** Summer 2011- May drive **

Masters of Business Administration- MBA Semester 2

MB0045 –Financial Management - 4 Credits

(Book ID: B1134)

Assignment Set- 2 (60 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

1. Given the following information, prepare a cash budget:

The company has a policy of selling its goods at 50% cash and the balance on credit. On credit sales, 50% is paid in the following month and balance 50% two months from the sale. Purchases are paid one month from the month of purchase. Wages are paid in the following month and overheads are also paid in the following month. The company plans a capital expenditure, in the month of April, for Rs. 25,000.

The company has a opening balance of cash of Rs. 40,000 on 1st Jan 2010. Prepare a cash budget for Jan to June.

2. Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement.

Raw material 60

Direct labour 22

Overheads 44

Total cost 126

Profit 18

Selling price 140

The following additional information is available:

#Average raw material in stock one month

#Average materials in process 15 days

#Credit allowed by suppliers one month

#Credit allowed to debtors two months

#Time lag in payment of wages 15 days

#Time lag in payment of overheads one month

#Sales on cash basis 20%

#Cash balance to be maintained 80,000

You are required to prepare a statement showing the working capital required to finance a level of activity of 100,000 units of output. You may assume production is carried out evenly throughout the year and payments occur similarly. Assume 360 days in a year.

3. Given the following information, calculate the weighted average cost of capital.

Capital structure in millions

Equity capital ( Rs.10 par value) 2

14% preference share capital Rs.100 each 1.5

Retained earnings 2

12% Debentures Rs.100 each 4

8% term loan 0.5

Total 10

The market price per equity share is Rs. 45. The company is expected to declare a dividend per share of Rs.5 and dividends are expected to grow at 15% pa. The preference shares are redeemable at Rs. 115 after 5 years and are currently traded at Rs. 90 in the market. Debentures will be redeemed after 5 years at Rs.110. The corporate tax rate is 30%. Calculate the Weighted average cost of capital.

4. Calculate the present value of the following options:

a) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa

b) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa payable semi annually

c) Rs. 5000 to be received every year for 5 years if the prevailing interest rate is 10% pa

d) Rs. 5000 to be received after 5 years and Rs. 10,000 to be received after 10 years

5. Explain each of the following:

a) Operating cycle

b) Shareholders wealth maximisation

c) Capital rationing

d) Economic order quantity

6. a) Discuss the advantages of ordering Economic order quantity of inventory.

b) Discuss the Dividend discount model of measuring cost of equity.

Masters of Business Administration- MBA Semester 2

MB0045 –Financial Management - 4 Credits

(Book ID: B1134)

Assignment Set- 2 (60 Marks)

1. Given the following information, prepare a cash budget:

The company has a policy of selling its goods at 50% cash and the balance on credit. On credit sales, 50% is paid in the following month and balance 50% two months from the sale. Purchases are paid one month from the month of purchase. Wages are paid in the following month and overheads are also paid in the following month. The company plans a capital expenditure, in the month of April, for Rs. 25,000.

The company has a opening balance of cash of Rs. 40,000 on 1st Jan 2010. Prepare a cash budget for Jan to June.

2. Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement.

Raw material 60

Direct labour 22

Overheads 44

Total cost 126

Profit 18

Selling price 140

The following additional information is available:

#Average raw material in stock one month

#Average materials in process 15 days

#Credit allowed by suppliers one month

#Credit allowed to debtors two months

#Time lag in payment of wages 15 days

#Time lag in payment of overheads one month

#Sales on cash basis 20%

#Cash balance to be maintained 80,000

You are required to prepare a statement showing the working capital required to finance a level of activity of 100,000 units of output. You may assume production is carried out evenly throughout the year and payments occur similarly. Assume 360 days in a year.

3. Given the following information, calculate the weighted average cost of capital.

Capital structure in millions

Equity capital ( Rs.10 par value) 2

14% preference share capital Rs.100 each 1.5

Retained earnings 2

12% Debentures Rs.100 each 4

8% term loan 0.5

Total 10

The market price per equity share is Rs. 45. The company is expected to declare a dividend per share of Rs.5 and dividends are expected to grow at 15% pa. The preference shares are redeemable at Rs. 115 after 5 years and are currently traded at Rs. 90 in the market. Debentures will be redeemed after 5 years at Rs.110. The corporate tax rate is 30%. Calculate the Weighted average cost of capital.

4. Calculate the present value of the following options:

a) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa

b) Rs. 10,000 to be received after 5 years if the prevailing rate of interest is 10%pa payable semi annually

c) Rs. 5000 to be received every year for 5 years if the prevailing interest rate is 10% pa

d) Rs. 5000 to be received after 5 years and Rs. 10,000 to be received after 10 years

5. Explain each of the following:

a) Operating cycle

b) Shareholders wealth maximisation

c) Capital rationing

d) Economic order quantity

6. a) Discuss the advantages of ordering Economic order quantity of inventory.

b) Discuss the Dividend discount model of measuring cost of equity.