Financial Management(Final Exam)

Nighat seema 11211

Faculty Sir Nabeel Badar

Question no . 2. 3. 4. 5. 6. 7. 8 are done in excel sheets.

Question no.9

1-M & M's key assumptions

ANSWER

There exists a perfect capital market in which there are no information costs or
transaction costs.
• Debt is risk free and kd remains constant at all levels of gearing.
• Investors are indifferent between personal and corporate gearing.
• Investors and companies can borrow at the same rate of interest.

2-Cash conversion cycle:

ANSWER
The Cash Conversion Cycle (CCC) is a metric that shows the amount of time it
takes a company to convert its investments in INVENTORY to cash. The
conversion cycle formula measures the amount of time, in days, it takes for a
company to turn its resource inputs into cash.

Cash Conversion Cycle = DIO + DSO – DPO

Where:

 DIO stands for Days Inventory Outstanding

 DSO stands for Days Sales Outstanding
 DPO stands for Days Payable Outstanding

3-Incremental Cash Flow

Incremental cash flow is the additional operating cash FLOW that an organization

receives from taking on a new project. A positive incremental cash flow means that
the company's cash flow will increase with the acceptance of the project. A
positive incremental cash flow is a good indication that an organization should
invest in a project.

4-THE CAPITAL BUDGETING PROCESS;

The budgeting process is the process of putting a budget in place. This process
involves planning and forecasting, implementing, monitoring, and controlling, and
finally evaluating the performance of the budget. A budget is essential for any
organization. It helps to keep track of its income and expenditure.
• Generate investment proposals consistent with the firm’s strategic
objectives.
• Estimate after-tax incremental operating cash flows for the investment
projects.
• Evaluate project incremental cash flows
• Select projects based on a value-maximizing acceptance criterion.
• Reevaluate implemented investment projects continually and perform post
audits for completed projects

5-Accurial vs cash ACCOUTING;

Accrual accounting is one of two accounting methods.

the other is cash accounting. Accrual accounting measures a company's
performance and position by recognizing economic events regardless of when cash
transactions occur, whereas cash accounting only records transactions when
payment occurs.
Accrual accounting is an accounting method where revenue or expenses are
recorded when a transaction occurs rather than when payment is received or made.
The method follows the matching principle, which says that revenues and expenses
should be recognized in the same period.
Cash accounting is the other accounting method, which recognizes transactions
only when payment is exchanged
Accrual accounting is the opposite of cash accounting, which recognizes
transactions only when there is an exchange of cash. Accrual accounting is almost
always required for companies that carry inventory or make sales on credit.
Accrual accounting, however, says that the cash method is not accurate because it
is likely, if not certain, that the company will receive the cash at some point in the
future because the services have been provided. The accrual method recognizes the
revenue when the clients' services are concluded even though the cash payment is
not yet in the bank. Revenue will be recognized as earned on Oct. 30. The sale is
booked to an account known as accounts receivable, found in the current assets
section of the balance sheet

6-Uses of Free cash flows

Free cash flow is an important measurement since it shows how efficient

a company is at generating cash. Investors use free cash flow to measure whether a
company might have enough cash for dividends or share buybacks.

Free cash flow (FCF) is the cash flow available for the company to repay creditors
or pay dividends and interest to investors. Some investors prefer FCF or FCF per
share over earnings or earnings per share as a measure of profitability because it
removes non-cash items from the income statement.
USES:

 Dividends. ...
 Share repurchases. ...
 Paying Down Debt. ...
 Reinvesting in the Company. ...
 Acquisitions. ...
 Shareholder Yield = Cash Dividends + Net Share Repurchases + Net Debt
Paydown / Market Capitalization.