ASSIGNMENT

DCM2102 – FINANCIAL MANAGEMENT

Q.No Assignment Set – 1 Marks Total Marks

Questions
1. Explain the functions of a financial manager in any organization. 10 10
2. Calculate the present value of the following cash flows assuming a 10 10
discount rate of 10% per annum.
Year Cash flows [₹]
1 10000
2 20000
3 30000
4 40000
5 50000
3. Explain the significance of the concept of cost of capital. Discuss 10 10
different component of cost of capital with example.

Q.No Assignment Set – 2 Marks TotalMarks

Questions
4. Explain the sources of finance.? Discuss the short term and long term 10 10
sources of finance for the firm.
5. The details regarding three companies are given below: 10 10
X Ltd Y Ltd Z Ltd.
r = 12% r = 8% r = 10%
Ke = 10 % Ke = 10 % Ke = 10 %
E = Rs. 100 E = Rs. 100 E = Rs. 100
Compute the value of an equity share of each of these companies applying
Walter’s formula when the dividend pay-out ratio is (a) 0%, (b) 20%, (c)
40%,

6. Explain Working capital management. Discuss various factors that affect 3+7 10
working capital requirement?

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 - 450
words. Each question is followed by evaluation scheme.
 Directorate of Online Education
SESSION SEP 2023
PROGRAM BACHELOR OF COMMERCE (BCOM)
SEMESTER III
COURSE CODE & NAME DCM2102 – FINANCIAL MANAGEMENT
CREDITS 4
NUMBER OF ASSIGNMENTS
S& 02
MARKS 30 Marks each

ARIN KALSOTRA
Course: FINANCIAL MANAGEMENT
Semester: III
Roll Number: 2214507417
221450741

Set – 1

Questions

1. Explain the functions of a financial manager in any organization.

Answer1: The financial manager plays a crucial role within an organization,

responsible for various functions that contribute to the financial well
well-being
and success of the company. The primary functions of a financial manager
include:
1. Financial Planning:
 Developing financial plans that align with the overall goals and
objectives of the organization.
 Creating budgets and forecasts to guide resource allocation and
expenditure.

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2. Capital Budgeting:
 Evaluating investment opportunities and determining which
projects
cts are worth pursuing.
 Assessing the potential risks and returns associated with capital
investments.
3. Risk Management:
 Identifying and analyzing financial risks that could impact the
organization.
 Implementing strategies to mitigate risks, such as insuran
insurance,
hedging, or diversification.
4. Financial Control:
 Monitoring and controlling financial activities to ensure
adherence to budgets and plans.
 Implementing internal controls and financial reporting systems.
5. Financial Reporting and Analysis:
 Producing accurate and timely financial statements and reports.
 Analyzing financial data to provide insights and support decision
decision-
making.
6. Working Capital Management:
 Managing short-term
short term assets and liabilities to ensure the
organization maintains sufficient liquidity.
 Balancing the need for cash with the efficient use of resources.
7. Cost Management:
 Controlling and optimizing costs across various functions within
the organization.
 Implementing cost-effective
cost effective measures to improve profitability.
8. Financing Decisions:
ons:

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 Deciding on the most appropriate sources of funds for the
organization.
 Negotiating with banks, financial institutions, or investors to
secure financing.
9. Dividend Policy:
 Formulating and implementing policies regarding the
distribution of dividends to shareholders.
 Balancing the need for dividends with the reinvestment of
profits for future growth.
10.Financial Strategy:
 Developing and executing a financial strategy that aligns with
the overall strategic goals of the organization.
 Aligning financial decisions with the long-term
long term vision and mission
of the company.
11.Corporate Governance and Compliance:
 Ensuring compliance with financial regulations, laws, and ethical
standards.
 Upholding principles of corporate governance and transparen
transparency
in financial reporting.
12.Investor Relations:
 Communicating with investors, analysts, and stakeholders to
provide financial updates and address inquiries.
 Building and maintaining positive relationships with the
investment community.
The financial manager's's functions are essential for maintaining the financial
health of the organization, supporting strategic decision-making,
decision making, and
ensuring the efficient use of resources to achieve organizational objectives.

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Q2:Calculate
Calculate the present value of the following cash flows assuming a
discount rate of 10% per annum.
Year Cash flows [₹]
1 10000
2 20000
3 30000
4 40000
5 50000

Answer 2: Given:
 Cash flow in year 1 (CF1): ₹10,000

 Cash flow in year 2 (CF2): ₹20,000

 Cash flow in year 3 (CF3): ₹30,000

 Cash flow in year 4 (CF4): ₹40,000

 Cash flow in year 5 (CF5): ₹50,000

 Discount rate (r): 10%

Present Value (PV) Calculation:

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5

Substituting the values:

PV ≈ 10,000 / (1+0.10)^1 + 20,000 / (1+0.10)^2 + 30,000 / (1+0.10)^3 + 40,000 / (1+0.10)^4 + 50,000

/ (1+0.10)^5

Calculating:

PV ≈ 9,090.91 + 16,528.93 + 24,144.10 + 31,940.90 + 39,922.92

Result:

PV ≈ ₹121,627.76

Conclusion:

The corrected present value is approximately ₹121,627.76

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Q3 : Explain the significance of the concept of cost of capital. Discuss different
component of cost of capital with example.

Answer3: The concept of the cost of capital is significant in financial

management as it represents the minimum rate of return a company must
earn on its investments to satisfy its shareholders and debt providers. It is a
crucial metric used in decision-making
decision processes
esses related to capital budgeting,
financing, and evaluating the overall financial health of a company. The cost of
capital reflects the company's opportunity cost for using its funds in a
particular project or investment.
Significance of Cost of Capital:
Investment Decision Making:
Helps in evaluating the viability of various investment opportunities by
comparing the expected return on investment with the cost of capital.
Capital Budgeting:
Guides decision-makers
makers in selecting projects that generate returns above the
cost of capital, ensuring value creation for shareholders.
Financing Decisions:
Influences choices between debt and equity financing. Understanding the cost
of capital helps in determining
termining the optimal capital structure.
Performance Evaluation:
Serves as a benchmark for assessing the performance of various divisions or
projects within the company.
Stock Valuation:
Affects the valuation of a company's stock, as the cost of equity is a key factor
in determining the required rate of return for equity investors.
Components of Cost of Capital:
Cost of Debt (Kd):

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Represents the cost associated with obtaining funds through debt. It is usually
the interest rate paid to bondholders or lenders.
Example: If a company issues bonds with an annual interest rate of 5%, the
cost of debt is 5%.
Cost of Equity (Ke):
Reflects the
he return required by equity investors to compensate for the risk of
holding the company's stock. It is often estimated using models like the Capital
Asset Pricing Model (CAPM).
Example: If the expected return on the market is 10%, and the company's beta
(aa measure of stock risk) is 1.2, the cost of equity using CAPM might be 12%.
Cost of Preferred Stock (Kp):
Pertains to the dividend payments made to preferred stockholders. It is
calculated as the annual dividend payment divided by the net issuance price.
Example: If a preferred stock pays an annual dividend of ₹5 per share and the
net issuance price is ₹100 per share, the cost of preferred stock is 5%.
Weighted Average Cost of Capital (WACC):
Represents the overall cost of capital for the company, consider
considering the
proportional weights of each component (debt, equity, preferred stock).
Example: If a company has 60% debt with a cost of 5%, 30% equity with a cost
of 12%, and 10% preferred stock with a cost of 5%, the WACC is calculated as
(0.60 * 5%) + (0.30 * 12%) + (0.10 * 5%) = 8.5%.
Understanding the cost of capital and its components is crucial for making
informed financial decisions and optimizing the capital structure of a company.
It ensures that the company's investments generate returns that adequately
compensate providers of capital.

Set- 2

Questions

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Q4: Explain the sources of finance.?

finance.? Discuss the short term and long term sources of
finance for the firm.

Answer4: Sources of Finance:

Sources of finance refer to the various means through which a business obtains funds to
meet its financial needs and support its operations. These sources can be broadly
categorized into two main types: short-term
short sources and long-term
term sources.

Short-Term Sources of Finance:

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Trade Credit: Businesses often buy goods and services on credit from their suppliers,
allowing them a period to pay for the purchases. This is a common form of short
short-term
financing.

Bank Overdraft: A bank overdraft allows a company to withdraw more money than it
currently has in its account, up to a predetermined limit. It is a flexible and often used
form of short-term
term financing for managing working capital.

Short-Term Loans: Companies can take short-term

shor term loans from financial institutions to
meet temporary cash flow shortages or address immediate financial needs. These loans
are typically repaid within one year.

Commercial Papers: Large, creditworthy companies can issue commercial papers to

investors, which are short-term
term debt instruments with maturities ranging from a few days
to a year.

Factoring and Invoice Discounting: Companies can sell their accounts receivable (invoices)
to a third party (factor) at a discount, providing immediate cash in excha
exchange.

Accruals: This involves accumulating expenses and revenues that are recognized but not
yet paid or received. It's a form of short-term
short term financing through delaying cash payments.

Long-Term
Term Sources of Finance:

Equity Capital: Companies can raise funds by issuing shares to investors. This represents
ownership in the company, and investors become shareholders.

Debt Capital: Companies can borrow funds through various debt instruments. Some
common forms include:

Bonds: Long-term
term debt securities issued to investors.
investors. Companies pay periodic interest and
repay the principal at maturity.

Loans: Long-term
term loans from financial institutions, which may have fixed or variable
interest rates.

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Retained Earnings: Companies can use their accumulated profits that have not been
distributed as dividends to fund new projects or expansion.

Preference Share Capital: Companies can issue preference shares, which combine features
of both equity and debt. Preference shareholders
shareholders receive a fixed dividend before common
shareholders.

Venture Capital and Private Equity: Startups or growing companies may secure funds from
venture capitalists or private equity firms in exchange for an ownership stake.

Government and Institutional Loans:

Lo Companies may access long-term term loans provided by
government agencies or financial institutions for specific projects or sectors.

Lease Financing: Companies can lease assets instead of purchasing them outright,
providing a long-term
term financing option for acquiring equipment or property.

The choice between short-term

term and long-term
long term sources of finance depends on the nature
of the business needs, the purpose
purpose of financing, and the financial strategy of the company.
Each source has its advantages and considerations in terms of cost, risk, and flexibility.

Q5:

The details regarding three companies are given below:

X Ltd Y Ltd Z Ltd.
r = 12% r = 8% r = 10%
Ke = 10 % Ke = 10 % Ke = 10 %
E = Rs. 100 E = Rs. 100 E = Rs. 100
Compute the value of an equity share of each of these companies applying
Walter’s formula when the dividend pay-out
pay out ratio is (a) 0%, (b) 20%, (c) 40%,
ANSWER5:

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Walter's Model - Intrinsic Value of Equity
Share

Given data:
- \( KE \) (COST OF EQUITY): 10%

- \( E \) (EARNINGS PER SHARE): RS. 100

COMPANY X LTD:

**(A) DIVIDEND PAYOUT RATIO = 0%**

\[ P_0 = \FRAC{0 + (100 \TIMES 1)}{0.10} = \FRAC{100}{0.10} = 1000 \]

**(B) DIVIDEND PAYOUT RATIO = 20%**

\[ P_0 = \FRAC{(0.20 \TIMES 100) + (100 \TIMES 0.80)}{0.10} = \FRAC{20 + 80}{0.10} = 1000 \]

**(C) DIVIDEND PAYOUT RATIO = 40%**

\[ P_0 = \FRAC{(0.40 \TIMES 100) + (100 \TIMES 0.60)}{0.10} = \FRAC{40 + 60}{0.10} = 1000 \]

COMPANY Y LTD:

*CALCULATIONS ARE IDENTICAL TO COMPANY X LTD.*

COMPANY Z LTD:

*CALCULATIONS ARE IDENTICAL TO COMPANY X LTD.*

**CONCLUSION:**

ACCORDING TO WALTER'S MODEL, THE INTRINSIC VALUE OF THE EQUITY SHARE FOR ALL THREE COMPAN
COMPANIES (X LTD, Y LTD, Z
LTD) IS RS. 1000 UNDER DIFFERENT DIVIDEND
DEND PAYOUT RATIOS (0%, 20%, 40%).

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Q6: Explain Working capital management.

management Discuss various factors that affect working
capital requirement?
Answer6: Working Capital Management:
Working capital refers to the funds used by a company to run its day
day-to-day operations.
Effective working capital management involves monitoring and controlling a company's
short-term
term assets and liabilities to ensure smooth
smooth business operations. The goal is to
strike a balance between maintaining sufficient liquidity and optimizing the use of
capital.
Components of Working Capital:
1. Current Assets:
 Cash and Cash Equivalents: Money in hand or investments with high
liquidity.
 Accounts Receivable: Amounts owed to the company by customers.
 Inventory: Raw materials, work-in-progress,
work progress, and finished goods.
2. Current Liabilities:
 Accounts Payable: Amounts owed by the company to suppliers.
 Short-Term
Term Debt: Borrowings with a maturity per
period of less than a
year.
Factors Affecting Working Capital Requirement:
1. Nature of Business:
 Different industries have varying working capital requirements. For
example, manufacturing companies may have higher inventory levels
compared to service-oriented
service businesses.
2. Seasonality:
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 Businesses experiencing seasonal demand fluctuations may require
higher
her working capital during peak seasons to meet increased
production and sales.
3. Credit Policy:
 The credit terms offered to customers affect accounts receivable. A
lenient credit policy increases sales but may tie up more working
capital.
4. Supplier Terms:
 Negotiating
gotiating favorable credit terms with suppliers can impact the
payment cycle, affecting the working capital cycle.
5. Production Cycle:
 Longer production cycles may tie up capital in inventory, impacting
working capital requirements.
6. Demand Fluctuations:
 Changes in customer demand affect inventory levels and,
consequently, working capital needs.
7. Technological Changes:
 Technological advancements can impact production processes,
affecting inventory turnover and working capital requirements.
8. Economic Conditions:
ns:
 Economic conditions influence customer spending and credit
availability, impacting accounts receivable and, consequently,
working capital.
9. Inflation:
 Inflation affects the cost of raw materials and may impact the overall
cost structure, influencing working capital needs.
10.Management Policies:

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 Management decisions regarding inventory levels, credit terms, and
collection policies directly impact working capital
capital efficiency.
11.Regulatory Environment:
 Compliance with regulatory requirements can impact the availability
and cost of working capital.
12.Global Factors:
 Companies operating globally may face currency exchange rate
fluctuations, affecting working capital requirements.
Importance of Effective Working Capital Management:
1. Liquidity: Ensures there is enough cash to cover day-to-day
day day expenses.
2. Operational Efficiency: Facilitates smooth business operations and reduces
the risk of disruptions.
3. Cost Control: Minimizes the cost of holding excessive inventory or relying
heavily on short-term
term financing.
4. Profitability: Efficient working capital management contributes to improved
profitability.
5. Investor Confidence: Demonstrates prudent financial management,
enhancing
ng investor confidence.
Effective working capital management is vital for maintaining financial health and
sustaining business operations. Regular monitoring and adjustments based on internal
and external factors are crucial for optimizing working capital.

………………………

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