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ASSIGNMENT FINANCIAL MANAGEMENT (MNGT 520) INSTRUCTIONS FOR PREPAIRING THE ASSIGNMENT 1. Last date of submitting the assignment is 10 th November, 2015. In case of late submission, ONE mark will be deducted for each day after the due date. 2. You can prepare the assignment using lecture notes, online sources or suggested text book at the end of the assignment. 3. You are asked not to give your assignment to other students because copying or transcribing may affect your marks adversely. 4. A good presentation of diagrams, figures and examples can enhance the quality of your assignment. 5. The materials of this assignment may be used in Final Exam. 6. There is no limit for pages. I need reasonable answers of all the questions. Questions: Question 1. Critically evaluate various approaches to the financial management. (Points 2) Question 2. What are the differences between fund flow and cash flow? (Points 2) Question 3. (a) Critically examine the advantages and disadvantages of equity shares. (Points 2) (b) Evaluate the overall view of debentures. (Points 2) Question 4. (a) What is optimum capital structure? (Points 1) (b) Compute the market value of the firm, value of shares and the average cost of capital from the following information. (Points 1) Net operating income Rs. 2, 00,000 Total investment Rs. 5, 00,000 Equity capitalization Rate: (a) If the firm uses no debt 10% (b) If the firm uses Rs. 25,000 debentures 11% (c) If the firm uses Rs. 4, 00,000 debentures 13% Assume that Rs. 5, 00,000 debentures can be raised at 6% rate of interest whereas Rs. 4, 00,000 debentures can be raised at 7% rate of interest. Question 5. A company has on its books the following amounts and specific costs of each type of capital. (Points 2) Type of Capital Debt Preference Equity Retained Earning Book Value Rs. 4,00,000 1,00,00 6,00,00 2,00,00 Market Value Rs. 3,80,000 1,10,00 9,00,000 3,00,000 13,00,000 Specific Costs (%) 5 6 15 13 16,90,00 Determine the weighted average cost of capital using: (a) Book value weights, and (b) Market value weights. Question 6. Distinguish the operating leverage from financial leverage. (Points 2) Question 7. Explain the factors affecting the dividend policy. (Points 2) Question 8. (a) A project costs Rs. 20, 00,000 and yields annually a profit of Rs. 3, 00,000 after depreciation @ 12% but before tax at 50%. Calculate the pay-back period. (Points 1) Profit after depreciation 3, 00,000 Tax 50% 1, 50,000 1, 50,000 Add depreciation: 20, 00,000 12.5 % 2, 50,000 (b) From the following information, calculate the net present value of the two projects and suggest which of the two projects should be accepted a discount rate of the two. (Points 1) Project X Rs. 20,000 5 years Rs. 1,000 Initial Investment Estimated Life Scrap Value Project Y Rs. 30,000 5 years Rs. 2,000 The profits before depreciation and after taxation (cash flows) are as follows: Year 1 Rs. 5000 20000 Project X Project Y Year 2 Rs. 10,000 10,000 Year 3 Rs. 10,000 5000 Year 4 Rs. 3000 3000 Year 5 Rs. 2000 2000 Note: The following are the present value factors @ 10% p.a. Year Facto r Question 9. 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 6 0.564 (a) An annuity is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the entire series does contain an annuity. Is this statement true or false? And Why? (Points 1) (b) Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds? (Points 1) BOOKS: 1 Brigham .F Eugene & Ehrhardt C. Michael , (2014) . Financial management theory and practce 14e , South Western CENGAGE learning , ISBN 13: 978-1111- 97221-9 2 Financial Management by C. Paramasivan and T. Subramanian, Publisher: New Age International Publisher, India, 3 Financial Management: Theory and Practice, By MICHAEL C. EHRHARDT and EUGENE F. BRIGHAM, 13th edition, SOUTH-WESTERN CENGAGAE LEARNING