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Analytical Questions— 1. Examine the annual report of a well-known company of your choice, particularly the chairman’s report and/or the director’s report. Are the corporate goals clearly? What specific references are made to the financial management? (student should enclose the annual report with the answer) The Provisions of section 260 of the Companies Act, 1956, the office up to the date of the ensuing Annual General Meeting and is eligible for appointment as Director of the Company. Subject to the approval of the shareholders in the ensuing Annual General Meeting, he has been appointed as a Whole-time Director of the Company for a period of five years w.e.f. August 01, 2008. Auditors The auditors retire at the conclusion of the ensuing Annual General Meeting and they have confirmed their eligibility and willingness to be re-appointed. Conservation of Energy, Research and Development, Technology Absorption, Foreign Exchange Earnings and Outgo Disclosures of particulars as required by the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are set out in the annexure included in this Report. Fixed Deposits Your Company has not accepted any fixed deposits. Disclosures under section 217 of the companies act, 1956 Except, as disclosed elsewhere in the report, there have been no material changes and commitments, which can affect the financial position of the Company between the end of the financial year and the date of this report. As required under section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, the names and other particulars of employees are set out in the annexure included in this Report. Acknowledgements
When the company has insufficient money to fund those projects or they do not want to fund those projects entirely. make profit). What is a profit? Profit is money left after subtracting total costs of sales and operation from total revenues from sales of products and services of the company. To sell something’s. the resources are limited. The primary goal of a business is to make profit. What are the major functions performed by the capital markets? Explain the importance of each function for corporate financial management. The Company has achieved impressive growth through the competence. To make revenues our company needs to sell something’s.e. no more. Well. clients. either they be product or service. Everything else comes in after that. That is it. vendors and other business associates for their continued support in the Company’s growth. The Directors also wish to thank the Government Authorities. and hire workers. usually via selling either equity and/or taking on . hard work. The management of the company must decided on which projects or investments they will take (i. no less. Since we are in real world. The Major Functions of the Capital Market Are: Raise capital for industry Businesses raise capital to fund projects that they cannot fund internally or fund projects that they do not want to fund internally. it needs to buy equipments.The Board wishes to place on record its appreciation to the contribution made by employees of the Company and its subsidiaries during the year under review. solidarity. they raise capital from external sources. all those things require money. Your Directors thank the customers. In order for company to produce both its products and services. the company need to produce them. build factories. cooperation and support of employees at all levels. How does the existence of a well-functioning capital market assist the financial management function? Discuss with reference to recent changes that have place in the area of finance. financial Institutions and Shareholders for their cooperation and assistance extended to For and on behalf of the Board of Directors 2.
This is done by making best use of the business's staff. such as Stock Markets. computer and software support. There are many tasks every business needs to do if it is going to succeed. They have responsibility for securing finances for future expansion and paying staff and suppliers. The following is a brief introduction to each of these functions: Human Resources . machinery.ICT will be used in each of these functional .will help the business remain competitive by developing new goods and services and updating the existing ones. security and health and safety. Commodities Markets and Foreign Exchange Markets.will keep a record of all money coming in and going out of the business.debt.will try and maximize the level of sales by carrying out market research and promoting the goods or service through a motivated sales team. Those transactions are usually handled by investment banks.ensures the business has the best staff for the job and that they are able to work effectively in a safe environment. They have responsibility for clerical duties. giving advice. Provide liquidity for financial instruments that trade in a secondary market Financial Markets are where short-term obligations or instruments are traded. Customer Service . Use of ICT .ensure the smooth running of the business on a day-to-day basis.will help the customer before and after a sale has been made by providing information. Operations .have the task of producing the goods or service in the most efficient way. These instruments could be Treasury Bills or Commercial Papers or Banker's Acceptance and etc. providing credit facilities. Each of these tasks is described as being a function of a business. building and raw materials. cleaning. Bond Markets. Administration and ICT support . delivering goods and providing after-sales support. Finance . Marketing and sales . Research and development .
the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest." observes Shipley. How much can he withdraw annually for a period of 30 years? Assume that at the end of 30 years the amount deposited will whittle down to zero. Shyam deposits Rs. according to a July World Trade Organization report. Explain why the degree of operating leverage affects the beta of the firm (and. In some cases companies have switched back to contracts that are backed by letters of credit rather than less-burdensome but riskier open accounts or have extended payment terms to gain business. in turn. "Our clients have been expressing concerns with private insurance coverage of their receivables and have been taking advantage of classic trade finance alternatives to reduce risk and days sales outstanding as opposed to less secure terms such as open account with longer tenors." 3. The restrictive climate has had an impact on worldwide trade volumes. an increasing number of companies are using classic trade instruments. including export letters of credit and confirmed export letters of credit in order to reduce their international risk exposure. "With the increase in economic volatility and private insurance failures. says Susie Shipley.000 in a bank which pays 10% interest. the required rate of return on equity). 00. Financial leverage (FL) takes the form of a loan or other borrowings (debt). The trade-finance shortage has likely contributed to an expected 10% decline in world merchandise trade volume for 2009. but pricing is still higher than precrisis levels. 1. Credit has begun to somewhat loosen. The risks inherent with trade financing in a down economy has pushed more manufacturers to require their customers to seek letters of credit as a safety net. Mr. If the firm's . Shipley says. 4.Increasing skepticism among trade partners regarding each other's financial health along with tighter credit conditions have manufacturers rethinking the way they conduct global trade deals. Illustrate with the help of examples and figures. head of the Royal Bank of Scotland's Global Trade Finance practice.
Margin buying is a common way of utilizing the concept of leverage in investing. EBIT = Earnings before interest and taxes and Interest = Interest payment: Debt-to-equity ratio = Debt-to-value ratio = = Debt-to-assets Interest coverage ratio = Degree of Financial Leverage (DFL) Financial Leverage affects the EPS of the firm. In the following. Financial Leverage acts as a double-edged sword. whereas a levered firm is made up of ownership equity and debt. then its ROE will be lower than if it did not borrow. then its return on equity (ROE) will be higher than if it did not borrow because assets = equity + debt (see accounting equation). A firm's debt to equity ratio is therefore an indication of its leverage. the degree of financial leverage measures the effect of a change in one variable on another variable. the loan principal and all accrued interest on the loan still need to be repaid. E = equity. if the firm's ROA is lower than the interest rate. Degree of financial leverage (DFL) may be defined as the percentage change in earnings (earnings per share) that occurs as a result of a percentage change in earnings before interest and taxes. .rate of return on assets (ROA) is higher than the rate of interest on the loan. This debt to equity ratio's influence on the value of a firm is described in the Modigliani-Miller theorem. D = liabilities. As is true of operating leverage. Measures of financial leverage Debt-to-equity Main article: Debt to equity ratio Debt to equity is generally measured as the firm's total liabilities divided by shareholders' equity. If the economic conditions are favorable and EBIT is increasing. Leverage allows greater potential returns to the investor that otherwise would have been unavailable but the potential for loss is also greater because if the investment becomes worthless. The DFL captures this relationship between EBIT and EPS. An unlevered firm can be seen as an all-equity firm. On the other hand. DFL is defined as the percentage change in EPS for a given percentage change in EBIT. a higher financial leverage has a positive impact on the EPS. A = total assets.
Explain why the IRR and NPV decision rules for two mutually exclusive projects may sometimes recommend the project and sometimes recommend different projects. non-financial liabilities. and this is sometimes referred to as gearing or simply leverage: Leverage (gearing) = A / E The two measures are related. the IRR of an investment is the interest rate at which the costs of the investment lead to the benefits of the investment.Symbolically. Gearing and Du Pont Analysis Use of the Du Pont Identity requires that leverage be measured in terms of total assets divided by shareholders' equity. debt-to-equity is equal to gearing times debt over assets: D / E = (A / E) * (D / A) 5. This means that all gains from the investment are inherent to the time value of money and that the investment has a zero net present value at this interest rate. Since the terms used are the same throughout. The term internal refers to the fact that its calculation does not incorporate environmental factors. . In more familiar terms. It is not uncommon to use only financial liabilities (long-term and short-term borrowings). accounts payable. or may adjust the carrying value of other items. such as non-tangible balance sheet items. and similar items. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR). thereby excluding. The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. The internal rate of return on an investment or potential investment is the annualized effective compounded return rate that can be earned on the invested capital. analysts may include or exclude certain items. In the context of savings and loans the IRR is also called the effective interest rate. For different applications of leverage. for example.
Used for capital budgeting. and accounting. taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield. and is a standard method for using the time value of money to appraise long-term projects. once financing charges are met. it measures the excess or shortfall of cash flows. and widely throughout economics. the converse process in DCF analysis. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price. is defined as the sum of the present values (PVs) of the individual cash flows. the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV).net present value (NPV) or net present worth (NPW) of a time series of cash flows. NPV is a central tool in discounted cash flow (DCF) analysis. and is more widely used in bond trading. . finance. in present value terms. The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price. both incoming and outgoing.
if the risk of default is lower. 25. Many firms have considered whether or not to implement just-in-time inventory procedures. The total loan amount is 100000. Now. Say. Hiralal company requires 10. even this can lower the interest rate of the loan 3. And hence. i. an Interest rate works on the following model: Interest Rate = Risk free Return in the market + Expected losses + Risk premium Risk free return in the market can be return on a treasury bond. the lender wants to give out 100 loans of 1000 each. Historically. Credit analysis (otherwise known as Credit risk analysis) deals with understanding the Risk of the borrower defaulting on payments.Assignment ‘B’ Analytical Questions— 1. Explain how credit analysis can result in customer paying a lower interest on purchases.. expected losses are 5% Finally.000 units of a certain item per year. The purchase price per unit is Rs. And the outcome of the credit risk analysis helps the lender in pricing the risk. The person can decide this risk premium based on what competition takes for same risk. And this reduces the interest rate.e. ppl may need lesser risk premium for making such loans. 2. it might have been notice that 5% of the loans given out are never recovered. the carrying cost per . Credit analysis is done for every account at the time of opening or taking a new loan. Hence. Explain how a company that would need to purchases additional computer equipment to implement such an inventory procedure and for whom both revenues and operating expenses would be largely unchanged might benefit form just-in-time. Let’s assume that the interest rate for risk free return is 3% Suppose. The interest rate should be = 3% + 5% + 2% = 10% This is the way the interest rate is arriving at. by analyzing the credit risk of a person. setting the interest rate for the loan. competition charge 2% for this kind of risk. Further. a person would like to get some premium for the extra risk taken. Typically. the expected losses from lower risk loans are going to be lower.
000 O=300 C= 25% of 25 =6 EOQ=√2 AO/C=√2*10. and the fixed cost per order is Rs.000*300/6=1000 (b) (c) . 300 (a) Determine the economic order quantity (b) How many times per year will inventory be ordered. if the size is equal to the EOQ (c )What will be the total cost of carrying Ans: (a) Economic Order Quantity (EOQ)=1000 A=10.year is 25% f the inventory value.
A financial system Ans: c – Is inclusive of financial markets. financial institutions and financial instruments 6. The difference between a capital market and money market is that Ans: b . Risk-return trade off implies Ans: c – Taking decisions in a way which optimizes the balance between risk and return 4. issue of shares and debentures etc. The Finance Manager is involved in almost all the decisions in any organization because Ans: b – Most decisions taken in an organization have financial implications 2. Maximising the wealth of shareholders by increasing earnings per share 5. A finance manager’s main objective is Ans: e – – Procuring funds for the firm through the loans.Assignment ‘C’ Objective Questions— 1. Earnings per share Ans: b – Refer to the market value per share of the company 3.
actually end up.– Capital markets can be classified into primary and secondary markets unlike the money market 7. Given an investment of Rs. Credit cards Ans: c – Enables a cards member to pay just the minimum amount due from him to the bank at any point of time 10. Treasury bills Ans: c – Are floated through auction conducted by RBI 9. becoming long term advances in many cases due to Ans: e – None of the above 11. Cash credits which are a form of short term bank borrowing. 1.000 to be invested for 9 months and interests credited annually Ans: c – It is better to invest in a scheme which earns simple interest at 15% . Call money market Ans: b – Deals in commercial paper 8. Money has time value since Ans: e – – Money in hand today is more certain than money to be get tomorrow The value of Money gets compounded as times goes by 12.
In order to find the value in 2000 of a sum of Rs. Current yield on a bond is Ans: a – Measured as the rate of return that will be earned on bond if it is purchased at its market price and coupon interest is received 17. The rule of 72 Ans: e – – Is used to find the doubling period Applies the Formula 72 divided by interest rate 16. which of the following is true? Ans: b – When the required rate of return is less than the coupon rate. With respect to.. If the discount rate is 15%. Which of the following is true? Ans: d – All of the above 18.. 100 par value bond bearing a coupon rate of 100/0 will mature after 6 years.13. A Rs. The real rate of interest or return is nothing but Ans: a – Nominal or Market Interest rate 15. the premium on the bond declines as the maturity approaches 19. which of the following is the value of the bond? Ans: b .the effect of the number of years to maturity on bond values. 100 invested in 1998 at X°/o interest rate Ans: a – The (FVIF)Future Value Interest Factor Table should be used 14.
00. Of which of the following basis can a funds flow statement prepared? Ans: b – Working capital basis 24. The dividend expected next year is Rs. Ans: c – Earnings before interest and tax 25. 100 par value bond carrying a coupon rate of 15% and maturing after 5 years is Rs. The equity stock of Rock Ltd. 110. 20 per share.– Rs. Which of the following is the yield to maturity on this bond? Ans: c – 12. The market value of a Rs.04 20. Ans: d – Zero sensitivity of the . is currently selling at Rs. 81. 2. Degree of financial leverage is __________________ below the financial breakeven point.38 21. The investor’s required rate of return on this stock is 12°/o. Which of the following is the expected growth rate if the constant growth mode? applies to Rock Ltd’ Ans: b – 2 22. Which of the following is a source of fund? Ans: a – Increase in assets 23. Operating leverage measures the ________________ to changes in quantity.
Unit Variable cost (V) = Rs. 150. The dividend expected a year hence is Re.88% 30.000.00.26. The expected rate of dividend growth is 8%. 17.00. Equity shares of a company are quoted in the market at Rs. When the Earnings before interest and taxes (EBIT) are Rs.0. 80 and Total Fixed Cost (F) = Rs. The degree of operating leverage for the company when output (Q) is 5000 units is Ans: e – 7 28.5. Tax Rate (T) = 50%. 75. Degree if total leverage (DTL) can be calculated by which of the following formula given Degree of operating leverage (DOL) and Degree of financial leverage (DFL) Ans: d – DOL x DFL 27.50. the degree of financial leverage is Ans: a – 1. The cost of equity capital to the company will be. While calculating average cost of capital Ans: d – Weights are always based on the market value 31. Consider following data for a company:Interest burden (I) = Rs.00.000. Preference Dividend (Dp) = Rs. Cost of equity capital is Ans: e . Ans: a – 13. The following data are available for a company: Unit selling price (P) = Rs.000.00. 1. 1.5 29.00. 3.
The dilemma of ‘liquidity’ vs. Ans: c – Taxes 33. ‘profitability’ arises in the case of Ans: d – Purely trading company 37. Under trading means Ans: d – None of the above 38. The term net working capital denotes Ans: b – The amount of long-term funds used to finance current assets (including loans and advances) 34. Current ratio indicates Ans: c . Advance received from the customers is Ans: b – The current assets item which is highly liquid in character 35.– All of the above 32. The following is/are some of the factors that influence the capital structure of a firm. Negative net working capital signifies that Ans: b – The value of current ratio is less than unity 36.
Current assets .– Cash inflows of the business 39. Liquidity ratio computed by eliminating inventories from current assets is Ans: c – Quick ratio .Current liabilities = Ans: b – Net working capital 40.
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