Description

MASTER OF BUSINESS ADMINISTRATION (MBA)
DMBA202 & FINANCIAL MANAGEMENT
Assignment Set – 1
1. a) “A rational human being has time preference for money” Give reasons.
Ans: The time preference for money is generally expressed by an interest rate which remains
positive even in the absence of any risk. It is called the riskfree rate.
1) Risk: There is
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b) Differentiate between compounding and discounting technique of time value of money.
Ans:
BASIS FOR
COMPARISON
COMPOUNDING DISCOUNTING
2. Cost of various types of capital of Radha Ltd. is given below along with weight and cost
of capital.
Sources of Funds Amount (Rs.) Proportion (W) in
total capital
structure
Cost of Capital (k)
Debts 240000 30% 5.68
Preference share
capital
80000 10% 9.33
Equity Share capital 400000 50% 13.30
Cost of retained
earnings
80000 10% 13.00
Compute weighted average cost of Capital as per:
1. Book value proportion.
2. What would be WACC in your opinion if company wants to change WACC approach
from book value to market value? In market value the price of Equity share is Rs.250 per
share instead of Rs.100 in book value.
Answer:
3. Write short notes on (any two)
1. NI approach of Capital structure
Ans: Net Income (NI) approach is suggested by Durand. He is of the view that capital structure
decision is relevant to the valuation of the firm. Any change in the financial leverage will have a
corresponding change in the overall cost of capital and also the total value of the firm. As the
ratio of
3. Modigliani and Miller approach of Capital structure
Answer:
Miller and Modigliani criticise traditional approach that the cost of equity remains unaffected by
leverage up to a reasonable limit and K0 remains constant at all degrees of leverage. They state
that the relationship between leverage and cost of capital is elucidated as in NOI approach. Table
depicts the
Q. No Assignment Set – 2
4. a. Elucidate the factors leading to Capital rationing.
Ans: The various factors related to the internal constraints imposed by the management are:
Private owned company
b. Explain in brief the phases of operating cycle.
Ans:
5. “Efficient cash Management will aim at maximising the cash inflows and slowing cash
outflows.” Discuss Identify the motives for holding cash by an organization.
Ans: The main motives behind holding cash are:
 Transaction motive
 Precautionary motive
 Speculative motive
 Compensating motive
These are
6. Solve and suggest which of the two projects should be accepted assuming a discount rate
of 10% based on net present value of the two projects.
Detail Project X Project Y
Initial Investment Rs.20000 Rs.30000
Estimated Life 5 Years 5 Years
Scrap Value Rs.1000 Rs.2000
The net cash flows are as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
Project X 5000 10000 10000 3000 2000
Project Y 20000 10000 5000 3000 2000
The Discounted rate of return@10% is as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
PV@10%
Discount
factor
0.909 0.826 0.751 0.683 0.621
Answer: