With Lots of Lucks

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
Year Cash flow Cumulative Cash
flows
1 25000 25000
2 40000 65000
3 50000 115000
4 40000 155000
5 30000 185000
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
100000 − 65000
⇒ 2+
50000
35000
⇒ 2+
50000
⇒ 2.7 Years
Solution:
b). Benefit cost ratio for 10% cost of capital.

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 With Lots of Lucks

Year Cash Flow 10% Pv Factor Pv of Cash Cumulative

flow
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

100000 − 93315
⇒ 3+
27320
6685
⇒ 3+
27320
⇒ 3 + .244 ⇒ 3.244

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

Pn =
(Dn+1 )
(Ke − g )
P4 = D5 / Ke − g
= D5 (1 + gn ) Ke − g
= 5(1.25) + (1 + 0.05) / (0.15 − 0.08)
4

= 15.26 / 0.07
= 16.48 / 0.07
= 235.42
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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 With Lots of Lucks
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 Pv of Cash

(10%) inflow
200 Million .909 181.8
150 Million .826 123.9
50 Million .751 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
D [r (E − D ) Ke]
P= +
Ke Ke

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%

D [r (E − D ) Ke]
a. P= +
Ke Ke
0.4 [0.18(40 − 0.4) 0.12] 0.4 + [0.18(40 − 0.4) 0.12]
40% = + =
Ke 0.12 0.12
= Rs. 498.33

0.5 [0.18(40 − 0.5) 0.12] 0.5 + [0.18(40 − 0.5) 0.12]

50% = + =
0.12 0.12 0.12
= Rs. 497.91

0.6 [0.18(40 − 0.6) 0.12] 0.6 + [0.18(40 − 0.6 ) 0.12]

60% = + =
0.12 0.12 0.12
= Rs. 497.91

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