Rajasthan Technical University MBA –Third Semester Examination, Jan.

2010 Finance for Strategic Decision Time: 3 Hours Note: 1) 2) The question paper is divided into two section- A and B. Section – A contain 6 questions, out of which the candidate is required to attempt any 4 questions. Section- B contains 1 question which is compulsory. 3) All questions carry equal marks. Section –A Ques 1) What do you understand by “Strategic Financial Decisions” Why these are decisions so Crucial and Complex? Give briefly the „Principles and Parameters‟ which may offer guidance to your decision process? Strategy is a comprehensive plan to achieve organizational goals. Such a plan is prepared keeping in view: - Internal strengths of company & - Challenges of external environment Such strategic plan is formed after the determination of long term goals and objectives of the organization and to make plans for allocation of resources and implementation of projects for achieving set goals.The process of strategic decision making involves the process of deciding long term: - Mission - Objective - Swot analysis - Identification of thrust areas Strategic decision making helps managers in identifying the sources of funds from where they can procure funds at lowest cost and employ them in areas which provide best return. It is a decision regarding management of Max Marks: 70

(vi) an information system. Analyzing the sources of low cost of funds. (iii) sound public finances and public debt management. The key tasks associated with the decisions related to strategic finance decision are.Maximizing profit . .Maximizing share holders wealth .Portfolio analysis . Analyzing profitable business activities The key objectives of strategic decisions pertaining to finance are: . a strong legal system is the most fundamental element of a sound financial system.Valuation of firm . strong legal and regulatory systems that produce and strictly enforce laws alone can protect the rights and interests of investors. (iv) a central bank. (ii) stable money. Since finance is based on contracts. 3. Ans : The basic elements of a well-functioning financial system are (i) a strong legal and regulatory environment. and (vii) a well-functioning securities market. Analysis of financial problems in individual firm 2. In today highly technologically advanced business world. (v) a sound banking system.Trend analysis Ques 2) (a) Describe briefly the key-elements of a well-functioning Financial System present in any economy.funds and resources and finding out best activities which can generate profit and value addition to the organization.Proper forecasting and measuring results Main tools and techniques of strategic financial decision making are: .Minimizing risk .Ratio analysis . 1. Hence.Maintaining control to rationalize costs . advanced statistical techniques such as regression analysis is used to verify and refine financial information for decision taking rather than mere financial depending on financial ratios.

Stable money is an important constituent as it serves as a medium of exchange. manager of public debt and foreign exchange. these financing needs of the governments world over led to the creation of financial systems. both equity and debt. and attracting foreign . and a standard of value (unit of account) for all the goods and services we might wish to trade in. lowering the cost of capital for firms. An autonomous central bank paves the way for the development of a sound financial system. A good financial system must also have a variety of banks both with domestic and international operations together with an ability to withstand adverse shocks without failing. Efficient securities markets promote economic growth by mobilising and deploying funds into productive uses. which result in the development of a good financial system. The monetary policy of the central bank influences the pace of economic growth. They perform diverse key functions such as operating the clearing and payments system. Historically. Securities markets facilitate the issue and trading of securities. A sound financial system can develop only when proper disclosure practices and networking of information systems are adopted. A central bank supervises and regulates the operations of the banking system. banker to the government. Banks also undertake credit risk analysis. The financial soundness of the banking system depends on how effectively banks perform these diverse functions. It acts as a banker to the banks. Another foundational element is information. and lender of the last resort. assessing the expected risk and return on the projects. Large fluctuations and depreciation in the value of money lead to financial crises and impede the growth of the economy. Sound public finance includes setting and controlling public expenditure priorities and raising revenues adequate to fund them efficiently. The banking system is the main fulcrum for transmitting the monetary policy actions. a store of value (a reserve of future purchasing power). Developed countries have sound public finances and public debt management practices. Banks are the core financial intermediaries in all countries. enhancing liquidity. and the foreign exchange market. All the participants in a financial system require information.

As early as August 1991. . Traditionally. from the very beginning. precisely) the following terms: Savings. Financial System Designs   Bank-based Market-based 2 (b) What have been the aims and objectives of „Financial Reforms in this regards in India and if with any results thereof? Financial sector reforms have long been regarded as an important part of the agenda for policy reform in developing countries. and rating agencies and countries which fail to come up to the new standards are likely to suffer through lower credit ratings and poorer investor perceptions. An efficient securities market strengthens market discipline by exerting corporate control through the threat of hostile takeovers for underperforming firms. soundness of the financial system has been elevated to a position similar to that of fiscal deficit as one of the 'fundamentals' for judging the health of an economy. this was because they were expected to increase the efficiency of resource mobilization and allocation in the real economy which in turn was expected to generate higher rates of growth. In this background it is both relevant and timely to examine how far India's financial sector measures up to what is now expected. they are also seen to be critical for macroeconomic stability. This is especially so in the aftermath of the East Asian crisis. Developing countries can expect increasing scrutiny on this front by international financial institutions. as an integral part of the economic reforms initiated in 1991. 3 (a) Define briefly (but clearly. More recently. Money. Following East Asia. Reform of the financial sector was identified. since weaknesses in the financial sector are widely regarded as one of the principal causes of collapse in that region. the government appointed a high level Committee on the Financial System (the Narasimham Committee) to look into all aspects of the financial system and make comprehensive recommendations for reforms. Investment. Interest and Inflation.investment.

stocks. bonds. Money Money is something that is widely used and accepted in transactions involving transfer of Goods and services from one person to another. with intent to increase productivity. will make saving less attractive (in contention between Keynesian and Monetarist views here. Poor returns on risky forms of saving.“Anything that is generally accepted as a means of exchange (i.the greater this MPS. Mutual funds. participants in the consumption account) do. mostly because of differences in definitions). all consist of stocks. and other items whose value is risky. mostly because of differences in definitions). Withers :. These factors affect the marginal propensity to save (MPS) . In monetary terms. They fall into the savings account. CDs. and other forms of savings marketed by financial intermediaries. pension obligations. basic goods purchases) have been made (in contention between Keynesian and Monetarist views here. means of settling debts) and that at the same time acts as a measure and as a store of value” . Stocks and bonds are considered to be important intermediary forms of savings as it gets transformed into a capital investment that produces value. Perceived likelihood of plunder of the future value of savings.e. mostly because of differences in definitions). stocks and bonds. Poor expectation for future economic growth. plant and machinery. e.g. the more saving households will do as a proportion of each additional increment of income Investment    Investment is made into capital (ie. Different authors has tried to define money in their own way. The level of saving in the economy depends on a number of factors (incomplete list):      A higher real interest rate will give a greater return on saving as banks offer more favourable rates. efficiency and output of goods and services In national accounting terms.Saving is what households (i. insurance annuities. heating bill. More disposable income after fixed expenditures (such as mortgage. via legal or extralegal means. Some of the definitions are given below: H. GICs. not the investment account. it is difficult to define it. make it more advantageous to hold money savings (in contention between Keynesian and Monetarist views here. and cash balances.“The stuff with which we buy and sell things” Crowither:. also 'human capital' . are NOT investments.training and education). the relationship between savings and investment is modeled.e. BICs. bonds. efficiency and output of goods and services. rather than being an accounting identity. increase households' savings as a precaution for a grim future. which in turn pay for the capital that increases productivity. mutual funds. However.

Interest Interest. LIC polices. Interest is there fore price of credit. fixed deposits. The percentage of principal that is paid as fee over certain period of time is called interest rate. bonds. equipments. Just mention the determinants of “Interest”. inventory etc i. Funds are saved from current consumption with the hope to get benefits from these funds in future. real estate etc. pension benefit leading to appreciation in the value of principal amount invested. There are two concepts of investment. Economic concept:. Inflation Inflation generally refers to rise in prices of specific goods or services. Financial investment means investment in shares.investment means exchange of financial claims such as shares.is fee paid on borrowed money/ capital. (b) Investment is the employment of funds with the aim of getting returns on it. It can be thought of rent of money. The amount lent or the value of asset lent is called the principal. provident funds etc to derive future income in the form of interest. investment means increase in building. The fee is compensation to lender for forgoing other useful investments that could have been made with the loaned money. Keynes :. capital stock of society. Financial concept:. premium rent. Two widely known indices for which inflation rates are reported in many countries as a consumer price index (CPI) which measures consumer prices and GDP deflator which measures price variations associated with domestic production of goods and services. .“Money is thing by delivery of which debt contracts and price contracts are discharged and in the shape of which a store of general purchasing power is held” A common thing which is there in above definitions is emphasis on functions of money.in economic term. debentures. dividend. NSC. It implies formation of new and productive capital.M.e. This principal value is held by the borrower on credit. Inflation is usually measured as percentage rate of change of a price index.J.

Period of investment . and public sector organizations . provision for dependents like wife and physically handicapped members of family Investment avenue selected should be suitable for achieving both the objectives i.PF. financial as well as personal. Two important factors considered are • Period of investment –which relate to liquidity • Risk in investment – relate to non-payment of principal or interest there on Factors effecting selection of suitable avenue for investment . education and marriage of children. LIC schemes.e.Tax benefits Investment Avenues .Market standing of borrowing agency .Future marketability . . .Loan facility . infrastmeture bonds etc. provision for house construction.LIC policies . Such objectives may be: .Personal objective – which are given due consideration by investor like provision for old age & sickness.Returns on investments . debentures & bonds of different companies. PPF and other tax saving schemes such as NSC.Risk in investment . investor would not like to take undue risk about his principal amount even interest rate offered is attractive.Monetary/ Financial :.Postal saving schemes .Deposits in banks.These include • Safety and security of funds invested • Profitability (through interest.Every investor has certain specific objectives to achieve through his short term and long term investments. dividend & capital appreciation) & • Liquidity (convertibility in to cash as & when required) Besides above.Investments in shares. public deposits in companies . corporations. public sector organizations.Investment objective .Investment attributes:.

and semi-Govt. interest rate ceilings are common in high inflation environments. But inflation can discourage investors by reducing their confidence in investments that take a long time to mature. investment planning becomes difficult. inflation can be problematic depending on what technique the company is uses to value its inventory. . when analyzing the earnings of a firm. (C) The effect of inflation on investment occurs directly and indirectly. In addition to this. The impact inflation has on a portfolio depends on the type of securities held there. High inflation is often associated with financial repression as governments take actions to protect certain sectors of the economy. a company may look like it's doing a great job. Inflation increases transactions and information costs. Such controls lead to inefficient allocations of capital that inhibit economic growth. In this case inflation will inhibit investment and could result in financial recession(Hellerstein. When there is high inflation. 4 What is the significance of „Bond Market‟? Describe and assess the current scenario and present status of the bond market in India. In the long run. a company’s revenue and earnings should increase at the same pace as inflation. This reluctance to enter into contracts over time will inhibit investment which will affect economic growth. Investments and interest.Investments in gild edged securities (securities of Govt.. which directly inhibits economic development.Investments in real estates . Investing only in stocks one may not have to worry about inflation. In an inflationary environment intermediaries will be less eager to provide long-term financing for capital formation and growth. Individuals may be reluctant to enter into contracts when inflation cannot be predicted making relative prices uncertain. 1997). silver. organizations) How does the “Inflation” affects the savings. when really inflation is the reason behind the growth. For example. For example. when inflation makes nominal values uncertain.Gold. precious metals and antiques . The main problem with stocks and inflation is that a company's returns can be overstated. Both lenders and borrowers will also be less willing to enter long-term contracts.

They borrow money through selling bonds to the private sector. At the moment. the government can pay a relatively low interest rate on these gilts. The bond market primarily includes government-issued securities and corporate debt securities. investors are quite happy to buy government bonds. the government have been able to borrow as much as they need at relatively low interest rates. This reduces the value of bonds. causing the price of bonds to fall and therefore the effective interest rate to rise. The government may then create inflation to be able to pay back the debt. So far. a 0. Japan is borrowing close to 200% of GDP and it hasn't spooked the bond market (yet). . business expansions and ongoing operations. This is why credit ratings can be very important. and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects. if the markets lost confidence. There is a chance that the government will not be able to repay its debt. Significance and current scenario Governments need to borrow money. the government needs to sell something like £180bn of gilts and bonds this year. The greater the chance of default. in the governments fiscal position. Investors will send bonds. then investors will require a higher interest payment to compensate for the risk. Fear of Default The problem with bond markets comes at the first sign of possible debt default. the higher the interest rate markets will require. Often the fear of higher interest rates due to borrowing is exaggerated. If there is a greater fear of debt default or default via inflation. When you have a national debt of £800bn. Usually. If the bond market feels the government is borrowing beyond it's capacity. Through the DMO. because the bond market has the appetite to buy them. However.The environment in which the issuance and trading of debt securities occurs.5% rise in interest rates is still a significant sum. They are seen as a safe investment (governments usually don't default) and the investor gets a guaranteed rate of interest in return. A downgrade in a countries credit rating from AAA to BBB means it is more difficult and more expensive to borrow. bond prices would fall and the government would have to pay higher interest rates. This is very important for the government.

financial intermediation will have to improve and the debt market. . although there will be some transitional arrangements. Thus State Governments' borrowing will be more and more market determined. 5 What you do understand by „Corporate Financial Models? Briefly give the conceptual features of such models you know about.But. is at a turning point in India with significant changes taking place in the domestic economic environment along with various proposed legislative changes. We can. It can be brutal. This will complete the transition to a fully market based issuance of Government securities. Again. the Central and State Governments in consonance with the Central and State FRBM Acts. Section B . as Government finances have been improving for both. the negative savings rate of public sector that had arisen over the last 5 years has turned positive. If this growth is to be maintained and accelerated in the medium and long run.Cut spending. This is perhaps the beginning of the emergence of a vibrant sub-national debt market – although it still has a long way to go. Third. a process that was initiated in the early 1990s with the introduction of auctions. Fourth. Current Scenario The Indian debt market. as a consequence of the recommendations of the Twelfth Finance Commission. the economy is estimated to be growing at 8. Let me briefly touch upon the reasons why I believe we are living in interesting times and why this is an opportune time to reflect on further debt market development. the role of the Central Government as a financial intermediary for State Governments is effectively ending. therefore. but.1 per cent this year with modest inflation and if similar conditions prevail. Second. 2006. it could force the government into painful choices. issues such as political stability. The first such significant change is the prohibition of RBI’s subscription to Government securities in the primary market effective April 1. expectations of future e. and the government securities market in particular. in this context will become even more important. look forward to Gross Domestic Savings touching 30 per cent or more of GDP on a sustained basis.c If the bond market froze up.t. Fifth. There is no fixed level of debt when bond markets will turn. It doesn't just depend on levels of debt. the point is the bond market has the capacity to throw the governments best laid plans into confusion. as mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. the sustenance of such growth will be possible only if investments in both infrastructure and industry accelerate. this will require debt financing with medium to long term maturity to supplement traditional bank financing. we can expect growth and inflation next year to also be on a similar path. increase taxes.

. Profit before tax for current year-end amount to Rs. (b) Write an elaborate note on the pricing. The following is the balance sheet of a corporate firm as on March 31. timing. including rs.7 (a) What do you understand by „Valuation of strategic options‟? Also illustrate it. 4 lakh as extraordinary income. current year. planning and procedure for „Acquisition of a Business‟. 64 lakh.