Q. 1. Answer all the questions. a.

Differentiate “arbitration” and “speculation” in foreign exchange

market. Ans. Arbitration is simultaneous purchase and sale of foreign exchangesin two or more markets
to profit from discrepancies inquotations whereas A speculation in the Forex market means that youbuy
and sell currencies. You do not just buy any currency at random andsell it at random, because
speculation means that you have to observethe rate and the background of your currency in order to
get a higher profit. The main instruments of speculation are buying currency andselling currency

(II Ans.The marginal cost of capital (MCC) is the cost associated withraising one additional dollar of
capital. The marginal cost will varyaccording to the type of capital used. For example, raising funds
throughthe use of unsecured or subordinated debt, or through debt that requireshigher interest rates to
offset risk, will be more expensive than debt thatis backed by collateral, such as a secured bond.

(III) Write a short note on JIT. Ans.Just in time (JIT) is a production strategy that strives to improve
abusiness' return on investment by reducing in-process inventory andassociated carrying costs. To meet
JIT objectives, the process relies onsignals or Kanban between different points, which are involved in
theprocess, which tell production when to make the next part. Kanban areusually 'tickets' but can be
simple visual signals, such as the presence orabsence of a part on a shelf.

(iv)Ans. The conditions for redemption of redeemable preference shares are:- must be a provision in
the Articles of Association regarding the redemption of The redeemable preference shares must be fully
paid up. preference shares. If the redeemable preference shareholders should be paid out of
distributable profit. shares are redeemed at a premium, it should be should be provided out of
securities The proceeds from fresh issue of debentures cannot be utilized for premium. The amount of
capital reserve cannot be used for redemption redemptionof preference share.

Ans. Dividend may be of different types

Regular Dividend Interim Dividend Stock-Dividend Scrip Dividend Bond Dividends Property
Dividend

Q.6 Define cash management. Discuss in detail the factors that determine the needs cash of a firm. Ans:
Cash management is the corporate process of collecting, managing and (short-term) investing cash. A
key component of ensuring a company's financial stability and solvency . Frequently corporate
treasurers or a business manager is responsible for overall cash management. Successful cash
management involves not only avoiding insolvency (and therefore bankruptcy), but also reducing days in
account receivables (AR), increasing collection rates, selecting appropriate short-term investment
vehicles , and increasing days cash on hand all in order to improve a company's overall financial
profitability. Determine: The working capital needs of a firm are influenced by nume

Cash management – definition and meaning

Cash management refers to the collection, handling, usage, and (short-term) investing of cash.
In other words, it is the management of the cash that flows in and out by a company.

Cash management covers a broad area of finance. It includes assessing cash flow and market
liquidity. It also includes assessing investments.

There is more to effective cash management than simply avoiding insolvency. It also involves
getting customers to pay on time. Above all, it is about doing everything possible to improve the
business’ financial profitability.

Factors Determining Cash Needs:

The working capital needs of a firm are influenced by numerous factors. The important ones are:

 Nature of business.

 Seasonality of operations.

 Production policy.

 Market conditions.

 Conditions of supply.

Nature of business:

The working capital requirement of a firm is closely related to the nature of its business. A
service firm, like an electricity undertaking or a transport corporation which has a short operating
cycle and which sells predominantly on cash basis, has a modest working capital requirement.
On the other hand, a manufacturing concern likes a machine tools unit, which has a long
operating cycle and which sells largely on credit, has a very substantial working capital
requirement.

Seasonality of operations:
Firms which have marked seasonality in their operations usually have highly fluctuating working
capital requirements. To illustrate, consider a firm manufacturing ceiling fans. The sale of ceiling
fans reaches a peak during the summer months and drops sharply during the winter period. The
working capital need of such firm is likely to increase considerably in summer months and
decrease significantly during the winter period. On the other hand, a firm manufacturing product
like lamps, which have even sales round the year, tends to have stable working capital needs.

Production policy:

A firm marked by pronounced seasonal fluctuation in its sales may pursue a production policy which
may reduce the sharp variations in working capital requirements. For example, a manufacturer of ceiling
fans may maintain a steady production throughout the year rather than intensify the production activity
during the peak business season. Such a production policy may dampen the fluctuations in working
capital requirements.

Market conditions:

The degree of competition prevailing in the market has an important bearing on working capital
needs. When competition is keen, a larger inventory of finished is required to promptly serve
customers who may not be inclined to wait because other manufacturers are ready to meet their
needs.

Conditions of supply:

The inventory of raw materials, spares, and stores on the conditions of supply. If the supply is
prompt and adequate, the firm can manage with small inventory. However, if the supply is
unpredictable and scant, then the firm, to ensure continuity of production, would have to acquire
stocks as and when they are available and carry large inventory on an average. A similar policy
may have to be followed when the raw material is available only seasonally and production
operations are carried out round the year.

Q.3 What is the importance of ratio analysis to management? Explain briefly any two ratios each
for measuring: i. Liquidity ii. Profitability Ans .

The various advantages of ratio analysis are as follows:

 It helps in the financial forecasting and planning activities. 

It helps in making strategic decisions. 

It helps in assessing firm’s progress and performance and inter-firm comparison with industry
average Ratio analysis is an invaluable tool to a business management to determine the
performanceof a business entity and to take cost controlling measures as and when necessary.The
concept of ratio analysis is very much helpful to a business, as it involves providing essential
facts by establishing a measure of relationship between two variables through which
theinterpretation is easier. Ratio analysis provides a clear understanding about profitability,
liquidity,

Profitability : Profitability ratios indicate management's ability to convert sales dollars into
profits and cash flow. The common ratios are gross margin, operating margin and net income
margin. The gross margin is the ratio of gross profits to sales. The gross profit is equal to sales
minus cost of goods sold. The operating margin is the ratio of operating profits to sales and net
income margin is the ratio of net income to sales. The operating profit is equal to the gross profit
minus operating expenses, while the net income is equal to the operating profit minus interest
and taxes. The return- on-asset ratio, which is the ratio of net income to total assets, measures a
company's effectiveness in deploying its assets to generate profits. The return-on-investment
ratio, which is the ratio of net income to shareholders' equity, indicates a company's ability to
generate a return for its owners

Liquidity: The most common liquidity ratio is the current ratio, which is the ratio of current
assets tocurrent liabilities. This ratio indicates a company's ability to pay its short-term bills. A
ratio ofgreater than one is usually a minimum because anything less than one means the
company hasmore liabilities than assets. A high ratio indicates more of a safety cushion, which
increasesflexibility because some of the inventory items and receivable balances may not be
easilyconvertible to cash. Companies can improve the current ratio by paying down debt,
convertingshort-term debt into long-term debt, collecting its receivables faster and buying
inventory onlywhen necessary.

Capital redemption reserve

A fund which exists both on the financial statements of a company and also as part of the
company's internal accounts. A business with a capital redemption reserve fund is legally
mandated by the U.S. Securities and Exchange Commission to make capital redemptions for
certain transactions acting as a hedge against capital reductions.

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on
average to all its security holders to finance its assets. The WACC is commonly referred to as the
firm's cost of capital. Importantly, it is dictated by the external market and not by management.
The WACC represents the minimum return that a company must earn on an existing asset base to
satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere.[1]

Companies raise money from a number of sources: common stock, preferred stock, straight debt,
convertible debt, exchangeable debt, warrants, options, pension liabilities, executive stock
options, governmental subsidies, and so on. Different securities, which represent different
sources of finance, are expected to generate different returns. The WACC is calculated taking
into account the relative weights of each component of the capital structure. The more complex
the company's capital structure, the more laborious it is to calculate the WACC.

Companies can use WACC to see if the investment projects available to them are worthwhile to
undertake

ABC ANALYSIS DEFINED

ABC analysis is a method of analysis that divides the subject up into three categories: A, B and
C.

Category A represents the most valuable products or customers that you have. These are the
products that contribute heavily to your overall profit without eating up too much of your
resources. This category will be the smallest category reserved exclusively for your biggest
money makers.

For example, a software company might engineer different pieces of software, but one is a niche
software that can be sold at a significantly higher price than the others. That’s why it accounts
for about 60% of the overall revenue, although the company sells far less of these products
compared to other software categories. Hence, this specific software is a category A product.

Category B represents your middle of the road customers or products. Many wrongly approach
this group as those who contribute to the bottom line but aren’t significant enough to receive a
lot of attention.

Yet, category B is all about potential. The members of this category can, with some
encouragement, be developed into category A items.

Category C is all about the hundreds of tiny transactions that are essential for profit but don’t
individually contribute much value to the company. This is the category where most of your
products or customers will live. It is also the category where you must try to automate sales as
much as possible to drive down overhead costs.

What Is Economic Order Quantity – EOQ?

Economic order quantity (EOQ) is the ideal order quantity a company should purchase for its
inventory given a set cost of production, a certain demand rate, and other variables. This is done
to minimize inventory holding costs and order-related costs.

The equation for EOQ also takes into account inventory holding costs such as storage, ordering
costs and shortage costs. This production-scheduling model was developed in 1913 by Ford W.
Harris and has been refined over time. The formula assumes that demand, ordering, and holding
costs all remain constant.