Unit 1
What are the primary objectives of Financial Mangement?
1. Profit Maximisation
2. Wealth Maximisation
Differentiate between Capital Structure and Financial Structure
Capital Structure- Long Term Sources
Financial Structure- Long + Short
Difference between Mutually Exclusive and Contingent Decision
Mutually Exclusive: Acceptance of one leads to rejection of other
Contingent: cceptance of one leads to acceptanceof other
Types of Working Capital Management
Cash
Inventory
Receivables
Difference between Discounting and Compounding
Discounting: PV from FV
Compounding FV from PV
Define Overcapitalization with an example
Over-capitalization refers to that state of affairs where earnings of the corporation do not justify the amount of capital invested in the business. In other words, an over-capitalized company earns less than what it should have earned at fair rate of return on its total capital.
How would you calculate Payback period method. Describe with an example
payback period can be computed by dividing cash outlay by the annual cash inflow
Formula of EOQ model
under root 2AO/C
State 3 Reasons for Time Preference of Money
•Future Uncertainties
•Preference for Present Consumption
•Reinvestment Opportunities
Differentiate Operating and Financial Leverage
Financial : relationship between EBIT and EPS.
Operating: between Sales revenue and EBIT
Formula to calculate WACC
WACC= ke*w1+ Kd* w2+ Kp*W3
How would you compute Optimum cash balance with the help of Baumol model?
where transaction cost meet holding cost
Role of Financial Manager
•Fund Raising: Estimation of Capital Requirement, Determination of Capital Composition, Choice of Sources of Funds
•Funds Allocation: Investment of Funds (Long-term), Management of Cash, Management of Receivables, Management of Inventory
•Profit Planning: Disposal of Surplus
Describe Assumptions of MM model of Capital Structure
1.The capital markets are perfect and complete information is available to all the investors free of cost.
2.Investors are rational and well informed about the risk return of all the securities.
3.All the investors have same expectations about the expected future earnings.
4.The personal leverage and corporate leverage are perfect substitutes.
5.Dividend Payout Ratio is 100%
6.There are no corporate taxes (However, this assumption was relaxed later)
How IRR is better than NPV
IRR is useful when comparing multiple projects against each other or in situations where it is difficult to determine a discount rate.
What is cost of delinquency in RM?
Cost of Default