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SESSION FEBRUARY – MARCH 2024
PROGRAM MASTER OF BUSINESS ADMINISTRATION
(MBA)
SEMESTER II
COURSE CODE & NAME DMBA202 – FINANCIAL MANAGEMENT
Assignment Set – 1
1. The consequences of “over-capitalization” are far more serious than “under
capitalization”. Discuss the statement by elaborating on the causes and effects of overcapitalization
and Undercapitalization.
Ans 1.
Over-capitalization and under-capitalization are two financial states that can significantly
impact a company’s operations and financial health. Over-capitalization occurs when a
company has more capital (equity and debt) than it can efficiently use, leading to suboptimal
returns on investment. On the other hand, under-capitalization happens when a company does
not have enough capital to operate effectively, potentially leading to financial distress and an
inability to meet obligations. While both situations have their own set of challenges, over-
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2. Zubi wants to invest in bonds in given alternative situations, as stated below. You are
required to advise her in selecting the best option:
Bond Price =Rs.500
Coupon rate= 8%
Life of bond = 5 Years
Redemption value = Rs.500
Rate of return = 10%
Options:
1. Interest accrued Annually
2. Interest accrued Bi-Annually
3. Interest accrued Quarterly
Ans 2.
To advise Zubi on selecting the best option for investing in bonds, we need to calculate the
yield to maturity (YTM) for each option. The YTM is the total return anticipated on a bond if
it is held until it matures.
Given:
Bond Price (P) = Rs. 500
Coupon Rate (C) = 8%
Life of Bond (N) = 5 years
Redemption Value (F) = Rs. 500
Rate of Return (r) = 10%
3a. Differentiate between Operating and Financial Leverage.
b. If you contribute Rs. 2,400 every year to a retirement account. Calculate what will be
the future value of this annuity in 30 years if 7% is the annual rate of return.
Ans 3.
a. Operating leverage and financial leverage are two important concepts in financial
management that deal with the use of fixed costs and debt in a company’s capital structure.
Operating Leverage: Operating leverage refers to the use of fixed operating costs by a
company. It is the degree to which a company uses fixed costs in its operations. Companies
with high operating leverage have a higher proportion of fixed costs in their cost structure,
such as rent, salaries, and depreciation.
Operating leverage magnifies the effect of changes in sales on a company’s earnings before
b. To calculate the future value of the annuity, we can use the future value of an ordinary
annuity formula:
FV=P×((1+r)n −1)/)
where:
 FV is the future value of the annuity,
 P is the annual contribution (payment),
 r is the annual interest rate, and
 n is the number of years.
Plugging in the values given:
Assignment Set – 2
4. Do you think that different factors affecting capital structure decisions will be viewed
differently by different companies? Support your answer with suitable examples.
Ans 4.
Different factors affecting capital structure decisions can indeed be viewed differently by
different companies. Capital structure decisions, which involve determining the mix of debt
and equity financing a company will use, depend on various factors such as industry norms,
company size, growth stage, profitability, and risk appetite. Here’s how some factors can be
5. You are required to prepare a statement showing the working capital required to
finance the level of activity of 18000 units per year from the following information: –
Particulars Rs.
Raw material per unit 12
Direct Labor per Unit 3
Overheads per unit 9
Total Cost per unit 24
Profit per unit 6
Selling price per unit 30
Additional Information:
1. Raw material is in stock on average for 2 months
2. Materials are in process on an average for half a month
3. Finished goods are in stock on an average for two months
4. Credit allowed by creditors is two months in respect of raw materials supplied.
5. Credit allowed to debtors is three months. Debtors are calculated on the selling price.
6. Lag in payment of wages in half a month. Cash on hand and at the bank is expected
to be Rs.7000
7. You are informed that all activities are evenly spread out during the year.
Ans 4.
To calculate the working capital required to finance the level of activity of 18,000 units per
year, we need to consider the various components of working capital based on the provided
information.
1. Raw Material:
 Raw material cost per unit = Rs. 12
 Raw material required for 18,000 units = 18,000 units * Rs. 12 = Rs. 216,000
6a. A manufacturing company places a semi-annual order of 24,000 units at a price of
Rs.20 per unit. Itscarrying cost is 15% and the order cost is Rs.12 per order.What is the
most economical order quantity? And how many orders need to be placed?
b) Differentiate between hard and soft capital rationing. 2.5+2.5+5
Ans 6a.
a. To find the most economical order quantity (EOQ) and the number of orders needed, we
can use the EOQ formula:
𝐸𝑂𝑄=2𝐷𝑆/𝐻
Where:
 D = Demand in units per year
Ans 6b.
In financial management, capital rationing refers to the process by which a company limits
the amount of new investments it undertakes, either by choice (soft capital rationing) or due
to external factors (hard capital rationing). Here’s a differentiation between the two: