Assignment ‘A’

Analytical Questions—

1. Examine the annual report of a well-known company of your

choice, particularly the chairman’s report and/or the
director’s report. Are the corporate goals clearly? What
specific references are made to the financial management?
(student should enclose the annual report with the answer)

The Provisions of section 260 of the Companies Act, 1956, the office
up to the date of the ensuing Annual General Meeting and is eligible
for appointment as Director of the Company. Subject to the
approval of the shareholders in the ensuing Annual General
Meeting, he has been appointed as a Whole-time Director of the
Company for a period of five years w.e.f. August 01, 2008.

Auditors

The auditors retire at the conclusion of the ensuing Annual General

Meeting and they have confirmed their eligibility and willingness to
be re-appointed.

Conservation of Energy, Research and Development, Technology

Absorption, Foreign Exchange Earnings and Outgo

Disclosures of particulars as required by the Companies (Disclosure

of Particulars in the Report of Board of Directors) Rules, 1988, are
set out in the annexure included in this Report.

Fixed Deposits

Your Company has not accepted any fixed deposits.

Disclosures under section 217 of the companies act, 1956

Except, as disclosed elsewhere in the report, there have been no

material changes and commitments, which can affect the financial
position of the Company between the end of the financial year and
the date of this report. As required under section 217(2A) of the
Companies Act, 1956, read with the Companies (Particulars of
Employees) Rules, 1975, as amended, the names and other
particulars of employees are set out in the annexure included in this
Report.

Acknowledgements
 The Board wishes to place on record its appreciation to the
contribution made by employees of the Company and its
subsidiaries during the year under review. The Company has
achieved impressive growth through the competence, hard work,
solidarity, cooperation and support of employees at all levels. Your
Directors thank the customers, clients, vendors and other business
associates for their continued support in the Company’s growth. The
Directors also wish to thank the Government Authorities, financial
Institutions and Shareholders for their cooperation and assistance
extended to

For and on behalf of the Board of Directors

2. What are the major functions performed by the capital

markets? Explain the importance of each function for
corporate financial management. How does the existence of
a well-functioning capital market assist the financial
management function? Discuss with reference to recent
changes that have place in the area of finance.

The Major Functions of the Capital Market Are:

 Raise capital for industry

Businesses raise capital to fund projects that they cannot fund

internally or fund projects that they do not want to fund
internally.

The primary goal of a business is to make profit. That is it, no

more, no less. Everything else comes in after that. What is a
profit? Profit is money left after subtracting total costs of sales
and operation from total revenues from sales of products and
services of the company.

To make revenues our company needs to sell something’s. To

sell something’s, either they be product or service, the
company need to produce them. In order for company to
produce both its products and services, it needs to buy
equipments, build factories, and hire workers.

Well, all those things require money. Since we are in real

world, the resources are limited. The management of the
company must decided on which projects or investments they
will take (i.e. make profit). When the company has insufficient
money to fund those projects or they do not want to fund
those projects entirely, they raise capital from external
sources, usually via selling either equity and/or taking on
 debt. Those transactions are usually handled by investment
banks.

 Provide liquidity for financial instruments that trade in

a secondary market Financial Markets are where short-term
obligations or instruments are traded, such as Stock Markets,
Bond Markets, Commodities Markets and Foreign Exchange
Markets. These instruments could be Treasury Bills or
Commercial Papers or Banker's Acceptance and etc.

There are many tasks every business needs to do if it is going to

succeed. Each of these tasks is described as being a function of a
business. The following is a brief introduction to each of these
functions:

 Human Resources - ensures the business has the best staff

for the job and that they are able to work effectively in a safe
environment;

 Finance - will keep a record of all money coming in and going

out of the business. They have responsibility for securing
finances for future expansion and paying staff and suppliers;

 Administration and ICT support - ensure the smooth

running of the business on a day-to-day basis. They have
responsibility for clerical duties, cleaning, computer and
software support, security and health and safety;

 Operations - have the task of producing the goods or service

in the most efficient way. This is done by making best use of
the business's staff, machinery, building and raw materials;

 Marketing and sales - will try and maximize the level of

sales by carrying out market research and promoting the
goods or service through a motivated sales team;

 Customer Service - will help the customer before and after a

sale has been made by providing information, giving advice,
providing credit facilities, delivering goods and providing
after-sales support;

 Research and development - will help the business remain

competitive by developing new goods and services and
updating the existing ones; Use of ICT - ICT will be used in
each of these functional
 Increasing skepticism among trade partners regarding each
other's financial health along with tighter credit conditions have
manufacturers rethinking the way they conduct global trade
deals.

In some cases companies have switched back to contracts that

are backed by letters of credit rather than less-burdensome but
riskier open accounts or have extended payment terms to gain
business. The restrictive climate has had an impact on worldwide
trade volumes.

The trade-finance shortage has likely contributed to an expected

10% decline in world merchandise trade volume for 2009,
according to a July World Trade Organization report. Credit has
begun to somewhat loosen, but pricing is still higher than pre-
crisis levels, says Susie Shipley, head of the Royal Bank of
Scotland's Global Trade Finance practice.

The risks inherent with trade financing in a down economy has

pushed more manufacturers to require their customers to seek
letters of credit as a safety net, Shipley says.

"With the increase in economic volatility and private insurance

failures, an increasing number of companies are using classic
trade instruments, including export letters of credit and
confirmed export letters of credit in order to reduce their
international risk exposure," observes Shipley. "Our clients have
been expressing concerns with private insurance coverage of
their receivables and have been taking advantage of classic
trade finance alternatives to reduce risk and days sales
outstanding as opposed to less secure terms such as open
account with longer tenors."

3. Mr. Shyam deposits Rs. 1, 00,000 in a bank which pays 10%

interest. How much can he withdraw annually for a period of 30
years? Assume that at the end of 30 years the amount deposited
will whittle down to zero.

4. Explain why the degree of operating leverage affects the

beta of the firm (and, in turn, the required rate of return on
equity). Illustrate with the help of examples and figures.

Financial leverage (FL) takes the form of a loan or other borrowings

(debt), the proceeds of which are (re)invested with the intent to
earn a greater rate of return than the cost of interest. If the firm's
rate of return on assets (ROA) is higher than the rate of interest on
the loan, then its return on equity (ROE) will be higher than if it did
not borrow because assets = equity + debt (see accounting
equation). On the other hand, if the firm's ROA is lower than the
interest rate, then its ROE will be lower than if it did not borrow.
Leverage allows greater potential returns to the investor that
otherwise would have been unavailable but the potential for loss is
also greater because if the investment becomes worthless, the loan
principal and all accrued interest on the loan still need to be repaid.

Margin buying is a common way of utilizing the concept of leverage

in investing. An unlevered firm can be seen as an all-equity firm,
whereas a levered firm is made up of ownership equity and debt. A
firm's debt to equity ratio is therefore an indication of its leverage.
This debt to equity ratio's influence on the value of a firm is
described in the Modigliani-Miller theorem. As is true of operating
leverage, the degree of financial leverage measures the effect of a
change in one variable on another variable. Degree of financial
leverage (DFL) may be defined as the percentage change in
earnings (earnings per share) that occurs as a result of a
percentage change in earnings before interest and taxes.

Measures of financial leverage

Debt-to-equity

Main article: Debt to equity ratio

Debt to equity is generally measured as the firm's total liabilities

divided by shareholders' equity. In the following, D = liabilities, E =
equity, A = total assets, EBIT = Earnings before interest and taxes
and Interest = Interest payment:

Debt-to-equity ratio =

Debt-to-value ratio = = Debt-to-assets

Interest coverage ratio =

Degree of Financial Leverage (DFL)

Financial Leverage affects the EPS of the firm. Financial Leverage

acts as a double-edged sword. If the economic conditions are
favorable and EBIT is increasing, a higher financial leverage has a
positive impact on the EPS. The DFL captures this relationship
between EBIT and EPS. DFL is defined as the percentage change in
EPS for a given percentage change in EBIT.
 Symbolically,

For different applications of leverage, analysts may include or

exclude certain items, such as non-tangible balance sheet items,
non-financial liabilities, and similar items, or may adjust the carrying
value of other items. It is not uncommon to use only financial
liabilities (long-term and short-term borrowings), thereby excluding,
for example, accounts payable.

Gearing and Du Pont Analysis

Use of the Du Pont Identity requires that leverage be measured in

terms of total assets divided by shareholders' equity, and this is
sometimes referred to as gearing or simply leverage:

Leverage (gearing) = A / E

The two measures are related. Since the terms used are the same
throughout, debt-to-equity is equal to gearing times debt over
assets: D / E = (A / E) * (D / A)

5. Explain why the IRR and NPV decision rules for two
mutually exclusive projects may sometimes recommend the
project and sometimes recommend different projects.

The internal rate of return (IRR) is a rate of return used in capital

budgeting to measure and compare the profitability of investments. It
is also called the discounted cash flow rate of return (DCFROR) or
simply the rate of return (ROR).[1] In the context of savings and loans
the IRR is also called the effective interest rate. The term internal
refers to the fact that its calculation does not incorporate
environmental factors.

The internal rate of return on an investment or potential investment

is the annualized effective compounded return rate that can be earned
on the invested capital.

In more familiar terms, the IRR of an investment is the interest rate

at which the costs of the investment lead to the benefits of the
investment. This means that all gains from the investment are inherent
to the time value of money and that the investment has a zero net
present value at this interest rate.
 net present value (NPV) or net present worth (NPW)[1] of a time
series of cash flows, both incoming and outgoing, is defined as the sum
of the present values (PVs) of the individual cash flows. In case when
all future cash flows are incoming (such as coupons and principal of a
bond) and the only outflow of cash is the purchase price, the NPV is
simply the PV of future cash flows minus the purchase price (which is
its own PV). NPV is a central tool in discounted cash flow (DCF)
analysis, and is a standard method for using the time value of money
to appraise long-term projects. Used for capital budgeting, and widely
throughout economics, finance, and accounting, it measures the
excess or shortfall of cash flows, in present value terms, once financing
charges are met.

The NPV of a sequence of cash flows takes as input the cash flows
and a discount rate or discount curve and outputting a price; the
converse process in DCF analysis, taking as input a sequence of cash
flows and a price and inferring as output a discount rate (the discount
rate which would yield the given price as NPV) is called the yield, and is
more widely used in bond trading.
 Assignment ‘B’
Analytical Questions—

1. Many firms have considered whether or not to implement just-in-time

inventory procedures. Explain how a company that would need to
purchases additional computer equipment to implement such an
inventory procedure and for whom both revenues and operating
expenses would be largely unchanged might benefit form just-in-time.

2. Explain how credit analysis can result in customer paying a

lower interest on purchases.

Credit analysis (otherwise known as Credit risk analysis) deals with

understanding the Risk of the borrower defaulting on payments. Credit
analysis is done for every account at the time of opening or taking a new
loan. And the outcome of the credit risk analysis helps the lender in
pricing the risk, i.e., setting the interest rate for the loan. Typically, an
Interest rate works on the following model:

Interest Rate = Risk free Return in the market + Expected losses + Risk
premium

Risk free return in the market can be return on a treasury bond. Let’s
assume that the interest rate for risk free return is 3%

Suppose, the lender wants to give out 100 loans of 1000 each. The total
loan amount is 100000. Historically, it might have been notice that 5% of
the loans given out are never recovered. Hence, expected losses are 5%

Finally, a person would like to get some premium for the extra risk taken.
The person can decide this risk premium based on what competition takes
for same risk. Say, competition charge 2% for this kind of risk.

The interest rate should be = 3% + 5% + 2% = 10%

This is the way the interest rate is arriving at.

Now, by analyzing the credit risk of a person, if the risk of default is lower,
the expected losses from lower risk loans are going to be lower. And this
reduces the interest rate. Further, ppl may need lesser risk premium for
making such loans. And hence, even this can lower the interest rate of the
loan

3. Hiralal company requires 10,000 units of a certain item per

year. The purchase price per unit is Rs. 25; the carrying cost per
year is 25% f the inventory value; and the fixed cost per order is
Rs. 300

(a) Determine the economic order quantity

(b) How many times per year will inventory be ordered, if the size
is equal to the EOQ

(c )What will be the total cost of carrying

Ans:

(a)

Economic Order Quantity (EOQ)=1000

A=10,000

O=300

C= 25% of 25 =6

EOQ=√2 AO/C=√2*10,000*300/6=1000

(b)

(c)
Assignment ‘C’

Objective Questions—

1. The Finance Manager is involved in almost all the decisions

in any organization because

Ans: b

– Most decisions taken in an organization have financial implications

2. Earnings per share

Ans: b

– Refer to the market value per share of the company

3. Risk-return trade off implies

Ans: c

– Taking decisions in a way which optimizes the balance between risk

and return

4. A finance manager’s main objective is

Ans: e

– Procuring funds for the firm through the loans, issue of shares and
debentures etc.

– Maximising the wealth of shareholders by increasing earnings per

share

5. A financial system

Ans: c

– Is inclusive of financial markets, financial institutions and financial

instruments

6. The difference between a capital market and money market

is that

Ans: b
– Capital markets can be classified into primary and secondary
markets unlike the money market

7. Call money market

Ans: b

– Deals in commercial paper

8. Treasury bills

Ans: c

– Are floated through auction conducted by RBI

9. Credit cards

Ans: c

– Enables a cards member to pay just the minimum amount due from
him to the bank at any point of time

10. Cash credits which are a form of short term bank

borrowing, actually end up, becoming long term advances in
many cases due to

Ans: e

– None of the above

11. Money has time value since

Ans: e

– Money in hand today is more certain than money to be get

tomorrow

– The value of Money gets compounded as times goes by

12. Given an investment of Rs. 1,000 to be invested for 9

months and interests credited annually

Ans: c

– It is better to invest in a scheme which earns simple interest at 15%

 13. In order to find the value in 2000 of a sum of Rs. 100
invested in 1998 at X°/o interest rate

Ans: a

– The (FVIF)Future Value Interest Factor Table should be used

14. The real rate of interest or return is nothing but

Ans: a

– Nominal or Market Interest rate

15. The rule of 72

Ans: e

– Is used to find the doubling period

– Applies the Formula 72 divided by interest rate

16. Current yield on a bond is

Ans: a

– Measured as the rate of return that will be earned on bond if it

is purchased at its market price and coupon interest is
received

17. Which of the following is true?

Ans: d

– All of the above

18. With respect to...the effect of the number of years to

maturity on bond values, which of the following is true?

Ans: b

– When the required rate of return is less than the coupon rate, the
premium on the bond declines as the maturity approaches

19. A Rs. 100 par value bond bearing a coupon rate of

100/0 will mature after 6 years. If the discount rate is 15%,
which of the following is the value of the bond?

Ans: b
 – Rs. 81.04

20. The market value of a Rs. 100 par value bond carrying
a coupon rate of 15% and maturing after 5 years is Rs. 110.
Which of the following is the yield to maturity on this bond?

Ans: c

– 12.38

21. The equity stock of Rock Ltd. is currently selling at Rs.

20 per share. The dividend expected next year is Rs. 2.00.
The investor’s required rate of return on this stock is 12°/o.
Which of the following is the expected growth rate if the
constant growth mode? applies to Rock Ltd’

Ans: b

– 2

22. Which of the following is a source of fund?

Ans: a

– Increase in assets

23. Of which of the following basis can a funds flow

statement prepared?

Ans: b

– Working capital basis

24. Operating leverage measures the sensitivity of the

________________ to changes in quantity.

Ans: c

– Earnings before interest and tax

25. Degree of financial leverage is __________________ below the

financial breakeven point.

Ans: d

– Zero
 26. Degree if total leverage (DTL) can be calculated by
which of the following formula given Degree of operating
leverage (DOL) and Degree of financial leverage (DFL)

Ans: d

– DOL x DFL

27. The following data are available for a company: Unit selling
price (P) = Rs. 150, Unit Variable cost (V) = Rs. 80 and Total
Fixed Cost (F) = Rs. 3,00,000. The degree of operating
leverage for the company when output (Q) is 5000 units is

Ans: e

– 7

28. Consider following data for a company:Interest burden

(I) = Rs. 1,50,000, Tax Rate (T) = 50%, Preference Dividend
(Dp) = Rs. 75,000. When the Earnings before interest and
taxes (EBIT) are Rs.5,00,0.00, the degree of financial
leverage is

Ans: a

– 1.5

29. Equity shares of a company are quoted in the market

at Rs. 17.00. The dividend expected a year hence is Re. 1.00.
The expected rate of dividend growth is 8%. The cost of
equity capital to the company will be.

Ans: a

– 13.88%

30. While calculating average cost of capital

Ans: d

– Weights are always based on the market value

31. Cost of equity capital is

Ans: e
– All of the above

32. The following is/are some of the factors that influence the
capital structure of a firm,

Ans: c

– Taxes

33. The term net working capital denotes

Ans: b

– The amount of long-term funds used to finance current assets

(including loans and advances)

34. Advance received from the customers is

Ans: b

– The current assets item which is highly liquid in character

35. Negative net working capital signifies that

Ans: b

– The value of current ratio is less than unity

36. The dilemma of ‘liquidity’ vs. ‘profitability’ arises in

the case of

Ans: d

– Purely trading company

37. Under trading means

Ans: d

– None of the above

38. Current ratio indicates

Ans: c
– Cash inflows of the business

39. Current assets - Current liabilities =

Ans: b

– Net working capital

40. Liquidity ratio computed by eliminating inventories

from current assets is

Ans: c

– Quick ratio