FINANCIAL MANAGEMENT (DBB2104)

ASSIGNMENT

ARJUN VISWAN
SEMESTER.: III
ROLL NO.: 2214507873
BACHELOR OF BUSINESS ADMINISTRATION (BBA)
MANIPAL UNIVERSITY

Assignment Set – 1
1. Explain the functions of a financial manager in any organization.
The financial manager in an organization plays a critical role in managing the financial aspects of the
business to achieve its objectives and maximize shareholder wealth. The functions of a financial manager
encompass a wide range of activities that involve planning, organizing, directing, and controlling financial
resources. Here are the key functions of a financial manager:
1. Financial Planning:
 Develops financial plans that align with the organization's overall strategic goals. This includes
short-term and long-term financial planning to ensure the availability of funds for various
activities.
2. Capital Budgeting:
 Evaluates investment opportunities and proposes capital expenditure projects. Uses financial
analysis techniques to assess the feasibility and profitability of potential investments.
3. Risk Management:
 Identifies and analyzes financial risks faced by the organization, including market risks, credit
risks, and operational risks. Develops strategies to mitigate these risks and ensures the
organization's financial stability.
4. Capital Structure Management:
 Determines the optimal capital structure by balancing debt and equity to minimize the cost of
capital. Evaluates the impact of financing decisions on the organization's overall financial
health.
5. Cash Flow Management:
 Manages the organization's cash flow to ensure there is enough liquidity to meet short-term
obligations. Plans for cash needs, monitors cash inflows and outflows, and makes
recommendations to improve cash management.
6. Financial Reporting and Analysis:
 Prepares financial statements, including income statements, balance sheets, and cash flow
statements. Conducts financial analysis to assess the company's performance, profitability, and
financial health.
7. Financial Control:
 Implements internal controls to safeguard assets and ensure the accuracy and reliability of
financial reporting. Monitors financial performance against budgeted targets and takes
corrective actions as needed.
8. Cost Management:
 Manages and controls costs to improve efficiency and profitability. Analyzes cost structures,
identifies cost-saving opportunities, and implements cost-effective measures.
9. Working Capital Management:
  Manages the organization's working capital, including inventory, accounts receivable, and
accounts payable. Aims to optimize the balance between liquidity and profitability.
10. Dividend Policy:
 Formulates and implements the company's dividend policy. Balances the distribution of profits
to shareholders with the need for retained earnings for reinvestment in the business.
11. Financial Forecasting:
 Conducts financial forecasting to anticipate future financial needs and trends. Helps in
developing strategies to address potential challenges or opportunities.
12. Compliance and Governance:
 Ensures compliance with financial regulations and governance standards. Keeps abreast of
changes in financial reporting requirements and ensures the organization adheres to legal and
regulatory obligations.
13. Investor Relations:
 Manages relationships with investors, analysts, and other stakeholders. Communicates
financial performance, strategies, and future plans to build trust and confidence among
investors.
14. Treasury Management:
 Manages the organization's treasury functions, including cash management, investment
management, and risk management related to currency and interest rate exposure.
15. Financial Negotiations:
 Engages in financial negotiations, such as securing loans, negotiating terms with creditors, and
managing relationships with financial institutions.
The financial manager's functions are dynamic and interrelated, requiring a holistic approach to financial
management to ensure the organization's sustained growth and success. Effective financial management
contributes to the overall strategic and operational objectives of the organization.

2. 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

1st Year cash inflow – Rs 10,000

PV factor at 10% = 1/1.10 = 0.909
Present Value = 10,000* 0.909 = 9,090

2nd Year – Cash inflow – Rs 20,000

 PV Factor at 10% = 0.909 /1.10 = 0.826
Present Value = 20,000* 0.826 = 16,520

3rd Year Cash inFlow – Cash Flow -Rs 30,000

PV factors at 10% = 0.826/1.10 = 0.751
Present Value = 30,000* 0.751= 22,530

4th Year – Cash inFlow – Rs 40,000

PV Factors at 10% = 0.751/1.10 = 0.683
Present Value = 40,000 * 0.683= 27,230

5th Year – Cash – Rs 50,000

PV Factors at 10% = 0.683/1.10= 0.621
Present Value = 50,000* 0.621 = 31,050

Year Cash Flow PV Factor at 10% Present Value

1 10,000 0.909 9090
2 20,000 0.826 16520
3 30,000 0.751 22530
4 40,000 0.883 27320
5 50,000 0.621 31050

3. Explain the significance of the concept of cost of capital. Discuss different component of cost of capital
with example.
Significance of the Concept of Cost of Capital:
The concept of cost of capital is crucial for financial decision-making within a company. It represents the
overall cost that a company incurs to obtain funds for its operations and growth. Understanding the cost
of capital is significant for the following reasons:
1. Investment Appraisal:
 Helps in evaluating the viability of investment projects. If the return on an investment is less
than the cost of capital, it may not be a sound financial decision.

2. Capital Budgeting:
  Guides capital budgeting decisions by providing a benchmark for comparing the expected
returns from projects with the cost of capital. Projects that generate returns higher than the
cost of capital contribute positively to shareholder wealth.
3. Financial Structure Decision:
 Assists in determining the optimal capital structure by balancing the use of debt and equity.
Companies aim to minimize the overall cost of capital to maximize profitability.
4. Setting Financial Goals:
 Influences financial strategies and goals. Companies may set financial objectives based on
achieving a specific return that exceeds the cost of capital.
5. Stock Valuation:
 Affects stock valuation, as investors expect returns that exceed the cost of capital. The market
value of a company's stock is influenced by the perception of its ability to generate returns
above the cost of capital.
Components of Cost of Capital:
1. Cost of Debt (Kd):
 The cost associated with raising funds through debt. It is the interest rate paid to debt holders.
The formula for the cost of debt is Kd=I/P , where I is the annual interest payment, and P is the
principal amount.
Example: If a company issues bonds with an annual interest payment of ₹5,000 and a face value of
₹100,000, the cost of debt is 5/100,000 = 0.05% or 5%
2. Cost of Equity (Ke):
 The return required by equity investors to compensate for the risk associated with holding the
company's stock. Common methods to calculate the cost of equity include the Dividend
Discount Model (DDM) or the Capital Asset Pricing Model (CAPM).
Example: If a company's stock is expected to pay dividends of ₹2 per share, and the stock price is ₹50, the
cost of equity using DDM is 250/50 = 0.4 or 4%.
3. Cost of Preferred Stock (Kp):
 The cost associated with raising funds through preferred stock. It is the dividend rate paid to
preferred stockholders. The formula for the cost of preferred stock is Kp = D/P, where D is the
annual preferred dividend, and P is the market price per preferred share.
Example: If a company issues preferred stock with an annual dividend of ₹4 per share and a market price
of ₹80 per share, the cost of preferred stock is 4/80 = 0.05 or 5%.
4. Cost of Retained Earnings (Kr):
  The opportunity cost of using retained earnings for investment rather than distributing them
to shareholders. It is the return shareholders could have earned if the funds were paid out as
dividends.
Example: If a company has a retention ratio of 60%, and the return on equity (ROE) is 15%, the cost of
retained earnings is 0.60×0.15=0.09 or 9%.
5. Weighted Average Cost of Capital (WACC):
 The weighted average of the costs of all sources of capital, taking into account the proportion
of each source in the capital structure.
Example: If a company has a capital structure of 40% debt, 50% equity, and 10% preferred stock, and the
costs of debt, equity, and preferred stock are 5%, 10%, and 6% respectively, the WACC is
0.40×0.05+0.50×0.10+0.10×0.06+0×00.40×0.05+0.50×0.10+0.10×0.06+0×0.
Understanding and calculating the cost of capital components helps companies make informed financial
decisions, ensuring that capital is acquired and utilized efficiently to maximize shareholder value.

Assignment Set – 2

4. What are the sources of finance? Discuss the short term and long term sources of finance for the firm.
Sources of finance refer to the various means through which a company raises funds to meet its capital
requirements. These sources can be categorized into two main types: short-term sources and long-term
sources.
1. Short-Term Sources of Finance:
Short-term financing is used to meet the working capital needs of a business, covering day-to-day
operational expenses and short-term liabilities. Short-term sources of finance include:
 Trade Credit:
 Delaying payment to suppliers within agreed-upon credit terms.
 Bank Overdraft:
 Allowing the business to withdraw more money than it has in its account, up to a specified
limit.
 Commercial Paper:
 Short-term unsecured promissory notes issued by large corporations to raise funds in the
money market.
 Short-Term Loans:
 Borrowing money for a short period from banks or financial institutions to meet immediate
needs.
 Factoring:
  Selling accounts receivable to a third party (factor) to get immediate cash.
 Accruals:
 Accumulated or accrued expenses that are settled at a later date, such as wages and taxes.
 Trade Finance:
 Instruments like letters of credit and bills of exchange used in international trade transactions.
2. Long-Term Sources of Finance:
Long-term financing is used for capital investment, expansion, and projects with a longer payback period.
Long-term sources of finance include:
 Equity Shares:
 Selling ownership shares in the company to investors, providing them with a claim on the
company's profits and voting rights.
 Preference Shares:
 Offering shares that have a fixed dividend rate and priority over common shareholders in case
of liquidation.
 Debentures/Bonds:
 Issuing long-term debt securities that pay fixed interest over a specified period. Debentures
are unsecured, while bonds may be secured by assets.
 Term Loans:
 Obtaining loans from financial institutions or banks with a specified repayment period and
interest rate.
 Venture Capital:
 Investment by venture capitalists in exchange for equity, often provided to startups and high-
growth companies.
 Private Placements:
 Selling securities directly to institutional investors or a small group of investors without going
through a public offering.
 Leasing:
 Acquiring the use of assets, such as machinery or equipment, by making regular lease
payments over an agreed-upon period.
 Retained Earnings:
 Using profits retained by the company for reinvestment in business operations and growth.
 Government Grants and Subsidies:
 Financial assistance provided by the government to support specific projects, industries, or
research initiatives.
  Convertible Securities:
 Securities, such as convertible bonds or preference shares, that can be converted into
common equity after a specified period.
The choice of short-term or long-term sources depends on the nature and purpose of the financial
requirements, as well as the financial strategy and risk tolerance of the company. Balancing short-term
and long-term financing is crucial for maintaining financial stability and meeting both immediate and
future needs.

5. 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 ratio is (a) 0%, (b) 20%, (c) 40%,

p= D/Ke + r(E – D)/Ke / ke

P = Market Price per share

D = Dividend per share
r = Internal rate of return
E = Earnings per share
Ke= Cost of equity capital or capitalization rate

X. Ltd Y Ltd Z Ltd

a) When dividend pay-out ratio is 0% When dividend pay out ratio is When dividend pay out ratio is
0% 0%
0 0.12(100−0)/0.10 0 0
P= +
0.10 0.10 P= + P= +
0.10 0.10
0.12(100)/0.10 0. 8(100−0)/0.10 0.10 (100−0)/0.10
= 0+
0.10 0.10 0.10
= 0+ 1200 0. 8(100)/0.10 0.10 (100)/0.10
= 0+ = 0+
= 1,200 0.10 0.10
= 0+ 800 = 0+ 1000
= 800 = 1000
b) When divided pay-out ratio is 20% When dividend pay out ratio is When dividend pay out ratio is
20 % 20 %
20 0.12(100−20)/0.10 20 20
P= +
0.10 0.10 P= + P= +
0.10 0.10
0.12(80)/0.10 0. 8(100−20)/0.10 0.10 (100−20)/0.10
= 200+
0.10 0.10 0.10
= 200+960 0. 8(80)/0.10 0.10 (80)/0.10
= 200+ = 200+
= 1160 0.10 0.10
 = 200+640 = 200+800
= 840 = 1000

c) When dividend pay-out ratio is 40% When dividend pay-out ratio is When dividend pay-out ratio is
4 0 0.12(100−4 0)/0.10 40% 40%
P= +
0.10 0.10 40 40
P= + P= +
0.12(60)/0.10 0.10 0.10
= 400 +
0.10 0. 8(100−40)/0.10 0.10 (100−40)/0.10
7.2/0.10 0.10 0.10
= 400 +
0.10 0. 8(60)/0.10 0.10 (60)/0.10
= 400 + = 400 +
= 1120 0.10 0.10
48 /0.10 6/0.10
= 400 + = 400 +
0.10 0.10
= 400 + 480 = 400 + 600
= 880 = 1000

6. What is Working capital management? Discuss various factors that affect working capital requirement?
Working capital refers to the capital required by a company to finance its day-to-day operational
activities. Working capital management involves managing the balance between a company's short-term
assets and liabilities to ensure smooth and efficient operations. The goal is to maintain an optimal level of
working capital that allows the company to meet its short-term obligations while maximizing operational
efficiency and profitability.
Factors Affecting Working Capital Requirement:
Several factors influence the working capital requirements of a business. Understanding these factors is
essential for effective working capital management:
1. Nature of the Business:
 The industry and nature of business significantly impact working capital requirements. For
example, industries with long production cycles or extended credit terms may require higher
levels of working capital.
2. Seasonality:
 Businesses with seasonal variations in demand may experience fluctuations in working capital
needs. Retailers, for instance, may need more working capital during peak seasons to meet
increased customer demand.
3. Credit Policy:
  The credit terms extended to customers and the credit terms received from suppliers affect
working capital. A more lenient credit policy can increase receivables, while favorable credit
terms from suppliers can reduce payables.
4. Production Cycle:
 The length of the production cycle and the time it takes to convert raw materials into finished
goods impact working capital requirements. A longer production cycle may tie up more funds
in inventory.
5. Sales Growth:
 Rapid sales growth can strain working capital as increased sales often lead to higher
receivables and inventory levels. Companies need to manage this growth to avoid liquidity
challenges.
6. Supplier Relationships:
 The terms negotiated with suppliers, including payment terms and the ability to secure
favorable credit, influence working capital. Efficient supplier relationships can lead to better
payment terms.
7. Economic Conditions:
 Economic conditions, such as inflation and recession, can affect the availability and cost of
credit. In challenging economic times, access to financing may become more difficult,
impacting working capital.
8. Technological Changes:
 Technological advancements can influence the efficiency of inventory management and order
fulfillment. Adopting modern systems may improve working capital management by reducing
holding costs and enhancing order fulfillment.
9. Regulatory Environment:
 Regulatory changes, especially in areas like taxation and trade policies, can affect working
capital requirements. Companies need to adapt to regulatory changes that impact their
financial operations.
10. Management Policies:
 The policies set by management, such as the dividend payout ratio and the decision to retain
earnings, can impact the availability of internal funds for working capital.
11. Inflation:
 Inflation can affect the cost of goods sold, pricing, and interest rates, influencing the overall
working capital needs of a business.
12. Globalization:
  Companies engaged in international trade may face currency fluctuations and uncertainties,
impacting their working capital management strategies.
By carefully analyzing and managing these factors, businesses can optimize their working capital
management, ensuring liquidity, minimizing the cost of capital, and supporting overall operational
efficiency. Effective working capital management is vital for the financial health and sustainability of a
company.