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Management
[Assignment SET1 & SET2]
Name : P. Srinath
SMDUE ID : 520923307
Center : Mehbub College Campus, Secunderabad
Subject Code : MB0029
Subject : Financial Management
ASSIGNMENT MBA SEM II Subject Code:
MB0029 SET 1
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When a firm follows wealth maximization goal, it achieves
maximization of market value of share. When a firm practices wealth
maximisation goal, it is possible only when it produces quality goods at
low cost. On this account society gains because of the societal
welfare.
Amount (A) =?
80000=A{1+.10)10 }/{.10(1+.10)10}
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80000=A{ 1.593742/0.259374}
A =80000/ 6.144567
A = 13019.63 Yrly
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Matching the sources with utilization The prudent
policy of any good financial plan is to match the term of the source
with the term of investment. To finance fluctuating working
capital needs the firm resorts to short terms finance. All fixed assets
financed investments are to be financial by long term sources. It is a
cardinal principle of financial planning.
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income but everything is so expensive there. It is identical with make
little, since your much money actually cannot buy many things. For
instance, average worker in Indonesia make approximately 1 million
Rupiah monthly. Can you imagine make 1 million dollars monthly here?
Unfortunately, that 1 million Rupiah is only around $ 108, since the
currency exchange of Rupiah is around Rp. 9,200 to $ 1 USD. Currency
exchange surely will impact your purchasing power and your financial
situation. Currency of a country is usually base on its economic
condition i.e. governments budget, balance trade, inflation level and
growth. Foreign exchange is the biggest financial market in the world,
we definitely will learn about it in later articles.
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will increase employment opportunity and opportunity for personal
financial wealth.
Case Study:
The company would need to raise debt to the extent of Rs.200 million.
The company has the following options of borrowing Rs.200 million:
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2. What is the annual installment of bank loan?
4. Should the company borrow from the bank or from the financial
institution?
Salvage : 55000000
Yea PV of cash
rs Cash inflows PV factors at 14 % inflows
45,000,00 39,47
1 0 0.877 3,684
45,000,00 34,62
2 0 0.769 6,039
45,000,00 30,37
3 0 0.675 3,718
68,000,00 40,26
4 0 0.592 1,459
68,000,00 35,31
5 0 0.519 7,069
68,000,00 30,97
6 0 0.456 9,885
68,000,00 27,17
7 0 0.400 5,338
68,000,00 23,83
8 0 0.351 8,016
30,000,00 9,22
9 0 0.308 5,238
30,000,00 8,09
10 0 0.270 2,314
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MB0029 520923307
98,670
250,00
Initial cash out flow 0,000
44,1
NPV 98,670
Answer 2.
Interest rate : 14 %
No of Year(N) : 10 Years
= 3,83,43,558
Answer 3.
= 3,86,39,876
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ASSIGNMENT MBA SEM II Subject Code:
MB0029 SET 2
There are three methods one can use to derive the cost of retained
earnings:
To calculate the cost of capital using the CAPM approach, you must
first estimate the risk-free rate (rf), which is typically the U.S. Treasury bond
rate or the 30-day Treasury-bill rate as well as the expected rate of return on
the market (rm).
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(b) Bond-yield-plus-premium approach
Also known as the dividend yield plus growth approach. Using the
dividend-growth model, you can rearrange the terms as follows to
determine ks.
ks= D1 + g;
P0
where:
D1 = next years dividend
g = firms constant growth rate
P0 = price
and
(F+P)/2
Where kd is post tax cost of debenture capital,
I is the annual interest payment per unit of debenture,
T is the corporate tax rate,
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F is the redemption price per debenture,
P is the net amount realized per debenture,
N is maturity period
13.5(0.52) + (1.8)/ 13.5*.48+2/7
6.51
---------------------------------------
(2+1.8)/2 1.9=3.43
(b) 13.5(1-.52) + (2-2.2)/4 13.5*.48-.2/4
---------------------------------------
(2+2.2)/2 2.1
=6.43/.21=3.06
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2. Volga is a large manufacturing company in the private sector. In
2007 the company had a gross sale of Rs.980.2 crore. The other
financial data for the company are given below:
Borrowing 165.47
EBIT 43.17
Interest 34.39
b. Operating leverage
c. Financial leverage
Now EBIT=Q(S-V)-F
So Q(S-V) =EBIT+F
= 43.17+118.23
=161.47
So DOL=161.47/43.17=3.74
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d. Combined leverage= DOL*DFL
= 3.74*4.92
=18.4
Without taxes
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To see why this should be true, suppose an investor is considering
buying one of the two firms U or L. Instead of purchasing the shares of the
levered firm L, he could purchase the shares of firm U and borrow the same
amount of money B that firm L does. The eventual returns to either of these i
investments would be the same. Therefore the price of L must be the same
as the price of U minus the money borrowed B, which is the value of L's debt.
This discussion also clarifies the role of some of the theorem's assumptions.
We have implicitly assumed that the investor's cost of borrowing money is
the same as that of the firm, which need not be true in the presence of
asymmetric information or in the absence of efficient markets.
Next comes the financial manager who is responsible to collect all the
data from the related departments. On the other hand, the finance manager
has the responsibility of using the set of norms for better estimation. One of
these norms uses the principles of cash flow estimation for the process.
There are a number of principles of cash flow estimation. These are the
consistency principle, separation principle, post-tax principle and incremental
principle. The separation principle holds that the project cash flows can be
divided in two types named as financing side and investment side. On the
other hand, there is the consistency principle. According to this principle,
some kind consistency is necessary to be maintained between the flow of
cash in a project and the rates of discount that are applicable on the cash
flows. At the same time, there is the post-tax principle that holds that the
forecast of cash flows for any project should be done through the after-tax
method.
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Incidental Effects: Any kind of project taken by a company remains
related to the other activities of the firm. Because of this, the particular
project influences all the other activities carried out, either negatively or
positively. It can increase the profits for the firm or it may cause losses.
These incidental effects must be considered.
Overhead Cost: All the costs that are not related directly with a
service but have indirect influences are considered as overhead charges.
There are the legal and administrative expenses, rentals and many more.
Whenever a company takes a new project, these costs are assigned.
(b) Rigidities that hamper the force flow of Capital between firms.
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When capital markets are not favorable to the company the firm
cannot tap the capital market for executing new projects even though the
projects have positive net present values. The following reasons attribute to
the external capital rationing:
For equipment A
Average cash flow Rs. 20000/- per year
And the initial investment Rs. 75000/-
So the ratio of initial cash flow & initial investment=75000/20000
=3.75
From the PVIFA table for 6 years annuity factor vary near 3.75 is 16%
So PV of cash flow at 16% is 73600/-
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So the ratio of initial cash flow & initial investment=50000/14000
=3.57
From the PVIFA table for 6 years annuity factor vary near 3.75 is 18%
So PV of cash flow at 18% is 49000/-
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