MB0045_MBA_Sem2_Fall/August 2012

Master of Business Administration - MBA Semester 2

MB0045 Financial Management - 4 Credits
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Considering the following information, what is the price of the share as per
Gordons Model?
Details of the Company

Net sales
Rs.120 lakhs
Net profit margin
12.5%
Outstanding preference Rs.50 lakhs@
shares
No. of equity shares
Cost of equity shares
Retention ratio
Rate of interest (ROI)

12%

dividend
25, 000
12%
40%
16%

Answer :
Solution:

Gordon formula of P =
Where P is the price of the share,
E is Earnings per share,
b is Retention ratio,
(1 b) is dividend payout ratio,
Ke is cost of equity capital,
br is growth rate in the rate of return on investment

Earnings per share, E = (Net profit after tax Preference dividend) / No.
of equity shares

Q.2 Examine the components of working capital & also explain the concepts of working
capital.
Answer : There are two important concepts of Working Capital gross and net
Dear Students,
Get

your

assignments

from

Our

ESTEEMED

ORGANIZATION

smumbaassignment.com
Just email to kvsude@gmail.com or S M S to +91 9995105420.
message Format - SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 ,
we will reach back you with in 24H
Or Directly call our Middle East Office +974 55702886 .
More Info, Kindly visit smumbaassignment.com
Best Regards, Admin
smumbaassignment.com

Gross Working Capital: Gross Working Capital refers to the amounts invested in the
various components of current assets. This concept has the following practical relevance.

Q.3 Internal capital rationing is used by firms for exercising financial control. How does
a firm achieve this?
Answer : Capital budgeting decisions involve huge outlay of funds. Funds available for
projects may be limited. Therefore,

Q.4 What are the objectives of working capital management? Briefly explain the
various elements of operating cycle.
Answer : Aim of Working Capital Management

Q.5 Define risk. Examine the need for assessing the risks in a project.
Answer : Risk is the potential that a chosen action or activity (including the choice of
inaction) will lead to a loss (an undesirable outcome). The notion implies that a

Q.6 Briefly examine the significance of identification of investment opportunities in

capital budgeting process
Answer : The extent to which the capital budgeting process needs to be formalized and
systematic procedures established depends on the size of the

Dear Students,
Get

your

assignments

from

Our

ESTEEMED

ORGANIZATION

smumbaassignment.com
Just email to kvsude@gmail.com or S M S to +91 9995105420.
message Format - SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 ,
we will reach back you with in 24H
Or Directly call our Middle East Office +974 55702886 .
More Info, Kindly visit smumbaassignment.com
Best Regards, Admin

smumbaassignment.com

MB0045_MBA_Sem2_Fall/August 2012
Master of Business Administration - MBA Semester 2
MB0045 Financial Management - 4 Credits
Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Examine the reasons for holding inventories by a firm & also discuss the techniques
of inventory control.
Answer : Whether a business is in retailing or manufacturing, there are several cogent
reasons for holding inventory. Businesses may hold stocks of raw materials, spare parts for
machinery, work in progress or finished goods. Given that there are costs involved with
purchases, orders and carriage inwards, a firm might want to minimize its order costs and
utilize storage space efficiently. While a business would incur holding costs when storing
inventory, these costs can be offset if there are good business reasons for so doing.

== To meet expected demand ==

A business must ensure that it has adequate supplies to meet expected demand for its goods,
regardless of whether it is a retailing or production environment. Particularly where a
business has a high demand and rapid turnover, having stock in storage ensures that the firm
can comfortably meet anticipated demand.

== To guard against shortages ==

Holding inventory can act as insurance against future shortages. Unexpected shortages in the
supply of raw materials or finished goods can affect the production run of a business or its
ability to meet demand. Holding inventories allows a degree of continuity for the activities of
an enterprise.

== To benefit from discounts ==

Suppliers often offer trade discounts for bulk purchases, once those purchases are above a
certain amount. A business can reduce the unit cost of materials and its ordering costs
(delivery, import duties) by purchasing a large amount of goods/ raw materials to hold in
stock.

== To deal with variations in usage or demand ==

"Usage" refers to production consumption in a manufacturing process. Increased usage can
increase the demand for materials. This is the result of either increased inefficiency or
increased production levels. Sometimes a business might cater for special orders or have high
seasonal demand that it must address, requiring additional stock to facilitate such
occurrences.

== To facilitate the production process ==

Stock can allow the manufacturing process to flow smoothly and help the business to respond
quickly and effectively to contingencies.

== In times of high inflation/ supply shortages ==

Holding vast supplies of inventories can be a deliberate strategy in response to unusual or
difficult economic circumstances. In times of high inflation, a business might not wish to
purchase stock at increasingly higher prices. Once the business determines that it is feasible
to hold additional inventory beyond the usual levels, this is a very sensible strategy.

== Some processes require holding work in progress ==

Inventory can also include work in progress. Some products might have longer production
cycles than others (like wine or cheese for instance). It is necessary to hold a high volume of
inventory to cater for the inherent nature of production in some business contexts.

Techniques of Inventory control

Naturally, there are restrictions on how much inventory a business could or should hold. The
nature of the product, regulations and maximum storage capacity are some elements that limit
or deter a business from holding too much inventory. Once a business decides to hold
inventory, then a proper inventory management and control system is necessary to optimize
both the stock levels and inventory costs.

There are several techniques a person can use to increase profitability and streamline
workflow via proper inventory control. Through research, competitive analysis and
experience, an effective business leader can balance costs versus benefits to storing and
ordering the necessary supplies to ensure business vitality. The supply chain is made of all
materials that help you to produce, market and supply your product. Inventory control means
that you have identified every facet of your supply chain and its logistics.

FIFO
If you deal in perishable items, FIFO (first in, first out) is an important concept to understand
and maintain throughout the supply chain. If a grocery store did not rotate their stock, new
stock coming in would get taken immediately and older stock would expire, causing great
loss. Stock must be arranged by date received.

Cutting Edge Control

For a great deal of stock that needs constant management, consider bar codes or RFID (radio
frequency identification) where hand-held readers can immediately tell you where valuable

merchandise is. Many IT inventory programs on the market provide a wealth of features
including tie-ins to USPS, Fed-Ex and/or UPS to track merchandise and provide real-time
logistics.

Costs versus Convenience

A business owner must balance space available for extra stock versus speed of product
turnover, fees for storage, cost in bulk versus regular ordering, and whether clients/end users
would be willing to wait.

Stock Levels
Defining your minimum stock level will allow you to set up regular inspections and reordering of supplies. Take into account emergencies and vendors taking longer than average
to replenish stock. This will aid you in arriving at JIT (just in time) ordering, where stock is
held for a minimum amount of time before moving on to the next stage in the supply chain.

Your Security
Stock security is a necessary cost. Many experts recommend separating staff that is
responsible for stock management from staff that has financial responsibility. Many times,
shoplifting and thievery is committed by employees rather than a stranger. Security guards,
cameras, bar codes and security devices are used by most businesses since the cost of security
is minimal compared to the millions of dollars that U.S. businesses lose each year to stolen
goods. Training staff in identifying potential security issues and having a clear method of
reporting violations is important in reducing crime. Often, shoplifters and thieves use
standard techniques to distract employees and take stock.

Stock on Hand
Having a great deal of stock on hand has both positive and negative consequences. Having an
immediate supply means that end users get their product that much sooner. Speed and

immediate gratification for a client can make the difference not only in a sale, but
recommendations, repeat business and client loyalty. In the modern business environment
where every business is a global business, an emergency or unforeseen circumstance
anywhere in the world can render competition without resources you have on hand. Of
course, one must take into account using capital in bulk buys, management and insurance
costs as well as goods perishing or becoming obsolete.

Dear Students,
Get

your

assignments

from

Our

ESTEEMED

ORGANIZATION

smumbaassignment.com
Just email to kvsude@gmail.com or S M S to +91 9995105420.
message Format - SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 ,
we will reach back you with in 24H
Or Directly call our Middle East Office +974 55702886 .
More Info, Kindly visit smumbaassignment.com
Best Regards, Admin
smumbaassignment.com

Q.2 a.) A bond of Rs. 1000 value carries a coupon rate of 10% and has a maturity period
of 6 years. Interest is payable semi-annually. If the required rate of return is 12%,
calculate the value of the bond. ( 5marks)
Answer : solution Value of bond =Rs50 (PVIFA 6%,12Yeaes ) +1000 PVIF 6%,12 Years. Rs
50 (8.384 ) +1000 (0.497) = Rs 419.2+ 497 = Rs 916.20
Q.3 Examine the features & evaluation of decision-tree approaches.

Answer : Decision-tree Approach

The Decision-tree Approach (DT) is another useful alternative for evaluating risky
investment proposals. The outstanding feature of this method is that it

Q.5 Critically examine the pay-back period as a technique of approval of projects.

Answer : Definition: An investment's payback period in years is equal to the net investment
amount divided by the average annual cash flow from the investment.

What it means: How long will it take to get my money back?

Strengths: It's easy to compute, easy to understand and provides some indication of risk by
separating long-term projects from short-term projects.

Q.6 Two companies are identical in all aspects except in the debt-equity profile.
Company X has 14% debentures worth Rs. 25,00,000 whereas company Y does not have
any debt. Both companies earn 20% before interest and taxes on their total assets of Rs.
50,00,000. Assuming a tax rate of 40% and cost of equity capital to be 22%, find out the
value of the companies X and Y using NOI approach.
Answer : Solution
S= 1000,000/.22 =4545454.5
B=25,00,000

Dear Students,

Get

your

assignments

from

Our

ESTEEMED

ORGANIZATION

smumbaassignment.com
Just email to kvsude@gmail.com or S M S to +91 9995105420.
message Format - SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 ,
we will reach back you with in 24H
Or Directly call our Middle East Office +974 55702886 .
More Info, Kindly visit smumbaassignment.com
Best Regards, Admin
smumbaassignment.com

Dear Students,
Get your assignments from Our ESTEEMED ORGANIZATION smumbaassignment.com
Just email to kvsude@gmail.com or S M S to +91 9995105420.
message Format - SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 , we will
reach back you with in 24H
Or Directly call our Middle East Office +974 55702886 .
More Info, Kindly visit smumbaassignment.com
Best Regards, Admin
smumbaassignment.com