JAIPUR NATIONAL UNIVERSITY, JAIPUR

School of Distance Education & Learning

Internal Assignment No. 1

MBA - 109

Paper Code: MBA–FM/DFM

Paper Title: Financial Management

Last date of submission:Max. Marks: 15

Note: Question No. 1 is of short answer type and is compulsory for all the students.

It carries 5 Marks. (80-100 Words)

Q. 1. Answer all the questions:

a. What is risk? How do you distinguish between systematic and unsystematic risk?
Ans: Systematic risk is the probability of a loss associated with the entire market or the segment
whereas Unsystematic risk is associated with a specific industry, segment or security. ...
Conversely, unsystematic risk can be eliminated through diversification of portfolio
BASIS FOR
SYSTEMATIC RISK UNSYSTEMATIC RISK
COMPARISON

Meaning Systematic risk refers to the hazard which is Unsystematic risk refers to the risk
associated with the market or market associated with a particular security,
segment as a whole. company or industry.

Nature Uncontrollable Controllable

Factors External factors Internal factors

Affects Large number of securities in the market. Only particular company.

 b. Define “Miller and Orr model” of cash management.
Ans: the Miller and Orr model of cash management is one of the various cash management models in
operation. It is an important cash management model as well. It helps the present day companies to
manage their cash while taking into consideration the fluctuations in daily cash flow.

Description of the Miller and Orr Model of Cash Management

As per the Miller and Orr model of cash management the companies let their cash balance move within
two limits – the upper limit and the lower limit. The companies buy or sell the marketable securities only
if the cash balance is equal to any one of these.

When the cash balances of a company touches the upper limit it purchases a certain number of salable
securities that helps them to come back to the desired level.

If the cash balance of the company reaches the lower level then the company trades its salable securities
and gathers enough cash to fix the problem.
It is normally assumed in such cases that the average value of the distribution of net cash flows is zero. It
is also understood that the distribution of net cash flows has a standard deviation. The Miller and Orr
model of cash management also assumes that distribution of cash flows is normal.

c. State the features of money market.

Ans: Money market is a market for short-term loan or financial assets. It as a market for the lending and
borrowing of short term funds. As the name implies, it does not actually deals with near substitutes for
money or near money like trade bills, promissory notes and government papers drawn for a short period
not exceeding one year. These short term instruments can be converted into cash readily without any
loss and at low transaction cost.

Money market is the centre for dealing mainly in short – term money assets. It meets the short-term
requirements of borrowers and provides liquidity or cash to lenders. It is the place where short-term
surplus funds at the disposal of financial institutions and individuals are borrowed by individuals,
institutions and also the Government.

d. Define the significance of international finance management.

Ans: International Finance is related to business decisions such as asset selection, resource allocation
and financial management.

1. For Business Firms:

Significance of international finance management. · International finance is a main tool to determine the
exchange rates, get an idea about investing in international debt securities, compare inflation rates, to
determine the economic status of other countries and to decide the foreign markets

Every firm faces the four important decision-making areas in financial management.

Investment decision
ii. Financing decision

iii. Working capital management decision

iv. Dividend decision.

e-State the relationship between BOP and national economy.

Ans: Relationship between National economy and balance of payments Because the balance of
payments, including the international investment position, forms an integral part of the
National Accounts, there is complete concordance between them in concept and
classification, although the extent of cross-classifications may differ between the two
systems. The balance of payments and National Accounts identify resident producers and
consumers identically, and both invoke the same concepts of economic territory and centre
of economic interest. Both use market prices as the primary concept of valuation of
transactions and they adopt identical concepts of accrual accounting. The systems use
identical conversion procedures to convert transactions which take place in foreign
currency to UK currency

NOTE: Answer any two questions. Each question carries 5 Marks. (1*5=5 Marks) (500 Words).

Q.2 what do you understand by “Financial Management”? Discuss its significance in Business
Management.
Ans: Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such
as procurement and utilization of funds of the enterprise. It means applying general management
principles to financial resources of the enterprise.

1. It helps in Achieving Group Goals - It arranges the factors of production, assembles and organizes
the resources, integrates the resources in effective manner to achieve goals. It directs group
efforts towards achievement of pre-determined goals. By defining objective of organization
clearly there would be no wastage of time, money and effort. Management converts
disorganized resources of men, machines, money etc. into useful enterprise. These resources are
coordinated, directed and controlled in such a manner that enterprise work towards attainment
of goals.
2. Optimum Utilization of Resources -Management utilizes all the physical & human resources
productively. This leads to efficacy in management. Management provides maximum utilization
of scarce resources by selecting its best possible alternate use in industry from out of various
uses. It makes use of experts, professional and these services leads to use of their skills,
knowledge, and proper utilization and avoids wastage. If employees and machines are producing
its maximum there is no under employment of any resources.
 3. Reduces Costs - It gets maximum results through minimum input by proper planning and by
using minimum input & getting maximum output. Management uses physical, human and
financial resources in such a manner which results in best combination. This helps in cost
reduction.

4. Establishes Sound Organization - No overlapping of efforts (smooth and coordinated functions).

To establish sound organizational structure is one of the objective of management which is in
tune with objective of organization and for fulfillment of this, it establishes effective authority &
responsibility relationship i.e. who is accountable to whom, who can give instructions to whom,
who are superiors & who are subordinates. Management fills up various positions with right
persons, having right skills, training and qualification. All jobs should be cleared to everyone.

Q.3 what is capital budgeting? Critically examine the various methods of evaluation of capital
Budgeting proposals.
Ans: What Is Capital Budgeting?
Capital budgeting is the process a business undertakes to evaluate potential major projects or
investments. Construction of a new plant or a big investment in an outside venture are examples of
projects that would require capital budgeting before they are approved or rejected.

As part of capital budgeting, a company might assess a prospective project's lifetime cash inflows and
outflows to determine whether the potential returns that would be generated meet a sufficient target
benchmark. The process is also known as investment appraisal.

There are two broad evaluation methods for a capital budgeting proposal:
i. Non-Discounted Cash Flow Methods:
These are the traditional methods and include payback period and the accounting rate of return (ARR).
Their biggest disadvantage is that they ignore the time value of money. The payback method is skewed
towards selection of projects with the shortest payback period; it ignores the timing of profits as well as
expected profits after the payback period

The ARR is the average annual expected profits from the project divided by the project cost. It is superior
to the payback method because it considers all future profits but its value is affected by computation—
average pre-tax profits and average project cost will generate a higher ARR than post-tax profits and total
project cost.

ii. Discounted Cash Flow (DCF Methods):

They take into account time value of money. The methods include net present value, internal rate of
return, and profitability index. All three methods consider the time value of money, use post-tax cash
flows, and consider all cash flows over the project’s life. They are therefore superior to traditional
evaluation methods.
Q.4 Define dividend policy. Explain briefly the factors which affect the dividend policy of a firm.
Ans: Dividend policy is the policy a company uses to structure its dividend payout to shareholders.
Some researchers suggest that dividend policy may be irrelevant, in theory, because investors
can sell a portion of their shares or portfolio if they need funds.
TYPE OF INDUSTRY
The nature of the industry to which the company belongs has an important effect on the dividend policy.
Industries, where earnings are stable, may adopt a consistent dividend policy as opposed to the
industries where earnings are uncertain and uneven. They are better off in having a conservative
approach to dividend payout.
 OWNERSHIP STRUCTURE
 AGE OF CORPORATION
 THE EXTENT OF SHARE DISTRIBUTION
 DIFFERENT SHAREHOLDERS’ EXPECTATIONS
 LEVERAGE
 FUTURE FINANCIAL REQUIREMENTS / REINVESTMENT OPPORTUNITY
 BUSINESS CYCLES
 CHANGES IN GOVERNMENT POLICIES
 PROFITABILITY
 TAXATION POLICY
 TRENDS OF PROFITS
 LIQUIDITY
 LEGAL RULES
 INFLATION
 CONTROL OBJECTIVES
 REPAYMENT OF DEBT

Q.5 what is meant by inventory control? Explain the different costs associated with inventory.
Ans: Inventory control, also referred to as stock control, is so broad and incorporates so many functions
that it is difficult to describe in a limited definition, but we like how this Inc.com entry puts it: Inventory
control refers to “all aspects of managing a company’s inventories: purchasing, shipping, receiving,
tracking, warehousing and storage, turnover, and reordering.” Inventory control is such a critical piece of
an organization’s operations and bottom line that it is too important to leave to human error or
antiquated systems. That’s why so many companies opt to invest in inventory control systems, so that all
of the components of inventory control are managed by one integrated system.
Inventory Purchase Costs

The most basic type of inventory cost is the purchase price. Some businesses, such as retailers, buy
finished goods inventory that is ready for resale as soon as they receive it. Alternatively you might
purchase component parts, and assemble them into new products for sale. Still others purchase raw
materials directly and either resell the materials or assemble materials into semi-finished or finished
goods before sale.

The key to keeping inventory purchase costs low is to develop long-term, mutually beneficial
partnerships with reliable suppliers. Suppliers can offer you price/volume discounts or price contracts to
keep your costs at a reasonable level.

Inventory Processing Costs

Some businesses perform work on inventory they purchase before it is ready for sale. If you're a
computer manufacturer, for example; you likely buy component parts such as microchips, displays and
input devices, then assemble various components into individual machines. Assembly processes result in
labor costs for assembly workers, and you'll pay the utilities expenses for those workspaces.

Inventory Distribution Costs

Inventory items have to be shipped a number of times before they turn into sales revenue. The inventory
you buy must be shipped from the supplier to your company, which, while usually covered by the
supplier, can sometimes be the buyer's responsibility. Larger businesses will generally house new
inventory at a warehouse or distribution center before shipping it on to a specific retail store or other
outlet.

Sometimes you'll ship inventory directly to end users, especially if you're an online retailer or have a
national or international reach. Inventory transport costs might include freight trucking, shipping by rail
or air transport, as well as light-vehicle deliveries in local areas.

Inventory Holding Costs

Storing inventory either in your warehouse or in a sales outlet incurs additional costs. Holding inventory
means labor costs for handling duties, additional utilities and rent/mortgage costs due to the physical
spaces required. The just-in-time or JIT inventory purchasing model can reduce inventory holding costs
by ordering inventory exactly when it is needed, preventing storage backups and freeing up employees'
time to focus on more productive tasks.

Losses From Shrinkage

Shrinkage refers to anything that renders inventory unfit for sale or return to a supplier. Inventory that
has already been paid for can disappear due to theft from employees or consumers. Perishable inventory
items can spoil if not sold on time, making it impossible to recoup the costs. Damage to inventory caused
on your premises can also land inventory items in the trash with no financial value.

Inventory items stored for too long can become obsolete and lose most of their value in some industries,
such as cell phone sales.

Note: Question No. 1 is of short answer type and is compulsory for all the students.

It carries 5 Marks. (1*5=5 Marks) (50-100 Words)

Q. 1. Answer all the questions.

a. Differentiate “arbitration” and “speculation” in foreign exchange market.
Ans: Arbitration is simultaneous purchase and sale of foreign exchanges in two or more markets
to profit from discrepancies in quotations whereas A speculation in theForex market means
that you buy and sell currencies. You do not just buy any currency at random and sell it at
random, because speculation means that you have to observe the rate and the
background of your currency in order to get a higher the rate and the background of your
currency in order to get a higher profit. The main instruments of speculation are buying
currency and selling currency
b. Define marginal cost of capital.
Ans: The marginal cost of capital (MCC) is the cost associated with raising one additional dollar
of capital. The marginal cost will vary according to the type of capital used. For example,
raising funds through the use of unsecured or subordinated debt, or through debt that
requires higher interest rates to offset risk, will be more expensive than debt that is backed
by collateral, such as a secured bond
c. Write a short note on JIT.
Ans: Just in time (JIT) is a production strategy that strives to improve a business' return on
investment by reducing in-process inventory and associated carrying costs.To meet JIT
objectives, the process relies on signals or Kanban between different points, which are
involved in the process, which tell production when to make the next part. Kanban are
usually 'tickets' but can be simple visual signals, such as the presence or absence of a part
on a shelf
d. What are the conditions for the redemption of redeemable preference share?
Ans: A company should be authorized by its articles to issue redeemable preference shares within a
period not exceeding twenty years.

2. The preference shares should be redeemed out of i) profits available for dividend or ii) out of proceeds
of fresh issue of shares made for the purpose of redemption.

3. If redemption is out of profits available for dividend, then a sum equal to the nominal amount of the
shares redeemed is required to be transferred to Capital Redemption Reserve Account (utilisation of CRR
Account is further restricted to issuance of fully paid-up bonus shares only).

In a scenario where part of the redemption is financed by fresh issue and part by profits, then:
Amount to be transferred to the CRR = Nominal Value of the Preference Shares to be redeemed Less
Proceeds of Fresh Issue of Share Capital (being Nominal value of Equity Shares issued)

The conditions for redemption of redeemable preference shares are:- There must be a provision in the
Articles of Association regarding the redemption of preference shares. The redeemable preference shares
must be fully paid up. The redeemable preference shareholders should be paid out of distributable profit.
If the shares are redeemed at a premium, it should be should be provided out of securities premium.
The proceeds from fresh issue of debentures cannot be utilizedfor redemption. The amount of capital
reserve cannot be used for redemption of preference shares.

e. Mention the different types of dividend paid by companies.

Ans: Dividend may be of different types.
Regular Dividend
Interim Dividend
 Stock-Dividend
Scrip Dividend
Bond Dividends
Property Dividend
Note: Answer all the questions. (Word limits 500)
Q.6 Define cash management. Discuss in detail the factors that determine the needs cash of a firm.\
Ans: What Is Cash Management?
Cash management is the process of collecting and managing cash flows. Cash management can be
important for both individuals and companies. In business, it is a key component of a company's financial
stability. For individuals, cash is also essential for financial stability while also usually considered as part
of a total wealth portfolio.

Individuals and businesses have a wide range of offerings available across the financial marketplace to
help with all types of cash management needs. Banks are typically a primary financial service provider
for the custody of cash assets. There are also many different cash management solutions for individuals
and businesses seeking to obtain the best return on cash assets or the most efficient use of cash
comprehensively.

Factor # 1. Terms of Purchase and Sale:

Terms on which goods are bought and sold decide, to a large extent, the amount of cash reserve that a

firm will have to hold. If a business firm can manage to buy materials on credit terms but sell its products

on cash, it can run its affairs with a little cash balance. The reverse tendency will be found where the firm

makes purchases on cash basis but it has to sell its productions to customers on credit terms.
Factor # 2. Collection Period of Receivables:

If speed of collection of accounts receivable in a firm, is quick the firm need not carry large cash balance.

However, owing to liberal credit and collection policies, poor collection machinery and other factors, the

firm will have to maintain relatively substantial reserve of cash to meet normal business expenses

Factor # 3. Credit Position of the Firm:

A firm having established good image in the market circle can carry its affairs with little cash balance
obviously because the firm gets liberal credit facilities from other business enterprises..

Factor # 4. Production Policy of the Firm:

Production policy is also an important determinant of normal cash requirements. If management of an

enterprise decides to hold inventory worth 3 months production requirements to maintain fairly steady

production throughout the year, it will require larger amount of cash to finance the inventory

requirements than one following hand to mouth policy of carrying inventories.

Factor # 5. Nature of Demand of Firm’s Products:

Where demand of firm’s products is highly susceptible to changes in economic conditions, the firm will

have to hold large cash balance to strengthen its liquidity position. This tendency is usually observed in

undertakings engaged in luxurious products. However, public utility concerns need not maintain large

cash reserve because of the constant flow of cash in the firm resulting from the regularity of their

services.

Factor # 6. Sale-Asset Relationship:

Sale-asset relationship must be examined minutely while assessing cash requirements for normal

transaction purposes. A firm having larger amount of sales in relation to fixed assets will have to carry

substantially large cash balance to meet inventory and receivables.

In this connection it may be argued that increase in quantum of sales brings in increased cash to the firm

which could be used to finance additional inventory and receivable requirements. There are no two

opinions about this. However, it should be remembered that amount of cash inflow does not increase in
proportion to the increase in sales. As a matter of fact, risk in sales results in increase in cash at

diminishing rate.

Factor # 7. Amount of Current Liabilities and their Maturity Period:

A firm with larger amount of current liabilities will have to hold larger cash reserve than one with small

amount of current liabilities. Furthermore, maturity period of these liabilities should also be considered

while deciding the level of cash holding.

Q.7 what is the importance of ratio analysis to management? Explain briefly any two ratios each for
measuring:
i. Profitability ii. Liquidity
ans: Ratio analysis is an invaluable aid to management in the discharge of its basic function such
as planning, forecasting, control etc. The ratios that are derived after analysing and
scrutinizing the past result, helps the management to prepare budgets to formulate
policies and to prepare the future plan of action etc.
Liquidity and the Current Ratio

The most common liquidity ratio is the current ratio, which is the ratio of current assets to current
liabilities. This ratio indicates a company's ability to pay its short-term bills. A ratio of greater than one is
usually a minimum because anything less than one means the company has more liabilities than assets.
A high ratio indicates more of a safety cushion, which increases flexibility because some of the inventory
items and receivable balances may not be easily convertible to cash.

Companies can improve the current ratio by paying down debt, converting short-term debt into long-
term debt, collecting its receivables faster and buying inventory only when necessary

Profitability Ratios and Margins

Profitability ratios indicate management's ability to convert sales dollars into profits and cash flow. The
common ratios are gross margin, operating margin and net income margin. The gross margin is the ratio
of gross profits to sales. The gross profit is equal to sales minus cost of goods sold.

The operating margin is the ratio of operating profits to sales and net income margin is the ratio of net
income to sales. The operating profit is equal to the gross profit minus operating expenses, while the net
income is equal to the operating profit minus interest and taxes. The return-on-asset ratio, which is the
ratio of net income to total assets, measures a company's effectiveness in deploying its assets to
generate profits. The return-on-investment ratio, which is the ratio of net income to shareholders'
equity, indicates a company's ability to generate a return for its owners.

Q.8 Write short notes on:

a. Capital Redemption Reserve (CRR)
ans: A limited company may issue redeemable preference shares if it’s Articles of Association provide.
Thus, these preference shares are liable for redemption within a period not exceeding twenty
years from the date of issue. A company cannot issue irredeemable preference shares. Also, a
company can redeem only fully paid-up preference shares out of the profits available for
dividend or out of the proceeds of a fresh issue of shares for redemption. Hence, the preference
shares are redeemed from the capital reserve account created for the purpose of the
redemption.
b. Weighted Average cost of capital
Companies often run their business using the capital they raise through various sources. They
include raising money through listing their shares on the stock exchange (equity), or by
issuing interest-paying bonds or taking commercial loans (debt). All such capital comes at a
cost, and the cost associated with each type varies for each source.
Formula : WACC=(VE×Re)+(VD×Rd×(1−Tc))
c. ABC analysis
ans: Inventory optimization in supply chain, ABC analysis is an inventory categorization method which
consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the
least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) and not
on the trivial many (C-items).

Economic order quantity (EOQ)

ans: EOQ is the acronym for economic order quantity. The economic order quantity is the
optimum quantity of an item to be purchased at one time in order to minimize the combined annual
costs of ordering and carrying the item in inventory. EOQ is also referred to as the optimum lot size