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Topics: Finance, Corporate finance, Net present value Pages: 11 (3862 words) Published: February 1, 2013
| 2012|
MBA -2-SEM531110555|

[Financial Management]|

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. Q.2 What are the factors that affect the financial plan of a company? Q.3 Show the relationship between required rate of return and coupon rate on the value of a bond.

Q.4 Discuss the implication of financial leverage for a firm. 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
Calculate the a) payback period.
b) Benefit cost ratio for 10% cost of capital
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.

Q1. What are the 4 finance decisions taken by a finance manager. Ans. A firm performs finance functions simultaneously and continuously in the normal course of the business. They do not necessarily occur in a sequence. Finance functions call for skilful planning, control and execution of a firm’s activities. Let us note at the outset hat shareholders are made better off by a financial decision that increases the value of their shares, Thus while performing the finance function, the financial manager should strive to maximize the market value of shares. Whatever decision does a manger takes need to result in wealth maximization of a shareholder. 1. Investment Decision

Investment decision or capital budgeting involves the decision of allocation of capital or commitment of funds to long-term assets that would yield benefits in the future. Two important aspects of the investment decision are: a) The evaluation of the prospective profitability of new investments, and b) The measurement of a cut-off rate against that the prospective return of new investments could be compared. Future benefits of investments are difficult to measure and cannot be predicted with certainty. Because of the uncertain future, investment decisions involve risk. Investment proposals should, therefore, be evaluated in terms of both expected return and risk. Besides the decision for investment managers do see where to commit funds when an asset becomes less productive or nonprofitable. There is a broad agreement that the correct cut-off rate is the required rate of return or the opportunity cost of capital. However, there are problems in computing the opportunity cost of capital in practice from the available data and information. A decision maker should be aware of capital in practice from the available data and information. A decision maker should be aware of these problems. 2. Financing Decision

Financing decision is the second important function to be performed by the financial manager. Broadly, her or she must decide when, where and how to acquire funds to meet the firm’s investment needs. The central issue before him or her is to determine the proportion of equity and debt. The mix of debt and equity is known as the firm’s capital structure. The financial manager must strive to obtain the best financing mix or the optimum capital structure for his or her firm. The firm’s capital structure is considered to be optimum when the market value of shares is maximized. The use of debt affects the return and risk of shareholders; it may increase the return on equity funds but it always increases risk. A proper balance will have to be struck between return and risk. When...
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