DMBA 202- FINANCIAL MANAGEMENT

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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 over-capitalization 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-capitalization tends to have more serious consequences than under-capitalization.

Causes of over-capitalization can vary but often include aggressive or inaccurate financial projections, excessive borrowing,

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  1. 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

 

3a. Differentiate between Operating and Financial Leverage.

  1. 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.

  1. 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

 

 

Assignment Set – 2

 

  1. 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 viewed differently:

Industry Norms: Different

 

  1. 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

 

 

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?

  1. b) Differentiate between hard and soft capital rationing. 5+2.5+5

Ans 6a.

  1. To find the most economical order quantity (EOQ) and the number of orders needed, we can use the EOQ formula:

=Ö2/

Where:

 

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