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Q2. Explain about the doubling period and present value. Solve the below given problem:
Under the ABC Banks 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:
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Q3. Write short notes on:
a) Operating Leverage
b) Financial leverage
c) Combined leverage
Answer: a) Operating Leverage
Operating leverage arises due to the presence of fixed operating expenses in the firms 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.
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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?
Details of Firms A and B
Net operating income EBIT
Interest on debentures I
Equity earnings E
Cost of equity Ke
Cost of debentures Kd
Market value of equity S =
E/Ke
Market value of debt B
Total value of firm V
Answer:
Firm A
Rs 1,00,000
Nil
Rs. 1, 00, 000
15%
10%
Rs. 6, 66, 667
Firm B
Rs 1,00,000
Rs 25,000
Rs. 75, 000
15%
10%
Rs. 5,00, 000
Nil
Rs. 6, 66, 667
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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.
Year
1
2
3
4
Cash Inflow
40000
50000
15000
30000
Project-specific risk
Competitive or competition risk
Industry-specific risk
International risk
Market risk
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Q6. Explain the objectives of Cash Management. Write about the Baumol model with their assumptions.
Answer:
Objectives of Cash Management
The major objectives of cash management in a firm are:
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