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Master of Business Administration- MBA Semester 2
MB0045-Financial Management-4 Credits
(Book ID: B1628)
Assignment (60 Marks)
Note: Answer all questions within 400 words each. Each Question carries
10 marks 6 X 10=60
Qus1: Explain the liquidity decisions and its important elements. Write
complete information on dividend decisions.
Answer. The liquidity decision is concerned with the management of the current
assets, which is a pre-requisite to long-term success of any business firm. This is
also called as working capital decision. The main objective of the current assets
management is the trade-off between profitability and liquidity, and there is a
conflict between these two
Q2. Explain about the doubling period and present 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?
Answer. Doubling period

A very common question arising in the minds of an investor is “how long will it take
for the amount invested to double for a given rate of interest”.
Q3. Write short notes on:
a) Operating Leverage
b) Financial leverage
c) Combined leverage
Answer. a). Operating leverage arises due to the presence of fixed operating
expenses in the firm’s income flows. It has a close relationship to business risk.
Operating leverage affects business risk factors, which can be viewed as the
uncertainty inherent in estimates of future operating income. The operating
leverage takes place when a change in revenue produces greater change in
Earnings Before Interest and Taxes (EBIT). It indicates the impact of
Q4. Explain the factors affecting Capital Structure. Solve the below given
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?

Answer. Capital structure should be planned at the time a company is promoted.
The initial capital structure should be designed very carefully. The management of
the company should set a target capital structure, and the subsequent financing
decisions should be made with a view to achieve the target capital structure. Every
time the funds have to be procured, the financial manager weighs the pros and cons
of various
Q5. Explain all the sources of risk in capital budgeting with examples.
Solve the below given problem:
An investment will have an initial outlay of Rs 100,000. It is expected to
generate cash inflows. Cash inflow for four years.

If the risk free rate and the risk premium is 10%,
a) Compute the NPV using the risk free rate
b) Compute NPV using risk-adjusted discount rate
Answer. There are several definitions for the term ‘risk’. It may vary depending on
the situation, context and application. Risk may be termed as a degree of
uncertainty. It may be defined as the possibility that the actual result from an
investment will differ from the expected result. Risk in capital budgeting maybe
defined as the variation
Q6. Explain the objectives of Cash Management. Write about the Baumol
model with their assumptions.
Answer. The major objectives of cash management in a firm are:
• Meeting payments schedule

• Minimizing funds held in the

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