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2021 1.a) What are the key financial functions of a firm

Ans: The key financial functions of a firm encompass various activities and responsibilities
aimed at managing the financial resources of the company effectively to achieve its strategic
objectives and maximize shareholder value. Here are the primary financial functions of a
firm:
1. Financial Planning and Analysis (FP&A):
- Developing strategic financial plans, budgets, and forecasts to guide decision-making
and resource allocation.
- Analyzing financial performance, identifying trends, and evaluating variances to inform
strategic initiatives and operational improvements.
2. Capital Budgeting and Investment Analysis:
- Evaluating investment opportunities, capital projects, and potential acquisitions to assess
their financial viability and potential return on investment.
- Conducting cost-benefit analyses, net present value (NPV), internal rate of return (IRR),
and other financial metrics to prioritize and allocate capital efficiently.
3. Capital Structure Management:
- Determining
the optimal mix of debt and equity financing to minimize the cost of capital and maximize
shareholder value.
- Managing capital structure dynamics, including debt issuance, equity financing, and
capital restructuring activities to maintain financial flexibility and liquidity.
4. Financial Risk Management:
- Identifying, assessing, and mitigating financial risks, including market risk, credit risk,
liquidity risk, and operational risk.
- Implementing risk management strategies, such as hedging, diversification, and
insurance, to protect the firm's financial assets and minimise potential losses.
5. Financial Reporting and Compliance:
- Ensuring accurate and timely preparation of financial statements, including balance
sheets, income statements, and cash flow statements, in compliance with accounting
standards and regulatory requirements.
- Communicating financial performance and key metrics to internal stakeholders, external
investors, and regulatory authorities to maintain transparency and accountability.
6. Treasury Management:
- Managing cash flow, liquidity, and working capital to optimise cash balances, minimise
financing costs, and meet short-term obligations.
- Investing excess cash reserves, monitoring banking relationships, and implementing
cash management strategies to enhance liquidity and financial stability.
7. Financial Control and Governance: Establishing internal controls, policies, and procedures
to safeguard assets, prevent
fraud, and ensure compliance with legal and regulatory requirements.
- Conducting internal audits, risk assessments, and compliance reviews to monitor
financial performance and mitigate operational risks.
8. Investor Relations:
- Building and maintaining relationships with investors, analysts, and other stakeholders to
communicate the company's financial performance, strategic initiatives, and long-term value
proposition.
- Managing investor communications, including earnings calls, investor presentations,
annual reports, and regulatory filings, to promote transparency and investor confidence.
Overall, the key financial functions of a firm are essential for managing financial resources
efficiently, mitigating risks, and driving sustainable growth and profitability over the long term.
These functions play a critical role in supporting strategic decision-making, ensuring financial
stability, and creating value for shareholders and other stakeholders.
c) Strength and weakness of the common legal forms of business structure
Ans: Sure, here's a brief overview:
1. Sole Proprietorship:
- Strength: Easy to set up and manage, complete control over decision-making.
- Weakness: Unlimited personal liability, limited access to capital, difficult to scale.
2. Partnership:
- Strength: Shared responsibility and expertise, easier access to capital than sole
proprietorship.
- Weakness: Shared profits and liabilities, potential for conflicts among partners, general
partners have unlimited liability.
3. Limited Liability Company (LLC):
- Strength: Limited liability for owners, flexible management structure, pass-through
taxation.
- Weakness: More complex to set up and maintain than sole proprietorship or partnership,
varies by state in terms of regulations.
4. Corporation:
- Strength: Limited liability for owners, easier access to capital through the sale of stock,
perpetual existence.
- Weakness: Double taxation (corporate profits taxed at the corporate level and then again
when distributed to shareholders), more complex and costly to establish and maintain,
extensive regulatory requirements.
2.a)State the informational content of dividend
Ams: The informational content of a dividend typically includes:
1. Amount: The total dividend payout per share or per unit of ownership.
2. Declaration Date: The date on which the company's board of directors announces the
dividend payment.
3. Ex-Dividend Date: The date on which the stock begins trading without the dividend.
Investors who purchase shares on or after this date are not entitled to receive the upcoming
dividend.
4. Record Date: The date on which the company determines the shareholders who are
eligible to receive the dividend.
5. Payment Date: The date on which the dividend is actually paid to eligible
shareholders.
Overall, dividends provide valuable information to investors about a company's financial
health, profitability, and commitment to returning value to shareholders.
a)Various types of dividend
Ans: There are several types of dividends that companies may distribute to their
shareholders:
1. Cash Dividend: The most common type, where shareholders receive a portion of the
company's profits in the form of cash payments.
2. Stock Dividend: Instead of cash, shareholders receive additional shares of company
stock. This can be a percentage of current shares or additional shares issued.
3. Property Dividend: Shareholders receive assets or property instead of cash or stock.
This could include physical assets such as equipment or real estate.
4. Special Dividend: An extra, one-time dividend payment that is not part of the regular
dividend schedule. It is often issued when a company experiences exceptional profits or
wants to distribute excess cash to shareholders.
5. Scrip Dividend: Shareholders have the option to receive either cash or additional
shares of stock. If they choose to receive shares, they are issued a promissory note (scrip)
that represents the dividend payment.
6. Liquidating Dividend: Paid when a company is winding down its operations or selling
off assets. It represents a return of capital to shareholders rather than a distribution of profits.
Each type of dividend has its own implications for shareholders and the company's financial
situation.

3.a) Explain the effect of financial leverage on EPS

Ans: Financial leverage refers to the use of debt to finance a company's operations or
investments. When a company employs financial leverage, it increases its potential for
higher returns on equity, but it also amplifies the risk. This is because debt creates fixed
interest payments, which must be paid regardless of the company's performance.
The effect of financial leverage on earnings per share (EPS) is primarily seen through the
magnification of profitability. When a company takes on debt to finance its operations or
investments, it often incurs interest expenses. These interest expenses are deducted from
the company's earnings before calculating EPS.
If the company's return on investment (ROI) is higher than the cost of debt, financial
leverage can amplify EPS. This is because the company's net income increases due to the
additional returns generated from using debt financing. However, if the ROI is lower than the
cost of debt, financial leverage can decrease EPS as the interest expenses eat into the
company's profits.
In summary, financial leverage can either magnify or diminish EPS depending on the
effectiveness of the company's debt utilisation and its ability to generate returns exceeding
the cost of debt.
a)What does the indifference point of EBIT indicate
Ans: The indifference point of EBIT (Earnings Before Interest and Taxes) indicates the level
of EBIT at which two different financing options result in the same net income. It helps in
determining the point at which a company is indifferent between two financing alternatives,
typically debt and equity.The indifference point of EBIT indicates the level of EBIT (Earnings
Before Interest and Taxes) where the choice between different financing options has no
impact on the firm's net income. It helps in determining the balance between debt and equity
financing.

4.a) What are the dangerous of maintaining excessive working capital

Ans:Maintaining excessive working capital can lead to several dangers for a company:
1. Opportunity Cost: Excess working capital tied up in low-return assets means missed
opportunities for investment in more profitable endeavors.
2. Reduced Efficiency: Idle cash can lead to inefficient use of resources, such as increased
storage costs for excess inventory or low returns on idle funds.
3. Increased Risk: Holding excessive working capital can expose the company to higher risk,
such as inflation eroding the value of idle cash or obsolescence reducing the value of excess
inventory.
4. Limited Growth: Excessive working capital may limit the company's ability to invest in
growth opportunities or respond to unexpected expenses or downturns.
5. Shareholder Dissatisfaction: Shareholders may view excessive working capital as a sign
of poor management or inefficiency, leading to dissatisfaction and potential loss of investor
confidence.
Overall, maintaining excessive working capital can hinder a company's profitability,
efficiency, and ability to adapt to changing market conditions.

a)How to determine working capital at optimum level

Ans: Determining the optimum level of working capital involves balancing the need for
liquidity with the efficient utilization of resources. Here are some steps to help determine the
optimum level:
1. Calculate Working Capital Requirements: Start by calculating the working capital
requirements of your business, considering factors such as inventory levels, accounts
receivable, and accounts payable.
2. Analyze Industry Standards: Compare your working capital levels with industry
benchmarks to see how your business stacks up against competitors and industry norms.
3. Forecast Cash Flows: Forecast future cash flows to understand the timing and
magnitude of inflows and outflows. This can help determine the amount of working capital
needed to support ongoing operations.
4. Consider Seasonality and Business Cycles: Take into account seasonal variations and
business cycles that may affect your working capital needs. Adjust your working capital
levels accordingly to ensure smooth operations throughout the year.
5. Assess Risk Tolerance: Consider your company's risk tolerance and financial stability.
Determine how much buffer you need to cover unexpected expenses or downturns in the
business environment.
6. Optimize Inventory Management: Streamline inventory management practices to
minimize excess inventory levels while ensuring sufficient stock to meet demand.
7. Improve Receivables and Payables Management: Implement strategies to optimize
accounts receivable collection and accounts payable payment terms to improve cash flow
efficiency.
8. Regular Monitoring and Adjustment: Continuously monitor your working capital levels
and adjust as needed based on changes in business conditions, market dynamics, and
growth opportunities.
By following these steps and regularly reviewing your working capital position, you can
optimize liquidity while maximizing the efficient use of resources in your business.

b)
5.a) How would you determine the optimum level of current assets
Ans: Determining the optimum level of current assets involves balancing the need for
liquidity with the efficient utilization of resources. Here's how you can approach it:
1. Calculate Current Asset Requirements: Start by calculating the current asset
requirements of your business, which typically include cash, accounts receivable, and
inventory. Consider factors such as operating cycle, sales forecasts, and payment terms.
2. Assess Working Capital Needs: Analyze your working capital needs based on the
nature of your business, industry standards, and historical data. Consider the level of safety
cushion required to cover unexpected expenses or fluctuations in cash flow.
3. Evaluate Liquidity Ratios: Use liquidity ratios such as the current ratio (current assets
divided by current liabilities) and the quick ratio (quick assets divided by current liabilities) to
assess the adequacy of your current assets in meeting short-term obligations.
4. Consider Cash Flow Forecasting: Forecast future cash flows to understand the timing
and magnitude of inflows and outflows. This can help determine the amount of cash and
liquid assets needed to support ongoing operations.
5. Analyze Working Capital Turnover: Evaluate the efficiency of your current asset
management by analyzing metrics such as inventory turnover and accounts receivable
turnover. Strive to optimize turnover ratios to minimize excess holdings while maintaining
adequate liquidity.
6. Review Industry Benchmarks: Compare your current asset levels and ratios with
industry benchmarks to gauge your business's performance relative to peers and identify
areas for improvement.
7. Assess Risk Tolerance: Consider your company's risk tolerance and financial stability.
Determine the appropriate level of liquidity needed to withstand unexpected events or
downturns in the business environment.
8. Optimize Cash Conversion Cycle: Streamline processes related to cash inflows and
outflows, including inventory management, accounts receivable collection, and accounts
payable management, to optimize the cash conversion cycle and reduce the need for
excessive current assets.
9. Regular Monitoring and Adjustment: Continuously monitor your current asset levels
and ratios, and adjust as needed based on changes in business conditions, market
dynamics, and growth opportunities.
By following these steps and regularly reviewing your current asset position, you can
optimize liquidity while maximizing the efficient use of resources in your business.
5.a) How would you determine the optimum level of current assets, illustrate your
answer
Ans: Sure, let's illustrate how to determine the optimum level of current assets using an
example:
1. Calculate Current Asset Requirements: Consider a fictional company, ABC
Electronics, which sells consumer electronics. Start by calculating its current asset
requirements. This includes cash, accounts receivable, and inventory. Suppose ABC's
current liabilities amount to $500,000.
2. Assess Working Capital Needs: Analyze ABC's working capital needs based on its
business operations, sales forecasts, and historical data. Let's say ABC determines it needs
a safety cushion of $200,000 to cover unexpected expenses and maintain smooth
operations.
3. Evaluate Liquidity Ratios: Calculate ABC's liquidity ratios. Suppose ABC's current
assets amount to $800,000. The current ratio would be 1.6 ($800,000 / $500,000), indicating
that ABC has $1.60 in current assets for every $1 of current liabilities, which is considered
healthy.
4. Consider Cash Flow Forecasting: Forecast ABC's future cash flows to understand
when and how much cash will be needed. Based on the forecast, ABC estimates it needs
$300,000 in cash to cover upcoming expenses and investments.
5. Analyze Working Capital Turnover: Evaluate ABC's working capital turnover ratios,
such as inventory turnover and accounts receivable turnover. Suppose ABC's inventory
turnover ratio is 5 times per year, indicating that it sells through its inventory relatively
quickly.
6. Review Industry Benchmarks: Compare ABC's current asset levels and ratios with
industry benchmarks to see how it fares against competitors. If ABC's ratios are in line with
or better than industry averages, it suggests its current asset management is effective.
7. Assess Risk Tolerance: Consider ABC's risk tolerance and financial stability. If ABC
operates in a volatile industry or faces uncertain market conditions, it may want to maintain
higher levels of current assets as a precaution.
8. Optimize Cash Conversion Cycle: Streamline processes related to cash inflows and
outflows, such as inventory management and accounts receivable collection, to minimize the
cash conversion cycle and reduce the need for excessive current assets.
9. Regular Monitoring and Adjustment: Continuously monitor ABC's current asset levels
and ratios, adjusting them as needed based on changes in business conditions, market
dynamics, and growth opportunities.
b) Do you recommend that a firm should finance its current assets entirely with short term
financing
Ans: It depends on various factors such as the nature of the business, industry norms, and
the company's financial position. Here are considerations for both sides:
Pros of Financing Current Assets with Short-Term Financing:
1. Flexibility: Short-term financing provides flexibility, allowing the company to adjust its
financing needs according to changes in the business environment or market conditions.
2. Lower Interest Costs: Short-term financing often comes with lower interest costs
compared to long-term financing, which can help minimize the company's borrowing
expenses.
3. Matched Maturity: Financing current assets with short-term debt can align the maturity
of liabilities with the underlying assets' short-term nature, reducing mismatch risk.
Cons of Financing Current Assets with Short-Term Financing:
1. Refinancing Risk: Short-term financing requires frequent refinancing, exposing the
company to refinancing risk, especially during periods of tight credit conditions or rising
interest rates.
2. Potential Liquidity Crunch: Relying too heavily on short-term financing may lead to a
liquidity crunch if the company faces difficulty in rolling over its debt or accessing additional
financing when needed.
3. Risk of Interest Rate Volatility: Short-term financing is susceptible to interest rate
volatility. If interest rates rise unexpectedly, the company's borrowing costs could increase,
affecting profitability.
Recommendation:
In most cases, a balanced approach is advisable. While short-term financing can be
beneficial for funding seasonal fluctuations in current assets or managing working capital
needs, relying entirely on short-term financing may expose the company to risks during
economic downturns or tight credit markets.
Therefore, it's often prudent for companies to use a mix of short-term and long-term
financing to fund their current assets. This strategy helps mitigate refinancing risk while
maintaining flexibility and minimizing interest costs. Additionally, companies should regularly
assess their financing options and adjust their capital structure based on changing market
conditions and business requirements.
c)What is the concept of working capital
Ans: The concept of working capital refers to the difference between a company's current
assets and current liabilities. In simpler terms, it represents the resources a company needs
to fund its day-to-day operations. Working capital is essential for covering short-term
expenses such as raw materials, inventory, labor costs, and operating expenses.
Working capital is calculated using the following formula:
Working capital = Current assets - current liabilities
A positive working capital indicates that a company has more current assets than current
liabilities, which generally signifies liquidity and financial health. Conversely, a negative
working capital suggests that a company may struggle to meet its short-term obligations.
Managing working capital effectively is crucial for ensuring smooth operations and avoiding
liquidity problems. Companies strive to strike a balance between maintaining sufficient
liquidity and maximizing the efficient use of resources to optimize working capital. Strategies
for managing working capital include optimizing inventory levels, improving accounts
receivable collection, extending accounts payable payment terms, and forecasting cash
flows accurately.
c) What is the concept of working capital cycle
Ans: The concept of the working capital cycle, also known as the cash conversion
cycle, refers to the time it takes for a company to convert its investment in raw
materials and other resources into cash from sales. It involves the management of
cash, inventory, accounts receivable, and accounts payable.
The working capital cycle consists of the following stages:
1. Inventory Conversion Period: This is the time it takes for a company to convert
raw materials into finished goods ready for sale. It starts when raw materials are
purchased and ends when the finished goods are ready for sale.
2. Accounts Receivable Collection Period: Once goods are sold, there is a period
during which the company waits to collect payment from customers. This stage
represents the time it takes for the company to collect cash from credit sales.
3. Accounts Payable Payment Period: During this period, the company pays its
suppliers for the raw materials and other resources used in production. It reflects the
time between purchasing materials and paying for them.
The working capital cycle is calculated using the following formula:
Working Capital Cycle} =Inventory Conversion Period} +{Accounts Receivable
Collection Period} -{Accounts Payable Payment Period}
A shorter working capital cycle indicates that a company is able to convert its
investments into cash more quickly, which improves liquidity and efficiency.
Conversely, a longer working capital cycle may tie up resources and lead to liquidity
challenges.
Efficient management of the working capital cycle involves strategies such as
optimising inventory levels, improving accounts receivable collection processes,
negotiating favourable payment terms with suppliers, and streamlining operational
processes to reduce cycle times. By managing the working capital cycle effectively,
companies can improve cash flow, reduce financing costs, and enhance overall
financial performance.
c) What is meant by cash conversion cycle
Ans: The cash conversion cycle (CCC), also known as the working capital cycle,
represents the time it takes for a company to convert its investments in raw materials
and other resources into cash from sales. It encompasses the entire process from
purchasing raw materials to collecting cash from customers.
The cash conversion cycle consists of three key stages:
1. Inventory Conversion Period: This is the time it takes for a company to convert
raw materials into finished goods ready for sale. It starts when raw materials are
purchased and ends when the finished goods are ready for sale.
2. Accounts Receivable Collection Period: Once goods are sold, there is a period
during which the company waits to collect payment from customers who made
purchases on credit. This stage represents the time it takes for the company to
collect cash from credit sales.
3. Accounts Payable Payment Period: During this period, the company pays its
suppliers for the raw materials and other resources used in production. It reflects the
time between purchasing materials and paying for them.
The cash conversion cycle is calculated using the formula:
CCC=Inventory Conversion Period} + Accounts Receivable Collection Period} -
Accounts Payable Payment Period}
A shorter cash conversion cycle indicates that a company is able to convert its
investments into cash more quickly, which improves liquidity and efficiency.
Conversely, a longer cash conversion cycle may tie up resources and lead to liquidity
challenges.
Efficient management of the cash conversion cycle involves strategies such as
optimising inventory levels, improving accounts receivable collection processes,
negotiating favourable payment terms with suppliers, and streamlining operational
processes to reduce cycle times. By managing the cash conversion cycle effectively,
companies can improve cash flow, reduce financing costs, and enhance overall
financial performance.
c) Why cash conversion cycle is important in working capital management
Ans: The cash conversion cycle (CCC) is crucial in working capital management for
several reasons:
1. Liquidity Management: The CCC provides insights into the company's liquidity
position by indicating how quickly it can convert its investments into cash. A shorter
CCC implies better liquidity and the ability to meet short-term obligations more
efficiently.
2. Efficiency Measurement: The CCC serves as a measure of operational
efficiency. A shorter cycle indicates that the company is effectively managing its
inventory, accounts receivable, and accounts payable, leading to improved efficiency
in converting resources into cash.
3. Optimal Resource Allocation: By analyzing the components of the CCC,
companies can identify areas for improvement in their working capital management.
This enables them to allocate resources more effectively, such as optimizing
inventory levels, improving receivables collection, or negotiating better payment
terms with suppliers.
4. Cost Reduction: Efficient management of the CCC can lead to cost savings.
For example, reducing the inventory conversion period can lower holding costs and
minimize the risk of inventory obsolescence. Similarly, shortening the accounts
receivable collection period reduces the need for costly financing options to cover
cash flow gaps.
5. Cash Flow Forecasting: Understanding the CCC helps in forecasting cash
flows more accurately. By knowing the timing of cash inflows and outflows,
companies can better plan for their financing needs and avoid liquidity shortages.
6. Competitive Advantage: Companies with a shorter CCC can respond more
quickly to market opportunities and customer demands. This agility can provide a
competitive advantage by allowing the company to capture sales opportunities and
adapt to changes in the business environment more effectively.
Overall, the CCC is a vital metric in working capital management as it provides
valuable insights into a company's liquidity, efficiency, and ability to optimize its
resources to generate cash flow. By actively managing the components of the CCC,
companies can enhance their financial performance and maintain a competitive edge
in the market.
c) Why cash conversion cycle is important in working capital management, give an
example to illustrate
Ans: The cash conversion cycle (CCC) is important in working capital management
because it directly impacts a company's liquidity, efficiency, and profitability. Let's
illustrate this with an example:
Consider Company A, a manufacturing firm that produces and sells electronic
gadgets. Company A's CCC consists of three key components:
1. Inventory Conversion Period: Company A purchases raw materials to
manufacture its gadgets. It takes an average of 30 days to convert these raw
materials into finished goods ready for sale.
2. Accounts Receivable Collection Period: After selling its gadgets, Company A
offers customers credit terms, allowing them 60 days to pay. On average, it takes
Company A 45 days to collect payment from its customers.
3. Accounts Payable Payment Period: Company A purchases raw materials on
credit from suppliers and has 30 days to pay its suppliers.
Now, let's calculate Company A's cash conversion cycle using the formula:
CCC} = \Inventory Conversion Period} + \Accounts Receivable
Collection Period} - \Accounts Payable Payment Period} \]
CCC} = 30 + 45 - 30 = 45 \ days} \]
Company A's cash conversion cycle is 45 days. Here's why this is important in
working capital management:
1. Liquidity: A shorter CCC means faster cash generation, improving Company
A's liquidity. With a 45-day CCC, Company A can more effectively cover its
short-term obligations and have cash available for operational needs.
2. Efficiency: A shorter CCC indicates efficient working capital management.
Company A's ability to convert its investments in raw materials into cash in just 45
days demonstrates efficient inventory management and effective accounts
receivable collection practices.
3. Profitability: Efficient working capital management can enhance profitability. By
reducing the time it takes to convert resources into cash, Company A can minimize
financing costs, reduce the risk of inventory obsolescence, and improve overall
financial performance.
4. Competitive Advantage: With a shorter CCC, Company A can respond more
quickly to market opportunities and customer demands. This agility allows Company
A to capture sales opportunities, maintain strong customer relationships, and
outperform competitors with longer cash conversion cycles.
In summary, the cash conversion cycle is essential in working capital management
as it provides valuable insights into a company's liquidity, efficiency, profitability, and
competitive positioning. By actively managing and optimizing the components of the
CCC, companies can enhance their financial performance and achieve sustainable
growth.
6.a) What is the firm's earning power
Ans: #### Firm's Earning Power
Earning power refers to a company's ability to generate profits over the long term,
assuming that current operational conditions generally remain constant. It is an
important factor that investors consider when assessing whether to buy a company's
shares. Analysts also review a company's earning power to determine if its stock is
worth investing in.
There are different methods and formulas used to calculate earning power,
depending on the specific context. One approach is the Earnings Power Value (EPV)
method, which looks at a firm's current cost of capital. EPV is derived by dividing a
company's adjusted earnings by its weighted average cost of capital. However, it's
important to note that EPV does not take into account future growth or competitor
assets.
Another method is the asset earning power (AEP) ratio, which compares a
company's earnings before taxes to its total assets. This ratio is useful for comparing
firms with different tax situations and can indicate how efficient a company is at
generating cash flow from its asset base.
Additionally, earning power can be calculated by dividing a company's operating
income by its total assets. This measure assesses the profit a company makes from
its business operations, excluding the impact of taxes or financial activity.
It's worth noting that earning power is often used in conjunction with other financial
ratios and measures to gain a comprehensive understanding of a company's
financial health and potential for growth.
In summary, earning power represents a company's ability to generate profits over
the long term, and it is an important factor considered by investors and analysts
when evaluating a company's financial performance and potential for investment.
a)How are the net profit margin and the assets turnover related
Ans: #### The Relationship Between Net Profit Margin and Assets Turnover
The net profit margin and assets turnover are two important financial ratios that
provide insights into a company's financial performance. While they measure
different aspects of a company's operations, they are related in the sense that they
both contribute to determining a company's return on assets (ROA).
Net Profit Margin is a profitability ratio that measures how much profit a company
earns for every dollar of sales revenue. It is calculated by dividing net income by
sales revenue and multiplying the result by 100. Net profit margin indicates how well
a company controls its costs and generates profit from its sales.
Assets Turnover measures how efficiently a company uses its assets to generate
revenue. It is calculated by dividing sales revenue by the average total assets of the
company. Assets turnover ratio indicates how effectively a company utilizes its
assets to generate sales.
The relationship between net profit margin and assets turnover can be understood
through the concept of return on assets (ROA). ROA is a profitability ratio that shows
how well a company utilizes its assets to generate profit. It is calculated by
multiplying the net profit margin by the assets turnover ratio.
A company can have a high return on assets even if it has a low profit margin
because it has a high assets turnover. This means that the company is generating a
high level of sales relative to its assets, which compensates for the lower profit
margin. On the other hand, a company with a high profit margin may have a low
assets turnover, indicating that it is not efficiently utilizing its assets to generate
sales.
In summary, while net profit margin and assets turnover are distinct ratios, they are
related in the sense that they both contribute to determining a company's return on
assets. A company can have a high return on assets by either having a high profit
margin or a high assets turnover, or a combination of both.

b) The total sales ( all credit) of a firm is Rs. 6,40,000. It has a gross profit
margin of 15 percent and a current ratio of 2.5. The firm’s current liabilities are Rs.
96,000; inventories Rs. 48000 and cash Rs. 16,000. a) Determine the average inventory
to be carried by the firm, if an inventory turnover of 5 times is expected? (Assume a
360 days year), b) Determine the average collection period if the opening balance of
debtor is intended to be of Rs. 80,000? (Assume a 360-day year).
Solution :
a)Inventory turnover = cost of goods sold/ Average inventory
Since gross profit margin is 15%, the cost of goods sold should be 85% of the sales.
Cost of goods sold = 0.85 * 6,40,000 = 5,44,000
= 5,44,000/Average inventory = 5,
Thus average inventory is= 5,44,000/5 = 1,08,800

b) Average collection period:= (average debtors/ credit sales )*360

Average debtors = (opening balance + closing Balance)/2
Closing balance of debtors is found as follows:
Current assets (2.5 of current liabilities) 2.40,000
Less : Inventories 48,000
Cash 16,000 64,000

Debtors 1,76,000
Average debtors = (1,76,000 + 80,000)/2 = 1,28,000
Average collection period = (1.28,000/6,40,000)*360 days =72 day

c) X company has made the plans for the next year. It is estimated that the company will
employed total Assets of Taka 800000 50% of the assets being finalised to buy capital at an
interest cost of 8% per year the directive cost for the year are estimated at 480000 and all
other operating expenses are estimated at 80000. The goods will be sold to customer
customers at 150% of the director costs. Text rate is assumed to be 50%.
i. You are required to calculate: (i) net profit margin; (ii) return on assets; (iii) assets turnover
and (iv) return on owners’ equity.
Solution. The net profit is calculated as follows:

Sale 150% of 480000 720000

Direct costs 480000

Gross profit 240000

Operating expense 80000

Interest charges 8% of 400000 32000 112000

Profit before tax 128000

 Tax 50% 64000

Net profit after tax 64000

(i)Net profit margin = Profit after taxes /Sales = Rs. 64000 /Rs. 720000 = 0.089 or 8.9%
(ii)Return on assets =EBIT (1 - T)/Assets =160000 (1 - 0.5)/800000 = 0.10 or 10%
(iii)Assets turnover = Sales/ Assets =Rs. 720000/Rs. 800000 = 0.9 times
(iv)Return on equity =Net profit after taxes /Owners' equity
= Rs. 64000 /50% of Rs. 800000 = Rs. 64000 /Rs. 400000 = 0.16 or 16

2020 1.a) Financial management

Ans:Financial management is the strategic planning, organizing, directing, and controlling of
financial activities within an organization to achieve its financial goals and objectives
efficiently and effectively. It involves managing various aspects such as budgeting,
investment decisions, financing decisions, cash flow management, risk management, and
financial reporting. The primary aim of financial management is to maximise shareholder
wealth while ensuring the long-term sustainability and profitability of the organisation.

b) Basic objective of financial management

Ans: The fundamental objective of financial management is to maximize shareholder wealth
or maximize the value of the firm's stock. This overarching goal encompasses various
specific objectives, including:

1. Profit Maximization: Increasing profits by managing revenue, expenses, and investments

efficiently.
2. Wealth Maximization: Enhancing the value of the firm's stock through sound financial
decision-making.
3. Efficient Resource Allocation: Allocating resources effectively to maximize returns and
minimize costs.
4. Risk Management: Identifying, assessing, and mitigating financial risks to safeguard the
firm's assets and ensure stability.
5. Optimal Capital Structure: Determining the optimal mix of debt and equity financing to
minimize the cost of capital and maximize shareholder returns.
6. Maximizing Shareholder Value: Focusing on actions that increase the long-term value of
the firm, such as investing in profitable projects and strengthening competitive advantage.
7. Liquidity Management: Maintaining an appropriate level of liquidity to meet short-term
obligations and exploit investment opportunities.
8. Growth and Sustainability: Pursuing growth strategies that generate sustainable returns
and contribute to long-term profitability and shareholder value.

c) How does modern approach of financial management differ from traditional approach
Ans: The modern approach to financial management typically involves leveraging
technology, data analytics, and real-time information to make more informed decisions. This
contrasts with the traditional approach, which often relies on manual processes and
historical data. Modern methods allow for quicker analysis, better risk assessment, and more
agile responses to changing market conditions, ultimately leading to improved financial
performance and strategic decision-making.

d) Comment on the challenging role of financial manager in modern business

2.a)A bird in hand is better than two in the bush, explain this statement in respect of dividend
policy.
Ans: #### The Bird in Hand Theory and Dividend Policy

The statement "a bird in hand is better than two in the bush" can be applied to dividend
policy in the context of the Bird in Hand Theory. This theory suggests that investors prefer
the certainty of receiving dividends from their investments rather than relying on the potential
for future capital gains.

According to the theory, investors value the certainty of receiving dividend payments
because capital gains are uncertain and come with inherent risks. The adage "a bird in the
hand is worth two in the bush" implies that it is better to hold onto something you already
have (dividends) rather than taking the risk of losing it by pursuing potentially higher returns
in the future (capital gains).

The Bird in Hand Theory was developed as a counterpoint to the Modigliani-Miller dividend
irrelevance theory, which suggests that investors do not care where their returns come from.
The Bird in Hand Theory emphasises the preference for dividends due to the uncertainty
associated with capital gains.

Dividends provide investors with a tangible and immediate return on their investment, which
can be used for various purposes such as reinvestment, meeting financial obligations, or
generating income. By receiving dividends, investors have a "bird in hand" that they can rely
on, rather than relying on the uncertain future performance of the company's stock for capital
gains.

It is important to note that the Bird in Hand Theory assumes a stable dividend policy with no
changes to the dividend payments. This theory suggests that investors value the certainty of
receiving dividends and prefer them over the potential but uncertain capital gains.

In summary, the Bird in Hand Theory in the context of dividend policy suggests that investors
prefer the certainty of receiving dividends rather than relying on the potential for future
capital gains. This theory emphasizes the value of immediate returns and the inherent
uncertainty associated with capital gains.

b)What is share repurpose? What are its key motives of share repurposeShare
repurchase, also known as share buyback, is when a company buys back its own shares
from the open market. This reduces the number of outstanding shares, effectively
consolidating ownership among the remaining shareholders.

The key motives behind share repurchases include:

1. Enhancing shareholder value: By reducing the number of shares outstanding,
share repurchases can increase earnings per share (EPS) and potentially boost the
company's stock price, benefiting existing shareholders.

2. Capital allocation: Companies may view their own stock as undervalued and believe that
repurchasing shares is a more attractive investment than other alternatives such as
dividends or capital expenditures.

3. Return excess cash to shareholders: When a company has excess cash on hand, it can
use share repurchases as a way to return capital to shareholders without committing to
ongoing dividend payments.

4. Employee stock options: Share repurchases can be used to offset the dilutive effect of
employee stock options and other equity-based compensation programs, thereby
maintaining or enhancing EPS.

5. Defending against hostile takeovers: Share repurchases can make it more expensive for
potential acquirers to gain control of the company by reducing the number of shares
available for purchase on the open market.

Overall, share repurchases can be a strategic tool for companies to manage their capital
structure, optimize shareholder value, and respond to various market conditions and
corporate objectives..

c) The offshore steel company has earnings available for common stockholders tk 30 lakh
and has 5 lakh shares of common stock outstanding at a Taka 90 per share. The farm is
currently contemplating the payments of tk 3 per share in cash dividend.
i. Calculate the firm's current earnings per share and price earning ratio.
ii.If the farm can repurchase its stock at tk 93 per share, how many shares can be
repurchased in lieu of making the propose day cash dividend payment.
iii.How much will the EPS after the proposed repurchase Why
iv.if on the stocks sells at the old P/E ratio, what will the market price be after repurchase
v.Compare the earnings per share before and after the proposed repurchase
vi.Compare the shareholders position under the dividend and repurchase alternatives

Ans: i. Earnings per share (EPS) = Earnings available for common stockholders / Number of
shares outstanding
EPS = 30,00,000 Tk / 5,00,000 shares = Tk 6 per share
Price-earnings ratio (P/E ratio) = Market price per share / Earnings per share
Given that the market price per share is Tk 90, P/E ratio = 90 Tk / 6 Tk = 15

ii.To find out how many shares can be repurchased with the cash dividend payment:
Cash available for repurchase = Cash dividend per share * Number of shares outstanding
Cash available for repurchase = 3 Tk/share * 5,00,000 shares = 15,00,000 Tk
Number of shares repurchased = Cash available for repurchase / Repurchase price per
share
Number of shares repurchased = 15,00,000 Tk / 93 Tk/share ≈ 16,129 shares
iii.After the repurchase, the new number of shares outstanding = 5,00,000 - 16,129 =
4,83,871 shares
New earnings per share (EPS) = Earnings available for common stockholders / New number
of shares outstanding
New EPS = 30,00,000 Tk / 4,83,871 shares ≈ Tk 6.21 per share

iv.If the stock sells at the old P/E ratio, the market price after repurchase would be:
Market price after repurchase = New EPS * Old P/E ratio
Market price after repurchase = Tk 6.21 * 15 = Tk 93.15

v.Before repurchase: EPS = Tk 6 per share

After repurchase: EPS = Tk 6.21 per share

vi. Under the dividend alternative, shareholders receive cash dividends per share. Under the
repurchase alternative, shareholders benefit indirectly through an increase in EPS and
potentially an increase in stock price. However, they lose the immediate cash benefit of
receiving dividends. It depends on shareholders' preferences regarding cash flow versus
capital appreciation.

3.a) How is combined leverage measured

Ans: Combined leverage is measured by calculating the combined leverage ratio, which is
the sum of operating leverage and financial leverage. Operating leverage measures the
impact of fixed operating costs on the company's earnings before interest and taxes (EBIT),
while financial leverage measures the impact of fixed financial costs on the company's net
income. By adding these two leverage measures together, you get the combined leverage,
which reflects the overall sensitivity of a company's earnings to changes in sales or revenue.

a)Assuming that other things being equal, what would be the changes in the degree of
combined leverage in the following situations i.fixed costs increase ii.EBIT level increases iii.
selling price increases iv. Variable cost decreases
Ans: a) The changes in the degree of combined leverage in the following situations would
be:

i. If fixed costs increase: The degree of combined leverage would increase because higher
fixed costs would amplify the impact of changes in sales or revenue on earnings.

ii. If EBIT level increases: The degree of combined leverage would remain the same
because EBIT (earnings before interest and taxes) is a measure used in calculating
operating leverage, which is only one component of combined leverage.

iii. If selling price increases: The degree of combined leverage would increase because
higher selling prices would increase revenue, potentially magnifying the impact of fixed costs
on earnings.

iv. If variable costs decrease: The degree of combined leverage would increase because
lower variable costs would increase the contribution margin, potentially amplifying the impact
of fixed costs on earnings.
b)The following information relating to the operational and capital structure of XYZ
Co. Installed Capacity 1200 units
Actual production and sales 800 units
Selling price per unit 15
Variable cost per unit 10
Fixed cost Situation A 1000 Situation B 2000 Situation C 3000
Capital Structure Financial Plan
Equity (1) 5,000 (2) 7,500 (3) 2,500
Debt (1) 5,000 (2) 2,500 (3) 7,500
Cost of debt 12%

i.Calculate the operating leverage and financial leverage under situation A, B and C
and financial plans I, II and III respectively.
ii. Also determine the combination of operating and financial leverage which give the
highest value and the least value
iii.State how these calculation may be useful to the financial manager of a company

Ans: i. Calculation of operating leverage

Particular Situation A Situation B Situation C

Sales 12,000 12,000 12,000

Less: Variable cost 8,000 8,000 8,000

Contribution 4,000 4,000 4,000

Less: Fixed cost 1,000 2,000 3,000

Operating profit / EBIT 3,000 2,000 1,000

Operating Leverage = 4,000/3,000 4,000/2,000 4,000/1,000

Contribution ÷ EBIT
=1.33 2 4

Calculation of Financial Leverage

Particular Financial plan 1 Financial plan 2 Financial plan 3

Situation A

Operating profit / EBIT 3,000 3,000 3,000

Less: Interest 600 300 900

EAT 2,400 2,700 2,100

Financial Leverage = 1.25 1.1 1.43

EBIT÷ [EBIT - I- DP÷ (1-t)
]

Situation B

Operating profit / EBIT 2,000 2,000 2,000

Less: Interest 600 300 900

EAT 1,400 1,700 1,100

Financial Leverage = 1.43 1.18 1.82

EBIT÷ [EBIT - I- DP÷ (1-t)
]

Situation C

Operating profit / EBIT 1,000 1,000 1,000

Less: Interest 600 300 900

EAT 400 700 100

Financial Leverage = 2.5 1.43 10

EBIT÷ [EBIT - I- DP÷ (1-t)
]

ii.Combination of Operating and Financial Leverage:

Higher value situation C and Financial Plan 3 = 4×10=40
Least value situation A and Financial plan 2 = 1.33 × 1.11 = 1.476

iii. Usefulness of these calculations to the financial manager of a company:

These calculations of operating leverage and financial leverage are useful to the
financial manager of a company in several ways:
a.Decision-making: The financial manager can use these calculations to assess the
impact of changes in sales volume on operating income and net income. This helps
in making informed decisions regarding production levels, pricing strategies, and
cost management.
b.Risk assessment: By understanding the degree of operating leverage and
financial leverage, the financial manager can assess the risk associated with the
company's cost structure and capital structure. This knowledge helps in evaluating
the company's ability to handle changes in sales, manage fixed costs, and meet
financial obligations.
c.Profitability analysis: The calculations of operating leverage and financial
leverage provide insights into the company's profitability potential. The financial
manager can identify the combination of leverage that maximises profits and make
strategic decisions accordingly.
d.Capital structure optimization: The financial manager can use these calculations
to evaluate different financial plans and determine the optimal capital structure for
the company. This involves analysing the trade-off between equity and debt financing
and selecting the mix that maximises shareholder value.
In summary, the calculations of operating leverage and financial leverage provide
valuable information to the financial manager for decision-making, risk assessment,
profitability analysis, and capital structure optimization

4.Why is financial leverage considered to be superior than operating leverage?

Ans: #### Financial Leverage vs Operating Leverage

Financial leverage and operating leverage are two different concepts that are used to assess
the financial health and performance of a company. While both types of leverage have their
own significance, financial leverage is generally considered to be superior to operating
leverage. Here's why:

Financial Leverage refers to the use of debt to finance a company's operations and
investments. By borrowing money, a company can increase its assets and potentially
generate higher returns for shareholders. However, it's important to note that financial
leverage also increases the company's debt-to-equity ratio, which can be a cause for
concern depending on the industry and average ratios.

Financial leverage can be advantageous when the revenue generated from the company's
operations exceeds the interest expense on the debt. In such cases, the company can
benefit from the additional funds obtained through borrowing, which can be used for
expansion, investment in assets, or other strategic initiatives.

Operating Leverage, on the other hand, refers to the use of fixed costs in a company's cost
structure. It indicates how sensitive a company's profits are to changes in sales volume. A
company with high operating leverage has a higher proportion of fixed costs compared to
variable costs. This means that a small change in sales can have a significant impact on the
company's profits.

While operating leverage can be beneficial in certain situations, it also comes with risks. If a
company incorrectly forecasts future sales and overestimates its revenue, it can lead to a
significant discrepancy between actual and budgeted cash flow, affecting the company's
ability to operate effectively.

In comparison, financial leverage is generally considered superior to operating leverage

because it provides more flexibility and potential for growth. By using debt financing, a
company can access additional funds to invest in its operations and assets, potentially
increasing shareholder value. However, it's important for companies to carefully manage
their debt levels and ensure that the returns generated from the borrowed funds exceed the
interest expense.

In summary, financial leverage is often considered superior to operating leverage because it

allows companies to access additional funds for investment and growth. However, it's
important for companies to strike a balance and manage their debt levels effectively to avoid
excessive risk.
 5.Why should a company try to have a balance between operating and financial leverage?
Ans: Having a balance between financial leverage and operating leverage is important for
several reasons:

1. Risk Management: Financial leverage increases the risk of financial distress because it
involves borrowing money, which needs to be repaid regardless of the company's
performance. Operating leverage increases the risk of losses during downturns because
fixed costs remain constant. By having a balance of the two leverages, a company can
mitigate the overall risk by not relying too heavily on one type of leverage.

2. Flexibility: Different business environments and economic conditions require different

strategies. By having a balance between financial and operating leverage, a company can
adapt more easily to changes in the business environment. For example, during periods of
economic uncertainty, reducing financial leverage and increasing operating leverage might
be more prudent.

3. Optimizing Returns: Both financial and operating leverage have the potential to increase
returns when used appropriately. By balancing the two, a company can optimize its overall
returns while managing risk. This allows the company to take advantage of growth
opportunities while safeguarding against potential losses.

4. Stability: A balanced approach to leverage can contribute to the stability of a company's

financial position. It ensures that the company is not overly dependent on either debt or fixed
costs, which can help maintain stability during periods of volatility or economic downturns.

5. Investor Confidence: Investors typically prefer companies that demonstrate prudent

financial management and risk mitigation strategies. A balanced approach to leverage
signals to investors that the company is mindful of both growth opportunities and risk
management, which can enhance investor confidence and support the company's valuation.

Overall, a balance between financial and operating leverage allows a company to optimize
its capital structure, manage risk effectively, and enhance its ability to navigate various
business conditions while maximizing shareholder value.

6.What makes the position of the firm very risky?

Ans: Both operating and financial leverage can contribute to the overall riskiness of a firm's
position, but they do so in different ways:

1. **Financial Leverage Risk:**

- Financial leverage involves the use of debt to finance operations or investments. While
debt can amplify returns when investments perform well, it also increases the firm's financial
risk.
- High financial leverage means the firm has a high proportion of debt relative to equity,
leading to higher interest expenses and debt service obligations.
- In times of economic downturns or when the firm's performance deteriorates, the burden
of debt repayment becomes more challenging, potentially leading to financial distress or
even bankruptcy.
- Financial leverage magnifies the impact of fluctuations in earnings on the firm's equity
value, making it more sensitive to changes in financial conditions and market sentiment.

2. **Operating Leverage Risk:**

 - Operating leverage refers to the use of fixed costs in a firm's operations. When a firm has
high operating leverage, a significant portion of its costs are fixed, meaning they do not vary
with changes in production or sales volume.
- High operating leverage can increase the firm's profitability when sales increase, as fixed
costs are spread over a larger revenue base, leading to higher margins.
- However, operating leverage also magnifies losses when sales decrease or fail to meet
expectations, as fixed costs remain constant. This can result in lower profits or even losses,
impacting the firm's financial stability and ability to cover its fixed expenses.
- Operating leverage makes the firm more vulnerable to changes in demand, competition,
or market conditions, as it affects the firm's breakeven point and profit sensitivity to sales
fluctuations.

In summary, both financial and operating leverage can make the position of a firm very risky,
but they do so through different mechanisms. Financial leverage increases the firm's
financial risk by amplifying the impact of debt on the firm's profitability and solvency.
Operating leverage increases the firm's operational risk by magnifying the impact of fixed
costs on its profitability and sensitivity to changes in sales volume. Balancing these two
types of leverage is essential for managing overall risk and ensuring the firm's long-term
financial health and stability.

4.a. Discuss the various approaches of working capital financing.

Ans:
b.What are the factors affecting receivables

b.What is meant by credit policy

c.What is aging schedule

c.prepare an aging schedule using your imaginary sales data.

2019
1.a. Dividend has an information content discuss with example.
Ans:The concept of "dividend information content" refers to the idea that changes in dividend
policy can convey valuable information to investors about a company's financial health,
future prospects, and management's confidence in the business. Dividend decisions reflect
management's assessment of the company's earnings, cash flow, investment opportunities,
and capital structure considerations. Here's how dividend information content works with an
example:

**Example:**

Let's consider a company, ABC Corp, which has been paying consistent dividends for
several years. However, in the current year, the company announces a significant increase
in its dividend payout ratio or initiates a special dividend. This change in dividend policy can
signal several things to investors:

1. **Positive Earnings Outlook:** A higher dividend payout ratio may indicate that the
company's earnings have improved and are expected to remain strong in the future.
Management's decision to return a larger portion of earnings to shareholders suggests
confidence in the company's ability to sustain profitability and generate cash flow.

2. **Strong Cash Flow Generation:** Increasing dividends could signal that the company's
cash flow generation has strengthened, allowing it to distribute more cash to shareholders
while still retaining sufficient funds for operational needs and growth initiatives.

3. **Limited Investment Opportunities:** A company with limited investment opportunities

may choose to distribute excess cash to shareholders through dividends rather than
retaining it for reinvestment in the business. This could imply that the company has reached
a mature stage of growth or that it lacks attractive investment opportunities in its industry.

4. **Shareholder-Friendly Management:** A company's decision to pay dividends or increase

dividend payouts can reflect management's commitment to shareholder value creation. By
returning cash to shareholders, management aligns its interests with those of investors and
signals that it prioritizes shareholder returns.

5. **Financial Stability:** Consistent or increased dividend payments may indicate that the
company has a stable financial position and sufficient liquidity to meet its dividend
obligations. This can reassure investors about the company's ability to withstand economic
downturns or adverse market conditions.

However, it's essential to note that dividend decisions are not always straightforward and can
be influenced by various factors, including tax considerations, regulatory requirements,
capital allocation priorities, and future growth prospects. Investors should consider the
broader context of a company's financial performance, industry dynamics, and
management's credibility when interpreting dividend changes as signals of underlying
business strength or weakness.

b.How does Godowns model differ from walter's model in a situation when the Return on
Investment of a Firm is equal to the required rate?
Ans: Godown's model and Walter's model are both dividend decision models used by firms
to determine their optimal dividend policy. While they share similarities, they differ in their
assumptions and approaches to determining the optimal dividend payout ratio. Let's
compare the two models in a situation where the Return on Investment (ROI) of a firm is
equal to the required rate:

1. **Godown's Model:**
- Godown's model focuses on the relationship between the cost of equity (required rate of
return) and the internal rate of return (ROI) of the firm's investments.
- In Godown's model, the optimal dividend payout ratio is determined by comparing the
internal rate of return (ROI) of the firm's investments to the required rate of return (cost of
equity).
- When the ROI equals the required rate of return, it implies that the firm is earning exactly
the return that shareholders expect. In this situation, according to Godown's model, the
optimal dividend payout ratio is irrelevant. The firm can either pay out dividends or retain
earnings without affecting shareholder wealth, as shareholders are indifferent between
receiving dividends and reinvesting earnings.
2. **Walter's Model:**
- Walter's model focuses on the trade-off between retaining earnings for reinvestment and
paying dividends to shareholders.
- In Walter's model, the optimal dividend payout ratio is determined by comparing the
return on investment (ROI) to the cost of equity, along with the firm's growth rate and
dividend per share.
- When the ROI equals the required rate of return, it implies that the firm's investments are
earning exactly the return that shareholders expect. In this situation, according to Walter's
model, the firm's optimal dividend payout ratio is to pay out all earnings as dividends (100%
payout ratio). This is because retaining earnings for reinvestment does not provide any
additional benefit to shareholders, as the return on investment equals the required rate of
return.
In summary, in a situation where the return on investment (ROI) of a firm is equal to the
required rate of return, Godown's model would suggest that the optimal dividend payout ratio
is irrelevant, while Walter's model would suggest a 100% dividend payout ratio. The
difference in recommendations reflects the different assumptions and objectives of each
model regarding the impact of dividend policy on shareholder wealth.

c.Apex company has been following walter's model with respect to divide and
payment accordingly is here at dividend time. The capital budget is reviewed in
conjunction with the earnings for the period and alternative inversion opportunities
for the shareholders in the current year, the farmer reports a turnover of 4250000. It
is estimated that the farm can earn tk 850000 if the amounts are retained. The farms
have 50,000 shares Standing and the investors have alternative investment
opportunities that will yield them 10%
Required i. the price earnings ratio and the current market price of a share of the
farm
ii TThe market price of share at 50% 75% and 80% payout ratio
iii. What should be the dividend payout ratio that to will maximise the shareholders
wealth why
iv.will your decision be changed if the required rate of return is a 20%
Ans:

2.a.