National Institute of Business Management

Chennai - 020
FIRST SEMESTER EMBA/ MBA
Subject : Financial Management
Attend any 4 questions. Each question carries 25 marks
(Each answer should be of minimum 2 pages / of 300 words)

1. Explain the Indian Financial Systems.

2. Explain debentures as instruments for raising long-term
debt capital.
3. What is Working Capital Cycle? Discuss.
4. What are the characteristics and uses of ratio analysis?
Explain with examples.
5. Explain how you will estimate cash flows.
6. Explain Performance Budgeting.

25 x 4=100 marks

Answer 1 -

Explain the Indian Financial

Systems.
Economic developments and growth at constant pace is only possible
with the help of well-knit financial system for any country. The sole
financial systems have many sub-systems with many processes.
Financial sub-systems comprise of financial institutions, financial
markets, financial instruments and services that assists in capitalizing
the revenue. Its a mechanism by which savings are transformed
investments and it can be said that financial system play an significant
role in economic growth of the country by mobilizing surplus funds and
utilizing them effectively for productive purpose.
The financial system is characterized by the presence of integrated,
organized and regulated financial markets, and institutions that meet
the short term and long term financial needs of both the household
and corporate sector. Both financial markets and financial institutions
play an important role in the financial system by rendering various
financial services to the community. They operate in close combination
with each other in a reciprocal behavior.
The word "system", in the term "financial system", implies a set of
complex and closely connected or interlined institutions, agents,
practices, markets, transactions, claims, and liabilities in the economy.
The financial system is concerned about money, credit and finance-the
three terms are intimately related yet are somewhat different from
each other. Indian financial system consists of financial market,
financial instruments and financial intermediation.
Components/ Constituents of Indian Financial system:
The following are the four main components of Indian Financial system
1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.

Financial institutions:
Financial institutions are the intermediary who facilitates smooth
functioning of the financial system by making investors and borrowers
meet. They mobilize savings of the surplus units and allocate them in
productive activities promising a better rate of return. Financial
institutions also provide services to entities seeking advise on various
issues ranging from restructuring to diversification plans. They provide
whole range of services to the entities who want to raise funds from
the markets elsewhere. Financial institutions act as financial
intermediaries because they act as middlemen between savers and
borrowers. Were these financial institutions may be of Banking or NonBanking institutions.
Financial Markets:
Finance is a prerequisite for modern business and financial institutions
play a vital role in economic system. It's through financial markets the
financial system of an economy works. The main functions of financial
markets are:
1. To facilitate creation and allocation of credit and liquidity
2. To serve as intermediaries for mobilization of saving
3. To assist process of balanced economic growth
4. To provide financial convenience
Financial Instruments
Another important constituent of financial system is financial
instruments. They represent a claim against the future income and
wealth of others. It will be a claim against a person or an institution, for
the payment of the some of the money at a specified future date.
Financial Services:
Efficiency of emerging financial system largely depends upon the
quality and variety of financial services provided by financial
intermediaries. The term financial services can be defined as
"activities, benefits and satisfaction connected with sale of money that
offers to users and customers, financial related value".

Consolidating it all, the Indian financial system has undergone much

structural transformation over the past decade. The financial sector
has acquired strength, efficiency and stability by the combined effect
of competition, regulatory measures, and policy environment. While
competition, consolidation and convergence have been recognized as
the key drivers of the banking sector in the coming years and we would
soon get the adjective of Developed Country

Answer 2 -

Explain debentures as
instruments for raising long-term debt
capital.
Debentures are vital instruments for raising long-term debt capital.
Debenture holders are nothing but the creditors of the company. The
obligation of the company towards its debenture holders is similar to
that of a borrower who promises to pay interest and capital at specified
times. Interest payment on debenture is a statutory obligation, unlike
dividend payments on equity shares. Interest paid on debentures is a
tax-deductible expense. Debentures have to be compulsorily retired in
accordance with the terms of the issue, whereas equity share capital
need not be redeemed. Debenture holders are not entitled to vote.
Debentures are usually secured by a charge on the immovable
properties of the company. The interests of the debenture holders is
usually represented by a trustee, which is usually an insurance
company, a bank, or a firm of attorneys and this trustee is responsible
for ensuring that the borrowing company fulfils the contractual
obligations embodied in the contract. Debentures can be classified
based on conversion, security and redemption. On the basis of
convertibility, they can be classified into:
i.

Non Convertible Debentures (NCDs)

These debentures cannot be converted into equity shares and
will be redeemed at the end of the maturity period

ii.

Fully Convertible Debentures (FCDs)

These debentures will be converted into equity shares after a
specified period of time at one stroke or in installments. These
debentures may or may not carry interest till the date of
conversion. In the case of a fully established company with an
established reputation and good, stable market price, FCDs are
very attractive to the investors as their bonds are getting

automatically converted to shares which may at the time of

conversion be quoted much higher in the market compared to
what the debenture holders paid at the time of FCD issue.
iii.

Partly convertible Debentures (PCDs)

These are debentures, a portion of which will be converted into
equity share capital after a specified period, whereas the nonconvertible (NCD) portion of the PCD will be redeemed as per the
terms of the issue after the maturity period.

Debenture capital offers the following advantages to the issuing

company:
a. The cost of debt capital represented by debentures is much
lower than the cost of preference or equity capital.
b. Debenture financing does not result in dilution of control since
debenture holders are not entitled to vote
c. The call provision found in many debenture issues provides
flexibility in changing the capital structure
d. In a period of rising prices, debenture issue is advantageous. The
burden of servicing debentures, which entails a fixed monetary
commitment for repayment of interest and principal, decreases
in real terms as price level increases.
Disadvantages
a. Debenture interest and capital repayments are obligatory
payments. Failure to meet these payments jeopardizes the
solvency of the firm.
b. The protective covenants associated with a debenture issue may
be restrictive.
c. Considering investors perspective, the interest earned from the
debentures is taxable.
d. No voting right for a debenture holder.

Answer 4:

What are the characteristics

and uses of ratio analysis? Explain with
examples.
Ratio Analysis is a form of Financial Statement Analysis that is used to
obtain a quick indication of a firm's financial performance in several
key areas. The ratios are categorized as Short-term Solvency Ratios,

Debt Management Ratios, Asset Management Ratios, Profitability

Ratios, and Market Value Ratios.
Ratio Analysis as a tool possesses several important features. The
data, which are provided by financial statements, are readily available.
The computation of ratios facilitates the comparison of firms which
differ in size. Ratios can be used to compare a firm's financial
performance with industry averages. In addition, ratios can be used in
a form of trend analysis to identify areas where performance has
improved or deteriorated over time.
Comparing ratios over time can help a business make reasonable
predictions about what it should expect in the future if conditions
remain the same or similar. Breaking data down to ratios and
comparing the ratios over time also can help businesses see if trends
or cycles emerge. Because Ratio Analysis is based upon accounting
information, its effectiveness is limited by the distortions which arise in
financial statements due to such things as Historical Cost Accounting
and inflation. Therefore, Ratio Analysis should only be used as a first
step in financial analysis, to obtain a quick indication of a firm's
performance and to identify areas which need to be investigated
further.
Uses of ratio analysis include breaking data down so that it can be
compared. When comparing two sets of data, ratios can help bring the
numbers to equivalent figures.
For example, if the business wants to compare its monthly cost of
goods sold for the past year, it should not look at the raw numbers.
Instead, the business should calculate the cost of goods sold as a
percentage of the total sales in order to determine if costs truly have
increased or decreased.
Standard ratios have been developed to accomplish certain types of
analysis within different areas of business. For example, in finance it
is common to use the earnings per share, gross profit margin, return on
assets, and inventory turnover ratios. Not only does this help a
business in comparing historical data between itself and competitors,
but employees are generally trained in using these specific ratios
before being hired. Even though most ratios are easy to compute, the
analyst must understand the significance of each ratio in order to avoid
making false assumptions.

Answer 6: Explain Performance Budgeting.

As a fresh and somewhat different budgeting method, Performance
Budgeting considers all conventional methods of scrutinizing and using
the budgetary documents as insufficient, time-consuming and
obsolete. Moreover, the Performance Budgetary approaches are also
far more superior and contemporary in nature than the traditional
ones. For instance in case of governmental projects, the Performance
Budgeting system facilitates the government to decide the objectives
of the projects undertaken, determining the type of activities required
to accomplish them. All such activities or performances have
considerable expenses involved with them. Hence the long-term
projects are disintegrated in the form of annual Performance Budgets,
which incorporate the financial figures. Performance budgeting lays
immediate stress on the specific goals of the company in a stipulated
time.
Functions of a Performance Budget:
A Performance Budget informs the public about the total expended
amounts on various services, as well as the anticipated benefit which
the buyers will derive. It informs the people about the possible
destinations where their expenses go, along with the cost of the
expected benefit.
A Performance Budget permits the policy and decision makers like
executives, elected officers, budget officers, managers and others to
have a transparent view of the tradeoffs between alternative
expenditure plans, thus, making more up-to-date, beneficial and
effective allocation of the financial resources.
Achieving performance budget:
Performance Budgeting is of course an advanced budgeting process. To
successfully accomplish such budgeting, one should go through a
systematic procedure, which begins with getting explanations from the
Key Performance Indicators (KPIs), which relate the performance
indicators with the available resources. This is followed by an approach
called the Balanced Scorecard approach, where the Key Performance
Indicators are examined and connections are established between the
causes and effects of the Performance Budgeting system. It is this
established connection which is integrated with the existing
commercial system, for tracing out activities like acquisition, sales,

finances, etc. Today, the concept of Balanced Scorecard is widely

practiced in the private commercial sectors, and less in the public
sectors, owing to the advent of Performance Budgeting. In fact,
Scorecard can be regarded as the nascent stage of the concept of
Performance Budgeting, which follows a similar, but far more advanced
procedure.
Benefits of performance budget:

Shortens the lengthy, traditional budgeting and reporting

procedures which save money and time simultaneously and
assists with fresh regulatory necessities.
Managers in the public sectors are empowered for effective
promotion of resources.
Makes the agencies more focused, on a constant basis, on the
reduction of resources, as being their highest priority activity.
There is a remarkable alignment in the data collection and
reporting procedures of the agencies involved.
Improves performance on a continuous basis in the public
sectors.