Internal Assessments

Program – MBA Program

Subject – Financial Management

Semester - 3

Assessment Type – (Subjective Assignment)

Questions & Answers:

1. What are the types of attitude towards risk?

Attitudes towards risk can vary among individuals and organizations. Here are some
common types of attitudes towards risk:
1. Risk-Averse
2. Risk-Seeking
3. Risk-Neutral
4. Risk-Tolerant
5. Risk-Aware
6. Risk-Managed

Risk-Averse: Risk-averse individuals or organizations prefer to avoid or minimize risks as

much as possible. They prioritize security and stability over potential gains and are more
likely to choose conservative options.

Risk-Seeking: Risk-seeking individuals or organizations are comfortable with taking risks and
are motivated by potential high returns. They are willing to accept higher levels of
uncertainty and volatility in pursuit of greater rewards.

Risk-Neutral: Risk-neutral individuals or organizations are indifferent to risk and make

decisions based solely on expected values. They are not swayed by the level of risk involved
and focus primarily on maximizing expected outcomes.

Risk-Tolerant: Risk-tolerant individuals or organizations are willing to accept a certain level

of risk in exchange for potential rewards. They understand and consider the risks involved
but are not overly deterred by them.

Risk-Aware: Risk-aware individuals or organizations acknowledge and understand the risks

involved in a decision or venture. They carefully assess and manage risks, taking steps to
mitigate them while still pursuing opportunities.

Risk-Managed: Risk-managed individuals or organizations actively identify, assess, and

manage risks through various strategies, such as diversification, hedging, and insurance.
They aim to control and limit the impact of risks while still engaging in potentially rewarding
activities.

It's important to note that an individual or organization's attitude towards risk may vary
depending on the specific context, circumstances, and personal or organizational goals.
Additionally, risk attitudes can be influenced by factors such as experience, knowledge,
cultural background, and individual or organizational values.
2 . What are the salient rights of equity shareholders and mention the different
suppliers of common share capital?
The salient rights of equity shareholders, also known as common shareholders
or common stockholders, include:

Ownership Rights: Equity shareholders have an ownership stake in the company and
therefore have the right to participate in the company's profits and assets. They have
the potential to benefit from capital appreciation if the value of the company's
shares increases.

Voting Rights: Shareholders typically have the right to vote on certain matters that
affect the company, such as electing the board of directors, approving major
corporate actions, and making changes to the company's articles of incorporation or
bylaws.

Dividend Rights: Equity shareholders have the right to receive dividends, which are a
portion of the company's profits distributed to shareholders. However, dividends are
typically discretionary and depend on the company's financial performance and the
board of directors' decision.

Preemptive Rights: Shareholders may have preemptive rights, also known as rights
of first refusal, which allow them to purchase additional shares of the company's
stock before it is offered to other investors. This helps shareholders maintain their
proportional ownership in the company.

Information Rights: Equity shareholders have the right to access certain company
information, such as financial statements, annual reports, and other disclosures. This
allows shareholders to make informed decisions about their investment and hold the
company accountable.

Liquidation Rights: In the event of the company's liquidation or winding up, equity
shareholders have the right to a portion of the company's remaining assets after all
debts and other obligations are paid off. However, in many cases, common
shareholders are the last to receive any remaining assets after creditors and
preferred shareholders.

As for the suppliers of common share capital, they can include:

Individual Investors: Individual investors purchase shares of a company's common

stock through public offerings or secondary market transactions.

Institutional Investors: Institutional investors, such as mutual funds, pension funds,

and insurance companies, invest in common shares on behalf of their clients or
policyholders.

Venture Capital Firms: Venture capital firms provide capital to start-up companies in
exchange for an ownership stake in the form of common shares.
Angel Investors: Angel investors are individuals who invest their own capital in start-
up companies in exchange for equity, often in the form of common shares.

Employee Stock Ownership Plans (ESOPs): Some companies offer common shares to
their employees through ESOPs, allowing employees to become shareholders in the
company.

Rights Offerings: Companies may issue additional common shares directly to existing
shareholders through a rights offering, giving them the opportunity to purchase new
shares at a discounted price.

It's important to note that the specific rights and suppliers of common share
capital can vary depending on the jurisdiction, company structure, and applicable
regulations.

3. What are the categories of security issues?

Security issues can be broadly categorized into several categories. Here are
some common categories of security issues:
 Network Security Issues
 Application Security Issues
 Data Security Issues
 Physical Security Issues
 Social Engineering
 Security Policy and Governance Issues
 Mobile Security Issues
 Cloud Security Issues
 Internet of Things (IoT) Security Issues

Network Security Issues: These issues involve vulnerabilities and threats related to
network infrastructure, such as unauthorized access, data interception, network
attacks (e.g., Distributed Denial of Service attacks), and network misconfigurations.

Application Security Issues: These issues pertain to vulnerabilities and threats within
software applications. Examples include injection attacks (e.g., SQL injection, code
injection), cross-site scripting (XSS), cross-site request forgery (CSRF), insecure direct
object references, and insecure session management.

Data Security Issues: These issues involve the protection of sensitive data from
unauthorized access, disclosure, alteration, or destruction. Data breaches, insider
threats, inadequate access controls, data leakage, and weak encryption mechanisms
are some examples.

Physical Security Issues: Physical security issues refer to the protection of physical
assets and facilities. This includes unauthorized access to buildings, theft or damage
to equipment, lack of surveillance, and inadequate security measures to prevent
physical breaches.

Social Engineering: Social engineering refers to the manipulation of individuals to

gain unauthorized access to systems or information. It includes tactics like phishing,
pretexting, baiting, tailgating, and impersonation.

Security Policy and Governance Issues: These issues pertain to the lack of effective
security policies, procedures, and governance frameworks within an organization.
This includes poor security awareness and training programs, absence of incident
response plans, weak password policies, and inadequate security audits.

Mobile Security Issues: With the proliferation of mobile devices, security issues
specific to mobile platforms have emerged. This includes mobile malware, insecure
mobile applications, data leakage through mobile devices, and device theft or loss.

Cloud Security Issues: Cloud computing introduces its own set of security concerns.
Issues may include data breaches in cloud storage, insecure APIs, account hijacking,
lack of segregation between customer environments, and shared vulnerabilities.

Internet of Things (IoT) Security Issues: As IoT devices become more prevalent,
security issues related to them are on the rise. These issues include insecure IoT
device configurations, lack of encryption, weak authentication mechanisms, and the
potential for IoT devices to be used as entry points into larger systems.

These categories provide a broad overview, and security issues can often overlap
or be interconnected. It's essential to address multiple layers of security to ensure
comprehensive protection against various threats and vulnerabilities.

4 . How do EBIT and EPS depend upon the financial leverage?

EBIT (Earnings Before Interest and Taxes) and EPS (Earnings Per Share) can be
influenced by the level of financial leverage employed by a company. Financial
leverage refers to the use of debt or borrowed funds to finance a company's
operations or investments. Here's how EBIT and EPS can be affected by financial
leverage:

EBIT and Financial Leverage: Financial leverage can amplify a company's EBIT,
resulting in higher earnings for shareholders. When a company uses debt financing,
it incurs interest expense on the borrowed funds. Interest expense is deducted from
EBIT to calculate net income. Since interest expense is tax-deductible, the presence
of debt reduces the company's taxable income, resulting in lower tax payments. As a
result, the company's net income after deducting interest expense can be higher
compared to a scenario without debt. This higher net income increases EBIT,
benefiting the shareholders.
EPS and Financial Leverage: Financial leverage can impact EPS by increasing the
number of shares outstanding or by affecting the net income available to
shareholders. Here's how it can work:
1. Dilution Effect
2. Interest Expense Impact
3. Tax Benefit

A) Dilution Effect: When a company employs financial leverage, it often issues debt
securities such as bonds or takes loans. In some cases, the company may need to
issue additional equity (common stock) to meet debt obligations or fund growth.
Issuing new shares can dilute the ownership stake of existing shareholders, thereby
reducing EPS.

B) Interest Expense Impact: The interest expense associated with debt financing
reduces the net income available to common shareholders. Since EPS is calculated by
dividing net income by the number of shares outstanding, a higher interest expense
can result in a lower net income and subsequently lower EPS.

C) Tax Benefit: As mentioned earlier, interest expense is tax-deductible. The tax

shield provided by interest expense can reduce the company's tax liability and
increase net income, which, in turn, can positively impact EPS.

It's important to note that while financial leverage can amplify returns in a
favorable business environment, it can also magnify losses in unfavorable conditions.
High levels of debt increase the financial risk for a company, as it needs to meet
interest payments even during periods of low profitability or economic downturns.
It's crucial for companies to strike a balance when employing financial leverage,
considering factors such as their ability to service debt, interest rate risks, and overall
financial stability.

5 . What are the factors to be considered before selecting a source of working

capital?
When selecting a source of working capital, several factors should be considered to
ensure the financial stability and operational efficiency of a company. Here are some key
factors to consider:

Cost of Capital: The cost associated with obtaining working capital is a critical factor.
Different sources of working capital, such as bank loans, lines of credit, trade credit, or
equity financing, have varying costs. It's essential to evaluate the interest rates, fees, and
any other costs associated with each option to determine the most cost-effective source.

Availability and Accessibility: Assess the availability and accessibility of the working capital
source. Consider factors such as the credit limit, flexibility in utilizing funds, and the ease of
accessing funds when needed. A source that provides sufficient liquidity and can be accessed
promptly during cash flow shortages is valuable.

Repayment Terms and Conditions: Understand the repayment terms and conditions
associated with each working capital source. Evaluate factors such as repayment period,
installment schedule, grace periods, and any associated penalties or restrictions. It's
important to ensure that the repayment terms align with the company's cash flow
projections and financial capabilities.

Collateral Requirements and Security: Some sources of working capital, such as secured
loans or lines of credit, may require collateral or security. Evaluate the collateral
requirements and determine if the company has sufficient assets to pledge as collateral.
Additionally, consider the implications of providing collateral, such as the risk of losing assets
in the event of default.

Business Cycle and Seasonality: Analyze the company's business cycle and seasonality
patterns. Different industries and businesses have unique working capital requirements
based on their revenue patterns. Consider a working capital source that aligns with the
business's specific needs during high and low demand periods.

Risk Tolerance: Evaluate the risk tolerance of the company. Some sources of working capital,
such as equity financing or venture capital, involve sharing ownership or control. Assess
whether the company is willing to accept dilution of ownership or relinquishing control in
exchange for working capital.

Relationship with Lenders or Suppliers: Consider the existing relationships with lenders or
suppliers. Establishing strong relationships with financial institutions or suppliers can
facilitate access to favorable working capital options, such as negotiated credit terms or
extended payment terms.

Long-Term Financial Strategy: Align the selection of a working capital source with the long-
term financial strategy of the company. Consider the company's growth plans, investment
opportunities, and the impact of working capital decisions on the overall financial structure
of the business.

By considering these factors, companies can make informed decisions when selecting a
source of working capital that best suits their specific needs, financial capabilities, and
strategic objectives. It's recommended to consult with financial advisors or experts to assess
the suitability of different options based on the company's unique circumstances.