MBA 202- FINANCIAL MANAGEMENT

ASSIGNMENT NO_1

QUESTION ONE

The basic rationale for the objective of shareholders wealth maximization is that it reflects
the most efficient use of society’s economic resources and thus leads to a maximization of
society’s economic wealth. Comment critically.

ANSWER:

The maximization of wealth is a more viable objective of management. Any action which creates
wealth or which has a net present worth is a desirable one and should be undertaken. Wealth of
the firm is reflected in the maximization of the present value of the firm i.e., the present worth
of the firm. This value may be readily measured if the company has shares that are held by the
public, because the market price of the share is indicative of the value of the company. And to a
shareholder, the term ‘wealth’ is reflected in the amount of his current dividends and the
market price of share.
If organization assumes objectives of shareholders wealth maximization, it will struggle for profit
maximization which will lead to more operations with optimum utilization of resources at
minimum possible price and waste management. Thus it has to concentrate on 3 things: the
demand for its product, the production function, and the supply of its inputs.

Operations of business needs employees to produce and supply, which will be hired from the
society and the unemployment rate will decreased, on the other hand the organization will
survive in competition in long run because it will try to produce goods in large scale which of
course decrease the price of production and the final goods would be supplied to the society to
meet the demands of the society as whole.

QUESTION TWO

Describe the three broad areas of financial decision-making.

ANSWER:

The three broad areas of financial decision making are viz; capital budgeting, capital structure,
and working capital management.

Capital Budgeting
Capital budgeting is considered as a significant decision i.e.; allocating capital in the firm. It is
developing a plan to invest in buildings, machineries, equipments, research and development,

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godowns, showrooms, distribution network, information infrastructure, brands, and other long-
lived assets. And for this magnitude, timing, and riskiness of cash flows associated with it, the
options embedded in the investment project are considered.

Capital Structure
The means of financing the investment project is decided by finding optimal debt ratio for the
firm, and about which specific instrument of equity and debt finance should be employed. And
about capital markets that should be accessed, the time of raising finances and the price for
offering its securities.

The capital structure and dividend decisions are guided by considerations of cost and flexibility,
in the main. The objective of it is to minimize the cost of financing without imparting the ability
of the firm to raise finances required for value creating investment projects.

Working Capital Management

The day to day financial activities deal with the current assets and current liabilities which are
also referred as short term financial management. The key issues in working management are:
optimal level of inventory for the operation of the firm, decision regarding whether to grant
credit to its customers and the terms of it. And the amount of cash to be carried in hand and
investment of temporary cash surpluses. The sources of short term finance are appropriate for
the firm is also a factor to be considered under working capital management.

QUESTION THREE

`Time Value of Money is said to be the most important aspect of financial management as it
helps in investment decisions’. Comment on this statement.

ANSWER:

We know that a rupee today is more valuable than a rupee a year hence. This is said so due to
three reasons but the main is that Capital can be employed productively to generate positive
returns. An investment of one rupee today would grow to (1+ r) a year hence.

QUESTION FOUR

You have borrowed a 3-year loan of Rs1,00,000 at 9% interest per annum to buy household
goods. Your finance company requires three equal repayments.

a) Based on the details given, calculate the Annual Installment to be paid

b) By paying of equally each year for 3 years, you shall completely pay-off your loan with
9% interest. Draw up a Loan-Amortization Schedule to show this.

ANSWER:

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QUESTION FIVE

Axis Bank pays 12% in interest compounded quarterly. If Rs10,000 is deposited by you, how
much should it grow at the end of 5 years?

ANSWER: