Directorate of Online Education

ASSIGNMENT

NAME JASVIR SINGH

ROLL NUMBER 2214503044
SESSION NOV 2023
PROGRAM BACHELOR OF BUSINESS ADMINISTRATION (BBA)
SEMESTER III
COURSE CODE & NAME DBB2104 – FINANCIAL MANAGEMENT
CREDITS 4
NUMBER OF ASSIGNMENTS & 02
MARKS 30 Marks each

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.

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 discount 10 10
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 different 10 10
component of cost of capital with example.

Q. Assignment Set – 2 Marks Total Marks

No Questions
4. What are 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. What is Working capital management? Discuss various factors that affect 3+7 10
working capital requirement?
 Directorate of Online Education

ASSIGNMENT SET-1
QUESTION:01
ANSWER:
The person in charge of handling the duties of a financial department is known as the finance manager.
Let's talk about the primary responsibilities of financial managers.
Raising of funds: This is an important function that the finance manager plays. He needs to
arrange to raise the necessary finances. Finances can be divided into two categories: debt and
equity. A finance manager must speak with the bank and/or other financial institutions or act
as a mediator in order to raise the first kind of fund. A finance manager must work with
merchant bankers to raise the second kind of fund by inviting the public to subscribe to its
fixed deposits, buy shares or debentures, and other means.
The manager bears the responsibility of securing cash by maintaining flexibility while
balancing the risk associated with various financing sources.
A financial manager plays an important role to the upkeep of the following various forms of
financing:
1. Debt Finance: A company may borrow money from banks, other financial
institutions, or private individuals for short-term working capital needs as well as
long-term investment purposes with the goal of repaying the money plus interest. The
person or organisation that made the loan becomes a creditor. Generally speaking,
debt financing has limitations that can hinder businesses from pursuing opportunities
outside of their primary business.
2. Equity Finance: Using equity financing, a company can also raise capital to meet its
needs for working capital and investments. In order to obtain funds, equity financing
involves sharing ownership rights.
3. Deployment of Fund: There will always be a variety of demands for the allocation of
resources. Based on the necessity and significance of the finances, the finance
manager makes financial decisions after conferring with managers of various
departments, including production, R&D, marketing, human resources, etc. A finance
manager may occasionally have to make decisions about how to allocate money to
various assets in accordance with the top management's investment choices.
4. Controlling: The finance manager's responsibility is to determine where and how
much funding is required, and then to make sure that the funding is being acquired
and allocated in accordance with the plan. We refer to this function as controlling.
The Return on Investment (ROI) serves as the assessment's overall metric. Finance
managers employ a variety of control strategies, including internal audit, cost control,
ratio analysis, and break-even analysis.
 Directorate of Online Education
5. Profit Planning: Another duty of a financial manager is profit planning. Pricing,
costs, product selection, and output volume are all up for debate. Profit planning is
essential to maximising the investment.
Risk and Return trade off: Financing and investment decisions need finance managers to strike the correct
balance between returns and risks. If a company is taking out a large loan to fund its operations, the profits
from those operations must be used to settle the debt, which includes principal and interest.
There is some risk associated with every investment. Therefore, the finance manager bears the task of
determining the optimal investment opportunity while taking the investment's burden into account.

Question:02
Answer:
Calculation of the present value of the following cash flows assuming a discount rate of 10%
per annum.
Discount rate 10%
Year Cash flows [₹]
1 10000
2 20000
3 30000
4 40000
5 50000

Cash Flow PV Factor at 10 % Present Value

10000 0.909 8263
20000 0.826 16520
30000 0.751 22530
40000 0.683 27320
50000 0.620 31000
Total Present Value 105633
 Directorate of Online Education
Question: 03
Answer:

Significance of Cost of Capital & different component.

Financial decisions involving investments, financing, credit decisions, etc. typically involve
the concept of cost of capital. Let's analyse the importance for each of them.
a) Investment Decisions: A company utilises the cost of capital to discount the
projected cash flows from the project over its lifetime when evaluating an investment
opportunity. Even in cases when the project selection process employs internal rate of
return (IRR) criteria, the decision-making process compares the IRR to the total cost
of capital. The project should be approved if the internal rate of return (IRR) exceeds
the cost of capital; if not, it should be denied.

b) Financing Decision: When choosing a funding source for the investment, cost of
capital is a major consideration. The financial manager makes use of the sources with
the lowest costs attached. By doing this, the company will be able to optimise
shareholder returns while simultaneously lowering its overall cost of capital.

c) Creating the Company's Credit Policy: Costs and benefits are the basis for working
capital decisions in finance. The finance manager should take the cost of financing
into account when creating the company's credit policy. This includes the cost of
credit (receivables) as well as the advantages of giving clients credit.
 Directorate of Online Education
Assignment Set – 2

Question:04
Answer:
The source of finance is a source of funding that enables a business to meet its
operating needs. This includes fixed assets, short-term working capital, and other
long-term investments.

Long term Source of Finance: A company's long-term capital or long-term

financing serves as its financial cornerstone. It is significant because, until the
company reaches the income-generating stage, it is the only source of funding. It is
necessary for both core working capital and fixed asset financing. Long-term loans
have terms of at least five years.
1. Equity Shares: The most common form of long-term funding is the issuance of
equity, often known as common shares. It stands for ownership capital, which is a
part of the risk and gain that come with owning businesses. Because ordinary
shares have no maturity date, they can be used as a permanent source of capital.
2. Preference shares: Preference share capital is defined under the Companies Act
of 2013 as that portion of share capital that has preferential rights regarding.
(i) the payment of dividends at a certain rate and
(ii) the return of capital upon the winding up of the business. It does not impose
any obligations because preference dividends are only paid out at predetermined
rates and only in the event that there are profits.
3. Retained earnings/Ploughing back of profit: This kind of financial management
prevents the company's whole earnings from being paid out as dividends to its
shareholders. The business keeps a portion of the profit. Ploughing back of profits
is the practice of keeping profits for the business and using them year after year.
4. Debentures/Bonds: Debentures are a way for a business to raise capital. A
debenture is a document bearing the company's common seal that acknowledges a
debt. In India, a bond is an alternate name for debentures. In actuality, long-term
or everlasting debt is referred to as debentures.
5. Term loans: Long-term and medium-term debt can be obtained through term
loans. They are typically acquired in India to finance significant project
expansions, modernization, diversification, or working capital margin. Project
finance is another name for this type of financing. A legal agreement between the
lending institution and the borrower serves as the foundation for the granting of a
term loan.
6. Special financial institutions (SFIs): In order to facilitate the nation's rapid
industrial development, the Government of India established a number of special
financial institutions in 1948 with the adoption of the first industrial policy
decision. These organisations provide medium- and long-term funding to
industries in order to meet their needs. These loans have a set interest rate and
require repayment of the loan balance over a number of years in instalments. The
primary goal of SFIs, which lend money to businesses, is to stimulate the
economy.
 Directorate of Online Education
Short Term Source of Finance: Short-term financing options are available for a
brief period of time. Bank working capital and capital funds, public deposits,
commercial papers, factoring of receivables, and other financial instruments are
examples of short-term financing. These funding sources are available for use for
a year or less.

1. Trade credit: With trade credit, purchases of items can be made with instant
payment. Business organisations are typically granted trade credit, according
to the industry norms on trade and competition, as well as the buyer-supplier
dynamic. Being a major component of nearly one-third of all short-term credit,
it is among the most widely used types of working capital financing.
2. Retained earnings/Ploughing back of profit: This kind of financial
management prevents the company's whole earnings from being paid out as
dividends to its shareholders. The business keeps a portion of the profit.
Ploughing back of profits is the practice of keeping profits for the business and
using them year after year.
3. Debentures/Bonds: Debentures are a way for a business to raise capital. A
debenture is a document bearing the company's common seal that
acknowledges a debt. In India, a bond is an alternate name for debentures. In
actuality, long-term or everlasting debt is referred to as debentures.
4. Term loans: Long-term and medium-term debt can be obtained through term
loans. They are typically acquired in India to finance significant project
expansions, modernization, diversification, or working capital margin. Project
finance is another name for this type of financing. A legal agreement between
the lending institution and the borrower serves as the foundation for the
granting of a term loan.
5. Special financial institutions (SFIs): In order to facilitate the nation's rapid
industrial development, the Government of India established a number of
special financial institutions in 1948 with the adoption of the first industrial
policy decision. These organisations provide medium- and long-term funding
to industries in order to meet their needs. These loans have a set interest rate
and require repayment of the loan balance over a number of years in
instalments. The primary goal of SFIs, which lend money to businesses, is to
stimulate the economy.
6. Accrued expenses: An obligation that a business has to pay for services it has
already received is represented by an incurred expense. They thereby provide
a source of funding that is interest-free.
When employees provide services, the company becomes liable for accrued
wages and salaries. However, they are paid thereafter, typically in instalments
of one month. The length of the payment period will increase with the amount
of money contributed by the employees.
7. Deferred income: Payments received for goods and services that a business
has committed to provide at a later time are referred to as deferred income
because they boost the business's liquidity and cash assets, which serve as a
source of funding.
 Directorate of Online Education
8. Commercial Paper: The company issues commercial paper in the form of
unsecured promissory notes in order to raise short-term capital. To raise short-
term money, only large enterprises with strong financial standing and a high
credit rating are eligible to issue commercial papers.

9. Letter of Credit: Providers, particularly those based abroad, require the buyer
to guarantee that a bank will cover the costs in the event that they are unable to
fulfil their commitments. By means of a letter of credit arrangement, this is
guaranteed. To make it easier for a consumer to buy items, a bank opens an
L/C in his name. The bank pays the supplier if the consumer fails to pay them
within the credit period. Through this arrangement, the bank assumes the
supplier's risk. The customer is charged by the bank for accessing the credit
letter. It is a financial agreement that is indirect.

10. Bill Discounting: It is the most traditional and straightforward type of

funding. A financial intermediary purchases bills resulting from a commercial
transaction at a discount. The financial intermediary releases the funds for the
firm's immediate use in exchange. The discount represents the intermediary
profit. It can also wait until the bill matures or further rediscount it.

Question:05:
Answer:
value of an equity shares of each of companies applying Walter’s formula when the dividend
pay-out ratio is (a) 0%, (b) 20%, (c) 40%,
The details regarding three companies as follows;
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

Calculation at next page:

 Directorate of Online Education

Question:06
Answer:
Working capital Management: Working capital management (WCM) is the effort made by
management to effectively manage current assets and current liabilities. It is the distinction
between current liabilities and current assets. Put differently, effective working capital
management (WCM) refers to guaranteeing that the company has enough cash on hand to
cover short-term loans and operating expenses.
Viewed in a broader context, WCM include WC financing in addition to current asset and
current liability management. Therefore, it becomes essential to prepare for WC at the lowest
possible cost and to use capital borrowing effectively.

Factors affecting working capital requirements:

1. Length of the operating cycle: The number of days required for everything from
material procurement to customer sales collection is known as the operating cycle
length. Days or months might be used to measure this. The working capital
requirements are directly correlated with the operational cycle length. Therefore, a
longer time frame will draw more money.
 Directorate of Online Education

2. Inventory Management Policy: Inventory management can be done in a number of

ways. A company must select the option that best meets its requirements, taking into
account the time required to deliver a product to a customer.
The working capital of the company will be impacted by the policies and procedures
it implements.

3. Bargaining power with suppliers: The companies to whom the firm outsources
services or purchases materials are the predecessors in the supply chain. After
additional processing and refinement, these inputs can be offered to the company's
customers. Typically, the company bargains with these suppliers or predecessors to
get a better deal with more advantageous terms.

4. Scale of operations: This refers to the firm's size. When a business operates on a
large scale, it signifies that it has invested more capital than a small business, either in
the form of a larger asset base or installed capacity.