MBA Assignments

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MBA Semester 2-SUMMER 2015

MB0045 - FINANCIAL MANAGEMENT

Q1. Critically analyze the four broad areas of strategic financing
decision.

Strategic financing decision is concerned with the procurement of the least
cost funds, and its effective utilisation for maximisation of the net
wealth of the firm. There exists a close relation between the maximisation
of net … Get complete Answers on www.smuHelp.com


Q2. What is FVIFA? Is it different from Sinking fund factor?
A finance company offers to pay Rs. 44,650 after five years to investors
who deposit annually Rs. 6,000 for five years. Calculate the rate of
interest implicit in this offer.

FVIFA stands for "Future Value Interest Factor for an Annuity".
FVIFA calculated by expression [(1+i)n – 1] / i)
Where,
i = Rate of interest
n = Time horizon or number of years
How is it different from Sinking fund factor? … Get complete Answers on
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Q3. A firm owns a machine furnishes the following information :
" "Rs. "
"Book value of the machine "1,10,000"
"Current market value "80,000 "
"Expected salvage value after the end of five "NIL "
"years of remaining useful life " "
"Annual cash operating costs "36,000 "
"The firm's cost of capital "15 % "
"Corporate tax rate "35 % "


The firm follows straight line method of depreciation (permitted by the
Income-tax authorities).
The management of the company is now considering selling of the machine. If
it does so, the total operating costs to perform the work, now done by the
machine, will increase by Rs. 40,000 p.a.
Advise the management.

Solution:

Cash Inflows (if machine is sold)

Selling price of the old machine Rs. 80,000
Add Tax service (0.35xRs 30,000, short-term capital loss)
10,500
-------------------
90,500

Present value of cash … Get complete Answers on www.smuHelp.com

Q4. How will you compute the cost of equity capital using CAPM?
The Xavier Corporation, a dynamic growth firm which pays no dividends,
anticipates a long-run level of future earnings of Rs. 7 per share. The
current market price of Xavier's share is Rs. 55.45. Floatation costs for
the sale of new equity shares would average about 10 % of the price of the
shares. What is the cost of new equity capital to Xavier Corporation?


Capital Asset Pricing Model – CAPM:
This model establishes a relationship between the required rate of return
of a security and its systematic risks expressed as "β". According to this
model,

… Get complete Answers on www.smuHelp.com



Q5. Jharkhand Mining ltd. has to select one of the two alternative projects
whose particulars are furnished below:

" "Project E "Project F "
" "Rajrappa, "Tatisilwai, "
" "Hazaribagh "Ranchi "
" "Rs. "Rs. "
"Initial Outlay "11,87,200 "10,06,700 "
"Net Cash Inflow : " " "
"End of year 1 "10,00,000 "1,00,000 "
"2 "2,00,000 "1,00,000 "
"3 "1,00,000 "2,00,000 "
"4 "1,00,000 "10,00,000 "


The company can arrange necessary funds @ 8 %. Compute the NPV and IRR of
each project and comment on the results.
Is there any contradiction in the results? If so, state the reason for such
contradictions. How would you propose to resolve the contradictions?

Solution:

The PV of Re. 1, to be received at the end of each year, at different cost
of capital, is the following:

… Get complete Answers on www.smuHelp.com


Q6. Premier Steel Ltd. has a present annual sales turnover of Rs.
40,00,000. The unit sale price is Rs. 20. The variable costs are Rs. 12 per
unit and fixed costs amount to Rs. 5,00,000 per annum. The present credit
period of 1 month is proposed to be extended to either 2 or 3 months
whichever is profitable. The following additional information is available:
"Credit period "1 month "2 months "3 months "
"Increase in "-- "10 % "30 % "
"sales by " " " "
"Bad debts on "1 % "2 % "5 % "
"sales " " " "


Fixed costs will increase by Rs. 75,000 when sales increase by 30 %. The
company requires a pre-tax return on investment of 20 %.
Evaluate the profitability of the proposals and recommend the best credit
period for the company.

Solution:

The change of credit period from 1 month to 2 months is expected to
increase the profit by rs 55667, which is more than rs 48583. Hance, the
firm may … Get complete Answers on www.smuHelp.com