Answer Sheets: Financial Management Arnowalt Clement, Reg. No: P13/08/DL7007 Section A Part One 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Ignored non-corporate enterprise Redeemable Preference Shares Domestic Political Risk Future Cost Designing Optimal Corporate Capital Structure Firms Point Agency Costs Legal Requirement Default Risk Beta

Part Two 1. Wealth maximization is also called value maximization. Wealth maximizations mean maximizing the present value of a course of action. Any financial action which results in positive NPV creates and adds to the existing wealth of the organization. All positive actions can be adopted as they add to the existing wealth and help in wealth maximization. Wealth Maximization also takes care of. Lenders or Creditors, Workers or Employees, Public or Society, Management or Employer. 2. Factoring is a financial service covering the financing and collection of book debts and receivables arising from credit sales of goods and services, both in domestic and international market. It clears the supplier from the burden of complicated administrative and financial tasks involved in receivables management. The main functions of a factor comprise (a) Maintenance of Sales ledger and collection of receivables (b) Credit Control (c) Credit Protection (d) Financing of Receivables and (e) Advisory services. The main three players of factoring service are the Factor, The Client and the customer. 3. An annuity is a stream of equal annual cash flows. Annuities involve calculations based upon regular periodic contribution or receipt of a fixed sum of money. 4. Net Present Value (NPV) is the process of calculating present values of cash inflows using cost of capital as an appropriate rate of discount and subtracts present value of cash outflows from the present value of cash inflows. Internal Rate of Return (IRR) is the rate at which the sum of discounted cash inflow equals the sum of discounted cash outflow. It is the rate at which the NPV of the

Answer Sheets: Financial Management Arnowalt Clement, Reg. No: P13/08/DL7007 investment is Zero. IRR depends mainly on the outlay ad proceeds associated with the project and not on any rate determined outside the investment. Section B 1. Caselet 1 Name of Company: Agarwal Cast Company Inc. Name of Principal Stock Holder: Mr. Gupta Name of Share Holders: Mr. Gupta, Mr. Berry Hook Loan Applied: $200,000/- dated. August 30, 2006 D&B Report: Satisfactory Mr. Gupta with his experience of 20 years as individual contractor and been in business since 1976 can manage business profitably. The receivable statements, list of customers and projects submitted are satisfactory. Additional Requirements Financial Reports needs to be submitted and scrutinized. Personal Profile and Detailed Company Profile Personal Financial Statement Required for both the share holders Co- lateral security required for funding Inventory Report as of date Suppliers List and Purchase Orders After reviewing the above documents and having an understanding of the Net worth of the company, the loan can be sanctioned. Also need to discuss on the interest chargeable and tenor of repayment. 2. Caselet 2 1. The potential profit for Bajaj Electronics from Booth plastics will be in the range of $10,300 for the sales of $65,000 which is not enough for maintaining the account and if funds uncollected on due dates, will be a loss making proposition. The only way to increase more profit is to offer lesser discount to Booth or offer 3% discount only if cash paid in advance. Also the salesman will be paid the commission only after the funds are realized. 2. Credit Limits can be approved only after dealing with Booth for couple of months to see how good they are in paying and keeping up the dates. To start with, booth can

Answer Sheets: Financial Management Arnowalt Clement, Reg. No: P13/08/DL7007 be offered lesser credit days and credit limit of $3000 for 3 months and then reviewed. Section C 1. Capital Structure / Factors Capital structure is that part of financial structure which represents long term sources. The term capital structure is generally defined to include only long term debt and total stockholder investment. This refers to the mix of long term sources of funds such as equity shares capital, reserves and surpluses, debenture, long term debt from outside sources and preference share capital. In other words capital structure refers to composition of capitalization. Capital structure is indicated by the flowing equation. Capital Structure = Long Term Debt + Preferred Stock + Net Worth Or Capital Structure = Total Assets Current Liabilities An appropriate capital structure should have features such as Profitability / Return, Solvency / Risk, Flexibility, Conservation / Capacity, Control. Capital Structure may be determined at the time of promotion of the firm or during latter stages. The following factors affect optimal capital structure. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Tax Benefit of Debt Flexibility Control Industry Leverage Ratios Seasonal Variations Degree of Competition Industry Life Cycle Agency costs Company Characteristics Timing of Public Issue Requirements of Investors Period of Finance Purpose of Finance Legal Requirements.

Optimum capital structure is possible only when there is a mix of debt and equity. The forms of capital structures are Complete Equity Share Capital, Different proportions of equity and preference share capital, Different proportions of equity and debt capital and different proportions of equity, preference and debt capital.

Answer Sheets: Financial Management Arnowalt Clement, Reg. No: P13/08/DL7007 The approaches considered to determine capital structure are EBIT-EPS Approach, Valuation Approach and Cash Flow Approach. 2. Working Capital Working capital refers to short term funds to meet operating expenses. It refers to the funds which a company must possess to finance its day to day operations. It is concerned with the management of the firms current assets and current liabilities. It relates with the problems that arise in attempting to manage the current assets, current liabilities and their inter-relationship that exists between them. If a firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced to bankruptcy. Broadly there are two concepts of working capital: Gross Working Capital The total current assets are termed as gross working capital or circulating capital. Significance of GWC is Optimum Investment in Current Assets and Financing of current Assets. Net Working Capital - Represents the amount of current assets which would remain after all current liabilities are paid. Significance of NWC is Maintaining liquidity position and to decide upon the extent of long term capital in financing current assets. Again working capital can be of two types Permanent Working capital, which is the minimum investment kept in the form of inventory of raw materials, work in process, finished goods, stores and spares and book debts to facilitate uninterrupted operation in a firm. Temporary working capital, which a firm required to maintain an additional current assets temporarily over and above permanent working capital to satisfy cyclical demands. Dangers of Excessive working capital 1. It results in unnecessary accumulation of inventories, which leads to mishandling of the same, waste, theft and losses in increase 2. It is indication of defective credit policy and slack in collection period. These lead to bad debts that can reduce profits 3. It makes management complacent which degenerates into managerial inefficiency 4. Accumulation inventories tend to make speculative profits grow. This type of speculation makes the firm to follow liberal dividend policy and difficult to cope with in future is unable to make speculative profits.

Answer Sheets: Financial Management Arnowalt Clement, Reg. No: P13/08/DL7007 Dangers of inadequate working capital 1. It stagnates growth 2. It becomes difficult to implement operating plans and achieve the firms target profit 3. Operating inefficiencies creep in and becomes difficult even to meet day to day commitments. 4. It leads to inefficient utilization of fixed assets, the firms profitability would deteriorate 5. It renders the firm to avail attractive credit opportunities 6. Firm loses its reputation when it is not in a position to honor its short term obligations. Therefore, firms should maintain the right amount of working capital on continuous basis.