudecafe
- Transient Stability Enhancement of Doubly Fed Induction Machine-Based Wind Generator by Bridge-Type Fault Current LimiterUploaded byMSM
- Ch9(1)Handouts_3eUploaded byFelipe Dias
- John Maxwell and His Team Deliver Strategic Leadership Development Tools for Costa Rican Transformation at Request of Costa Rican PresidentUploaded byPR.com
- Pv Elite Webinar PptUploaded byAndrea Hank Lattanzio
- 3-axi-configurations.pptUploaded bySingamaneni Ashokkumar
- MrpUploaded byPaul Tello Rojas
- mechanic of mecUploaded byLeandro Peçanha
- Survey of Some Heavy MetalUploaded byEdidiong Asuquo
- MATTHEW HARLFINGER, a minor,By Marlee Harlfinger and Robert HarlfingerPlaintiffs/Appellants v.HOWARD MARTIN M.D., Defendant/Appellee____________________BRIEF OF AMICUS CURIAECHILDREN'S WATCH____________________On Appeal From An Order Of The Suffolk Superior CourtUploaded bySusan von Struensee