MB045:-FINANCIAL MANAGEMENT Q1.What Are the Goals of Financial Management?

Answer:-The changing financial environment is prompting those who manage the financial resources of ministries to clarify the primary goals of their work. One who has given this issue considerable thought is Paul Clark, executive pastor of Fairhaven Church in Centerville, Ohio. The following short list of goals, from his blog, Where church vision meets organizational reality, gives any ministry financial decision maker plenty to think about. Avoid Fraud There are many ways to destroy the trust between the congregation and the leadership of the church but financial mismanagement is a big one. Many churches do not give this area of ministry the appropriate attention by: Using volunteers who do not have the appropriate training Holding the misperception that the government will never pay any attention Mimicking the practices of other churches without proper verification of their correctness Fulfill Our Fiduciary Responsibility As leaders in the church, we have a fiduciary responsibility (the highest standard of care imposed at either equity or law) to handle finances appropriately. Effective Management Ensure that the congregation has confidence in church management. Effective Communication When done well, this gives the congregation a greater understanding of the financial position of the church, the link between finances and ministry, and their own role in the ministry. Shared Vision Be sure that congregants understand and can support our vision and our direction. The Guiding Principle: Being Above Reproach What is more, he was chosen by the churches to accompany us as we carry the offering, which we administer in order to honor the Lord himself and to show our eagerness to help. We want to avoid any criticism of the way we administer this liberal gift. For we are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes of men. (2 Cor. 8:1921) For ideas on how to ensure the financial integrity of your ministry, check out the white paperHandling Cash: A Common-Sense Approach to Securing Your Ministrys Most Liquid Asset .

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Q.2 What are the features of optimum credit policy?

Answer:- The firms operating profit is maximized when total cost is minimised for a given level of revenue. Credit
policy at point an in represents the maximum operating profit (since total cost is minimum). But it is not necessarily the optimum credit policy. Optimum credit policy is one which maximizes the firm s value. The value of the firm is maximized when the incremental or marginal rate of return of an investment is equal to the incremental or marginal cost of funds used to finance the investment. The incremental rate of return can be calculated as incremental operating profit divided by the incremental investment in receivable. The incremental cost of funds is the rate of return required by the suppliers of funds, given the risk of investment in accounts receivable. Note that the required rate of return in not equal to the borrowing rate. Higher the risk of investment, higher the required rate of return. As the firm loosens its credit policy, its investment in accounts receivable becomes more risky because of increase in slowpaying and defaulting accounts. Thus the required rate of return is an upward sloping curve. In sum, we may state that the goal of the firms credit policy is to maximize the value of the firm. To achieve this goal, the evaluation of investment in accounts receivable should involve the following four steps: Estimation of incremental operating profit Estimation of incremental investment in account receivable Estimation to the incremental rate of return of investment Comparison of the incremental rate of return with the required rate of return. Standards variable production administrative and selling costs are per cent of sales (bad -debt losses and collection costs excluded). Thus contribution is 8.3 per cent of sales: 100 - 91.7 = 8.3 per cent. By tightening its credit policy, standard can expect to lose sales of $6 million (10 per cent of total sales of $60 million). Thus, the lost contribution will be $0.498 million: Change in contribution = change in sales x contribution ratios cont = sales x c = - 60 x 0.083 = $ - 0.498 million Since bad-debt losses and collection costs were entirely attributable to the marginal accounts, with the discontinuance of sales to those customers, these costs will be avoided. We should subtract these avoidable costs from contribution to find lost operating profit, which is equal to $ 0.456 million: Change in = change in additional Operating profit = contribution cost op - cont sales (b + d) = - 0.498 [- 60 (0.0005 + 0.0002)] = - 0.498+ 0.04 = - $ 0.502 million Services:- Optimum Credit Policy Homework | Optimum Credit Policy Homework Help | Optimum Credit Policy Homework Help Services | Live Optimum Credit Policy Homework Help | Optimum Credit Policy Homework Tutors | Online Optimum Credit Policy Homework Help | Optimum Credit Policy Tutors | Online Optimum Credit Policy Tutors | Optimum Credit Policy Homework Services |

Q3. What

are the assumptions of MM approach?

Answer:Modigliani Millar approach, popularly known as the MM approach is similar to the Net operating income approach. The MM approach favors the Net operating income approach and agrees with the fact that the cost of capital is independent of the degree of leverage and at any mix of debt-equity proportions. The significance of this MM approach is that it provides operational or behavioral justification for constant cost of capital at any degree of leverage. Whereas, the net operating income approach does not provide operational justification for independence of the company's cost of capital. Basic Propositions of MM approach: 1. At any degree of leverage, the company's overall cost of capital (ko) and the Value of the firm (V) remains constant. This means that it is independent of the capital structure. The total value can be obtained by capitalizing the operating earnings stream that is expected in future, discounted at an appropriate discount rate suitable for the risk undertaken. The cost of capital (ke) equals the capitalization rate of a pure equity stream and a premium for financial risk. This is equal to the difference between the pure equity capitalization rate and ki times the debt-equity ratio. The minimum cut-off rate for the purpose of capital investments is fully independent of the way in which a project is financed.

2. 3.

Assumptions of MM approach: 1. 2. 3. 4. 5. Capital markets are perfect. All investors have the same expectation of the company's net operating income for the purpose of evaluating the value of the firm. Within similar operating environments, the business risk is equal among all firms. 100% dividend payout ratio. An assumption of "no taxes" was there earlier, which has been removed.

Arbitrage process Arbitrage process is the operational justification for the Modigliani-Miller hypothesis. Arbitrage is the process of purchasing a security in a market where the price is low and selling it in a market where the price is higher. This results in restoration of equilibrium in the market price of a security asset. This process is a balancing operation which implies that a security cannot sell at different prices. The MM hypothesis states that the total value of homogeneous firms that differ only in leverage will not be different due to the arbitrage operation. Generally, investors will buy the shares of the firm that's price is lower and sell the shares of the firm that's price is higher. This process or this behavior of the investors will have the effect of increasing the price of the shares that is being purchased and decreasing the price of the shares that is being sold. This process will continue till the market prices of these two firms become equal or identical. Thus the arbitrage process drives the value of two homogeneous companies to equality that differs only in leverage. Limitations of MM hypothesis: 1. 2. 3. 4. 5. 6. Investors would find the personal leverage inconvenient. The risk perception of corporate and personal leverage may be different. Arbitrage process cannot be smooth due the institutional restrictions. Arbitrage process would also be affected by the transaction costs. The corporate leverage and personal leverage are not perfect substitutes. Corporate taxes do exist. However, the assumption of "no taxes" has been removed later.

Online Live Tutor Modigliani Millar Approach: we have the best tutors in Finance in the industry. Our tutors can break down a complex Modigliani Millar Approach problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Modigliani Millar Approach concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Modigliani Millar Approach tutoring and experience the quality yourself.

Calculate the PV of an annuity of Rs.500 received annually for four year when discounting factor is 10%.
Q4.

Answer:PV = Annuity amount PVIFA(10%,4Year) = 500*(10%,4 year)

=

500*3.1699

=1584.95 Heance The PV of annually amount is =1584.95

Q5. Suraj metals are expected to declar a dividend of Rs. 5 per share and the growth rate in dividend is expected to grow @ 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?

Answer:-

Ke

= = = =

(D1/Pe)+G (5/110) 0.04545 0.1454 +0.10 +0.10

=14.54% Ans

Q6. An investment will have an initial outlay of Rs. 100000 . it is expected to generate cash inflows. Table 1.2 highlights the cash inflow for four year.

Year

cash inflow

1 2 3 4

40000 50000 15000 30000

If the risk free rate and the risk premium is 10%, a) Compute the PV using the risk free rate b) Compute NPV using risk adjusted discount rate. Answer:A) Year 1 2 cash inflows 40000 50000 PV factor at 10% PV of cash flows 0.909 0.826 36360 41300

3 4

15000 30000 Pv of cash flows Pv of cash outflows NPV

0.751 0.683

11265 20490 109415

(100000)

--9415

B) Year 1 2 3 4 cash inflows 40000 50000 15000 30000 Pv of cash flows Pv of cash outflows NPV PV factor at 20% 0.833 0.694 0.579 0.482 PV of cash flows 33320 34700 8685 14460 91165 (100000) (8835)

The project would be acceptable when no allowance is made for risk.