Master of Business Administration- Semester 2 MB 004/MB5F 201 FINANCIAL MANAGEMENT (4 credits) ASSIGNMENT- Set 1 Marks 60

Note: Each Question carries 10 marks. Answer all the questions.

(Book ID: B1628)

Q-1 What are the goals of financial management?

Ans-1 he financial management has to take three important decision viz. (i) Investment decision i.e., where to invest fund and in what amount, (ii) Financing decision i.e., from where to raise funds and in what amount, and (iii) Dividend i.e., how much to pay dividend and how much to retain for future expansion. In order to make these decisions the management must have a clear understanding of the objective sought to be achieved. It is generally agreed that the financial objective of the firm should be maximization of owner's economic welfare. There are two widely discussed approaches or criterion of maximizing owners' welfare -(i) Profit maximization, and (ii) Wealth maximization. It should be noted here that objective is used in the sense of goal or goals or decision criterion for the three decisions involved..
Profit Maximization: Maximization of profits is very often considered as the mainobjective of a business enterprise. The shareholders, the owners of the business, invest their funds in the business with the hope of getting higher dividend on their investment. Moreover, the profitability of the business is an indicator of the sound health of the organisation, because, it safeguards the economic interests of various social groups which are directly or indirectly connected with the company e.g. shareholders, creditors and employees. Wealth Maximization: The wealth maximization (also known as value maximization or Net Present Worth Maximization) is also universally accepted criterion for financial decision making. The value of an asset should be viewed in terms of benefits it can produce over the cost of capital investment.

Q2. Calculate the PV of an annuity of Rs. 500 received annually for four years when discounting factor is 10%. Ans-: Q3. Suraj Metals are expected to declare a dividend of Rs. 5 per share and the growth rate in dividends is expected to grow @ 10% p.a. The price of one share is currently at Rs. 110 in the market. What is the cost of equity capital to the company?
Q-4 What are the assumptions of MM approach?
Ans-6Assumptions in Modigliani And Miller Approach

The proposition that the weighted average cost of capital is constant irrespective of the type of capital structure is based on the following assumptions:

(a) Perfect capital markets: The implication of a perfect capital market is that (i) securities are infinitely divisible; (ii) investors are free to buy/sell securities; (iii) investors can borrow without restrictions on the same terms and conditions as firms can; (iv) there are no transaction costs; (v) information is perfect, that is, each investor has the same information which is readily available to him without cost; and (vi) investors are rational and behave accordingly. (b) Given the assumption of perfect information and rationality, all investors have the same expectation5 of firm's net operating income (EBIT) with which to evaluate the value of a firm. (c) Business risk is equal among all firms within similar operating environment that means, all firms can be divided into 'equivalent risk class' or 'homogeneous risk class'. The term equivalent/homogeneous^ risk class means that the expected earnings have identical risk characteristics. Firms within an industry are assumed to have the same risk characteristics. The categorization of firms into equivalent risk class is on the basis of the industry group to which the firm belongs. (d) (e) The dividend payout ratio is 100 per cent. There are no taxes. This assumption is removed later.

Q5. An investment will have an initial outlay of Rs 100,000. It is expected to generate cash inflows. Table 1.2 highlights the cash inflow for four years.
Table 1.2: Cash inflow

Cash inflow 40000 50000 15000 30000

Year
1 2

3 4

If the risk free rate and the risk premium is 10%, a) Compute the NPV using the risk free rate b) Compute NPV using risk-adjusted discount rate