Name Anil Kumar Joshi

Roll No. 520949950

Course & Semester MBA Semester – II

Subject Name & Code FINANCIAL MANAGEMENT - MB0029

Assignment No. Set-1

LC name & Code NIPSTec LTD. 1640

Date of Submission

Session FEB – 2010 (Spring 2010)

Q1. Why wealth maximization is superior to profit maximization in today’s
context? Justify you answer?

Answer: Maximization of profits is regarded as the proper objective of the firm, but it
is not as inclusive a goal as that of maximizing stockholder wealth. For one thing,
total profits are not as important as earnings per stock. Therefore, wealth
maximization is superior in a way that it is based on cash flow, not on the accounting
profit.

Wealth maximization is superior because it values the duration of expected returns.

Since distant flows are uncertain, converting them into comparable values at base
period facilitated better comparison of financial projects. This can be achieved by for
example; by discounting all future earnings to establish their net present value.

When a firm follows wealth maximization goal, it achieves maximization of market

value of share. When a firm practices wealth maximization goal, it is possible only
when it produces quality goods at low cost. On this account therefore, society gains
because of the societal welfare.

A company’s earning can be reinvested in full to fuel the ever-increasing demand of

company’s fund requirements or they may be paid off to equity holders in full or they
may be paid off to equity holders in full or they may be partly held back and invested
and partly paid off. These decisions are taken keeping in mind the company’s growth
stages. High growth companies may reinvest the entire earnings to grow more,
companies with no growth opportunities return the funds earned to their owners &
companies with constant growth invest a little & return the rest. Shareholders of the
companies with high growth prospects utilizing funds for reinvestment activities have
to be compensated for parting with their earning. Therefore the cost of retained
earning is the same as the cost of shareholder’s expected return from the firm’s
ordinary shares. That is Kr=Ke.

B. Kd=[I(1-T)+{(F-P)/n}]/(F+P)/2

Where Kd= Post Tax cost of debenture capital

I=annual interest payment per unit debenture
T=tax rate
F=redemption price per debenture
P=net amount realized per debenture
n= maturity period

so, Kd=[13.5*2/100(1-.52)+{(2-1.8)/7}]/(2+1.8)/2
=0.08347 or 8.35%

the cost in 4 years if the market value of debentures at that time is Rs.2.2 million is

Kd=[I(1-T)+{(F-P)/n}]/(F+P)/2
=[13.5*2.2/100(1-.52)+{(2.2-1.8)/4}]/(2.2+1.8)/2
=0.12128 or 12.128%
Q2. Re: Your grandfather is 75 years old. He has total savings of Rs.80,000.
He expects that he live for another 10 years and will like to spend his savings
by then. He places his savings into a bank account earning 10 per cent
annually. He will draw equal amount each year- the first withdrawal occurring
one year from now in such a way that his account balance becomes zero at
the end of 10 years. How much will be his annual withdrawal?

Answer:
Present Value(PV) =80000/-
Amount (A) =?
Interest Rat e(I) =10%
No. of Year(N) =10

PVAn = A {1+i)n-1} /{ i(1+i)n}

80000=A{1+.10)10 }/{.10(1+.10)10}
80000=A{ 1.593742/0.259374}
A =80000/ 6.144567
A = 13019.63 Yrly
Q3. What factors affect financial Plan?
Ans. We live in a society and interact with people and environment. What happens to
us is not always accordance to our wishes. Many things turn out in our live are
uncontrollable by us. Many decisions we take are the result of external influences.
So do our financial matters. There are many factors affect our personal financial
planning. Range from economic factors to global influences. Aware of factors
affecting your money matters below will certainly benefit your planning.

Life situation and personal value

Your life situation, namely age, marital status, employment status (income), number
and age of household and life cycle will have an effect on how you handle your
money. When you are young, you might not have much money. However, you have
longer time to accumulate wealth. Therefore, younger person usually will cope better
with higher risk. If you married and have children, you have to consider other family
member need beside you. You may need to set up more emergency fund, college
fund and buy more protection. Every one of us will go through different stage of life:
infant, youth, and adult then elderly. Every stage has different need. When you reach
young adult, you may not make too much. However, you have many expenses
waiting in line. You might need to pay your education loan. You probably need to buy
first car or take a home mortgage. You have to prepare for wedding or expecting
children. The size of your household and their age will also significantly influence the
way you handle your finance. Your personal value, what is important to you, your
principle desire and believed will shape the way you manage your money. Your
preference to certain thing will also make you choose certain financial strategies over
the others. For instance, if you like to move around, it is wiser to rent than buy a
house. That is what the first step in the process of financial planning is to understand
yourself. (Read the process of financial planning).

Economic factors

Many economic factors will significantly affect your financial plan, i.e. supply and
demand, various institutions, business, labor force, and government. Supply and
demand will form price. Price level will change your consumption pattern, so do your
investment and others. Labor force will determine your income. When unemployment
rate is high, it will be more difficult to find job. When job is rare, people are willing to
work for less money, and vice versa. Financial institutions and others business are
the user of labors. Their activities will shape the economic and eventually affect your
financial. Government will influence economic by monetary and fiscal policy. The
steps government take will affect you financially. When government raise the interest
rate, economic will cool down. When economic slow down, government will lower the
interest rate. When interest rate is low, invest your money in bank will not give you
decent return. It means take longer time for your investment to reach your financial
goals. Therefore, in order to get higher return people invest in stock market or
business.
Global influence

Since the advance of technology causes this globe to become “smaller”, especially in
the era of globalization. Now people do business cross the country boundary,
therefore what happen in other country will have an effect on people in another
country “Rain at Wall Street, drizzle around the world”. The economic of particular
country depend on foreign investment. When many foreign investors come, they will
create new businesses. New business will absorb many labors, therefore lowering
unemployment rate and increasing wages. However higher wage does not always
guarantee the prosperity of workers in certain country. When you earn high 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. government’s
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.

Economic condition

Consumer price, consumer spending, interest rate, money supply, unemployment,

house started, gross domestic product, trade balance and market indication are
among economic condition that affect your decision in handling your money matters.

Consumer price

Measure the value of your money through inflation rate. It influences your personal
financial planning because consumer price alter your money purchasing power.
When consumer price increase beyond your income, you will unable to buy as much
thing as you used to. Consumer spending measures the demand of good and
service by individuals and household. When consumer spending is up, more jobs will
be available and wage will be higher. Increase in consumer spending will drive
consumer price to increase and inflation level as well.

Interest rate

Measure cost of money or credit and return of investment. Increase in interest rate
will make credit more expensive and discourage borrowing. With high interest,
people are more likely to invest their money to earn interest than take higher risk to
do business. Excessive investment from investor with inability of bank lending to
third party will create over supply of fund. In which will drive down the interest rate
eventually.

Money supply

Measures money available for spending in an economic. More money make people
have more to save. Therefore, increases in money supply tend to decrease interest
rate as more people save. Moreover, higher saving and lower spending will reduce
job opportunity.

Unemployment measures number of people, who willing and able to work, out of
work. High unemployment rate reduce consumer spending and job opportunity. It is
wiser to setup higher emergency fund and reduce debt to cope with high
unemployment rate, since it is harder to get new job when unemployment rate are
high. House started measures the number of new house built. New house build is
sign of economic expansion. When new house build increase, it creates more jobs,
higher wage and higher consumer spending.

Gross domestic product measures the total value produce within a country’s border.
GDP indicate country prosperity. High GDP will increase employment opportunity
and opportunity for personal financial wealth.

Trade balance

Measures different between export and import. Deficit happen, when import exceed
export. Large deficit over long run will hurt employment and GDP. Surplus happen,
when export exceed import. Large surplus will raise the value of the currency,
reducing the future opportunity of export, since commodity become more expensive
to foreigner.

Market indication (stock market index)

Measures the relative value of stocks. These indexes provide indication of the price
movement of stocks. Since you will invest your money in the market to help you
reach your financial goals, understand how the market work will benefit you.
Q.4 Suppose you buy a one-year government bond that has a maturity value of
Rs.1000. The market interest rate is 8 per cent. (a) How much will you pay for
the bond? (b) If you purchase the bond for Rs.904.98, what interest rate will
you earn from this investment?

Ans:

(a) Rs. 925.9259

(b) 10.5%