Finanacial Mgt Assign Derick

7/24/2019 Finanacial Mgt Assign Derick

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Amity Campus

Uttar Pradesh

India 201303

ASSIGNMENTSPROGRAM M!C

SEMESTER"II

Su#$e%t Name

Study COUNTR&

R'(( Num#er )Re*+N'+,

Student Name

INSTRUCTIONSa, Students are re-uired t' su#mit a(( three assi*nment sets+

ASSIGNMENT .ETAI/S MARS

Assi*nment A !ie Su#$e%tie uesti'ns 10

Assi*nment Three Su#$e%tie uesti'ns 4 Case Study 10

Assi*nment C O#$e%tie 'r 'ne (ine uesti'ns 10

#, T'ta( 5ei*hta*e *ien t' these assi*nments is 306+ OR 30 Mar7s

%, A(( assi*nments are t' #e %'mp(eted as typed in 5'rd8pd9+d, A(( -uesti'ns are re-uired t' #e attempted+

e, A(( the three assi*nments are t' #e %'mp(eted #y due dates and need t' #e su#mitted 9'r

ea(uati'n #y Amity Uniersity+

9, The students hae t' atta%hed a s%an si*nature in the 9'rm+

Si*nature :::::::::::::::::::::::::::::::::

.ate :::::::::::::::::::::::::::::::::

) , Ti%7 mar7 in 9r'nt '9 the assi*nments su#mitted

Assi*nment ;A< Assi*nment ;< Assi*nment ;C


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!inan%ia( Mana*ement

Assi*nment A

1. What is stock split, what are its advantages?

A stock split is a method to increase the number of outstanding shares by proportionately reducing the face

value of a share. A stock split affects only the par value and does not have any effect on the total amount

outstanding in share capital. If a company announces a 2 for 1 stock split, they are telling the investmen

community they will be supplying shareholders with two shares of stock for every one share owned. There are

some very good reasons for a company to split its stock. As a stock rises in price over time, some investors may

become unwilling to pay such a high price for each share. This is more of a psychological barrier than a value-

based hurdle.

y splitting a stock, a company hopes to entice more investors to purchase the company!s securities. This i

why many companies make announcements when the stock price approaches historical highs. The first step in

the process usually involves gaining approval from the company!s board of directors and"or shareholders. #nce

approved, the company will make a formal announcement, giving the e$act date the split will occur. The holders

of stock on this record date are entitled to the split in shares. There are several possible combinations, 2 for 1and % for 2 being the most common splits. In a 2 for 1 stock split, the company is stating that it will have 2

shares outstanding for every 1 share currently issued. realey & 'eyers (2))%*, added that dividends per share

earnings per share and all other per-share variables would be half their previous levels.+or e$ample et us say

company A currently has 1)) million shares outstanding and the company announces a 2 for 1 split. et!s also

assume that on the day before the split occurs, the company!s stock closes at ) per share. #n the day of the

split, the company will have 2)) million shares outstanding and the opening price should be around 2 per

share.

The reasons for splitting shares are/


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T' ma7e shares attra%tie The prime reason foreffecting a stock split is to reduce the market price of a share

so as to make it more attractive to investors. 0hares of some companies enter into higher trading one making

them out of reach to small investors. 0plitting the shares will place them in more popular trading range thus

providing marketability and motivating small investors to buy them.

Indi%ati'n '9 hi*her 9uture pr'9its 0hare split is generally considered a method of managemen

communication to investors that the company is e$pecting high profits in future

=i*her diidend t' shareh'(ders hen shares are split, the company does not resort to reducing the cash

dividends. If the company follows a system of stable dividend per share, the investors would surely get higher

dividends with stock split.

Adanta*es '9 St'%7 Sp(it

A stock split is an action taken by a company to decrease the price of shares by increasing the number of shares

available, so that the total dollar value of the shares remains the same as before the split. There are a number of

ways in which the companies can split their stocks, such as two-for-one, three-for-two or three-for-one. Thi

re3uires approval from the board of directors and the shareholders.

The following are some of the ma4or advantages of a stock split/

0plitting the stock brings the share price down to an attractive level whereby small traders will be able to

invest more on these stocks. 0tock split is often seen as a positive indicator that a company is growing. 5ue to the lower prices, there will be more investors willing to buy and therefore the companies build up

more li3uidity by splitting their stocks. 6urrent shareholders en4oy the pleasure of doubling or tripling the number of shares they own. 6ompanies that split their stocks have typically en4oy a big 4ump in share prices.

2. Discuss the techniques of inventory control.


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Inventory control is the process employed to ma$imie a company!s use of inventory. The goal of inventory

control is to generate the ma$imum profit from the least amount of inventory investment without intruding upon

customer satisfaction levels. 7iven the impact on customers and profits, inventory control is one of the chief

concerns of businesses that have large inventory investments, such as retailers and distributors. 0ome of the

most important techni3ues of inventory control system include setting up of various stock levels, preparations of

inventory budgets, maintaining perpetual inventory system, establishing proper purchase procedures, inventory

turnover ratios and A6 analysis. This essay will discuss the different techni3ues of inventory control

To start with the company must set up various stock levels. 6hand (2)12*, states that the setting up of variou

stock levels is important to avoid over-stocking and under stocking of inventory. To achieve this management

has to decide about the ma$imum level, minimum level, re-order level, the danger level and average level of

materials to be kept in the store.

8e-ordering levelalso known as ordering level or ordering point or ordering limit is a point at which order fo

supply of material should be made. This level is fi$ed somewhere between the ma$imum level and the

minimum level in such a way that the 3uantity of materials represented by the difference between the re-

ordering level and the minimum level will be sufficient to meet the demands of production till such time as the

materials are replenished. 8eorder level depends mainly on the ma$imum rate of consumption and order lead

time. hen this level is reached, the store keeper will initiate the purchase re3uisition. 8eordering level i

calculated with the following formula/

8e-order level 9'a$imum 8ate of consumption $ ma$imum lead time

'a$imum level is the level above which stock should never reach. It is also known as ma$imum limit or

ma$imum stock. The function of ma$imum level is essential to avoid unnecessary blocking up of capital in

inventories, losses on account of deterioration and obsolescence of materials, e$tra overheads and temptation to

thefts. This level can be determined with the following formula. 'a$imum 0tock level 9 8eordering level :

8eordering 3uantity ; ('inimum 6onsumption $ 'inimum re-ordering period*


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'inimum level represents the lowest 3uantity of a particular material below which stock should not be allowed

to fall. This level must be maintained at every time so that production is not held up due to shortage of any

material. It is that level of inventories of which a fresh order must be placed to replenish the stock. This level is

usually determined through the following formula/

'inimum evel 9 8e-ordering level ; (mergency supply time.

E%'n'mi% Order uantity )E+O++, #ne of the most important problems faced by the purchasing departmen

is how much to order at a time. ?urchasing in large 3uantities involve lesser purchasing cost. ut cost of

carrying them tends to be higher. ikewise if purchases are made in smaller 3uantities, holding costs are lower

while purchasing costs tend to be higher. @ence, the most economic buying 3uantity or the optimum 3uantity

should be determined by the purchase department by considering the factors such as cost of ordering, holding or

carrying. This can be calculated by the following formula/

= 9 2A0"I

here =$ stands for 3uantity per orderB


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A stands for annual re3uirements of an item in terms of rupeesB

0 stands for cost of placement of an order in rupeesB and

I stand for inventory carrying cost per unit per year in rupees.

The other inventory control techni3ue is the preparation of inventory budgets. #rganiations having hug

material re3uirement normally prepare purchase budgets. The purchase budget is prepared well in advance. The

budgets for production and consumable material and for capital and maintenance material are separately

prepared. 0ales budget generally provide the basis for preparation of production plans. Therefore, the first step

in the preparation of a purchase budget is the establishment of sales budget.

As per the production plan, material schedule is prepared depending upon the amount and return contained in

the plan. To determine the net 3uantities to be procured, necessary ad4ustments for the stock already held is to

be made. They are valued as standard rate or current market. In this way, material procurement budget i

prepared. The budget so prepared should be communicated to all departments concerned so that the actua

purchase commitments are regulated as per budgets. At periodical intervals actuals are compared with the

budgeted figures and reported to management which provide a suitable basis for controlling the purchase of

materials,

Maintainin* Perpetua( Inent'ry Systemis another techni3ue to e$ercise control over inventory. It is also

known as automatic inventory system. The basic ob4ective of this system is to make available details about the

3uantity and value of stock of each item at all times. Thus, this system provides a rigid control over stock of

materials as physical stock can be regularly verified with the stock records kept in the stores and the cost office.

Pr'per Pur%hase Pr'%edureshas to be established and adopted to ensure necessary inventory control. The

following steps are involved.


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Pur%hase Re-uisiti'n It is the re3uisition made by the various departmental heads or storekeeper for their

various material re3uirements. The initiation of purchase begins with the receipts of a purchase re3uisition by

the purchase department.

Initin* u'tati'ns The purchase department will invite 3uotations for supply of goods on the receipt o

purchase re3uisition.

S%hedu(e '9 u'tati'ns The schedule of 3uotations will be prepared by the purchase department on the basis

of 3uotations received.

Appr'in* the supp(ier The schedule of 3uotations is put before the purchase committee who selects the

supplier by considering factors like price, 3uality of materials, terms of payment, delivery schedule etc.

Pur%hase Order It is the last step and the purchase order is prepared by the purchase department. It is a written

authoriation to the supplier to supply a specified 3uality and 3uantity of material at the specified time and place

mentioned at the stipulated terms.

The 'ther inent'ry %'ntr'( te%hni-ue is usin* the inent'ry turn'er rati'+

The rati' is %a(%u(ated usin* the 9'(('5in* 9'rmu(a

The ratio indicates how 3uickly the inventory is used for production. The higher the ratio, the shorter will be the

duration of inventory at the factory. It is the inde$ of efficiency of material management.

The comparison of various inventory turnover ratios of different items with those of previous years may revea

the following four types of inventories/


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S('5 m'in* Inent'ries These inventories have a very low turnover ratio. 'anagement should take all

possible steps to keep such inventories at the lowest levels.

.'rmant Inent'ries These inventories have no demand. The finance manager has to take a decision whether

such inventories should be retained or scrapped based upon the current market price, conditions etc.

O#s'(ete Inent'ries These inventories are no longer in demand due to their becoming out of demand. 0uch

inventories should be immediately scrapped.

!ast m'in* inent'ries These inventories are in hot demand. ?roper and special care should be taken in

respect of these inventories so that the manufacturing process does not suffer due to shortage of such

inventories.

Perpetua( inent'ry %'ntr'( system In a large organiation it is essential to have information about

continuous availability of different types of materials and stores purchased, issued and their balance in hand

The perpetual inventory control system enables the manufacturer to know about the availability of these

materials and stores without undergoing the cumbersome process of physical stock taking. Cnder this method,

proper information relating to receipt, issue and materials in hand is kept. The main ob4ective of this system is

to have accurate information about the stock level of every item at any time.

?erpetual inventory control system cannot-be successful unless and until it is accompanied by a system of

continuous stock taking i.e. checking the total stock of the concern %"D times a year by picking 1)"1 items daily

(as against physical stock taking which takes place once a year*.

The items are taken in rotation. In order to have more effective control, the process of continuous stock taking is

usually undertaken by a person other than the storekeeper. This will check the functioning of storekeeper also

The items may be selected at random to have a surprise check. The success of the system of perpetual inventory

control depends upon the proper implementation of the system of continuous stock taking.

AC ana(ysis


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In order to e$ercise effective control over materials, A..6. (Always etter 6ontrol* method is of immense use

Cnder this method materials are classified into three categories in accordance with their respective values

7roup EAF constitutes costly items which may be only 1) to 2)G of the total items but account for about )G of

the total value of the stores. A greater degree of control is e$ercised to preserve these items. 7roup EF consists

of items which constitutes 2) to %)G of the store items and represent about %)G of the total value of stores. A

reasonable degree of care may be taken in order to control these items. In the last category i.e. group E6F about

H) to )G of the items is covered costing about 2)G of the total value. This can be referred to as residuary

category. A routine type of care may be taken in the case of third category. This method is also known as Estock

control according to value methodF, Eselective value approachF and Eproportional parts value approachF. If thi

method is applied with care, it ensures considerable reduction in the storage e$penses and it is also greatly

helpful in preserving costly items.

3. Ea!ine risk ad"usted discount rate as a technique of incorporating risk factor in capital

#udgeting.

The increasing volatility of the global economy has caused investors to search out safer investment alternatives.

Investors use a capital budget when selecting their investments. A capital budget is a plan for investing in long-

term assets such as buildings and machinery. 8isk is inevitable to these investments. The various risks include

cash flows not being paid in time as agreed, the risk of the investee company collapsing and also the

management sinking the invested funds in risky pro4ects. y incorporating risk in capital budgeting, investor

can minimie losses. There are many techni3ues of incorporation of risk perceived in the evaluation of capita

budgeting proposals. They differ in their approach and methodology so far as incorporation of risk in the

evaluation process is concerned. This essay will e$amine risk ad4usted discount rate as a techni3ue o

incorporating risk factor in capital budgeting.

The use of risk ad4usted discount rate is based on the concept that investors demands higher returns from the

risky pro4ects. The re3uired rate of return on any investment includes compensation for delaying consumption

e3ual to risk free rate of return plus compensation for any kind of risk taken on. To allow for risk, the investo


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re3uires a premium over and above an alternative, which is risk-free. Accordingly, the more uncertain are the

returns in the future, the greater the risk and greater the premium re3uired. ased on this reasoning, it is

proposed that the risk premium be incorporated into the capital budgeting analysis through the discount rate

That is, if the time preference for money is to be recognied by discounting estimated future cash flows, at some

risk free rate, to their present value, then, to allow for the riskiness, of those future cash flows a risk premium

rate may be added to risk-free discount rate. 0uch a composite discount rate, called the risk-ad4usted discount

rate, will allow for both time preference and risk preference and will be a sum of the risk-free rate and risk

premium rate reflecting the investorsF attitude towards risk. The risk-ad4usted discount rate method can be

formally e$pressed as follows/

Cnder capital asset pricing model, the risk premium is the difference between the market rate of return and the

risk free rate multiplied by the beta of the pro4ect. The risk ad4usted discount rate accounts for risk by varying

the discount rate depending on the degree of risk of investment pro4ects. A higher rate will be used for riskier

pro4ects and a lower rate for less risky pro4ects. The net present value will decrease with increasing risk ad4usted

rate, indicating that the riskier a pro4ect is perceived, the less likely it will be accepted. If the risk free rate is

assumed to be G, some rate would be added to it, say JG, as compensation for the risk of the investment and

the composite 1DG rate would be used to discount the cash flows. The use of risk ad4usted discount rate has its

advantages and disadvantages. These adanta*es and disadanta*es are (isted #e('5

Adanta*es '9 ris7 ad$usted dis%'unt rate

It is simple and can be easily understood.

It has a great deal of intuitive appeal for risk-averse businessman.

It incorporates an attitude towards uncertainty.

.isadanta*es

This approach, however, suffers from the following limitations/


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There is no easy way deriving a risk ad4usted discount rate. 6apital asset pricing model provides a basis

of calculating the risk ad4usted discount rate. Its use has yet to pick up in practice.

It does not make any risk ad4usted in the numerator for the cash flows that are forecast over the future

years.

It is based on the assumption that investor are risk-averse. Through it is generally true, there e$ists a

category of risk seekers who do not demand premium for assuming risksB they are willing to pay

premium to take risks. Accordingly, the composite discount rate would be reduced, not increased, as the

level of risk increases.

In conclusion investors try to avoid risk. To encourage investors to invest their funds into risky pro4ects, the

returns from such pro4ects should be higher than returns from less risky investments such as treasury bonds. A

risk premium is a discount rate that is added to the risk-free rate of borrowing. The risk-free rate is the rate o

return of low-risk investments such as government-backed securities. The investments are then appraised using

the resulting discount rate. Investments that offer better returns are chosen.

$. %ritically ea!ine the pay#ack period as a technique of approval of pro"ects.

?ayback period in capital budgeting refers to the period of time re3uired to recoup the funds e$pended in an

investment, or to reach the break K even point. It is the time in which the initial cash outflow of an investment is

e$pected to be recovered from the cash inflows generated by the investment. +or e$ample, a 1)))) investment

which returned 2))) per year would have a five year payback period. ?ayback period is one of the simplest

investment appraisal techni3ues. The formula to calculate payback period of a pro4ect depends on whether the

cash flow per period from the pro4ect is even or uneven. In case they are even, the formula to calculate payback

period is/


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hen cash inflows are uneven, there is need to calculate the cumulative net cash flow for each period and then

use the following formula for payback period/

In the above formula,

Ais the last period with a negative cumulative cash flowB

is the absolute value of cumulative cash flow at the end of the period AB

Cis the total cash flow during the period after A

oth of the above situations are applied in the following e$amples.

The decision rule for payback period holds that an investor accepts a pro4ect only if itFs payback period is less

than the target payback period.

Adanta*es and .isadanta*es

Adanta*esof payback period are/

?ayback period is very simple to calculate. It can be a measure of risk inherent in a pro4ect. 0ince cash flows that occur later in a pro4ect!s life are

considered more uncertain, payback period provides an indication of how certain the pro4ect cash

inflows are. +or companies facing li3uidity problems, it provides a good ranking of pro4ects that would return money

early.

.isadanta*esof payback period are/


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?ayback period does not take into account the time value of money which is a serious drawback since it

can lead to wrong decisions. A variation of payback method that attempts to remove this drawback is

called discounted payback period method. It does not take into account, the cash flows that occur after the payback period.

&. Ea!ine the relationship of financial !anage!ent with other functional areas of finance

There e$ists an inseparable relationship between finance on the one hand and production, marketing and other

functions on the other. +or e$ample, recruitment and promotion of employees is clearly a responsibility of the

@8 functionB but it re3uires payment of wages and salaries and thus, involves finance. Advertising and sales

promotion activities fall under the purview of marketing. 0ince they re3uire cash, they affect financia

resources.

Although the finance function has a significant effect on other functions, yet it need not necessarily limit or

constraint the general running of the business. +inancial considerations are given more weightage over other

functions when a company is resource-crunched. 'arketing and other strategies will be devised in the light of

the financial constraints. #n the other hand, a fund rich company will be more fle$ible in devising its marketing

and other activities. In fact, financial policies will be devised to fit production and marketing decisions of a firm

in practice. The following are the relationships between financial management and other areas of management

+inancial 'anagement and 'arketing/ It deals with planning and controlling the entire marketing activities of a

concern and comprises the formulation of marketing ob4ectives, policies, programmes and strategies. The

purpose behind marketing management is to enhance the sales volume, to develop new markets, and to reach

new customers. @owever, the philosophy and approach to the pricing policy are critical elements in the

companyFs marketing effort, image and sales level. 0ince the determination of appro$imate price of the

companyFs product is very important both to the marketing and financial managers, there should be a 4oint

decision. hile the financial manager can supply the vital information regarding costs, changes in costs a

different levels of production and the profit margin re3uired to carry on the business, the marketing manager


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provides information as to how different prices will affect the demand for the firmFs product in the market and

the firmFs competitive position. Thus, the role of financial manager for the formulation of the pricing policies o

the firm cannot be undermined.

+inancial 'anager and ?ersonnel 'anagement/ The personnel manager organies the personnel department

which is generally assigned the operative functions of employment, compensation, training, etc. These functions

are performed in consultation with the heads of other departments. @owever, all these re3uire finances and

thereby the decision relating to these aspects can be taken by the personnel department, only after consulting

with the finance department.

+inancial 'anagement and ?roduction 'anagement/ ?roduction is the conversion of raw materials into finished

products, which is also called manufacturing of goods. The production department will have to ensure tha

production is carried on in the best manner at the lowest cost. @owever, production is indirectly related to the

key day-to-day decisions by the financial manager. +or instance, changes in the production process may

necessitate capital e$penditures, which the firmFs financial manager should evaluate and then finance. Thus

management and production management are related.

Assi*nment


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1. What are the assu!ptions of '' ('odigliani 'iller) approach?

The 'odigliani-'iller theorem argues that it does not matter how the firm is financed. They argued that the

value of a leveraged firm must be e3ual to the value of an unleveraged firm. If this is not the case, investors in

the leveraged firm will sell their shares (assume they owned 1)G*. They will then borrow an amount e3ual to

1)G of the debt of the leveraged firm. Csing these proceeds, they will purchase 1)G of the stock of the

unleveraged firm (which provides the same return as the leveraged firm* with a surplus left to be invested

elsewhere. This arbitrage process will drive the price of the stock of the leveraged firm down and drive up th

price of the stock of the unleveraged firm. This will continue until the value of both stocks is e3ual. In the end

the profitability and viability of the firm is unaffected by its financing decisions. @owever, the theory holds only

if a number of underlying assumptions are valid.

The '' model assumed that/

+irms must be in a homogeneous business risk class. If the firms have varying degrees of risk, the

market will value the firms at different rates. The earnings of the firms will be capitalied at differen

costs of capital. Investors have homogeneous e$pectations about e$pected future >IT. If investors have differen

e$pectations about future >IT then individual investors will assign different values to the firms

Therefore, the arbitrage process will not be effective. 0tocks and bonds are traded in perfect capital markets. Therefore, there are no brokerage costs and

individuals can borrow at the same rate as corporations. rokerage fees and varying interest rates will

in effect, lower the surplus available for alternative investment. Investors are rational. If by chance, investors were irrational, then they would not go through the entire

arbitrage process in order to achieve a higher return. They would be satisfied with the return provided

by the leveraged firm. There are no corporate ta$es. ith the e$istence of corporate ta$es the value of the leveraged firm mus

be e3ual to the value of the unleveraged firm plus the ta$ shield provided by debt.

2. *u!!aries the features of D%+ (Discounted cash flow) technique.


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The discounted cash flow (56+* method or time ad4usted techni3ue is an improvement over the traditional

techni3ues such as the payback. In evaluation of the pro4ects the need to give weightage to the timing of return

is effectively considered in all 56+ methods. 56+ methods are cash flow based and take the cogniance of both

the interest factors and cash flow after the payback period.

The features of the discounted cash flow techni3ue are as follows/

The estimation of cash flows, both inflows and outflows of are over the entire life of the pro4ect. The cash flows are discounted by an appropriate interest factor (discount factor* 0um of the present value of cash outflow is deducted from the sum of present value of cash inflows to

arrive at net present value of cash flows. hen appraising multi-period investments, where e$pected benefits and costs and related cash inflows

and outflows arise over time, the time value of money is taken into account. The time value of money is represented by the opportunity cost of capital. The discount rate used to calculate the


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3. Ea!ine the type and sources of risk in capital #udgeting.

ike anything, investments do have risks. There are different types of investment risks associated with capita

budgeting. Investors must constantly be aware of the risk they are assuming, know what it can do to their

investment decisions and be prepared for the conse3uences. Investors should be willing to purchase a particular

asset if the e$pected return is ade3uate to compensate for the risk, but they must understand that their

e$pectation about the asset!s return may not materialie.

T&PES O! RIS

In investment analysis, risk can be categoried into two general types/ those that are pervasive in nature, such as

market risk or interest rate risk and those that are specific to a particular security issue, such as business o

financial risk. These two general types make up total risk. The total risk is made up of the general (market*

component and a specific (issuer* component or the systematic risk and nonsystematic risk.

0ystematic risk is the risk that cannot be reduced or predicted in any manner and is almost impossible to predict

or protect against. >$amples of this type of risk include interest rate increases or government legislation

changes. The smartest way to account for this risk is to simply acknowledge that this type of risk will occur and

plan its effect on the investment.

Cnsystematic risk is risk that is specific to assets features and can usually be eliminated through a process called

diversification.>$amples of this type of risk include employee strikes or management decision changes.

SOURCES O! RIS

The following discussion e$amines the sources of risk.

Interest Rate Ris7

The variability in a security!s return resulting from changes in the level of interest rates is referred to as interes

rate risk. 0uch changes generally affect securities inverselyB that is, other things being e3ual, security prices


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move inversely to interest rates. Interest rate risk affects bonds more directly than common stocks, but it affects

both and is a very important consideration for most investors.

Mar7et Ris7

The variability in returns resulting from fluctuations in the overall market that is, the aggregate stock market is

referred to as market risk. All securities are e$posed to market risk, although it affects primarily common

stocks. 'arket risk includes a wide range of factors e$ogenous to securities themselves, including recessions

wars, structural changes in the economy and changes in consumer preferences.

In9(ati'n Ris7

A factor affecting all securities is purchasing power risk, or the loss of the purchasing power of invested dollars

This risk is related to interest rate risk, since interest rates generally rise as inflation increases, because lenders

demand additional inflation premiums to compensate for the loss of purchasing power.

usiness Ris7

The risk of doing business in a particular industry or environment is called business risk. +or e$ample, Apple

the traditional i?hone powerhouse, faces ma4or changes today in the rapidly changing i?hone industry.

!inan%ia( Ris7

+inancial risk is associated with the use of debt financing by companies. The larger the proportion of assets

financed by debt (as opposed to e3uity* the larger the variability in the returns, other things being e3ual.

/i-uidity Ris7

i3uidity risk is the risk associated with the particular secondary market in which a security trades. An

investment that can be bought or sold 3uickly and without significant price concession is considered to be

li3uid. The more uncertain about the time element and the price concession, the greater the li3uidity risk. A

Treasury bill has little or no li3uidity risk, whereas a small over-the-counter (#T6* stock may have substantial

li3uidity risk.

E>%han*e Rate Ris7

All investors who invest internationally in today!s increasingly global investment arena face the prospect of

uncertainty in the returns after they-convert the foreign gains back to their own currency. >$change rate risk is


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sometimes called currency risk. +or e$ample, a Mambian investor who buys an Indian stock denominated in

rupees must ultimately convert the returns from this stock back to Nwacha. If the e$change rate has moved

against the investor, losses from the e$change rate movements can partially or totally negate the original return

earned.

C'untry Ris7

6ountry risk, also referred to as political risk, is an important risk for investors today probably more important

now than in the past. ith more investors investing internationally, both directly and indirectly, the political and

therefore economic, stability and viability of a country!s economy needs to be considered. The Cnited 0tates

arguably has the lowest country, risk and other countries can be 4udged on a-relative basis using the Cnited

0tates as a benchmark.

$. (a) Deepak steel has issued non converti#le de#entures for s.& %r. Each de#enture is of par value

of s.1--, carrying a coupon rate of 1$, interest is paya#le annually and they are redee!a#le after

/yrs at a pre!iu! of & . 0he co!pany issued the on converti#le de#entures at a discount of 3 .

What is the cost of de#enture to the co!pany? 0a rate is $-.

(#) *upersonic ndustries td. has entered into an agree!ent with ndian 4verseas #ank for a loan of

s.1-%r. with an interest rate of 1-. What is the cost of loan if the ta rate is $&?

Assi*nment 3 )?0 MCs,

1 11 21 %1


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2 6 12 22 %2% 1% 2% %%D 1D 2D %D 1 2 %J 1J 2J %JH 1H 2H %H 1 2 %O 1O 2O %O1) 2) %) D)

1. e all live under conditions of PPPPPPPPPPPP and PPPPPPPPPPPPPPP.a* 8isk, returnb* 8isk, uncertaintyc* 8eturn, premiumd* Cncertainty, premium

2. +ind the present value of 8s.1, )), ))) receivable after 1) yrs. if 1)G is time preference for money.a* %D))b* %))c* %J))d* %H))

% hat is the future value of a regular annuity of 8e.1 earning a rate of 12G interest p.a. for QearsRa* .%%b* J.%%c* H.%%d* H.1%

D. If a borrower promises to pay 8s.2)))) eight years from now in return for a loan of 8s.12) today,what is the annual interest being offeredR

a* JG appro$b* HG appro$c* G appro$d* OG appro$

. A loan of 8s., )), ))) is to be repaid in 1) e3ual installments. If the loan carries12G interest p.a. hat is the value of one installmentR

a* JDO2b* HDO2

c* DO2d* ODO2

J If you deposit 8s.1), ))) today in a bank that offers G interest, in how many years will this amountdouble by H2 ruleR

a* Ob* c* Hd* J


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H An employee of a bank deposits 8s.%), ))) into his +5 A"c at the end of each year for 2) yrs. hat isthe amount he will accumulate in his +5 at the end of 2) years, if the rate of interest is OG.

a* 1%D))b* 1%)))c* 1%2))d* 1%D))

PPPPPPPPPPPP decisions could be grouped into two categories.a* 'ake or buy

b* 6apital budgetingc* +i$ed capitald* orking capital

O.PPPPPPPPPPPPP and revenue generation are the two important categories of capital budgeting.a* 6ost reductionb* ?roductionc* Investmentd* 5ividend

1).PPPPPPPPP appraisal e$amines the pro4ect from the social point of view.

a* +inancialb* 6ostc* >conomicd* Technical

11. All technical aspects of the implementation of the pro4ect are considered in PPPPPP appraisal.a* +inancialb* 6ostc* >conomicd* Technical

12.PPPPPPPPPP of a pro4ect is e$amined by financial appraisal.a* +inancial viabilityb* 6ost viabilityc* >conomic viabilityd* Technical viability

1%. Among the elements that are to be e$amined under commercial appraisal, the most crucial one is thePPPPPPPPPP.

a* 0upply of the productb* 5emand for the productc* 6ost of the product

d* >lements of cost

1D+ +ormulating is the third step in the evaluation of investment proposal.a*


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1J. >ffect of a pro4ect on the working of other parts of a firm is known as PPPPPPPPPP.a* 0eparation principalb* +ormulationc* >$ternalitiesd* After effects

1H. The essence of separation principal is the necessity to treat PPPPPPPPPPelements of a pro4ectseparately from that of PPPPPPPPPPP elements.

a* ?roduction, operations

b* +inancing, productionc* Investment, financingd* Investment, production

1. ?ayback period PPPPPPPPPPPPPP time value of money.a* Ignoresb* 6onsidersc*


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b* 'ediumc* @igherd*


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a* A6b* SITc* +#d* ?>8T

%J. ?ost completion audit is PPPPPPPPPPPP in the phases of capital budgeting decisions.a* +irst 0tepb* ast step

c* 'iddle stepd*

Finanacial Mgt Assign Derick

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