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# UNIVERSITY OF PETROLEUM & ENERGY STUDIES

## CENTRE FOR CONTINUING EDUCATION

EXECUTIVE MBA
(OIL & GAS MANAGEMENT)
SEMESTER I
YEAR: 2014 SESSION: JULY
ASSIGNMENT 2
FOR
Financial Management
M!OF "#2D\$
TO BE FILLED BY THE STUDENT\$
NAME% &&&&&&&&&&&&&&&&&&&&&&&
SAP NO'REGN NO% &&&&&&&&&&&&&&&&&&&&&&&
Section A (20 Marks)
Write short notes on any four of the following
1. Leasing as a Source of Finance
2. Portfolio Diversification and Risk
3. heories of ca!ital structure
". Different ca!ital #udgeting a!!raisal \$ethods
%. &o\$!onents of working ca!ital
Section B (30 marks)
(Attempt any three)
1. Define the ter\$ 'cono\$ic value added. (ow is it calculated)
2. Descri#e the #asic as!ects of the conce!t of cost of ca!ital.
3. '*!lain the conce!t of financial leverage and its i\$!act on 'PS.
". What is \$eant #y ca!ital rationing) What are the ste!s involved in ca!ital rationing)
Section C (50 marks)
(Attempt all questions. Eery question carries !0 marks)
Case Stu"y# Economic \$alue A""e"
While 0value1 is a general ter\$2 +value added3 has s!ecific \$eanings. 4 teach 5anage\$ent
-ccounting and when 4 say +What is value added)3 \$ost of the students would say that it is
0adding a feature to a !roduct1. 4t \$ay #e !roduct develo!\$ent #ut not necessarily value
addition. 4 !oint to a \$ulti\$edia hanging fro\$ the ceiling and say +his is !resently rotated
\$anually. 4ts !resent !rice is Rs."%2666. 4f the \$anufacturer introduces a feature for rotating
through a re\$ote control at an additional cost of Rs.1%26662 would it #e called value addition)3
5ost \$ay#e inclined to say2 +7es Sir32 #ut it is +8o Sir.3
Why2 no one would !ay a hefty su\$ of Rs.1%2666 for the new feature. 'ven if so\$eone is willing
to !ay2 it still does not add any value. 4t is only when the \$anufacturer can fetch say Rs.9%26662
value addition has occurred. 4n this way2 #y using a feature costing Rs.1%26662 the \$anufacturer
has reali:ed an additional Rs.262666 there#y increasing the #otto\$ line #y Rs.%2666.
4ts Profit ; Loss -ccounts for the last year are given #elow/
-n entity can increase ,alue addition #y <i=#ringing u! new !roducts or services which have a
higher value in the eyes of a custo\$er than the cost of in!uts used such as \$aterials2 co\$!onents
and services used to \$ake the\$2 <ii= ca!ture un>ta!!ed \$arket of new seg\$ents or geogra!hical
areas2 <iii= i\$!roving .uality and raising !rices2 <iv= reducing costs #y switching over to chea!er
raw \$aterials2 si:e reduction and co\$#inations2 and finally <v= reducing2 as far as !ossi#le2 non>
value added activities such as setu!2 storage2 trans!ortation2 wait and ins!ection.
4n econo\$ics2 the value addition is calculated #y the following for\$ula/
,alue -dded ? ,alue of sales less the cost of #ought>in goods and services.
4n this for\$ula2 only cost of #ought>in goods and services has #een accounted for. 4t co\$!letely
ignores la#our cost2 de!reciation2 \$ark>u! etc. 4n fact2 they are factors of !roduction <land2
la#our and ca!ital=. hey !rovide +services3 which raise value of +in!uts3 to a \$uch higher
reali:ed value. he difference would #e shared a\$ong the\$.
he ,alued added in our e*a\$!le and its distri#ution is shown in the #elow ta#le/
hen what is 'cono\$ic ,alue -dded)
'cono\$ic ,alue -dded <',-= concentrates only on one of the factors of !roduction i.e. &a!ital.
4t \$easures sur!lus value created #y total invest\$ents which include funds !rovided #y #anks2
#ond>holders and share holders. 4t is \$ore useful than Rate of Return <R@4= or 4nternal Rate of
Return <4RR=in evaluating o!erations of an enter!rise.
-ccounting !rofessor Steven @r!urt fro\$ Singa!ore 5anage\$ent Aniversity e*!lains/ +@ne of
the !ri\$ary insights fro\$ the ',- conce!t is recognition that growing earnings does not
necessarily increase fir\$ value or stock !rice. ',- focuses attention on how a fir\$ uses its
ca!ital #y asking2 +4s a fir\$ generating earnings a#ove and #eyond that e*!ected #y the \$arket
<the !roviders of the ca!ital=)3
(ow relevant is ',- today) Res!onds Stern2 +So\$e \$ay say that ',- was a fad of the 1BB6s2
#ut earning \$ore than the cost of ca!ital is not a fad. 4t is what all co\$!anies should do all of the
ti\$e. hat they do not is sur!rising. -ll of the talk on governance2 also not a fad2 never
de\$anded this si\$!le re.uire\$ent. Antil #oards do2 ',- will re\$ain as relevant as it was in the
1BB6s.3
he relevant for\$ula is/
',-? <Return on &a!ital > &ost of &a!ital= * otal &a!ital
We need three figures/
1. 8@P-
2. 4nvest\$ent
3. W-&&
Cy dividing 8@P- with 4nvest\$ent2 we get returns in !ercentage. Fro\$ this2 we deduct -W&&
which is also in !ercentageD the difference would show E!rofit !er ru!ee. Cy \$ulti!lying this
with total ca!ital2 we ca!ture ',- in ru!ee>ter\$s.
%uestions#
1. '*!lain the ter\$ value added.
2. (ow can an entity increase its value addition)
3. Descri#e with for\$ula2 how is value addition calculated)
". (ow do we get returns in !ercentage)
%. Read and su\$\$arise the case in a#out %6 words.