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MB0045-Financial Management

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Master of Business Administration - MBA Semester 2
MB0045-Financial Management-4 Credits
(Book ID: B1628)
Assignment (60 Marks)
Note: Answer all questions within 400 words each. Each Question carries 10 marks 6 X 10=60
Q1: Explain the liquidity decisions and its important elements. Write complete information on
dividend decisions.
Answer. The liquidity decision is concerned with the management of the current assets, which is a prerequisite to long-term success of any business firm. This is also called as working capital decision. The
main objective of the current assets management is the trade-off between profitability and liquidity, and
there is a conflict between these two concepts. If a firm does not have adequate working capital, it may
become illiquid and consequently fail to meet its current obligations thus inviting the risk of bankruptcy.
On the contrary, if the current
Q2. Explain about the doubling period and present value. Solve the below given problem:
Under the ABC Bank’s Cash Multiplier Scheme, deposits can be made for periods ranging from 3
months to 5 years and for every quarter, interest is added to the principal. The applicable rate of
interest is 9% for deposits less than 23 months and 10% for periods more than 24 months. What will
be the amount of Rs. 1000 after 2 years?
Answer. Doubling period
A very common question arising in the minds of an investor is “how long will it take for the amount
invested to double for a given rate of interest”. There are 2 ways of answering this question:
1. One way is to answer it by a rule known as ‘rule of 72’. This rule states that the period within which
the amount doubles is obtained by dividing72 by the rate of interest. Though it is a crude way of
calculating, this rule is
Q3. Write short notes on:
a) Operating Leverage
b) Financial leverage
c) Combined leverage
Answer. a). Operating leverage arises due to the presence of fixed operating expenses in the firm’s
income flows. It has a close relationship to business risk. Operating leverage affects business risk factors,
which can be viewed as the uncertainty inherent in estimates of future operating income. The operating
leverage takes place when a change in revenue produces greater change in Earnings Before Interest and
Taxes (EBIT). It indicates the impact of changes
Q4. Explain the factors affecting Capital Structure. Solve the below given problem:
Given below are two firms, A and B, which are identical in all aspects except the degree of leverage
employed by them. What is the average cost of capital of both firms?
Answer. Capital structure should be planned at the time a company is promoted. The initial capital
structure should be designed very carefully. The management of the company should set a target capital
structure, and the subsequent financing decisions should be made with a view to achieve the target
capital structure. Every time the funds have to be procured, the financial manager weighs the pros and
cons of various sources of finance and selects the most advantageous sources keeping in view the target
capital structure. Thus, the capital
Q5. Explain all the sources of risk in capital budgeting with examples. Solve the below given problem:
An investment will have an initial outlay of Rs 100,000. It is expected to generate cash inflows. Cash
inflow for four years.
If the risk free rate and the risk premium is 10%,
a) Compute the NPV using the risk free rate
b) Compute NPV using risk-adjusted discount rate
Answer. There are several definitions for the term ‘risk’. It may vary depending on the situation, context
and application. Risk may be termed as a degree of uncertainty. It may be defined as the possibility that
the actual result from an investment will differ from the expected result. Risk in capital budgeting maybe
defined as the variation of actual cash flows from the expected cash flows.
Stand-alone risk
Stand alone risk of a project is considered when the project is in isolation. Stand-alone risk is measured
by the variability of expected
Q6. Explain the objectives of Cash Management. Write about the Baumol model with their
Answer. The major objectives of cash management in a firm are:
• Meeting payments schedule
• Minimizing funds held in the form of cash balances
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