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Master of Business Administration - MBA Semester 2 MB0045 – Financial Management - 4 Credits

(Book ID: B1134) Assignment Set- 1 (60 Marks)

Note: Each question carries 10 marks. Answer all the questions. Q.1 What are the 4 finance decisions taken by a finance manager. Ans. Refer 1.4 Finance Functions, Page No 7, 1.4.1 Page No 8-9 Q.2 What are the factors that affect the financial plan of a company? Ans. Refer 2.3 Factors affecting Financial plan Page No 31 & 32 Q.3 Show the relationship between required rate of return and coupon rate on the value of a bond. Ans. Refer 4.2 Valuation of bonds Page No 65 Q.4 Discuss the implication of financial leverage for a firm. Ans. Refer to 6.3 Financial leverage Page No 113 and 114. Q.5 The cash flows associated with a project are given below:

Year Cash flow 0 (100,000) 1 25000 2 40000 3 50000 4 40000 5 30000

a) Calculate the payback period. b) Benefit cost ratio for 10% cost of capital

Solution a).:- Table Cash Flow and Cumulative Cash Flows

From the cumulative cash flows column. A recover the initial cash out tag of Rs. 1000,00 at the end of the third year. Therefore payback period of project is 2 years.

Therefore payback period

Years7.2

50000

350002

50000

650001000002

⇒

+⇒

−+⇒

Solution: b). Benefit cost ratio for 10% cost of capital.

Year Cash flow Cumulative Cash flows

1 25000 25000 2 40000 65000 3 50000 115000 4 40000 155000 5 30000 185000

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Year Cash Flow 10% Pv Factor Pv of Cash flow

Cumulative

1 25000 0.909 22725 22725 2 40000 0.826 33040 55765 3 50000 0.751 37550 93315 4 40000 0.683 27320 120635 5 30000 0.621 18630 139265

244.3244.3

27320

66853

27320

933151000003

⇒+⇒

+⇒

−+⇒

Q6. A company’s earnings and dividends are growing at the rate of 18% pa. The growth rate is

expected to continue for 4 years. After 4 years, from year 5 onwards, the growth rate will be 6% forever. If the dividend per share last year was Rs. 2 and the investors required rate of return is 10% pa, what is the intrinsic price per share or the worth of one share.

Ans. n = 4 Years, growth = 6 % , Ke = 10% required rate of return, D0 = 18 The Present value of this flow of dividends will be

( )( )

( )

( ) ( ) ( )

42.235

07.0/48.16

07.0/26.15

08.015.0/05.0125.15

1

/P

P

4

5

54

1n

=

=

=

−++=

−+=

−=

−= +

gKegnD

gKeD

gKeDn

The intrinsic price is 235.42

MB0045 – Financial Management - 4 Credits (Book ID: B1134) Assignment Set- 2 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions. Q.1 Discuss the objective of profit maximization v/s wealth maximization. Ans. (Refer 1.3.3 Wealth Maximization Vs Profit Maximization Page No 6-7) Q.2 Explain the Net operating approach to capital structure. Ans. Refer to 7.4 Page No 132-133, 135-136. Q.3 What do you understand by operating cycle. Ans. Refer to 11.6, Page No 238-239

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Q.4 What is the implication of operating leverage for a firm. Ans. Refer to 6.2 Page No 107-108 Q.5 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.

Sol:

Cost of Project Pv factor (10%)

Pv of Cash inflow

200 Million 150 Million 50 Million

.909

.826

.751

181.8 123.9 37.55

Q.6 Given the following information, what will be the price per share using the Walter model. Earnings per share Rs. 40 Rate of return on investments 18% Rate of return required by shareholders 12% Payout ratio being 40%, 50%, or 60%.

Ans. Walter Mode Formula ( )[ ]

Ke

KeDEr

Ke

DP

−+=

P is the market price per share, D is the dividend per Share, Ke is the cost of capital g is the growth rate of earnings, E is earning of share = 40, r is IRR = 18 % Dp ratio = 40 %, 50%, 60%

a. ( )[ ]

Ke

KeDEr

Ke

DP

−+=

( )[ ] ( )[ ]

33.498.

12.0

12.04.04018.04.0

12.0

12.04.04018.04.0%40

Rs

Ke

=

−+=

−+=

( )[ ] ( )[ ]

91.497.

12.0

12.05.04018.05.0

12.0

12.05.04018.0

12.0

5.0%50

Rs=

−+=

−+=

( )[ ] ( )[ ]

91.497.

12.0

12.06.04018.06.0

12.0

12.06.04018.0

12.0

6.0%60

Rs=

−+=

−+=