ASSIGNMENT Subject code: MB0029 Set 1 SUBJECT NAME: FINANCIAL MANAGEMENT

Q1. Why wealth maximization is superior to profit maximization in today’s context? Justify you answer? Answer: Superiority of Wealth Maximization over Profit Maximization: 1. It is based on cash flow, not based on accounting profit. 2. Through the process of discounting it takes care of the quality of cash flows. Distant uncertain cash flows into comparable values at base period facilitates better comparison of projects. There are various ways of dealing with risk associate with cash flows. These risk are adequately considered when present values of cash of any project. 3. In today’s competitive business scenario corporate play a key role. In company from of organization, shareholders own the company but the management of the company rests with the board of directors. Directors are elected by shareholders and hence agents of the shareholders. Company management procures funds for expansion and diversification from Capital Markets. In the liberalized set up-, the society expects corporate to tap the capital market effectively for their capital requirements. Therefore to keep the investors happy through the performance of value of shares in the market, management of the company must meet the wealth maximization criterion. 4. When a firm follows wealth maximization goal, it achieve maximization of market value of share. When a firm pact wealth maximization goal, it is possible only when procedures quality goods at low cost. On this account society gains became of the society welfare. 5. Maximization of wealth demands on the part of corporate to develop new products or render new services in the most effective and efficient manner. This helps the consumers all it will bring to the market the products and services that consumer’s need. 6. Another notable features of the firms committed to the maximization of wealth is that to achieve this goal they are forced to render efficient service to their customers with courtesy. This enhance consumer and hence the benefit to the society.

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10)10}/ {.144567 Annual withdrawal = 13019. He expects that he live for another 10 years and will like to spend his savings by then.7. He places his savings into a bank account earning 10 per cent annually. Since listing ensures liquidity to the shares help by the investors shareholders can reap the benefits arising from the performance of company only when they sell their shares. Therefore. it is clear that maximization of the net wealth of shareholders. 000. What factors affect financial Plan? Answer: .80. of Year (N) =10 PVAn = A {1+i) n-1} / {i (1+i) n} 80000=A {1+.the first withdrawal occurring one year from now in such a way that his account balance becomes zero at the end of 10 years. Every corporate action finds its reflection on the market value of shares of the company. Your grandfather is 75 years old. He has total savings of Rs. Therefore.259374} Annual withdrawal =80000/ 6.593742/0. 8.We live in a society and interact with people and environment. So do our financial matters.10)10} 80000=A {1. Many things turn out in our live are uncontrollable by us. Many decisions we take are the result of external influences. How much will be his annual withdrawal? Answer:Present Value (PV) =80000/Amount (A) =? Interest Rat e(I) =10% No. From the point of evaluation of performance of listed firms.10(1+. He will draw equal amount each year. shareholders wealth maximization could be considered a superior goal compared to profit maximization. There are many factors affect our personal financial planning. Q2. What happens to us is not always accordance to our wishes. Therefore we can conclude that maximization of wealth is the appropriate of goal of financial management in today’s context. Range from economic Set1 MB0029 2 .63 Yrly Q3. the most remarkable measure is that of performance of the company in the share market.

we must consider whether it is a capital intensive of labour intensive industry. 7. finance ministry circulars. A firm should aim at optimum capital structure that would achieve the least cost capital structure.The product policy of any good financial plan is to match the term of the source with the term of investment.A well established company enjoying a good market share. The promoters who do not like to lose their grip over the affairs of the company normally obtain extra funds for growth by issuing preference shares and debentures to outsiders. It is a cardinal principal of financial planning. Selection of sources of finances us closely linked to the firm’s capacity to manage the risk exposure. To finance fluctuating working capital needs. 5. Aware of factors affecting your money matters below will certainly benefit your planning.The size of the company greatly influences the availability of funds from different sources. Such a company can tap the capital market for raising funds in competitive term for implementation new projects to exploit the new opportunity emerging from changing business environment. 3.SEBI guidelines. Debt is cheap but risky whereas equity is costly. This factor has become a significant one today because of the globalization of capital market. All fixed assets-investment are to be finance by long term sources. 8. Flexibility: . 6. Matching the sources with utilization:. Sources of finance available:.The financial plan of company should possess flexibility so as to effect changes in the composition of capital structure when ever need arises. Government Policy:. Factors Affecting Financial Plan 1.Capital structure of a company is influenced by the desire of the existing management of the company to remain control over the affairs of the company. If the capital structure of a company is flexible.Here. various clauses of Standard Listing Agreement and regulatory mechanism imposed by FEMA and Set1 MB0029 3 . 4. 2. A small company normally finals it difficult to raise funds from long term sources at competitive terms. the firm resorts to short term finance.Sources of finance could be group into debt and equity. The capital structure of a company:. On the other hand. for its products normally commands investor’s confidence. This will have a major impact on the total assets that the firm owns. A large firm with a diversified product mix may manage higher quantum of debt because the firm may manage higher financial risk with a lower business risk. it will not face any difficulty in changing the sources of funds. Nature of the industry: . Status of the company in the industry:. large companies like Reliance enjoy the privilege of obtaining funds both short term and long term at attractive rates.factors to global influences. Size of the company: .

Q4. (a) How much will you pay for the bond? (b) If you purchase the bond for Rs.98 95.904.B.02 904.98 1000 Maturity value .A. Suppose you buy a one-year government bond that has a maturity value of Rs. what interest rate will you earn from this investment? Answer: .50% MB0029 4 X 100 = = Set1 X 100 . Bond value maturity Market interest rate Period of maturity Valu of bond = = = = = = Pay for the bond = 1000 8% 1Yrs Maturity value 1 + rate of return 1000 1 + 0.904.Department of Corporate Affairs (Govt of India) influence the financial plans of corporate today.02 Interest Current Price of bond 95.1000.98 10.98.Purchase price of bond 1000 . They are to be compiled with a time constraint.08 926 926 Answer: . Purchase price of bond Maturity value Interest earning = = = = = Rate of interest = 904. The market interest rate is 8 per cent. Management of public issues of shares demands the companies with much status in India.

55 million at the end of its economic life.317.675 0.200 million.00 0 : 250000000 : 10 Years : 55000000 PV of cash inflows 39.000. The company’s sales in the year ending on 31st March 2007 were Rs. The net profit of the company was Rs. The required rate of return of the company is 14 percent.039 30.00 0 68.456 Set1 MB0029 5 .592 0.000.76 million. It is expected to have an economic life of 10 years.069 30. The management of the company wants to improve profitability further. The Company can borrow funds from a nationalized bank at the interest rate of 14 percent for 10 years.68 million per annum from year four to year eight and for the remaining two years Rs.30million per annum.373. It manufacturing plan is situated in Haryana.261. The estimated cost of the new equipment is Rs.000. A financial institution has offered to lend money to DHPL at 13. The company has the following options of borrowing Rs.50% Case Study Deepak Hand tools Private Limited DHPL is a small sized firm manufacturing hand tools.100 crore) on an asset base of Rs.650 million.1000 million (Rs. Investment in New Equipment Life of machine Salvage Years 1 2 3 4 5 6 Cash inflows 45.000.769 0.519 0. The company would need to raise debt to the extent of Rs. The plant can be sold for Rs.000. Rs.00 0 45.5 per annum but it needs to pay equated quarterly installment of interest and repayment of principal.000.45 million per annum for the first three years. What is the annual installment of bank loan? 3.200 million: a. It will be required to pay equal annual installment of interest and repayment of principal.250 million. Should the company borrow from the bank or from the financial institution? Answer 1.00 0 68. Calculate the quarterly installments of the Financial Institution loan 4. b.473.885 PV factors at 14 % 0.684 34. One is to expand its manufacturing capacity. The company is currently considering an investment proposal.00 0 45. Should the company expand its capacity? Show the computation of NPV 2. The accountant forecasts that net cash inflows would be Rs.00 0 68.Interest rate earn from this investment = 10.979.718 40.877 0. Questions: 1.459 35.626.

400 0.5% / 4.000 13. 10) =20. Answer 2.00 0 0.092.000.198. 00. 00.000.270 0. Should the company borrow from the bank because payback by the company less then financial institution.670 Here NPV is positive it is advisable to the company to expand its capacity.000.00 0 55.351 0.00 0 68. Loan Amount Interest rate No of Year (N) : : Quarterly 20. 40) =20. 43.838.910 294.000.00 0 30.00 0 30. 39. 83.198. 00.558 Answer 3. 00.016 9. Loan Amount Interest rate No of Year (N) : : : 200000000 14 % 10 Years Installment X PVIFA (14%.835. 00.670 250.338 23.314 14.7 8 9 10 Salvage 68. 00.175.876 Answer 4. 86.000 / 5.000. 00.000.308 0.000 Installment = 20. 00. 00.000 / 5.225. Set1 MB0029 6 .000 Installment = 20.176 = 3.5 % : 10 Years Installment X PVIFA (13.270 PV of cash inflows Initial cash out flow NPV 27. 00.216 = 3.238 8.000 44.

Set1 MB0029 7 .