mfc 2nd semester cycle 6 assignment fm

8/20/2019 Mfc 2nd Semester Cycle 6 Assignment Fm

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Amity CampusUttar PradeshIndia 201303

ASSIGNMENTSPROGRAM M!C

SEMESTER"II

Su#$e%t Name !inan%ia& Mana'ementStudy COUNTR( Sudan )CPermanent Enr*&&ment Num#er +PEN, M!C001-.201/"201-01/

R*&& Num#er AM!20/ +T,Student Name SOMAIA TAM A) (OUSI! E)MA)I

INSTRUCTIONSa, Students are re uired t* su#mit a&& three assi'nment sets

ASSIGNMENT 4ETAI)S MAR SAssi'nment A !i5e Su#$e%ti5e 6uesti*ns 10Assi'nment Three Su#$e%ti5e 6uesti*ns 7 Case Study 10Assi'nment C O#$e%ti5e *r *ne &ine 6uesti*ns 10

#, T*ta& 8ei'hta'e 'i5en t* these assi'nments is 309 OR 30 Mar:s%, A&& assi'nments are t* #e %*mp&eted as typed in 8*rd;pd<d, A&& uesti*ns are re uired t* #e attemptede, A&& the three assi'nments are t* #e %*mp&eted #y due dates and need t* #e su#mit

e5a&uati*n #y Amity Uni5ersityC? @


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!inan%ia& Mana'ement

Assi'nment A

1 hat is st*%: sp&itB hat are its ad5anta'esChapter " 12 4i5idend 4e%isi*n12.7 Stock Split

)earnin' O#$e%ti5esAfter studying this unit, you should be able to understand the following:.1. Explain the i portance of di!idends to in!estors.2. "iscuss the effect of declaring di!idends on share prices.#. $ention the ad!antages of a stable di!idend policy.%. &ist out the !arious for s of di!idend.'. (i!e reasons for stock split.12 D St*%: Sp&itA stock split is a ethod to increase the nu ber of outstanding shares by proportionately reducing the fashare. A stock split affects only the par !alue and does not ha!e any effect on the total a ount outstandincapital. )he reasons for splitting shares are:T* ma:e shares attra%ti5e)he pri e reason for effecting a stock split is to reduce the arket price of a shar

ake it ore attracti!e to in!estors. Shares of so e co panies enter into higher trading *one aking it outo s all in!estors. Splitting the shares will place the in ore popular trading range thus pro!iding arkeand oti!ating s all in!estors to buy the .Indi%ati*n *< hi'her


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E/3 refers to the opti al order si*e that will result in the lowest ordering and carrying costs for an ite o based on its expected usage.E/3 odel answers the following key 0uantu of in!entory anage ent.a. +hat should be the 0uantity ordered for each replenish ent of stock4 b. ow any orders are to be paced in a year to ensure effecti!e in!entory $anage ent4

E/3 is defined as the order 0uantity that ini i*es the total cost associated with in!entory anage ent.t is based on the following assu ptions:

1. 5onstant or unifor de and. )he de and or usage is e!en throughout the period.2. nown de and or usage: "e and or usage for a gi!en period is known &e deter inistic.#. 5onstant 6nit price: er unit price of aterial does not change and is constant irrespecti!e of the order%. 5onstant 5arrying 5osts

)he cost of carrying is a fixed percentage of the a!erage !alue of in!entory.'. 5onstant ordering cost

5ost per order is constant whate!er be the si*e of the order.8. n!entories can be replenished i ediately as the stock le!el reaches exactly e0ual to *ero. 5onse0uenno shortage of in!entory.

7. Econo ic order 3uantity39 ;2" ; c" Annual usage or de and39 Econo ic order 3uantity

ordering cost per order kc c price per unit x percent carrying cost carrying cost of in!entory per unit per annu .Exa ple:Annual consu ption of raw aterials is %


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c =s.1<" #


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$ini u le!el is that le!el below which stock of in!entory should not nor ally fall.$ini u le!el /& @-=5 x -& )B+here,/& ordering le!el -=5 -or al rate of consu ption -& ) -or al &ead )i e.Orderin' &e5e&/rdering le!el is that le!el at which action for replenish ent of in!entory is initiated.

/& $=5 9 $& )+here,$=5 $axi u rate of consu ption$& ) $axi u lead ti e.3 A5era'e st*%: &e5e&A!erage stock le!el can be co puted in two ways1. ini u le!el F axi u le!el22. $ini u le!el F 1G2 of re order 0uantity.A!erage stock le!el indicates the a!erage in!est ent in that ite of in!entory. t is 0uite rele!ant fro the !iew of working capital anage ent.Mana'eria& si'ni


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E// ;2" ; 2 x '


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D 2 Types and s*ur%es *< Ris: in Capita& ud'etin'=isks in a pro ect are any. t is possible to identify three separate and distinct types of risk in any pro1.Stand J a&*ne ris:it is easured by the !ariability of expected returns of the pro ect.2.P*rt


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Mear 2 # lakhs 2 lakhsMear # 1 lakhs # lakhsMear % 1 lakhs # lakhs

Coth the pro ects ha!e a pay back period of % years. )he pro ect C is riskier than the ro ect A becausreco!ers ? of initial cash outlay in the first two years of its operation where as ro ect C generates hiinflows only in the latter half of the payback period.)his ethod considers only ti e related risks and ignores all other risk of the pro ect under consideratio

D 3 Ris: Ad$usted 4is%*unt Rate=isk pre iu need to be incorporated in discount rate in the e!aluation of risky pro ect proposals.)herefore the discount rate for appraisal of pro ects has two co ponents.)hose co ponents are1. =isk L free rate and risk pre iu=isk ad usted "iscount rate =isk free rate F =isk pre iu=isk free rate is co puted based on the return on go!ern ent securities.=isk pre iu is the additional return that in!estors re0uire as co pensation for assu ing the additional rassociated with the pro ect.

/ Criti%a&&y e amine the pay #a%: peri*d as a te%hni ue appr*5a& *< pr*$e%ts

Chapter J - Capita& ud'etin'8.N.2 "iscounted pay back period- K 2 4is%*unted Pay a%: Peri*d)he length in years re0uired to reco!er the initial cash out lay on the present !alue basis is called the disc back period. )he opportunity cost of capital is used for calculating present !alues of cash inflows."iscounted pay back period for a pro ect will be always higher than si ple pay back period because theof discounted pay back period is based on discounted cash flows.

or exa ple:Mear ro ect A

5ash flowsI factor at

1I of 5ash

flows5u ulati!e positi!e 5ashflows

< @%,


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A!erage in!est entA!erage in!est ent Cook Ialue of the in!est ent in the beginning

F Cook !alue of in!est ent at the end ofthe life of the pro ect or in!est ent

2I&&ustrati*n)he following particular refer to two pro ects:

9 M5ost %


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ranked for deciding on the allocation of capital on account of the need for capital rationing, pro ect witare preferred to the ones with lower A==.4is%*unted %ash


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#. )here are partial proble s associated with the e!aluation of pro ects with une0ual li!es or under funds‟constraints.

or ranking of pro ects under - I approach the pro ect with the highest positi!e - I is preferred to that - I.Pr*#&emA co pany is e!aluating two alternati!es for distribution within the plant. )wo alternati!es are1. 5 syste with a high initial cost but low annual operating costs.2. syste which costs less but ha!e considerably higher operating costs. )he decision to construct the p

already been ade, and the choice here will ha!e no effect on the o!erall re!enues of the pro ect. )he cosof the plant is 12> and the pro ects expected net cash costs are listed below:

(ear E pe%ted NetCash C*sts

5 Syste s Syste s< @#,


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nternal =ate of =eturn: t is the rate of return @i.e. discount rateB which akes the - I of any pro ect== is the rate of interest which e0uates the I of cash inflows with the I of cash flows.== is also called yield on in!est ent, anagerial efficiency of capital, arginal producti!ity of capital, r

return, ti e ad usted rate of return, == is the rate of return that pro ect earns.E5a&uati*n *< IRR1. == takes into account the ti e !alue of oney2. == calculates the rate of return of the pro ect, taking into account the cash flows o!er the entire life pro ect.

#. t gi!es a rate of return that reflects the profitability of the pro ect.%. t is consistent with the goal of financial anage ent i.e. axi i*ation of net wealth of share holder'. == can be co pared with the fir s cost of capital.‟8. )o calculate the - I the discount rate nor ally used is cost of capital. Cut to calculate ==, there is no calculate and e ploy the cost of capital for discounting because the pro ect is e!aluated at the rate of retgenerated by the pro ect. )he rate of return is internal to the pro ect.

4emerits1. == does not satisfy the additi!e principle.2. $ultiple rates of return or absence of a uni0ue rate of return in certain pro ects will affect the utility otechni0ues as a tool of decision aking in pro ect e!aluation.

#. n pro ect e!aluation, the pro ects with the highest == are gi!en preference to the ones with low inApplication of this criterion to utually exclusi!e pro ects ay lead under certain situations to acceptan pro ects of low profitability at the cost of high profitability pro ects.%. == co putation is 0uite tedious.

A%%ept *r Re$e%t Criteri*nf the pro ect s internal rate of return is greater than the fir s cost of capital, accept the proposal. /the‟ ‟

the proposal.== can be deter ine by sol!ing the following e0uation for r

== is also called yield on in!est ent, anagerial efficiency of capital, arginal producti!ity of capital, rreturn, ti e ad usted rate of return, == is the rate of return that pro ect earns.E5a&uati*n *< IRR1. == takes into account the ti e !alue of oney2. == calculates the rate of return of the pro ect, taking into account the cash flows o!er the entire life pro ect.#. t gi!es a rate of return that reflects the profitability of the pro ect.%. t is consistent with the goal of financial anage ent i.e. axi i*ation of net wealth of share holder'. == can be co pared with the fir s cost of capital.‟8. )o calculate the - I the discount rate nor ally used is cost of capital. Cut to calculate ==, there is no calculate and e ploy the cost of capital for discounting because the pro ect is e!aluated at the rate of retgenerated by the pro ect. )he rate of return is internal to the pro ect.

4emerits1. == does not satisfy the additi!e principle.2. $ultiple rates of return or absence of a uni0ue rate of return in certain pro ects will affect the utility otechni0ues as a tool of decision aking in pro ect e!aluation.#. n pro ect e!aluation, the pro ects with the highest == are gi!en preference to the ones with low in

Application of this criterion to utually exclusi!e pro ects ay lead under certain situations to acceptan pro ects of low profitability at the cost of high profitability pro ects.%. == co putation is 0uite tedious.


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A%%ept *r Re$e%t Criteri*nf the pro ect s internal rate of return is greater than the fir s cost of capital, accept the proposal. /the‟ ‟

the proposal.== can be deter ine by sol!ing the following e0uation for r

5 < R 5t where t 1 to n@1FrBt

E amp&eA pro ect re0uires an initial out lay of =s.1,


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(ear Cash


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Mear < 1 2 # % ' 85ashflows@=s.in

illionB

@1


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I of 5ashinflows

%,


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After a fir takes a decision to enter into any business or expand it s exiting business, plans to in!est in ‟achineries etc. are concei!ed and executed. )he process in!ol!ed is called 5apital Cudgeting. 5apital Cu

decision de and considerable ti e, attention and energy of the anage ent.1 / 2!inan%in' 4e%isi*ns

inancing decisions relate to the ac0uisition of funds at the least cost. ere cost has two di ension !i* ei plicit cost.Explicit cost refers to the cost in the for of coupon rate, cost of floating and issuing the securities etc.

plicit cost is not a !isible cost but it ay seriously affect the co pany s operation especially when it i‟ business and financial risk. or exa ple, i plicit cost is the failure of the organi*ation to pay to its lenddebenture holders loan install ent on due date on account of fluctuations in cash flow attributable to the business risk.

n all financing decisions a fir has to deter ine the proportion of e0uity and debt. )he co position of de0uity is called the capital structure of the fir ."ept is cheap because interest payable on loan is allowed as deductions in co puting taxable inco e on co pany is liable to pay inco e tax to the (o!ern ent of ndia. or exa ple, if the interest rate on loan t12>, tax rate applicable to the co pany is ', then when the co pany pays =s.12 as interest to the lendinco e of the co pany will be reduced by =s.12.

n other words when actual cost is 12> with the tax rate of ' the effecti!e cost beco es 8> therefore, d

cheap.Another thing notable in this connection is that the fir cannot a!oid its obligation to pay interest and loinstall ents to its lenders.1 / 3 4i5idend 4e%isi*ns

"i!idend yield is an i portant deter inant of an in!estor s attitude towards the security @stockB ‟ portfolio anage ent decisions. Cut di!idend yield is the result of di!idend decision. "i!idend dec

a or decision ade by a finance anager. t is the decision on for ulation of di!idend policy. Sgoal of financial anage ent is axi i*ation of wealth of shareholders, di!idend policy for ulatide ands the anagerial attention on the i pact of its policy on di!idend on the arket !alue of the

/pti u di!idend policy re0uires decision on di!idend pay ent rates so as to axi i*e the arket !alue o

)he payout ratio eans what portion of earning per share is gi!en to the shareholders in the for of cash n the for ulation of di!idend policy, anage ent of a co pany ust consider the rele!ance of its policyshares."i!idend policy influences the di!idend yield on shares. Since co pany s rating in the 5apital arket ha!‟i pact on its ability to procure funds by issuing securities in the capital arkets, di!idend policy, a deterdi!idend yield has to be for ulated ha!ing regard to all the crucial ele ent in building up the corporate ifollowing need ade0uate consideration in deciding on di!idend policy:1. reference of share holders "o they want cash di!idend or 5apital gains42. 5urrent financial re0uire ents of the co pany.#. &egal constraints on paying di!idends.%. Striking an opti u balance between desires of share holders and the co pany s funds re0uire ents‟

1 / / )i uidity 4e%isi*n

&i0uidity decisions are concerned with +orking 5apital $anage ent. t is 5oncerned with the day Lto Lfinancial operation that in!ol!e current assets and current liabilities.)he i portant ele ent of li0uidity decisions are:1. or ulation of in!entory policy2. olicies on recei!able anage ent.#. or ulation of cash anage ent strategies%. olicies on utili*ation of spontaneous finance effecti!ely.

1 / . Or'ani ati*n *< !inan%e !un%ti*n


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inancial decision are strategic in character and therefore, an efficient organi*ation structure is re0uiredthe sa e. inance is like blood that flows through out the organi*ation. n all organi*ation 5 /s play anrole in ensuring proper reporting based on substance to the stake holders of the co pany. Cecause of thethese functions play, finance function are organi*ed directly under the control of Coard of "irectors. orof the fir , there is a need to ensure both long ter and short ter financial sol!ency. ailure to achie!e tha!e its i pact on all other acti!ities of the fir .+eek function perfor ance by financial depart ent will weaken production, arketing and = acti!ities co pany. )he result would be the organi*ation beco ing ane ic. /nce ane ic, unless crucial and effecti!ere edial easures are taken up, it will pa!e way for corporate bankruptcy.5 / reports to the Coard of "irectors. 6nder 5 /, nor ally two senior officers anage the treasurer and cofunctions.A )reasurer perfor ance the following function:

1. /btaining finance.2. &iasoning with ter lending and other financial institutions.#. $anaging working capital.%. $anaging in!est ent in real assets.A 5ontroller perfor s:1. Accounting and Auditing2. $anage ent control syste s#. )axation and insurance%. Cudgeting and perfor ance e!aluation'. $aintaining assets intact to ensure higher producti!ity of operating capital e ployed in the organi*ation1 . Inter


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Assi'nment

1 hat are the assumpti*ns *< MM+M*di'&iani Mi&&er,appr*a%h

Chapter " . Capita& Stru%ture'.%.# )raditional Approach

'.%.% $iller and $odigliani Approach'.%.%.1 5riticis s of $$ proposition. 1 Intr*du%ti*n)he capital structure of a co pany refers to the ix of long ter finances used by the fir . n short, it isfinancing plan of the co pany. +ith the ob ecti!e of axi i*ing the !alue of the e0uity shares, the choicthat pattern of using debt and e0uity in a proportion that will lead towards achie!e ent of the fir Ds ob5apital structure should add !alue to the fir . inancing ix decisions are in!est ent decisions and ha!e on the operating earnings of the fir . Such decisions influence the fir Ds !alue through the earnings a!ashareholders.)he !alue of a fir is dependent on its expected future earnings and the re0uired rate of return. )he ob ecco pany is to ha!e an ideal ix of per anent sources of funds in a anner that will axi i*e the co pan

arket price. )he proper ix of funds is referred to asOptimal Capital Structure.)he capital structure decisions include debt e0uity ix and di!idend decisions. Coth these ha!e an effect)earnin' O#$e%ti5esAfter studying this unit, you should be able to understand the following.1. Explain the features of ideal capital structure.2. -a e the factors affecting the capital structure.#. $ention the !arious theories of capital structure.. / 3 Traditi*na& Appr*a%h)he )raditional Approach has the following propositions:

d re ains constant until a certain degree of le!erage and thereafter rises at an increasing rate.e re ains constant or rises gradually until a certain degree of le!erage and thereafter rises !ery sharply.

As a se0uence to the abo!e 2 propositions, o decreases till a certain le!el, re ains constant for oderatein le!erage and rises beyond a certain point.

. / / Mi&&er and M*di'&iani Appr*a%h$iller and $odigliani critici*e that the cost of e0uity re ains unaffected by le!erage up to a reasonable li being constant at all degrees of le!erage. )hey state that the relationship between le!erage and cost of capelucidated as in -/ approach. )he assu ptions for their analysis are:Per


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E pe%ted NOIExpected o!erall capitali*ation rateL 7 +S74,which is e0ual toO; * which is e0ual to -/ G oL 7 +S74, F O; * F NOI; *+here I is the arket !alue of the fir ,S is the arket !alue of the fir Ds e0uity," is the arket !alue of the debt,/ is the net operating inco e,

o is the capitali*ation rate of the risk class of the fir .)he basic argu ent for proposition is that e0uilibriu is restored in the arket by the arbitrage echanArbitrage is the process of buying a security at lower price in one arket and selling it in another arke price bringing about e0uilibriu . )his is a balancing act. $iller and $odigliani percei!e that the in!estors whose !alue is higher will sell their shares and in return buy shares of the fir whose !alue is lower. )heythe sa e return at lower outlay and lower percei!ed risk. Such beha!iours are expected to increase the shwhose shares are being purchased and lowering the share prices of those share which are being sold. )hioperation will continue till the arket prices of identical fir s beco e identical.Pr*p*siti*n II )he expected yield on e0uity is e0ual to discount rate @capitali*ation rateB applicable plu pre iu .

e F * 7 + *" d,4;SHPr*p*siti*n III )he a!erage cost of capital is not affected by the financing decisions as in!est ent and findecisions are independent.. / / 1 Criti%isms *< MM Pr*p*siti*nRis: per%epti*n)he assu ption that risks are si ilar is wrong and the risk perceptions of in!estors are peand corporate le!erage is different. )he presence of li ited liability of fir s in contrast to unli ited liabilindi!iduals puts fir s and in!estors on a different footing. All in!estors lose if a le!ered fir beco es banan in!estor loses not only his shares in a co pany but would also be liable to repay the oney he borrowArbitrage process is one way of reducing risks. t is ore risky to create personal le!erage and in!est in fir than in!esting in le!ered fir s.C*n5enien%e n!estors find personal le!erage incon!enient. )his is so because it is the fir Ds responsibilobser!e corporate for alities and procedures whereas it is the in!estorDs responsibility to take care of pele!erage. n!estors prefer the for er rather than taking on the responsibility and thus the perfect substitu

sub ect to 0uestion.Transa%ti*n %*stsAnother cost that interferes in the syste of balancing with arbitrage process is the pretransaction costs. "ue to the presence of such costs in buying and selling securities, it is necessary to in!a ount to earn the sa e a ount of return.Ta es +hen personal taxes are considered along with corporate taxes, the $iller and $odigliani approachexplain the financing decision and fir Ds !alue.A'en%y %*stsA fir re0uiring loan approach creditors and creditors ay so eti es i pose protecti!e co! protect their positions. Such restriction ay be in the nature of obtaining prior appro!al of creditors for fappoint ent of key persons, restriction on di!idend pay outs, li iting further issue of capital, li iting nein!est ents or expansion sche es etc.. . SummaryAccording to the - Approach, o!erall cost of capital continuously decreases as and when debt goes up structure. /pti al capital structure exists when the fir borrows axi u . -/ Approach belie!es that capital structure is not rele!ant. o is dependent business risk which is assuconstant.)raditional Approach tells us that o decreases with le!erage in the beginning, reaches its axi u pointfurther increases.$iller and $odigliani Approach also belie!e that capital structure is not rele!ant.Chapter " 12 4i5idend 4e%isi*n12 / Mi&&er and M*di'&iani M*de&


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S*&uti*nCase I hen di5idends are paidStep I P0 F 1 +41 7 P1,

+1 7 e,1


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Stru%ture8.1 ntroduction

/b ecti!e8.2 portance of 5apital budgeting

8.# 5o plexities in!ol!ed in 5apital Cudgeting "ecisions

8.% hases of 5apital Expenditure "ecisions

8.' dentification of n!est ent /pportunities

8.8 =ationale of 5apital Cudgeting roposals

8.7 5apital Cudgeting rocess8.7.1 )echnical Appraisal

8.7.2 Econo ic Appraisal8.? n!est ent E!aluation

8.N Appraisal criteria8.N.1 )raditional )echni0ues

8.N.2 "iscounted pay back period- K 2 4is%*unted Pay a%: Peri*d)he length in years re0uired to reco!er the initial cash out lay on the present !alue basis is called the disc back period. )he opportunity cost of capital is used for calculating present !alues of cash inflows."iscounted pay back period for a pro ect will be always higher than si ple pay back period because theof discounted pay back period is based on discounted cash flows.4is%*unted %ash


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%. - I is calculated by subtracting the I of cash outflows fro the present !alue of cash inflows.A%%ept *r re$e%t %riteri*n

f - I is positi!e, the pro ect should be accepted. f - I is negati!e the pro ect should be re ected.Accept or re ect criterion can be su ari*ed as gi!en below:1. - I O Pero accept2. - I Q Pero re ect

- I ethod can be used to select between utually exclusi!e pro ects by exa ining whether incre ental

in!est ent generates a positi!e net present !alue.Merits *< NPL meth*d1. t takes into account the ti e !alue of oney.2. t considers cash flows occurring o!er the entire life of the pro ect.#. - I ethod is consistent with the goal of axi i*ing the net wealth of the co pany.%. t analyses the erits of relati!e capital in!est ents.'. Since cost of capital of the fir is the hurdle rate, the - I ensures that the pro ect generates profits froin!est ent ade for it.

4emerits1. orecasting of cash flows is difficult as it in!ol!es dealing with effect of ele ents of uncertainties on o

acti!ities of fir .2. )o decide on the discounting factor, there is the need to assess the in!estor s re0uired rate of return. C‟ possible to co pute the discount rate precisely.#. )here are partial proble s associated with the e!aluation of pro ects with une0ual li!es or under funds‟constraints.

or ranking of pro ects under - I approach the pro ect with the highest positi!e - I is preferred to that - I.Pr*#&emA co pany is e!aluating two alternati!es for distribution within the plant. )wo alternati!es are1. 5 syste with a high initial cost but low annual operating costs.2. syste which costs less but ha!e considerably higher operating costs. )he decision to construct the palready been ade, and the choice here will ha!e no effect on the o!erall re!enues of the pro ect. )he cosof the plant is 12> and the pro ects expected net cash costs are listed below:(ear E pe%ted Net Cash

C*sts5 Syste s Syste s

< @#,


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resent !alue of incre ental sa!ings #


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)herefore, risk analysis in capital budgeting is part and parcel of enterprise risk anage ent. )he best budecision ay not yield the desired results because the uncertain conditions likely to e erge in future canalter the fortunes of the co pany.)earnin' O#$e%ti5esAfter studying this unit, you should be able to understand the following:1. "efine risk in capital budgeting.2. Exa ine the i portance of risk analysis in capital budgeting.#. $ethods of incorporating the risk factor in capital budgeting decision.

%. 6nderstand the types and sources of risk in capital budgeting decision.

3 E amine the type and s*ur%es *< ris: in %apita& #ud'etin.Chapter J D Ris: Ana&ysis in Capita& ud'etin'Stru%ture7.1 ntroduction/b ecti!es7.2 )ypes and sources of =isk in 5apital Cudgeting

7.# =isk Ad usted "iscount =ate

7.% 5ertainty E0ui!alent

7.' Sensiti!ity Analysis

7.8 robability "istribution Approach

7.7 "ecision L tree approach

7.? Su ary

7.2 )ypes and sources of =isk in 5apital Cudgeting)earnin' O#$e%ti5esAfter studying this unit, you should be able to understand the following:1. "efine risk in capital budgeting.2. Exa ine the i portance of risk analysis in capital budgeting.#. $ethods of incorporating the risk factor in capital budgeting decision.%. 6nderstand the types and sources of risk in capital budgeting decision.

D 2 Types and s*ur%es *< Ris: in Capita& ud'etin'=isks in a pro ect are any. t is possible to identify three separate and distinct types of risk in any pro1.Stand J a&*ne ris:it is easured by the !ariability of expected returns of the pro ect.2.P*rt


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#. ndustry L specific risk%. nternational risk'. $arket risk

1 Pr*$e%t J spe%i


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=isk pre iu is the additional return that in!estors re0uire as co pensation for assu ing the additional rassociated with the pro ect.D Summary=isk in pro ect e!aluation arises on account of the inability of the fir to predict the perfor ance of the certainty. =isk in capital budgeting decision ay be defined as the !ariability of actual return fro the ex)here are any factors that affect forecasts of in!est ent, costs and re!enues of a pro ect. t is possible tthree types of risk in any pro ect, !i* stand L alone risk, corporate risk and arket risk. )he sources of ra. ro ect b. 5o petitionc. ndustryd. nternational factors ande. $arket

)he techni0ues for incorporation of risk factor in capital budgeting decision could be grouped into con!etechni0ues and statistical techni0ues.

/ +a, 4eepa: stee& has issued n*n %*n5erti#&e de#entures


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%. f a borrower pro ises to pay =s.2 approxdB N> approx

'.A loan of =s.',


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12. of a pro ect is exa ined by financial appraisal.aB inancial !iability bB 5ost !iabilitycB Econo ic !iabilitydB )echnical !iability

1#.A ong the ele ents that are to be exa ined under co ercial appraisal, the ost crucial o .

aB Supply of the product bB "e and for the productcB 5ost of the productdB Ele ents of cost

1% or ulating is the third step in the e!aluation of in!est ent proposal.aB -o bB Mes

1'. A is not a rele!ant cost for the pro ect decision.aB Sunk cost bB "irect costcB ndirect costdB +orks cost

18. Effect of a pro ect on the working of other parts of a fir is known as .aB Separation principal bB or ulationcB ExternalitiesdB After effects

17.)he essence of separation principal is the necessity to treat ele ents of a pseparately fro that of ele ents.

aB roduction, operations bB inancing, production

cB n!est ent, financingdB n!est ent, production 1?. ayback period ti e !lue of oney.

aB gnores bB 5onsiderscB -one of the abo!e

1N. == gi!es a rate of return that reflects the of the pro ect.aB 5ost bB rofitabilitycB 5ash inflowsdB 5ash outflows

2


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bB 5alendar year cB /perating cycledB 5urrent cycle

22. is the a!erage length of ti e re0uired to produce and sell the product .

aB n!entory period bB Stock cyclecB n!entory con!ersion perioddB -one of the abo!e2#. is the a!erage length of ti e re0uired to con!ert the fir Vs recei!ables intoaB =ecei!ables period bB =ecei!ables cycle%, =ecei!ables con!ersion perioddB -one of the abo!e

2%. is length of ti e between fir Vs actual cash expenditure andits own receipt.

aB 5ash con!ersion period bB 5ash cyclecB 5ash perioddB 5ash and bank cycle2'. 5apital intensi!e industries re0uire a ount of working capital.aB &ower bB $ediucB igher dB -one of the abo!e

28. )here is a between !olu e of sales and the si*e of workingcapital of a fir .

aB ositi!e direct correlation bB -egati!e direct correlationcB -egati!e indirect correlation

dB ositi!e indirect correlation27.6nder inflationing conditions sa e le!el of in!entory will re0uire in!estworking capital.

aB "ecreased bB ncreasedcB Sa edB *ero

2?. &onger the anufacturing cycle the in!est ent in working capital.aB &arger bB s aller

2N. is used to esti ate working capital re0uire ent of a fir .

aB )rend analysis bB =isk analysiscB 5apital rationingdB /perating cycle

#


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aB erpetuity, bB Annuity

cB uturity dB -one of the abo!e

mfc 2nd semester cycle 6 assignment fm

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