THE ICFAI UNIVERSITY

STUDENT NAME- RITESH MOHAN KATHURIA

ENROLLMENT ID- 19FLICDDN01105

SECTION- “B”

BATCH AND YEAR- 2019-2024 & 02 YEAR

SEMESTER- FOURTH

SUBMITTED BY SUBMITTED TO

RITESH MOHAN KATHURIA DR. MEHFOOZ ALAM

QUESTION- 01

Ms. Sheetal is a manufacturer and exporter of silk in the international market. She

decided to look into the domestic untapped market and secured an order to supply 30

kgs of silk in a temple. She thought of starting the first domestic order as a

philanthropist and luckily her first order is from a temple. She waives off 25 percent of

the price and delivered the product. On the delivery of the product, the temple

administration finds the product unworthy and inferior quality. As her firm is

manufacturing export-oriented silks, she doesn’t agree with inferiority of the product.

But the temple administration asked her to take back all her consignment of delivery.

As a philanthropy act, she has no Business Contract with her.

ANSWER-

a) What are the key learnings from this case?

1. Both parties must have made up a contract.

Importance of Business Contract

 Proof of Details

 Avoids Misunderstanding

 Provides Security

 Provides Confidentiality

 Acts as a Record of the Business

2. Ms. Sheetal should have taken some amount of advance money

3. Checking product before purchasing. As if the customer have checked the product

beforehand they must have known about the quality.

 b) Export or domestic market, whichever is better?

According to me, both the markets are better.

Rest the difference are as followed-

Basis Domestic Market Export Market

Trading Blocs and Trade The Absence of these As the presence of these

Barriers barriers provides ample barriers restricts free trace

scope for the expansion of among countries worldwide.

business in the Domestic

Market.

Risk In Trade It is limited as the area of There is a large amount of

operation/business is risk involved because of the

limited. large area for

operation/business.

Agencies Involved Wholesalers, Retailers, and Exporters, Export Houses,

other trading organizations. Trading Houses, etc.

Competitions Not Highly Competitive Highly Competitive

Government interference Limited Interference. Interference that is

considerable as observed in

export marketing activities.

 c) What is the role of the business contract?

Role of Business Contract

A Business Contract-

It is a legally binding agreement which is between two or more persons or entities.

 Proof of Details

 Avoids Misunderstanding

 Provides Security

 Provides Confidentiality

 Acts as a Record of the Business

 A record of commitments for both parties.

 Helps to prevent conflicts and mitigate risk.

 They help an entire organization maintain compliance

 They serve as a collaboration and communication tool.

d) What do you think will be the solution for both the parties?

As there are the different solutions that both parties can have but according to me temple

administration should return the products with a proper refund to Ms. Sheetal and as a return,

Ms. Sheetal can give them more discount and products of better quality.
QUESTION- 02

Critically discuss and assess the impact of risk and uncertainty on the financial

decision- making process and be able to appropriately advice others on the basis of

analysis.

ANSWER-

Financial Risk:

Financial risk, in itself, isn't inherently good or bad but only exists to different degrees. Of

course, "risk" by its very nature features a negative connotation, and financial risk is not

any exception. Risk can spread from one business to affect a whole sector, market, or maybe

the planet. Risk can stem from uncontrollable outside sources or forces, and it's often

difficult to beat.

While it is not exactly a positive attribute, understanding the likelihood of monetary risk can

cause better, more informed business or investment decisions. Assessing the degree of

monetary risk related to security or asset helps determine or set that investment's value. Risk

is that the flip side of the reward. One could argue that no progress or growth can occur, be it

during a business or a portfolio, without assuming some risk. Finally, while financial risk

usually can't be controlled, exposure thereto is often limited or managed.

How to cope up with Financial Risk:

There are many tools available to individuals, businesses, and governments that allow them

to calculate the quantity of monetary risk they're taking over. The most common methods that

investment professionals use to research risks related to long-term investments—or the stock

exchange as a whole—

Includes:

 Fundamental Analysis-

The method of measuring a security's intrinsic value by evaluating all aspects of the

underlying business including the firm's assets and its earnings.

 Technical Analysis-

The method of evaluating securities through statistics and appears at historical returns,

trade volume, share prices, and other performance data.

 Quantitative Analysis-

The evaluation of the historical performance of a corporation using specific financial

ratio calculations.
QUESTION- 03
Analyse the financing decisions of firms including capital structure and cost of capital.
If you have to go for financing your firm what your decision will be under these
circumstances:

ANSWER-

a) Family-Owned Business You Just Took Over From Your Family.

It will typically be financed in its early stages by a mix of equity (via money invested in

shares), and/or loans from the family shareholders and possibly by an overdraft facility with

its bankers.

As the business develops, however, the family may have to think about the likelihood of

third-party investment, particularly if the business isn't self-financing and therefore the

necessary funds can't be found from relations, existing shareholders, or the company’s

bankers. Third-party investment might not just be required to fund an expansion of the

business but might alternatively be essential, for instance, to permit certain relations to

exit the business or to permit the relations to understand a part of the worth of their

investment within the company. There are a variety of categories of third-party investors

prepared to think about investing in privately businesses, starting from business angels or

high-net-worth individuals ('HNWIs'), to non-public equity or risk capital funds. The

growing crowdfunding sector can also prove a viable option where the closed corporation is

adept at marketing itself to the 'crowd' through the relevant online portal. A consequence of

doors investment could also be that the investor demands one or more seats on the board of

directors. This might concern some families, but independent directors can often bring

additional skills to the corporate. Such investors can also demand certain operational consent

rights within the company's constitutional documents. As such, third-party investment might
not always appeal to some family businesses given it'll be considered a threat to the

family’s control of the business and to its ability to steer the longer term direction of the

corporate. Investment through a risk capital fund, or private equity investor, or maybe

the 'crowd', can also accompany certain expectations of an exit within a 3 to 5 years’

time-frame. However, where the investors are well-matched in providing relevant expertise

and knowledge, also as much-needed funds, these risks to the closed corporation should be

outweighed by the potential benefits. Nevertheless, any such business should conduct its own

due diligence into the varied funding options available to make sure whichever is chosen is

that the most appropriate.

b) Own Start Up.

Angel financing may be a business investment model where high net worth individuals can

help start-ups by providing finance in exchange for equity within the company. Such high net

worth individuals are often mentioned as “business angels”.

As angel financing involves equity exchange, it also includes a high risk – high return

trade-off. This suggests that the investors are taking high risk in expectation of a high return.

To stick to such expectations, start-ups can further invest the finance received in high-income

yielding projects, or other instruments like debt or equity of other companies. This also helps

the start-up get a gentle income. The start-up should analyse the prospects of its projects,

form budgets and make wise decisions to finance its projects.

Some advantages of angel financing are:

 Angel financing is a smaller amount risky in comparison to debt financing, as start-

ups aren't obliged to pay back the capital to investors unless they plan to finish up.
  Angel investors don't expect immediate returns as they have a tendency to take a

position in an organisation within the end of the day.

 Since a start-up isn't well versed with industrial contacts, angel investors can help

establish them and share their knowledge and mentor the entrepreneurs.

Three types of venture capital funds

• Early Stage Financing-

Which involves Seed Financing, First- Stage Financing, Early Financing.

• Expansion Financing-

Which involves Bridge Financing.

• Acquisition Financing-

When they acquire a part of entire entity.

QUESTION- 04
Explain various Capital Structure Theories. Which theory has upper hand on other and why?
Explain.
ANSWER-
There are four different types of Capital Structure Theories-

Net Income approach

Capital Structure Theories-

Net Operating Income

approach

Traditional approach

Modigliani and Miller

approach

1. Net Income Approach

So, according to this approach,

The value of a particular firm is increase and decrease overall cost of capital by

increasing the proportion of debt financing in capital structure

It was suggested by “David Durand”.

2. Net Operating Income Approach (Irrelevant Theory)

So, according to this approach,

The total market value of a particular firm is not affected by the change in its capital

structure and the overall cost of capital remain constant irrespective of debt-equity

ratio.

It was also suggested by “David Durand”.

3. Traditional Approach (Intermediate Approach)

So, according to this approach,

The value of firm can be increased initially or cost of capital can be decreased by using

more debt as the debt is a cheaper source of fund than equity.

After that optimum capital structure can be reached by a proper debt-equity mix.

But after a particular point if the proportion of debt is increased, then the overall cost of

capital start increasing and market value begin to decline.

It was suggested by “Ezta Solomon and Fred Weston”.

4. Modigliani-Miller Approach

In the absence of
corporate taxes
Modigliani-
Miller Approach
When corporate
taxes exist
 a) In The Absence of Corporate Taxes

So, according to this approach,

The total value of a firm must be constant irrespective of degree of leverage, i.e. debt-

equity ratio. This can be justified by arbitrage process.

This approach is similar to the net operating income approach when taxes are ignored.

It means capital structure decision of a firm is not affect its market value.

b) When Corporate Taxes Are Assumed To Exist

So, according to this approach,

The value of the firm increase and cost of capital decrease with the use of debt if

corporate tax are considered. This is because of Benefit of tax because int. on tax is

deductible expense.

QUESTION- 05
Company ABC and company XYZ both manufacture soda pop in glass bottles. Company

ABC produced 30,000 bottles, which cost them 100 each. Company XYZ produced 45,000

bottles at a price of 125 each. Company ABC pays Rs 10,00,000 in rent, and company XYZ

pays Rs 17,50,000. Both companies pay an annual rent, which is their only fixed expense.

Compute the operating leverage and degree of operating leverage of each company.

Particulars ABC Ltd (in Rs) XYZ Ltd (in Rs)

A. Variable Cost/ Bottle 100 125

 B. Bottles Produced 30,000 45,000

C. Total Variable Cost 30,00,000 56,25,000

(A*B)
10,00,000 17,50,000
D. Add: Fixed Cost

Total Cost (C+D) 40,00,000 73,75,000