mb0045 financial management mba sem2 assignment

7/30/2019 MB0045 Financial Management MBA Sem2 Assignment

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Srimathe Ramanujaya Namaha

Name Krishnan ChariRegistration no 1208001521Course MBA Semester -2Subject & Code Financial Management MBA0045Date 19th May 2013

Answer To Q2

PV of an annuity factor of Rs 500 for 4 years

Annuity 500

discountrate 10%

tenor 4 years

formulae = PV=A*((1+i)^n-1)/(i*(1+i)^n)

Year=n

Cash

flow

Present value discounted at 10%,

given by ( cash flow/(1+0.10)^n

Present

value

annuity

factor

Present value of cash flow

=PV annuity factor x cash

flow,

1 500 (500/(1+0.10)^1 0.909 454.5

2 500 (500/(1+0.10)^2 0.827 413.5

3 500 (500/(1+0.10)^3 0.751 375.5

4 500 (500/(1+0.10)^4 0.683 341.5

Total sum ( PV FACTOR) 3.17 1585

The present value of an annuity cash flow of Rs 500 received every year for 4 years is therefore Rs 1585


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Answer q3.

Based on the data provided, we use the dividend growth model to estimate the cost of equity capital

Currnet market price per share Rs 110

Dividend expectation in period is Rs 5 per share

Growth rate in dividends is 10% p.a

The dividend growth rate model for cost of equity is given by Cost of equity (K)= (D/Pe)+g

Where D = dividend expectation

Pe= current price of equity

g= the growth rate in equity dividends

using the above data , the cost of equity as per dividend growth model works out to be as follows

Cost of equity =(5/110)+(10%)= 4.55%+10% =14.54% p.a

Answer to question 5

Initial outlay of investment is Rs 1,00,000

The risk free rate and the risk premium is 10% p.a

Based on the cash flow structure, the NPV is computed first using the discount rate as risk free rate at

10% as follows

Year

Cash flow

outflow

Cash

inflow

PV factor

formula

PV

factor

PV of cash

inflows

PV of cash

outflows

0 -100000 0 1 10000

1 40000 1/(1+0.10)^1 0.909 36364

2 50000 1/(1+0.10)^2 0.826 413223 15000 1/(1+0.10)^3 0.751 11270

4 30000 1/(1+0.10)^4 0.683 20490

109446 10000

NPV of the project is

he PV of cash inflow-

PV of Cash outflow 9446


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Answer Q5 continued

Under the second scenario, the NPV of the project is computed using the risk free rate of 10% and also

the risk premium of 10% which results in the discount rate being increased to 20%. The NPV of the

project after valuing the cash inflows and outflows of the project at 20% p.a is as follows

Year Cash flow outflow Cash inflow

PV

factor PV of cash inflows PV of cash outflow

0 -100000 0 1 1000

1 40000 1/(1+0.20)^1 0.833 33333

2 50000 1/(1+0.20)^2 0.694 34722

3 15000 1/(1+0.20)^3 0.579 8681

4 30000 1/(1+0.20)^4 0.482 14468

91204 1000

NPV of the project is the

PV of cash inflow-PV of

Cash outflow -8796

When the discount rate includes the risk premium the NPV of the project is in the negative

and indicates that the project should rejected as it does not recover the financial risk of the project

investments

Answer to Q4.

The basic assumptions of the Modiflani Miller model of capital structure and firm valuations are as

under :

Perfect capital markets : According to this assumption, securities can be freely traded where in

investors can buy and sell securities without transaction cost , securities are infinitely divisible and

availability of all required information at all times.

Rationale behavior of investors : Investors are assumed to behave rationally meaning using the right

combination of risk and return.

Homogenous risk perception : It is assumed that risk perception across investors is the same in term sof

business risk and uncertainty of returns.

Dividend payout is assumed to be 100% of the corporate earnings.


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The value of the firm is independent of the degree of financial leverage obtained by the firm. This is a

proposition of MM approach to value of the firm.

Answer to Q6.

Credit policy of the company sets standards for management of the account receivable or debtors of the

company and also the terms of doing business with its customers.

Some of the critical areas that a credit policy must address or focus on are as follows.

1.Credit terms : The credit policy should specify the reasonable terms on which the company should

offer credit terms for customers say in no of days credit such as 30 days or 45 days etc. The policy should

specify clearly the distinct credit terms that should be offered as between institutional and retail clients.

For institutional clients who form part of distributional chain, credit terms may be longer than that

offered for retail clients. Companies generally sell their commodities in cash for the retail segment and

only

2. Cash discount : The credit policy should also address the cash discounts that it needs to offer for

customers for any early payments made. For example it may be clearly state that cash discount of 2%

will be provided for any early payments over the traditional 30 day credit period.

3. Receivables management : The credit policy should also adhere to management of receivables in the

sense it should lay down the standard operating procedure for the following

a) Routine follow up and reporting of aging of receivables

b) Methods of dealing with doubtful and default receivables

mb0045 financial management mba sem2 assignment

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