Master of Business Administration Semester II MB0045 Financial Management - 4 Credits (Book ID: B1134)

Q1. Explain the steps involved in Financial Planning

Financial Planning The Finance Manager has to estimate the financial requirements of the company. He should determine the sources from which capital can be raised and determine how effectively and judiciously these funds are put into use so that repayments can be done in time. Financial planning is deciding in advance the course of action for future. Financial planning includes: Estimation of the amount of funds to be raised, finding out the various sources of capital and the securities offered against the money so received and laying down policies to administer the usage of funds in the most appropriate way. Estimate capital requirements: This is the first step in financial planning. The following factors may be used to determine the capital: o Requirement of fixed assets. o Investment intangible assets like patents, copyrights, etc. o Amount required for current assets like stocks, cash, bank balances, etc. o Cost of set-up and likely expenses to be incurred on the new issue of shares and debentures. Determine the type of sources to be acquired and their proportion: The Finance Manager has to decide on the form in which the money is to be sourced, that is, debt, equity, preference shares, loans from banks and the proportion in which these are to be procured. Steps in Financial Planning: The financial planning process involves the following steps:
1- Projection of financial statements

Financial statements are the company's profit and loss account and the balance sheet. These two statements can be prepared for a certain period of future time and they help the manager to determine the amount of fund requirements.
Determination of funds needed:

Once the projections are drawn in terms of sales of products, the cost of production, marketing activities, etc., the Finance Manager can draw up a plan as to the fund requirement based on the time factor. He can know whether the funds are to be procured on a short term basis or on a long term basis.
Forecast the availability of funds

A company will have a steady flow of funds. If the manager is able to forecast these amounts properly, then the moneys to be borrowed can be reduced, thus saving on the interest payments.
Establish and maintain control system:

Control system is ineffective without adequate planning and the adequacy of planning can be gauged only through proper control measures. Both these activities are essential for effective utilization of funds.
Develop procedures:

Procedures should be developed for basic plans how they should be achieved

Q2. A company is considering a capital project with the following information: The cost of the project is Rs.200 million, which consists of Rs. 150 million in plant a machinery and Rs.50 million on net working capital. The entire outlay will be incurred in the beginning. The life of the project is expected to be 5 years. At the end of 5 years, the fixed assets will fetch a net salvage value of Rs. 48 million ad the net working capital will be liquidated at par. The project will increase revenues of the firm by Rs. 250 million per year. The increase in costs will be Rs.100 million per year. The depreciation rate applicable will be 25% as per written down value method. The tax rate is 30%. If the cost of capital is 10% what is the net present value of the project. Q3. Discuss the relevance and factors that influence the determination of stock level. Q4. There was a replacement of its existing machine by a new machine. The new machine will cost Rs 2,00,000 and have a life of five years. The new machine will yield annual cash revenue of Rs 2,50,000 and incur annual cash expenses of Rs 1,30,000. The estimated salvage of the new machine at the end of its economic life is Rs 8,000. The existing machine has a book value of Rs 40,000 and can be sold for Rs 20,000. The existing machine, if used for the next five years is expected to generate annual cash revenue of Rs 2,00,000 and to involve annual cash expenses of Rs 1,40,000. If sold after five years, the salvage value of the existing machine will be negligible. The company pays tax at 40%. It writes off depreciation at 30% on the written down value. The companys cost of capital is 20% Compute the incremental cash flows of replacement decisions. Winter / November 2011

Hint : unit 8 solved problem Q5. Explicit cost and Implicit cost are the two dimensions of cost. What role does cost play in financial decisions

Q6. The following details have been Income Statement (Rs. In 2010 millions) 2009 Sales less 1200 returns Gross Profit 300 Selling Expenses 100 Administration 40 Deprecation 60 Operating Profit 100 Non operating 20 income EBIT (Earnings 120 before interest & Tax Interest 15 Profit before tax 105 Tax 30 Profit after tax 75 Dividend 38 Retained 37 earnings

extracted from the books of Ashraya Ltd 1000 520 120 45 75 280 40 320 18 302 100 202 100 102