FINANCIAL MANAGEMENT (MB0045)

ASSIGNMENT
Q 1. What are the goals of financial Management?
Ans:- Financial management means maximisation of economic
welfare of its shareholders. Maximisation of economic welfare
means maximisation of wealth of its shareholders. Shareholders
wealth maximisation is reflected in the market value of the firms
shares. Experts believe that, the goal of financial management is
attained when it maximises the market value of shares. There are
two versions of the goals of financial management of the firm
profit maximisation and wealth maximisation.
Profit Maximisation:- profit maximisation is based on
the cardinal rule of efficiency goals is to maximise the
returns with the best output and price levels. A firms
performance is evaluated in terms of profitability. Profit
maximisation is the traditional and narrow approach, which
aims at maximising the profit of the concern. Allocation of
resources and investors perception of the companys
performance can be traced to the goal of profit
maximisation. Profit maximisation has been criticised on
many accounts.
The concept of profit lacks clarity. What does profit mean?
Is it profit after tax or before tax?
Is it operating profit or net profit available to
shareholders?
In this sense, profit is neither defined pre cicely nor
correctly. It creates unnecessary conflicts regarding the
earning habits of the business concern.
Wealth maximisation:- The term wealth means
shareholders wealth or the wealth of the persons those
who are involved in the business concern. Wealth
maximisation is also known as value maximisation or net
present worth maximisation. This objective is an
universally accepted concept in the field of business
Wealth maximisation is possible only when
the company pursues policies that would increase the
market value of shares of the company. It has been

accepted by the finance managers as it overcomes the

limitations of profit maximisation.
Wealth maximisation is based on the concept of cash
flows.
Wealth maximisation considers time value of money.
Q 2. Calculate the PV of an annuity of Rs. 500 received
annually for four years when discounting factor
Is 10%
Ans:- Calculated present value of annuity
End of year Cash
PV factor
inflows
1
Rs. 500
0.909
2
Rs. 500
0.827
3
Rs. 500
0.751
4
Rs. 500
0.683
3.170

PV in Rs
454.5
413.5
375.5
341.5
1585.0

Present value of an annuity is Rs. 1585

Q 3. Suraj Metals are expected to declare a dividend of Rs.
5 per share and the growth rate in dividends is expected to
growth @ 10% p.a. the price of one share is currently at Rs.
110 in the market. What is the cost of equity capital to the
company?
Ans:Ke = (D1/Pe)+g
=(5/110) +0.10
=0.1454 or 14.54%
Cost of equity capital is 14.54%
Q 4. What are the assumptions of MM approach?
Ans:- Assumptions regarding Miller and Modigliani (MM) Approch
a. Perfect capital markets:- securities can be freely traded,

that is investors are free to buy and sell securities , no

hindrances on the borrowings, no presence of transaction
costs securities are infinitely divisible, and availability of all
required information at all times.
b. Rational behaviour:- They choose the combination of risk

and return which is most advantageous to them.

c. Homogeneity:- All investors have the same perception of

business risk and returns.

d. Taxes:- There is no corporate or personal income tax.
e. Dividend payout:- The firms do not retain earnings for

future activities
Q 5. An investment will have an initial outlay of Rs.
100,000. It is expected to generate cash inflows. Table 1.2
highlights the case inflow for four years.
Year
Cash inflow
1
40000
2
50000
3
15000
4
30000
If the risk free rate and the risk premium is 10%
a. Compute the NPV using the risk free rate
b. Compute NPV using risk-adjusted discount rate
Ans:- NPV can be computed using risk free rate. Table 1.2 shows
NPV calculation using the risk free rate
Year
Cash
PV factor at
PV of cash
flows(inflows)
10%
flows (inflows)
Rs
1
40000
0.909
36,360
2
50000
0.826
41,300
3
15000
0.751
11,265
4
30000
0.683
20,490
PV of cash
1,09,415
inflows
PV of csh
(1,00,0000
outflows
NPV
9,415
b) NPV can be computed using risk-adjusted discount. Table 1.2
shows NPV calculation the risk-adjusted discount.
Year
Cash inflows
PV factor at
PV of cash
Rs.
20%
inflows

1
2
3
4

40000
50000
15000
30000
PV of cash in
flows
PV of cash
outflows
NPV

0.833
0.694
0.579
0.482

33,320
34,700
8,685
14,460
91,165
(100,000)
(8,835)

The project would be acceptable when no allowance is made for

risk
However, it will not be acceptable if risk premium is added to the
risk free rate. By doing so, it moves from positive NPV to negative
NPV. the firm were to use the internal rate of return (IRR), then
the project would be accepted when IRR is greater than the riskadjusted discount rate
Q 6. What are features of optimum credit policy?
Ans:- A premier credit card will usually offer points that can be
redeemed for different products. It may also offer a higher
spending limit or reduced rate
An organization's credit policy, regardless of type of business,
details the rules associated with granting customers and other
stakeholders credit.
Financial organizations, government entities and medium/large
corporations generally maintain credit policies that are very
detailed and specific to particular situations. For some companies,
credit policy is limited to invoice terms.
The credit policy rules usually cover the following specific
attributes of the party that is to receive credit:
* Ability to pay back (e.g., income, asset sales, etc.)
* Historical use of credit (e.g., a credit rating)
* Collateral (e.g., can property be used as collateral to get the
credit)
* Amount (e.g., there may be limits on how much a particular
party may borrow)
* Duration (e.g., there may be limits on how long a particular
party may borrow for)
* Relationship (e.g., how long and with whom has the party been

affiliated with the company)

* Type (e.g., revolving vs. fixed credit)
Also, credit policy will typically have rules concerning the
loan/credit while extended including the following:
* Termination/credit call (i.e., the circumstances that allow the
granter to cancel the credit and expect immediate repayment)
* Duration (i.e., how long credit may be extended for)
* Pricing (i.e., what to charge the party taking credit for the use of
the credit)
* Frequency of payments (i.e., when and how often must the
credit/loan be paid back)
* Relationship (i.e., if the relationship changes, the credit already
extended may need terms changes as well)