ADL 13 Financial Management V1

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ADL 13 Financial Management V1

 

Assignment – A
Question 1. Examine the annual report of a well-known company of your choice,
particularly the Chairman’s report and/or the Directors’ Report. Are the
corporate goals clearly specified? What specific references are made to the
financial management? (Student should enclose the annual report with the answer)
Question 2. What are the major functions performed by the capital markets?
Explain the importance of each function for corporate financial management. How
does the existence of a well-functioning capital market a ssist the financial
management function? Discuss with reference to recent changes that have taken
place in the area of finance.
Question 3. Mr. Shyam deposits Rs. 1,00,000 in a bank which pays 10% interest.
How much can he withdraw annually for a period of 30 years. Assume that at the
end of 30 years the amount deposited will whittle down to zero.
Question 4. Explain why the degree of operating leverage affects the beta of the
firm (and, in turn, the required rate of return on equity). Illustrate with the
help of examples and figures.
Question 5. Explain why the IRR and NPV decision rules for two mutually
exclusive projects may sometimes recommend the project and sometimes recommend
different projects.

 

Assignment – B
Question 1. Many firms have considered whether or not to implement just-in-time
inventory procedures. Explain how a company that would need to purchase
additional computer equipment to implement such an inventory procedure and for
whom both revenues and operating expenses would be largely unchanged might
benefit from just-in-time.
Question 2. Explain how credit analysis can result in customer paying a lower
interest on purchases.
Question 3. Hiralal company requires 10,000 units of a certain item per year.
The purchase price per unit is Rs.25; the carrying cost per year is 25% of the
inventory value; and the fixed cost per order is Rs.300.
(a) Determine the economic order quantity
(b) How many times per year will inventory be ordered, if the size is equal
to the EOQ?
(c) What will be the total cost of carrying and ordering inventories when
10 orders a re placed per year?
Case Study
ASHA TOOLS COMPANY (Policy on Accounts Receivables)
In March 1999, Ms. Kumar was reviewing the credit policy of Asha Tools Company
(ATC herea fter). She was concerned about the increased cost of servicing the
debtors. The Prime Lending Rate had been recently been hiked by the banks and it
was at 16%. She noticed that the collection of company’s receivables had slowed
down and it resulted into a need to increase the short-term borrowings. ATC
manufactures a diverse line of all tools, including screwdrivers, pliers,
hacksaws and blades, and wrenches. Its product lines were marketed through an
established distribution system of over 4,000 retail hardware stores located
throughout India. Its headquarters and manufacturing facilities were located
along a river in the northern hills. The company’s sales in 1998 were
approximately Rs. 150 millions. Its annual sales growth of 8% exceeded the
industry growth of 6% per year, and profit margins were nearly double other hand
tool manufacturers. The company offered credit terms of ‘net to its customers, a
common practice in the industry. Even though many of its customers were small,
thinly capitalised hardware stores, ATC’s credit standards and collection policy
were somewhat liberal. Despite this, its average collection period (ACP) I been
about 40 days and its bad debt losses were low (2% of annual sales). During the
past yea r, there had been a significant slowdown in the company’s receivables
collection. ACP had gone up to 60 days. A recent ageing of the receivables,
shown in table 1. Due to this trend and high cost of servicing receivables Ms.
Kumar s wondering about the ways to reduce the firm’s investment in receivables.
She particularly wondered if the company could begin offering cash discount for
prompt payment. She recognised that the management of accounts receivables
involved a trade between costs and benefits and these should be weighed before
changes are contemplated. She, therefore, decided to evaluate the effects of
offering a cash discount payment within a 10-day discount period. She was unsure
of the most appropriate discount percentage; however, 2% was an industry
practice. She was also unsure of the number of customers that would avail the
discount. Given the nature of the customers, did not believe that more than 50%
would be able to take advantage of such discount. She decided to assume that
remaining customers would continue to stretch their credit. Thus, the ACP from
these customers would continue at the current level of 60 days’ sales. She did
not believe that the change in credit terms would have a noticeable effect on
company’s sales. Because of the adverse economic environment, however, she
estimated that the company’s bad debt losses would increase to 3% of sales.
ATC’s variable expenses, including direct labour, materials, supplies,
packaging, freight, and sales commissions, were approximately 75% of sales. The
company’s other expenses – including indirect labour, overhead, salaries, rent,
depreciation, property taxes, and insurance – were expected to remain fixed
during the foreseeable future. The company’s short-term bank borrowing
requirements were met through an unsecured line of credit with its bank. The
interest rate charged on borrowings under the line of credit floated with the
bank’s prime lending rate. The company was charged prime plus 2%. The average
prime interest rate was forecast to be 15% during the next one year. Company
sold almost entirely on credit. The total sales during 1999 were forecast to be
Rs.160 million.
Asha Tool Company

Receivables Ageing Schedule (February 1999) AmountPercent
0-30Rs.10,235,14040.2%
30-607,352,71028.9
60-904,833,02019.0
Over 903.027.65111.9
Rs.25.448.521100%

Question 1. Help Ms. Kumar in evaluating the marginal costs and benefits of
offering a cash discount as a means of speeding up the company’s receivables’
collection. What are your recommendations?
Question 2. What if interest rates decline in future years? How would this
affect your recommendations?
Question 3. Why will some customers continue to “stretch” their trade credit?
Are their incentives that ATC might offer to prevent this practice? If so, what
might they be?
Question 4. What if interest rates rise further? What would be the probable
effect upon the decision?

 
Assignment – C
1. The Finance Manager is involved in almost all the decisions in any
organisation because
(a). All managers report to the Finance manager
(b). Most decisions taken in an organisation have financial implications
(c). The result of most activities in an organisation are reflected in the
financial statements in monetary terms
(d). (b) and (c)
(e). (a), (b) and (c)
2. Earnings per share
(a). Refers to the earnings of equity and preference shareholders
(b). Refers to the market value per share of the company
(c). Refers to the earnings of equity shareholders after all the other
obligations of the company have been met
(d). Reflects the value of the firm
(e). (c) and (d)
3. Risk-return trade off implies
(a). Increasing the profits of the firm through increased production
(b). Not taking any loans which increase the risk of the firm
(c). Taking decisions in a way which optimises the balance between risk and
return
(d). Not granting credit to risky customers
(e). Minimising all risks
4. A Finance Manager’s main objective is
(a). To act as an interface between finance and other functions
(b). Procuring funds for the firm through the loans, issue of shares and
debentures etc.
(c). Achieving the right balance between risk and return
(d). Maximising the wealth of shareholders by increasing earnings per share
(e). (b) and (d)
5. A financial system
(a). Accelerates economic development
(b). Helps companies to mobilise funds
(c). Is inclusive of financial markets, financial institutions and financial
instruments
(d). (b) arid (c)
(e). (a), (b) and (c)
6. The difference between a capital market and money market is that ,
(a). While capital market deals with transactions related to short term debt,
money market deals with transaction related to long term debt
(b). Capital markets can be classified into primary and secondary markets
unlike the money market
(c). Capital market provides the resources needed by medium and large scale
industries for investment purposes while money market provides resources for
working capital needs
(d). (a) and (c)
(e). (b) and (c)
7. Call money market
(a). Trades in surplus funds of the banks
(b). Deals in commercial paper
(c). Helps in the maintenance of statutory liquidity ratio
(d). (a) and (c)
(e). (a), (b) and (c)
8. Treasury bills
(a). Are risky instruments as their interest rates are widely fluctuating
(b). Are also referred to as PSU bonds
(c). Are floated through auctions conducted by RBI
(d). Cannot be rediscounted with RBI
(e). Cannot be held by commercial banks
9. Credit cards
(a). Can be issued only by private banks
(b). Do not have an overdraft facility
(c). Enables a card member to pay just the minimum amount due from him to the
bank at any point of time
(d). Will not be replaced if lost
(e). (b) and (c).
10. Cash credits which are a form of short term bank borrowing, actually end up,
becoming long term advances in many cases due to
(a). The high liquidity of cash credit
(b). The rollover phenomenon
(c). Conversion of cash credit into overdraft
(d). (a) and (c)
(e). None of the above.
11. Money has time value since
(a). Money in hand today is more certain than money to be got tomorrow
(b). The value of money gets discounted as time goes by
(c). The value of money gets compounded as time goes by
(d). (a) and (b)
(e). (a) and (c)
12. Given an investment of Rs. 1,000 to be invested for 9 months and interests
credited annually
(a). It is better to invest in a scheme which earns compound interest at 12%
(b). It is better to invest in a scheme which earns simple interest at 12%
(c). It is better to invest in a scheme which earns simple interest at 15%
(d). It is better to invest in a scheme which earns compound interest at 14%
(e). The interest rate does not matter.
13. In order to find the value in 2000 of a sum of Rs. 100 invested in 1998 at
X%
interest rate
(a). The FVIF A table should be used
(b). The PVIF A table should be used
(c). The FVIF table should be used
(d). The PVIF table should be used e. (a) or (c) could be used
14. The real rate of interest or return is nothing but
(a). Nominal or market interest rate
(b). Market interest rate to which expected rate of inflation and risk
premium for uncertainty has been added
(c). Market interest rate which ahs been adjusted for inflation
(d). Nominal interest rate from which expected rate if inflation and risk
premium for uncertainty has been deducted
(e). None of the above
15. The rule of 72
(a). Is used to find the doubling period
(b). Makes use of FYIFA tables
(c). Applies the formula 72 divided by interest rate
(d). (b) and (c)
(e). (a) and (c)
16. Current yield on a bond is
a Measured as the rate of return that will be earned on a bond if it is
purchased at its current market price and coupon interest is received
(b). Coupon interest divided by previous ma rket price
(c). Equal to coupon rate if and only if the bond’s market price is greater
than its face value
(d). All of the above
e None of the above
17. Which of the following is true?
(a). A bond is an instrument of debt issued by a business or Government unit
(b). Par value is the value stated on the face of the bond
(c). A bond carries a specific interest rate which is called coupon rate
(d). All of the above
(e). None of the above.
18. With respect to…the effect of the number of years to maturity on bond
values,
which of the following is true?
(a). When the required rate of return is less than the coupon rate, the
discount on the bond declines as maturity approaches
(b). When the required rate of return is less than the coupon rate, the
premium on the bond declines as maturity approaches
(c). The shorter-the maturity of a bond, the greater its price change in
response to a given change in the required rate of return
(d). All of the above
(e). None of the above.
19. A Rs. 100 par value bond bearing a coupon rate of 10% will mature after 6
years.
If the discount rate is 15%, which of the following is the value of the bond?
(a). Rs. 80.42
(b). Rs. 81.04
(c). Rs. 102.57
(d). Rs. 115.64
(e). Rs. 67.89
20. The market value of a Rs. 100 par value bond carrying a coupon rate of 15%
and maturing after 5 years is Rs. 110. Which of the following is the yield to
maturity on this bond?
(a). 13 65
(b). 44.89
(c). 12.38
(d). 10.64
(e). 8.445
21. The equity stock of Rock Ltd. is currently selling at Rs. 20 per share. The
dividend expected next year is Rs. 2.00. The investor’s required rate of return
on this stock is 12%. Which of the following is the expected growth rate if the
constant growth model applies to Rock Ltd?
(a). 3.25
(b). 2
(c). 4.64
(d). 5.75
(e). None of the above
22. Which of the following is a source of fund?
(a). Increase in assets
(b). Increase in liabilities
(c). Decrease in liabilities
(d). Dividends paid
(e). All of the above
23. Of which of the following basis can a funds flow statement prepared?
(a). Total resource basis
(b). Working capital basis
(c). Cash basis
(d). All of the above
(e). None of the above
24. Operating leverage measures the sensitivity of the ____________ to changes
in quantity.
(a). Earnings per share
(b). Profit after tax
(c). Earnings before interest and tax
(d). Earnings before tax but after interest
(e). Expenditure
25. Degree of financial leverage is ____________ below the financial brea k even
point.
(a). Undefined
(b). Positive
(c). Negative
(d). Zero
(e). Has no relationship
26. Degree if total leverage (DTL) can be calculated by which of the following
formula given Degree of operating leverage (DOL) and Degree of financial
leverage (DFL)
(a). DOL + DFL
(b). DOL divided by DFL
(c). DFL – DOL
(d). DOL X DFL
(e). None of the above
27. The following data are available for a company:
Unit selling price (P) = Rs. 150, Unit Variable cost (V) = Rs. 80 and Total
Fixed
Cost (F) = Rs. 3,00,000. The degree of operating leverage for the company when
output (Q) is 5000 units is
(a). 3
(b). 4
(c). 5
(d). 6
(e). 7
28. Consider following data for a company:
Interest burden {I) = Rs. 1,50,000, Tax Rate (T) = 50%, Preference Dividend (Dp)
= Rs. 75,000. When the Earnings before interest and taxes (EBIT) are Rs.
5,00,0.00, the degree of financial leverage is
(a). 1.5
(b). 2.5
(c). 3.5
(d). 4.5
(e). 5.5
29. Equity shares of a company are quoted in the market at Rs. 17.00. The
dividend expected a year hence is Re. 1.00. The expected rate of dividend growth
is 8%. The cost of equity capital to the company will be
(a). 13.88%
(b). 12.88%
(c). 1.08%
(d). 10%
(e). 11.97%
30. While calculating average cost of capital
(a). Retained earnings are always excluded
(b). Bank borrowings for working capital are included
(c). Cost of issues are considered
(d). Weights are always based on the market value
(e). Preference sha res are given more weight
31. Cost of equity capital is
(a). Equal to last dividend paid to the equity shareholders
(b). Equal to the discounting factor which equates the net amount realised
from the issue to the future dividend payment
(c). Less than the cost of debt capital
(d). Equal to the dividend expectations of the equity shareholders for the
coming year
(e). All of the above
32. The following is/are some of the factors that influence the capital
structure of a firm
(a). Bankruptcy costs
(b). Agency costs
(c). Taxes
(d). All of the above
(e). None of the above
33. The term net working capital denotes
(a). The amount of liquid funds available to a company
(b). The amount of long-term funds used to finance current assets (including
loans and advances)
(c). The difference of current liabilities (including provisions) and the
current assets (including loans and advances)
(d). The amount of internal accruals
34. Advance received from the customers is
(a). An item of current liabilities
(b). A current asset item which is highly liquid in character
(c). A contingent liability not shown as part of the balance sheet
(d). An item of non-cash cost
35. Negative net working capital signifies that
(a). The value of current ratio is negative
(b). The value of current ration is less than unity
(c). Short term funds are diverted for long term purposes
(d). Both (b) and (c) are correct
36. The dilemma of ‘liquidity’ vs. ‘profitability’ arises in the case of
(a). Potentially sick units
(b). Any business organisation
(c). Only public sector units
(d). Purely trading company
37. Under trading means
(a). Selling goods at a price less than cost of production
(b). Sales are less when compared to the assets employed
(c). Assets employed are less when compared to sales
(d). None of the above
38. Current ratio indicates
(a). Profit earning capacity of the business
(b). Ability to pay long term debts
(c). Cash inflows of the business
(d). Capacity to meet current liabilities
39. Current assets – current liabilities =
(a). Gross working capital
(b). Net working capital
(c). Cash balance
(d). Sundry debtors
40. Liquidity ratio computed by eliminating inventories from current assets is
(a). Current ratio
(b). Inventory turnover ratio
(c). Quick ratio
(d). Both (a) and (c)
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