Mba 2nd Semester Paper

Topics: Finance, Interest, Inventory Pages: 9 (2360 words) Published: June 18, 2013
Examination Paper Semester I: Financial Management
Section A: Objective Type

Part one: (ONLY ANSWERS)
1. A) Ignored non-corporate enterprise.
2. C) Redeemable preference shares.
3. B) Domestic risk.
4. A) Future cost.
5. C) Designing optimal corporate capital structure.
6. B) Firms point.
7. D) Agency costs.
8. A) Legal requirement.
9. B) Default risk.
10 A) Beta

1) Ans) An annuity is stream of equal annual cash flows. Annuities involve calculations based upon the regular periodic contribution or receipt of a fixed sum of money. Illustration:
Mr. Ramesh deposits Rs.2000/- at the end of every year for 45 years in his saving account, paying 5% interest compounded annually. Determine the sum of money, he will have at the end of the 5th year.

End of year | Amount Deposited| Number of Years compounded| Compounded Interest| Future Sum (Rs.) |  |  |  |  |  |
1| 2000| 4| 1.216| 2432|
2| 2000| 3| 1.158| 2316|
3| 2000| 2| 1.103| 2206|
4| 2000| 1| 1.05| 2100|
5| 2000| 0| 1| 2000|

Amount at the end of 5th year Rs. 11054/-
Finding the common factor of Rs. 2000/-
= Rs. 2000/- (1.216+1.158+1.103+1.050+1.000)
= Rs. 2000/- (5.527)
= Rs. 11054/-

The above illustration depicts that in order to find the sum of the annuity; the annual amount must be multiplied by the sum of the appropriate compound interest factors. Such calculations are available for a wide range of I and n. To find the answer to the annuity question of illustration 3 we are required to look for the 5% column and the row for the five years and multiply the factor by annuity amount of Rs. 2000/-. From the table we find that the sum of annuity of Re.1 deposited at the end of each year for 5 years is 5.526(IF). Thus, when multiplied by Rs. 2000/- annuity (A) we find the total sum as Rs. 11054/-.

Symbolically Sn = IF x A
A= is the value of annuity.
If = represents the appropriate factor for the sum of the annuity of Re.1. Sn =represents the compound sum of annuity.

3) Ans) Loan Amortisation means the repayment of loan taken from outsiders for interest.

LI = PA [I(1+I)n]
[(1+I)n -1]

LI = PA ÷ PVIFAn.i


LI = Loan installment.
PA = Principal amount.
I = Interest rate.
n = Loan repayment period.

PVIFAn.i = PV interest factors at loan repayment period at a specified interest rate.

4) Ans) Difference between NPV and IRR
1. In case of mutually exclusive projects, if NPV method accepts the project while IRR rejects. 2. If there is a size disparity the NPV and the IRR will give different rankings. 3. When there is an incremental approach, the NPV method is superior to the IRR, because the former supports projects, which are compatible with the goal of shareholders wealth maximization while the latter does not. 4. When there is time disparity the NPV would give results superior to the IRR method. 5. In projects with unequal lives, NPV and IRR would give conflicting ranking to mutually exclusive projects. SL No| NPV Method | SL No| IRR Method|

 |  |  |  |
1| Interest rate is a known factor | 1| Interest rate is an unknown factor| 2| It involves computation of the amount that can be | 2| It attemps to find out the maximum rate of interest |  | invested in a given project so that the anticipated |  | at which funds are invested in the project. Earnings|  | earnings will be sufficient to repay this amount|  | from the project in the form cashflow will help us |  | with market rate of interest|  | to get back the funds already invested| 3| It assumes that the cashflows can be| 3| It also assumes that the cashflows can be |  | reinvented at the discounting rate in the new projects.|  | reinvested at the discouting rate in the new.|...
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