NAME- AKANSHA BABURAO NEBAPURE

ROLL NO – 2314107681
PROGRAMME – BACHELOR OF BUSINESS
ADMINISTRATION (BBA)
SEMISTER- III
COURSE NAME-FINANCIAL MANAGEMENT
COURSE CODE-DBB2104
Ans- 1

An organization's financial manager performs a number of vital duties that fall into the
following general categories:
1.Planning and Analysis of Finances:
● Creating and overseeing the organization's budget is known as budgeting.
● Forecasting is the process of estimating future financial results from past performance
and market trends.
● Financial Reporting: To convey the organization's financial situation, financial
statements and reports are prepared.
2. Management of Investments:
● Capital Budgeting: Assessing and choosing assets with a lengthy lifespan.
● Portfolio management is the process of overseeing an organization's investments in
order to reduce risks and maximize profits.
3.Making Financing Decisions:

● Capital Structure: Choosing the ideal ratio of internal funding, equity, and debt.
● locating and obtaining capital from a range of sources, including bonds, loans, and
equity finance.

4.Management of Cash Flow:

● Managing the organization's liquidity involves making sure it has adequate cash on
hand to cover its immediate liabilities.
● Predicting inflows and outflows of cash to keep optimal cash levels is known as cash
flow forecasting.

5.Risk Control:

● Financial risk assessment is the process of determining and evaluating various financial
risks, including operational, credit, and market risks.
● Risk mitigation refers to the application of techniques, like insurance or hedging, to
lessen identified hazards.

6.Control of Costs:

● Expense management is keeping an eye on and reining down organizational spending

to keep costs under control.
● Cost analysis is examining expenses to identify areas where they might be cut without
sacrificing effectiveness or quality.

7.Planning Strategically:

● Financial Strategy: Creating long-term financial plans that complement the overarching
objectives of the company.
● Assessment and supervision of prospective mergers, acquisitions, and divestitures.

8. Adherence to Regulations:
 ● Regulation Adherence: Making sure the company abides by financial laws, rules, and
guidelines.
Internal Controls: Enforcing and upholding internal controls to protect resources and
guarantee truthful financial reporting.

Ans-2

To calculate the present value (PV) of future cash flows, we use the formula:
The present value formula is PV = FV/(1 + i) n where PV = present value, FV = future value, i
= decimalized interest rate, and n = number of periods.
Let's calculate the present value for each cash flow:
1 – 10000/(1+0.10)^1 = 9091

2 – 20000/(1+0.10)^2 = 16528

3 - 30000/(1+0.10)^3 = 22539

4 - 40000/(1+0.10)^4 = 27320

5 - 50000/(1+0.10)^5 = 31045
Year Cash Flow Discount Factor Present Value (₹)
(1/(1+r)^n)
1 10000 0.909 9091
2 20000 0.826 16528
3 30000 0.751 22539
4 40000 0.683 27320
5 50000 0.620 31045
TOTAL PV 106423

Ans-3

To calculate the cost of equity,

a) Cost of Equity with Growing Dividends
For growing dividends, we use the Gordon Growth Model (also known as the Dividend
Discount Model):
• P=D1/r-g

• where: P=Current stock price

• g=Constant growth rate expected fordividends, in perpetuity
r=Constant cost of equity capital for thecompany (or rate of return)
• D1=Value of next year’s dividends
Given:
• The share price Po=100+10=110(including 10 premium)
• The expected dividend D1=15% of the face value (i.e. D1=15%×100=15)
• The growth rate g= 8% or 0.08
 Now, put these values into the formula:

Ke = 15/110+0.08

=0.1364+0.08=0.2164.

So, the cost of equity with growing dividends is approximately 21.64%.

b) Cost of Equity with Constant Dividends

For constant dividends, the cost of equity is calculated using:
Ke = D/Po
where:
• D is the constant dividend,
• Po is the current price of the share.
Given:
• The share price P0=110
• The constant dividend D=15.
Now, put these values into the formula:
Ke= 15/110
= 0.1364
So, the cost of equity with constant dividends is approximately 13.64%

Ans-4

Short-Term Sources of Finance

Short-term financing sources sometimes have a repayment period of less than a year and are
used to cover urgent operational needs. Typical short-term sources consist of:

Trade Credit:

● Suppliers enable the company to make purchases now and settle payments later.
● Benefits: Easy to obtain, no immediate financial outlay.
● Drawbacks: Missed out on cash discounts and hefty interest rates if payments are not
made on schedule.

Bank Overdraft:

● An arrangement whereby a bank permits a company to take out more cash than it has
in its account.
● Benefits: Fast and flexible money access.
● High borrowing rates and demand repayment are drawbacks.

Short-Term Loans:

● Bank or financial institution loans that must be returned within a year are described.
 ● Advantages: Generally fast clearance; can be customized to meet individual needs.
● Cons: Interest expenses and the requirement to offer collateral or security.

Commercial Paper:

● An instrument of short-term, unsecured debt that a company issues.

● Benefits include variable maturity dates and interest rates that are lower than those of
bank loans.
● Limitation to sizable, creditworthy companies and the possibility of not being able to
roll over debt are drawbacks.

Factoring:

● Selling accounts receivable at a discount to a third party, or factor.

● Pros: Less credit risk and instant cash flow.
● Cons: Value of some receivables is lost, which could harm relationships with
customers.

Long-Term Sources of Finance

Investments that will benefit the company over a longer period of time—typically more than a
year—are funded by long-term sources. Typical long-term sources consist of:

Finance for Equity:

● Description: Selling firm shares to raise money.

● Benefits: No repayment obligations and no interest expenses.
● Drawbacks: Possible loss of control and dilution of ownership.

Long-Term Loans:

● Bank or financial institution loans that have a longer than one-year repayment schedule
are described.
● Benefits include set payback terms and fixed interest rates.
● Cons: High interest rates, collateral requirements, and restrictive covenants.

Bonds and Debentures:

● Long-term debt products that investors are offered.

● Benefits: Fixed interest rates, potential for significant raises.
● Cons: Need for creditworthiness, interest expenses, and repayment obligations.

Retained Earnings:

● Reinvested profits back into the company as opposed to paying out dividends to
shareholders.
● Benefits: No commitment for repayment and no dilution of ownership.
● Cons: Only the company's profitability and opportunity cost are negative aspects.

Leasing:
 ● Description: Hiring instead of buying assets.
● Benefits include tax advantages, no high upfront costs, and cash flow preservation.
● Cons: No asset ownership and higher long-term costs.

Venture Capital:

● Investor-provided funds for start-ups and small enterprises with promising growth
prospects.
● Benefits: Significant sums of money, priceless contacts, and experience.
Drawbacks include high performance expectations, dilution of ownership, and pressure to
succeed.

Ans-5

Walter’s formula for the valuation of equity shares considers the relationship between the
company's return on investment (r) and the cost of equity (ke). The formula is given by:

P = D + (E-D) ( r/k ) / k

Here,
P = The value of the share price on every equity (price per equity share)
D = The dividend value on every share (dividend per share)
E = The value of earning on every share (earnings per share)
(E-D) = The value that comes after subtracting the dividend of share from earning (retained
earnings per share).
r = The value of return on every investment (rate of return on investments)
K = It is the cost of equity.
Given:
• r for X Ltd = 12%, Y Ltd = 8%, Z Ltd = 10%

• Ke=10% for all companies

• E=Rs.100
We need to compute the value of an equity share for dividend payout ratios of 0%, 20%, and
40%.
1. Dividend Payout Ratio = D= 0%*100=0
2. Dividend Payout Ratio = D= 20%*100=20
3. Dividend Payout Ratio = D= 40%*100=40
Now let's calculate the value of an equity share for each company under these dividend payout
ratios.
a) Dividend Payout Ratio = 0%
For D=0: 0+(r*(E-0)/Ke)) = r*E/Ke
b) Dividend Payout Ratio = 20%
For D=20: (20+(r*(E-20))/Ke
c) Dividend Payout Ratio = 40%
For D=40: (40+(r*(E-40))/Ke)
Let's calculate these values.
Values of Equity Shares for X Ltd, Y Ltd, and Z Ltd using Walter’s Formula
Given the following parameters:
• Return on investment (r)

• Cost of equity (ke)

• Earnings per share (E)
X Ltd (r = 12%, ke = 10%, E = Rs. 100):
1. Dividend Payout Ratio = 0%: P= 0+(0.12*(100-0))/0.10 = 120
2. Dividend Payout Ratio = 20%: P= 20+(0.12*(100-20))/0.10 = 115.99
3. Dividend Payout Ratio = 40%: P= 40+(0.12*(100-40))/0.10 = 111.99
Y Ltd (r = 8%, ke = 10%, E = Rs. 100):
1. Dividend Payout Ratio = 0%: P = 0+(0.08*(100-0))/0.10 = 80
2. Dividend Payout Ratio = 20%: P= 20+(0.08(100-20))/0.10 = 84
3. Dividend Payout Ratio = 40%: P= 40+(0.08*(100−40))/0.10= 88
Z Ltd (r = 10%, Ke = 10%, E = Rs. 100):
1. Dividend Payout Ratio = 0%: P= 0+(0.10*(100−0))/0.10 = 100
2. Dividend Payout Ratio = 20%: P=20+(0.10*(100−20))0.10 = 100
3. Dividend Payout Ratio = 40%: P=40+(0.10*(100−40))/0.10 = 100
Summary of Share Values
• X Ltd:

o 0% payout ratio: ₹120.00

o 20% payout ratio: ₹116.00
o 40% payout ratio: ₹112.00
• Y Ltd:
o 0% payout ratio: ₹80.00
o 20% payout ratio: ₹84.00
o 40% payout ratio: ₹88.00
• Z Ltd:
o 0% payout ratio: ₹100.00
o 20% payout ratio: ₹100.00
o 40% payout ratio: ₹100.00

Ans-6

Working capital management refers to the administration and control of a company's short-
term assets and liabilities to ensure the company maintains sufficient liquidity to carry out its
activities successfully and satisfy its short-term obligations. Effective working capital
management comprises managing inventories, accounts receivable, accounts payable, and cash
to enhance a firm's operating efficiency and profitability.

Factors Affecting Working Capital Requirements

Nature of Business:
Production vs. Provision: Because they must keep inventories of finished goods, work-in-
progress, and raw materials, manufacturing companies usually need more working capital than
service companies, which may need less because they don't keep large inventories.

Business Cycle:
Economic Situation: In times of economic expansion, companies could require additional
working capital to keep up with demand. On the other hand, working capital requirements may
drop during a recession.

Production Cycle:
Length of Production: Before they can sell their goods and turn a profit, businesses with longer
production cycles need to fund labor, raw materials, and overhead expenditures. This requires
more working capital.

Credit Policy:
Receivables Management: A company that extends extended credit terms to its clients may
have larger amounts of accounts receivable and, as a result, a greater need for working capital.
On the other hand, tighter terms for borrowing can lower the requirement for working capital.

Inventory Management:
Inventory Levels: Higher inventory levels require more working capital. Working capital
requirements can be lowered by using effective inventory management techniques, such as
just-in-time (JIT) systems, which can lessen the need for excess inventory.

Efficiency of Operation:
Process Optimization: Working capital requirements can be decreased by shortening the time
needed to transform raw resources into completed goods and sell them. This can be achieved
through efficient operations and simplified procedures.

Terms of Supplier:
Accounts Payable Management: Working capital requirements can be decreased by having
suppliers grant favorable credit terms, which might lessen the demand for cash right now. Strict
payment conditions, on the other hand, may result in a greater requirement for working capital.

Growth and Expansion: As a business expands, it frequently needs more working capital to
meet the demands of growing inventory, accounts receivable, and other operational
requirements.