NAME- RAJAN KUMAR

ROLL NUM- 2214501673

PROGRAM- BBA
SEMESTER-3
COURSE NAME-FINANCIAL MANAGEMENT
COURSE CODE-DBB2104
 SET-1
Que.1 Explain the function of a financial manager in any organization.
Ans. Financial management is planning, organizing, directing, and controlling the financial
activities of a business. They play an important role in achieving the goal of the business and are
managed by the finance manager of the organization. The finance manager aims to provide
maximum long-term returns to the provider of capital. Since needs are greater and resources are
limited, a business needs to manage its finances more efficiently and effectively. Therefore, an
effective finance depart- ment becomes very important. The
functions of a financial manager is following:

Raising of funds: This is a very important function of the finance manager. He has to plan for
raising funds as required. There are two types of finances: one is debt and the other is equity. To
raise the first type of fund, a finance manager has to communicate or mediate with the bank and/or
financial institutions. To raise the second type of fund, a finance manager needs to deal with
merchant bankers to mobilize the funds from the public by issuing shares or debentures and
attracting the public to subscribe to its fixed deposits, etc. While procuring the funds, the manager
has to decide how much funds (finance) are to be procured from various sources. He needs to
consider the cost of funds (interest or dividend) and also needs to consider the cost of the public
issue of shares and debenture.
Que.2 Calculate the present value of the cash flows assuming the discount rate of 10% per annum.
YEAR CASH FLOWS {RUP}
1 10000
2 20000
3 30000
4 40000
5 50000
Ans.
Que.3 Explain the significance of the concept of cost of capital. Discuss different component of
cost of capital with example.
Ans. Meaning of coast and cost of capital: In layman terms cost is the amount one pays to buy
goods or avail a service. This definition is from a buyer’s point of view but how do we define cost
from the seller’s point of view? The answer can be, the amount which he or she originally paid for
buying this product or service will be the cost. But what if the seller has produced the item or
generated the service himself or herself? Can we conclude that it did not cost anything as he or she
did not pay anything? This is very much true in case of services. Obviously, nobody will agree to
this view. Although nothing has been paid for it, it doesn’t mean that there is no cost involved. For
this reason, in finance and economics, cost is broadly categorised into two categories: explicit cost
and implicit cost.
Explicit costs are the payments which are made in
actual, in exchange of goods and services. One can see the transaction in account books of the
concerned entity. Implicit costs on the other hand are derived based on certain acceptable logic.
They are also known as notional cost or imputed cost etc. To understand it, let’s assume that if
someone asks money from you and you already have an option to earn a return of 8% p.a. from
this money, will you give this money to him below this rate? The obvious answer is no because
even if you don’t give the money to him you are assured of earning 8% p.a. from your money.
Only above this rate will you be ready to give it to somebody else. Therefore, the cost of money
for giving it to him will be 8% for you. In this case although you are paying nothing, for you the
assumed cost will be 8% p.a. which will be termed as “opportunity cost” or “implicit cost”. The
cost of retained earnings is calculated on the basis of same concept.
Significance of cost of capital: The concept of cost of capital is used frequently in taking financial
decisions such as investment, financing, credit decisions etc. Let us understand the significance
for each of them.
1. Investment decisions: When a firm has to evaluate an investment opportunity it uses the
cost of capital for discount the cash flows expected from the project over its life time. Even
if it uses IRR (Internal rate of return) criteria for the project selection, the IRR is compared
with the overall cost of capital to take the decision. If IRR is greater than the cost of capital,
then project should be accepted otherwise it should be rejected.
2. Financing Decisions: Cost of capital plays a crucial role in selecting the source of finance
for financing the investment. The finance manager uses those sources which has the least
cost associated with them. This will not only help the firm to minimise the overall cost of
capital but also maximise shareholders’ returns.
3. Designing the credit policy of the firm: Working capital decisions in finance are based
on costs and benefits. While designing the credit policy of the firm the finance manager
should consider the cost of financing - the cost of credit (receivables) and the benefits
associated with extending the credit to customers.
 SET-2
Que.4 What are the sources of finance? Discuss the short term and long term sources of finance
for the firm.
Ans. Researchers worldwide have discussed the different sources of finance from various
perspective. Scholarly studies on the management of funds have come up with a wide variety of
concepts to define the core ideology of owed and owned sources of funds. Some researchers
explain that the sources of funds play a very important role in the overall development of the
economy.
Sources of Finance:
1. Long- Term source of finance
2. Short- Term source of finance
Long Term source of finance: Long term finance or long-term capital forms the financial
foundation of a firm. It is important because it is the only source of financing for the firm up to the
income generating stage. It is required to finance fixed assets and also for core working capital.
Long-term finance covers a period of five years or more.
Sources of Long term finance are:
Ownership Capital Borrowed Capital
Equity shares Debenttures/Bonds
Preference shares Term loans
Retained earnings/Ploughing back of profits Loans from special financial institutions
Short of sources of finance: Short-term sources of finance are offered for a short time span. Short-
term finance includes working capital funds from banks, capital funds from banks, public deposits,
commercial papers, factoring of receivables, etc. These sources of funds are for a period of one
year or less.
Sources of of Short term finance:
Spontaneous sources Short term finance
Trade credit Commercial paper
Accrued expenses Letter of credit
Deferred income Bill discounting
Factoring accounts receivable
Que.5 The details regarding three companies are given below:

X Ltd Y Ltd Z Ltd.

r = 12% r = 8% r = 10%
Ke = 10 % Ke = 10 % Ke = 10 %
E = Rs. 100 E = Rs. 100 E = Rs. 100
Compute the value of an equity share of each of these companies applying Walter’s formula when
the dividend pay-out ratio is (a) 0%, (b) 20%, (c) 40%,
Ans. P=D/ke+r(E-D)/ke/ke
Where p= market price per share

D= Dividend per share

r=Internal rate of return

E=Earning per share

Ke=cost of equity capital or capitilasation rate
X Ltd. Y Ltd. Z Ltd

(a) When dividend pay-

Que.6 What is Working capital
out ratio is 0%
P=0/0.10+0.12(50-
management? Discuss various factors
0)/0.10= that affect working capital
=0+0.12(50) / 0.10 requirement?
Ans.
Working capital management: The
effort of management which goes
towards effective management of
current assets and current liabilities is
termed as working capital management
(WCM). It is the difference between current assets and current liabilities. In other words, efficient
WCM means ensuring sufficient liquidity in the business to be able to meet day-to-day expenses
and short-term debts. In a broader view, WCM includes WC financing apart from managing the
current assets and current liabilities. So, it becomes important to arrange for WC at lowest possible
cost and also to effectively utilize capital.