Amity Campus

Uttar Pradesh
India 201303

ASSIGNMENTS
PROGRAM: MFC
SEMESTER-II
Subject Name
Study COUNTRY
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Student Name

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INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b)
c)
d)
e)

Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates and need to be submitted for
evaluation by Amity University.
f) The students have to attached a scan signature in the form.

Signature :
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( ) Tick mark in front of the assignments submitted

Assignment A
Assignment B
Assignment C

Financial Management
Assignment A
1. What is stock split, what are its advantages?
A stock split is a method to increase the number of outstanding shares by proportionately reducing the face
value of a share. A stock split affects only the par value and does not have any effect on the total amount
outstanding in share capital. If a company announces a 2 for 1 stock split, they are telling the investment
community they will be supplying shareholders with two shares of stock for every one share owned. There are
some very good reasons for a company to split its stock. As a stock rises in price over time, some investors may
become unwilling to pay such a high price for each share. This is more of a psychological barrier than a valuebased hurdle.
By splitting a stock, a company hopes to entice more investors to purchase the company's securities. This is
why many companies make announcements when the stock price approaches historical highs. The first step in
the process usually involves gaining approval from the company's board of directors and/or shareholders. Once
approved, the company will make a formal announcement, giving the exact date the split will occur. The holders
of stock on this record date are entitled to the split in shares. There are several possible combinations, 2 for 1
and 3 for 2 being the most common splits. In a 2 for 1 stock split, the company is stating that it will have 2
shares outstanding for every 1 share currently issued. Brealey & Meyers (2003), added that dividends per share,
earnings per share and all other per-share variables would be half their previous levels . For example Let us say
company A currently has 100 million shares outstanding and the company announces a 2 for 1 split. Let's also
assume that on the day before the split occurs, the company's stock closes at $50 per share. On the day of the
split, the company will have 200 million shares outstanding and the opening price should be around $25 per
share.
The reasons for splitting shares are:

To make shares attractive: The prime reason for effecting a stock split is to reduce the market price of a share
so as to make it more attractive to investors. Shares of some companies enter into higher trading zone making
them out of reach to small investors. Splitting the shares will place them in more popular trading range thus
providing marketability and motivating small investors to buy them.
Indication of higher future profits: Share split is generally considered a method of management
communication

to

investors

that

the

company

is

expecting

high

profits

in

future.

Higher dividend to shareholders: When shares are split, the company does not resort to reducing the cash
dividends. If the company follows a system of stable dividend per share, the investors would surely get higher
dividends with stock split.
Advantages of Stock Split
A stock split is an action taken by a company to decrease the price of shares by increasing the number of shares
available, so that the total dollar value of the shares remains the same as before the split. There are a number of
ways in which the companies can split their stocks, such as two-for-one, three-for-two or three-for-one. This
requires approval from the board of directors and the shareholders.
The following are some of the major advantages of a stock split:
Splitting the stock brings the share price down to an attractive level whereby small traders will be able to
invest more on these stocks.
Stock split is often seen as a positive indicator that a company is growing.
Due to the lower prices, there will be more investors willing to buy and therefore the companies build up
more liquidity by splitting their stocks.
Current shareholders enjoy the pleasure of doubling or tripling the number of shares they own.
Companies that split their stocks have typically enjoy a big jump in share prices.

2. Discuss the techniques of inventory control.

Inventory control is the process employed to maximize a company's use of inventory. The goal of inventory
control is to generate the maximum profit from the least amount of inventory investment without intruding upon
customer satisfaction levels. Given the impact on customers and profits, inventory control is one of the chief
concerns of businesses that have large inventory investments, such as retailers and distributors. Some of the
most important techniques of inventory control system include setting up of various stock levels, preparations of
inventory budgets, maintaining perpetual inventory system, establishing proper purchase procedures, inventory
turnover ratios and ABC analysis. This essay will discuss the different techniques of inventory control
To start with the company must set up various stock levels. Chand (2012), states that the setting up of various
stock levels is important to avoid over-stocking and under stocking of inventory. To achieve this management
has to decide about the maximum level, minimum level, re-order level, the danger level and average level of
materials to be kept in the store.
Re-ordering level also known as ordering level or ordering point or ordering limit is a point at which order for
supply of material should be made. This level is fixed somewhere between the maximum level and the
minimum level in such a way that the quantity of materials represented by the difference between the reordering level and the minimum level will be sufficient to meet the demands of production till such time as the
materials are replenished. Reorder level depends mainly on the maximum rate of consumption and order lead
time. When this level is reached, the store keeper will initiate the purchase requisition. Reordering level is
calculated with the following formula:
Re-order level =Maximum Rate of consumption x maximum lead time
Maximum level is the level above which stock should never reach. It is also known as maximum limit or
maximum stock. The function of maximum level is essential to avoid unnecessary blocking up of capital in
inventories, losses on account of deterioration and obsolescence of materials, extra overheads and temptation to
thefts. This level can be determined with the following formula. Maximum Stock level = Reordering level +
Reordering quantity (Minimum Consumption x Minimum re-ordering period)

Minimum level represents the lowest quantity of a particular material below which stock should not be allowed
to fall. This level must be maintained at every time so that production is not held up due to shortage of any
material. It is that level of inventories of which a fresh order must be placed to replenish the stock. This level is
usually determined through the following formula:
Minimum Level = Re-ordering level (Normal rate of consumption x Normal delivery period)
Average stock level is determined by averaging the minimum and maximum level of stock. The formula for
determination of the level is as follows:
Average level =1/2 (Minimum stock level + Maximum stock level) or
Average level = minimum level + 1/2 of Re-ordering Quantity.
Danger level is that level below which the stock should under no circumstances be allowed to fall. Danger level
is slightly below the minimum level and therefore the purchases manager should make special efforts to acquire
required materials and stores. This level is calculated with the help of following formula:
Danger Level =Average rate of consumption x Emergency supply time.
Economic Order Quantity (E.O.Q.): One of the most important problems faced by the purchasing department
is how much to order at a time. Purchasing in large quantities involve lesser purchasing cost. But cost of
carrying them tends to be higher. Likewise if purchases are made in smaller quantities, holding costs are lower
while purchasing costs tend to be higher. Hence, the most economic buying quantity or the optimum quantity
should be determined by the purchase department by considering the factors such as cost of ordering, holding or
carrying. This can be calculated by the following formula:

Q = 2AS/I
Where Qx stands for quantity per order;

A stands for annual requirements of an item in terms of rupees;

S stands for cost of placement of an order in rupees; and
I stand for inventory carrying cost per unit per year in rupees.

The other inventory control technique is the preparation of inventory budgets. Organizations having huge
material requirement normally prepare purchase budgets. The purchase budget is prepared well in advance. The
budgets for production and consumable material and for capital and maintenance material are separately
prepared. Sales budget generally provide the basis for preparation of production plans. Therefore, the first step
in the preparation of a purchase budget is the establishment of sales budget.
As per the production plan, material schedule is prepared depending upon the amount and return contained in
the plan. To determine the net quantities to be procured, necessary adjustments for the stock already held is to
be made. They are valued as standard rate or current market. In this way, material procurement budget is
prepared. The budget so prepared should be communicated to all departments concerned so that the actual
purchase commitments are regulated as per budgets. At periodical intervals actuals are compared with the
budgeted figures and reported to management which provide a suitable basis for controlling the purchase of
materials,
Maintaining Perpetual Inventory System is another technique to exercise control over inventory. It is also
known as automatic inventory system. The basic objective of this system is to make available details about the
quantity and value of stock of each item at all times. Thus, this system provides a rigid control over stock of
materials as physical stock can be regularly verified with the stock records kept in the stores and the cost office.
Proper Purchase Procedures has to be established and adopted to ensure necessary inventory control. The
following steps are involved.

Purchase Requisition: It is the requisition made by the various departmental heads or storekeeper for their
various material requirements. The initiation of purchase begins with the receipts of a purchase requisition by
the purchase department.
Inviting Quotations: The purchase department will invite quotations for supply of goods on the receipt of
purchase requisition.
Schedule of Quotations: The schedule of quotations will be prepared by the purchase department on the basis
of quotations received.
Approving the supplier: The schedule of quotations is put before the purchase committee who selects the
supplier by considering factors like price, quality of materials, terms of payment, delivery schedule etc.
Purchase Order: It is the last step and the purchase order is prepared by the purchase department. It is a written
authorization to the supplier to supply a specified quality and quantity of material at the specified time and place
mentioned at the stipulated terms.
The other inventory control technique is using the inventory turnover ratio.
The ratio is calculated using the following formula:

The ratio indicates how quickly the inventory is used for production. The higher the ratio, the shorter will be the
duration of inventory at the factory. It is the index of efficiency of material management.
The comparison of various inventory turnover ratios of different items with those of previous years may reveal
the following four types of inventories:

Slow moving Inventories: These inventories have a very low turnover ratio. Management should take all
possible steps to keep such inventories at the lowest levels.
Dormant Inventories: These inventories have no demand. The finance manager has to take a decision whether
such inventories should be retained or scrapped based upon the current market price, conditions etc.
Obsolete Inventories: These inventories are no longer in demand due to their becoming out of demand. Such
inventories should be immediately scrapped.
Fast moving inventories: These inventories are in hot demand. Proper and special care should be taken in
respect of these inventories so that the manufacturing process does not suffer due to shortage of such
inventories.
Perpetual inventory control system: In a large organization it is essential to have information about
continuous availability of different types of materials and stores purchased, issued and their balance in hand.
The perpetual inventory control system enables the manufacturer to know about the availability of these
materials and stores without undergoing the cumbersome process of physical stock taking. Under this method,
proper information relating to receipt, issue and materials in hand is kept. The main objective of this system is
to have accurate information about the stock level of every item at any time.
Perpetual inventory control system cannot-be successful unless and until it is accompanied by a system of
continuous stock taking i.e. checking the total stock of the concern 3/4 times a year by picking 10/15 items daily
(as against physical stock taking which takes place once a year).
The items are taken in rotation. In order to have more effective control, the process of continuous stock taking is
usually undertaken by a person other than the storekeeper. This will check the functioning of storekeeper also.
The items may be selected at random to have a surprise check. The success of the system of perpetual inventory
control depends upon the proper implementation of the system of continuous stock taking.
ABC analysis:

In order to exercise effective control over materials, A.B.C. (Always Better Control) method is of immense use.
Under this method materials are classified into three categories in accordance with their respective values.
Group A constitutes costly items which may be only 10 to 20% of the total items but account for about 50% of
the total value of the stores. A greater degree of control is exercised to preserve these items. Group B consists
of items which constitutes 20 to 30% of the store items and represent about 30% of the total value of stores. A
reasonable degree of care may be taken in order to control these items. In the last category i.e. group C about
70 to 80% of the items is covered costing about 20% of the total value. This can be referred to as residuary
category. A routine type of care may be taken in the case of third category. This method is also known as stock
control according to value method, selective value approach and proportional parts value approach. If this
method is applied with care, it ensures considerable reduction in the storage expenses and it is also greatly
helpful in preserving costly items.
3. Examine risk adjusted discount rate as a technique of incorporating risk factor in capital
budgeting.
The increasing volatility of the global economy has caused investors to search out safer investment alternatives.
Investors use a capital budget when selecting their investments. A capital budget is a plan for investing in longterm assets such as buildings and machinery. Risk is inevitable to these investments. The various risks include
cash flows not being paid in time as agreed, the risk of the investee company collapsing and also the
management sinking the invested funds in risky projects. By incorporating risk in capital budgeting, investors
can minimize losses. There are many techniques of incorporation of risk perceived in the evaluation of capital
budgeting proposals. They differ in their approach and methodology so far as incorporation of risk in the
evaluation process is concerned. This essay will examine risk adjusted discount rate as a technique of
incorporating risk factor in capital budgeting.

The use of risk adjusted discount rate is based on the concept that investors demands higher returns from the
risky projects. The required rate of return on any investment includes compensation for delaying consumption
equal to risk free rate of return plus compensation for any kind of risk taken on. To allow for risk, the investor

requires a premium over and above an alternative, which is risk-free. Accordingly, the more uncertain are the
returns in the future, the greater the risk and greater the premium required. Based on this reasoning, it is
proposed that the risk premium be incorporated into the capital budgeting analysis through the discount rate.
That is, if the time preference for money is to be recognized by discounting estimated future cash flows, at some
risk free rate, to their present value, then, to allow for the riskiness, of those future cash flows a risk premium
rate may be added to risk-free discount rate. Such a composite discount rate, called the risk-adjusted discount
rate, will allow for both time preference and risk preference and will be a sum of the risk-free rate and riskpremium rate reflecting the investors attitude towards risk. The risk-adjusted discount rate method can be
formally expressed as follows:

Under capital asset pricing model, the risk premium is the difference between the market rate of return and the
risk free rate multiplied by the beta of the project. The risk adjusted discount rate accounts for risk by varying
the discount rate depending on the degree of risk of investment projects. A higher rate will be used for riskier
projects and a lower rate for less risky projects. The net present value will decrease with increasing risk adjusted
rate, indicating that the riskier a project is perceived, the less likely it will be accepted. If the risk free rate is
assumed to be 8%, some rate would be added to it, say 6%, as compensation for the risk of the investment and
the composite 14% rate would be used to discount the cash flows. The use of risk adjusted discount rate has its
advantages and disadvantages. These advantages and disadvantages are listed below
Advantages of risk adjusted discount rate

It is simple and can be easily understood.

It has a great deal of intuitive appeal for risk-averse businessman.

It incorporates an attitude towards uncertainty.

Disadvantages
This approach, however, suffers from the following limitations:

There is no easy way deriving a risk adjusted discount rate. Capital asset pricing model provides a basis
of calculating the risk adjusted discount rate. Its use has yet to pick up in practice.

It does not make any risk adjusted in the numerator for the cash flows that are forecast over the future
years.

It is based on the assumption that investor are risk-averse. Through it is generally true, there exists a
category of risk seekers who do not demand premium for assuming risks; they are willing to pay
premium to take risks. Accordingly, the composite discount rate would be reduced, not increased, as the
level of risk increases.

In conclusion investors try to avoid risk. To encourage investors to invest their funds into risky projects, the
returns from such projects should be higher than returns from less risky investments such as treasury bonds. A
risk premium is a discount rate that is added to the risk-free rate of borrowing. The risk-free rate is the rate of
return of low-risk investments such as government-backed securities. The investments are then appraised using
the resulting discount rate. Investments that offer better returns are chosen.

4. Critically examine the payback period as a technique of approval of projects.

Payback period in capital budgeting refers to the period of time required to recoup the funds expended in an
investment, or to reach the break even point. It is the time in which the initial cash outflow of an investment is
expected to be recovered from the cash inflows generated by the investment. For example, a $10000 investment
which returned $2000 per year would have a five year payback period. Payback period is one of the simplest
investment appraisal techniques. The formula to calculate payback period of a project depends on whether the
cash flow per period from the project is even or uneven. In case they are even, the formula to calculate payback
period is:

When cash inflows are uneven, there is need to calculate the cumulative net cash flow for each period and then
use the following formula for payback period:

In the above formula,

A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A
Both of the above situations are applied in the following examples.
The decision rule for payback period holds that an investor accepts a project only if its payback period is less
than the target payback period.
Advantages and Disadvantages
Advantages of payback period are:
Payback period is very simple to calculate.
It can be a measure of risk inherent in a project. Since cash flows that occur later in a project's life are
considered more uncertain, payback period provides an indication of how certain the project cash
inflows are.
For companies facing liquidity problems, it provides a good ranking of projects that would return money
early.

Disadvantages of payback period are:

 Payback period does not take into account the time value of money which is a serious drawback since it
can lead to wrong decisions. A variation of payback method that attempts to remove this drawback is
called discounted payback period method.
It does not take into account, the cash flows that occur after the payback period.

5. Examine the relationship of financial management with other functional areas of finance
There exists an inseparable relationship between finance on the one hand and production, marketing and other
functions on the other. For example, recruitment and promotion of employees is clearly a responsibility of the
HR function; but it requires payment of wages and salaries and thus, involves finance. Advertising and sales
promotion activities fall under the purview of marketing. Since they require cash, they affect financial
resources.
Although the finance function has a significant effect on other functions, yet it need not necessarily limit or
constraint the general running of the business. Financial considerations are given more weightage over other
functions when a company is resource-crunched. Marketing and other strategies will be devised in the light of
the financial constraints. On the other hand, a fund rich company will be more flexible in devising its marketing
and other activities. In fact, financial policies will be devised to fit production and marketing decisions of a firm
in practice. The following are the relationships between financial management and other areas of management.

Financial Management and Marketing: It deals with planning and controlling the entire marketing activities of a
concern and comprises the formulation of marketing objectives, policies, programmes and strategies. The
purpose behind marketing management is to enhance the sales volume, to develop new markets, and to reach
new customers. However, the philosophy and approach to the pricing policy are critical elements in the
companys marketing effort, image and sales level. Since the determination of approximate price of the
companys product is very important both to the marketing and financial managers, there should be a joint
decision. While the financial manager can supply the vital information regarding costs, changes in costs at
different levels of production and the profit margin required to carry on the business, the marketing manager

provides information as to how different prices will affect the demand for the firms product in the market and
the firms competitive position. Thus, the role of financial manager for the formulation of the pricing policies of
the firm cannot be undermined.
Financial Manager and Personnel Management: The personnel manager organizes the personnel department,
which is generally assigned the operative functions of employment, compensation, training, etc. These functions
are performed in consultation with the heads of other departments. However, all these require finances and
thereby the decision relating to these aspects can be taken by the personnel department, only after consulting
with the finance department.
Financial Management and Production Management: Production is the conversion of raw materials into finished
products, which is also called manufacturing of goods. The production department will have to ensure that
production is carried on in the best manner at the lowest cost. However, production is indirectly related to the
key day-to-day decisions by the financial manager. For instance, changes in the production process may
necessitate capital expenditures, which the firms financial manager should evaluate and then finance. Thus,
management and production management are related.

Assignment B

1. What are the assumptions of MM (Modigliani Miller) approach?

The Modigliani-Miller theorem argues that it does not matter how the firm is financed. They argued that the
value of a leveraged firm must be equal to the value of an unleveraged firm. If this is not the case, investors in
the leveraged firm will sell their shares (assume they owned 10%). They will then borrow an amount equal to
10% of the debt of the leveraged firm. Using these proceeds, they will purchase 10% of the stock of the
unleveraged firm (which provides the same return as the leveraged firm) with a surplus left to be invested
elsewhere. This arbitrage process will drive the price of the stock of the leveraged firm down and drive up the
price of the stock of the unleveraged firm. This will continue until the value of both stocks is equal. In the end,
the profitability and viability of the firm is unaffected by its financing decisions. However, the theory holds only
if a number of underlying assumptions are valid.
The MM model assumed that:
Firms must be in a homogeneous business risk class. If the firms have varying degrees of risk, the
market will value the firms at different rates. The earnings of the firms will be capitalized at different
costs of capital.
Investors have homogeneous expectations about expected future EBIT. If investors have different
expectations about future EBIT then individual investors will assign different values to the firms.
Therefore, the arbitrage process will not be effective.
Stocks and bonds are traded in perfect capital markets. Therefore, there are no brokerage costs and
individuals can borrow at the same rate as corporations. Brokerage fees and varying interest rates will,
in effect, lower the surplus available for alternative investment.
Investors are rational. If by chance, investors were irrational, then they would not go through the entire
arbitrage process in order to achieve a higher return. They would be satisfied with the return provided
by the leveraged firm.
There are no corporate taxes. With the existence of corporate taxes the value of the leveraged firm must
be equal to the value of the unleveraged firm plus the tax shield provided by debt.

2. Summaries the features of DCF (Discounted cash flow) technique.

The discounted cash flow (DCF) method or time adjusted technique is an improvement over the traditional
techniques such as the payback. In evaluation of the projects the need to give weightage to the timing of return
is effectively considered in all DCF methods. DCF methods are cash flow based and take the cognizance of both
the interest factors and cash flow after the payback period.
The features of the discounted cash flow technique are as follows:
The estimation of cash flows, both inflows and outflows of are over the entire life of the project.
The cash flows are discounted by an appropriate interest factor (discount factor)
Sum of the present value of cash outflow is deducted from the sum of present value of cash inflows to
arrive at net present value of cash flows.
When appraising multi-period investments, where expected benefits and costs and related cash inflows
and outflows arise over time, the time value of money is taken into account.
The time value of money is represented by the opportunity cost of capital.
The discount rate used to calculate the NPV in the DCF analysis properly reflect the systematic risk of
cash flows attributable to the project being appraised and not the systematic risk of the organization
undertaking the project.
A good decision relies on an understanding of the business and an appropriate DCF methodology. DCF
analysis is considered and interpreted in relation to an organizations strategy and its economic and
competitive position.
Cash flows is estimated incrementally, so that a DCF analysis only considers expected cash flows that
could change if the proposed investment is implemented. The value of an investment depends on all the
additional and relevant cash inflows and outflows that follow from accepting an investment.
At any decision-making point, past events and expenditures are considered irreversible outflows (and
not incremental costs) that should be ignored, even if they had been included in an earlier cash flow
analysis.
All assumptions used in undertaking DCF analysis and in evaluating proposed investment projects, are
supported by reasoned judgment, particularly where factors are difficult to predict and estimate. Using
techniques such as sensitivity analysis to identify key variables and risks helps to reflect worst, most
likely and best case scenarios and therefore could support a reasoned judgment.
A post-completion review or audit of an investment decision includes an assessment of the decisionmaking process and the results, benefits and outcomes of the decision.

3. Examine the type and sources of risk in capital budgeting.

Like anything, investments do have risks. There are different types of investment risks associated with capital
budgeting. Investors must constantly be aware of the risk they are assuming, know what it can do to their
investment decisions and be prepared for the consequences. Investors should be willing to purchase a particular
asset if the expected return is adequate to compensate for the risk, but they must understand that their
expectation about the asset's return may not materialize.
TYPES OF RISK:
In investment analysis, risk can be categorized into two general types: those that are pervasive in nature, such as
market risk or interest rate risk and those that are specific to a particular security issue, such as business or
financial risk. These two general types make up total risk. The total risk is made up of the general (market)
component and a specific (issuer) component or the systematic risk and nonsystematic risk.

Systematic risk is the risk that cannot be reduced or predicted in any manner and is almost impossible to predict
or protect against. Examples of this type of risk include interest rate increases or government legislation
changes. The smartest way to account for this risk is to simply acknowledge that this type of risk will occur and
plan its effect on the investment.
Unsystematic risk is risk that is specific to assets features and can usually be eliminated through a process called
diversification. Examples of this type of risk include employee strikes or management decision changes.
SOURCES OF RISK
The following discussion examines the sources of risk.
Interest Rate Risk:
The variability in a security's return resulting from changes in the level of interest rates is referred to as interest
rate risk. Such changes generally affect securities inversely; that is, other things being equal, security prices

move inversely to interest rates. Interest rate risk affects bonds more directly than common stocks, but it affects
both and is a very important consideration for most investors.
Market Risk:
The variability in returns resulting from fluctuations in the overall market that is, the aggregate stock market is
referred to as market risk. All securities are exposed to market risk, although it affects primarily common
stocks. Market risk includes a wide range of factors exogenous to securities themselves, including recessions,
wars, structural changes in the economy and changes in consumer preferences.
Inflation Risk:
A factor affecting all securities is purchasing power risk, or the loss of the purchasing power of invested dollars.
This risk is related to interest rate risk, since interest rates generally rise as inflation increases, because lenders
demand additional inflation premiums to compensate for the loss of purchasing power.
Business Risk:
The risk of doing business in a particular industry or environment is called business risk. For example, Apple,
the traditional iPhone powerhouse, faces major changes today in the rapidly changing iPhone industry.
Financial Risk:
Financial risk is associated with the use of debt financing by companies. The larger the proportion of assets
financed by debt (as opposed to equity) the larger the variability in the returns, other things being equal.
Liquidity Risk:
Liquidity risk is the risk associated with the particular secondary market in which a security trades. An
investment that can be bought or sold quickly and without significant price concession is considered to be
liquid. The more uncertain about the time element and the price concession, the greater the liquidity risk. A
Treasury bill has little or no liquidity risk, whereas a small over-the-counter (OTC) stock may have substantial
liquidity risk.
Exchange Rate Risk:
All investors who invest internationally in today's increasingly global investment arena face the prospect of
uncertainty in the returns after they-convert the foreign gains back to their own currency. Exchange rate risk is

sometimes called currency risk. For example, a Zambian investor who buys an Indian stock denominated in
rupees must ultimately convert the returns from this stock back to Kwacha. If the exchange rate has moved
against the investor, losses from the exchange rate movements can partially or totally negate the original return
earned.
Country Risk:
Country risk, also referred to as political risk, is an important risk for investors today probably more important
now than in the past. With more investors investing internationally, both directly and indirectly, the political and
therefore economic, stability and viability of a country's economy needs to be considered. The United States
arguably has the lowest country, risk and other countries can be judged on a-relative basis using the United
States as a benchmark.
4. (a) Deepak steel has issued non convertible debentures for Rs.5 Cr. Each debenture is of par value
of Rs.100, carrying a coupon rate of 14%, interest is payable annually and they are redeemable after
7yrs at a premium of 5 %. The company issued the Non convertible debentures at a discount of 3 %.
What is the cost of debenture to the company? Tax rate is 40%.

(b) Supersonic Industries Ltd. has entered into an agreement with Indian Overseas bank for a loan of
Rs.10Cr. with an interest rate of 10%. What is the cost of loan if the tax rate is 45%?

Assignment 3 (40 MCQs)

11

21

31

2
3
4
5
6
7
8
9
10

C
B

12
13
14
15
16
17
18
19
20

22
23
24
25
26
27
28
29
30

32
33
34
35
36
37
38
39
40

1. We all live under conditions of ____________ and _______________.

a) Risk, return
b) Risk, uncertainty
c) Return, premium
d) Uncertainty, premium
2. Find the present value of Rs.1, 00, 000 receivable after 10 yrs. if 10% is time preference for money.
a)
38400
b)
38500
c)
38600
d)
38700
3 What is the future value of a regular annuity of Re.1 earning a rate of 12% interest p.a. for 5 Years?
a)
5.353
b)
6.353
c)
7.353
d)
7.153
4. If a borrower promises to pay Rs.20000 eight years from now in return for a loan of Rs.12550 today,
what is the annual interest being offered?
a)
6% approx
b)
7% approx
c)
8% approx
d)
9% approx
5. A loan of Rs.5, 00, 000 is to be repaid in 10 equal installments. If the loan carries
12% interest p.a. What is the value of one installment?
a)
68492
b)
78492
c)
88492
d)
98492
6 If you deposit Rs.10, 000 today in a bank that offers 8% interest, in how many years will this amount
double by 72 rule?
a)
9
b)
8
c)
7
d)
6

7 An employee of a bank deposits Rs.30, 000 into his FD A/c at the end of each year for 20 yrs. What is
the amount he will accumulate in his FD at the end of 20 years, if the rate of interest is 9%.
a) 1534800
b) 1535000
c) 1535200
d) 1535400
8 ____________ decisions could be grouped into two categories.
a) Make or buy
b) Capital budgeting
c) Fixed capital
d) Working capital
9._____________ and revenue generation are the two important categories of capital budgeting.
a) Cost reduction
b) Production
c) Investment
d) Dividend
10._________ appraisal examines the project from the social point of view.
a) Financial
b) Cost
c) Economic
d) Technical
11. All technical aspects of the implementation of the project are considered in ______ appraisal.
a) Financial
b) Cost
c) Economic
d) Technical
12.__________ of a project is examined by financial appraisal.
a) Financial viability
b) Cost viability
c) Economic viability
d) Technical viability
13. Among the elements that are to be examined under commercial appraisal, the most crucial one is the
__________.
a) Supply of the product
b) Demand for the product
c) Cost of the product
d) Elements of cost
14. Formulating is the third step in the evaluation of investment proposal.
a) No
b) Yes
15. A __________ is not a relevant cost for the project decision.
a) Sunk cost
b) Direct cost
c) Indirect cost
d) Works cost

16. Effect of a project on the working of other parts of a firm is known as __________.
a) Separation principal
b) Formulation
c) Externalities
d) After effects
17. The essence of separation principal is the necessity to treat __________elements of a project
separately from that of ___________ elements.
a) Production, operations
b) Financing, production
c) Investment, financing
d) Investment, production
18. Payback period ______________ time value of money.
a) Ignores
b) Considers
c) None of the above
19. IRR gives a rate of return that reflects the ______________ of the project.
a) Cost
b) Profitability
c) Cash inflows
d) Cash outflows
20. The methods of appraising an investment proposal can be grouped into _____ methods and
___________ methods.
a) Traditional, modern
b) Primary, secondary
c) First, second
d) old, new
21.The time gap between acquisition of resources from suppliers and collection of
cash from
customers is known as ________.
a) Financial year
b) Calendar year
c) Operating cycle
d) Current cycle
22.__________ is the average length of time required to produce and sell the product.
a) Inventory period
b) Stock cycle
c) Inventory conversion period
d) None of the above
23. __________ is the average length of time required to convert the firms receivables into cash.
a) Receivables period
b) Receivables cycle
c) Receivables conversion period
d) None of the above
24. ______________ is length of time between firms actual cash expenditure and
its own receipt.
a) Cash conversion period
b) Cash cycle
c) Cash period
d) Cash and bank cycle
25. Capital intensive industries require ____________ amount of working capital.
a) Lower

b) Medium
c) Higher
d) None of the above
26. There is a ______________ between volume of sales and the size of working capital of a firm.
a) Positive direct correlation
b) Negative direct correlation
c) Negative indirect correlation
d) Positive indirect correlation
27. Under inflationing conditions same level of inventory will require ____________ investment in
working capital.
a) Decreased
b) Increased
c) Same
d) zero
28. Longer the manufacturing cycle ______ the investment in working capital.
a) Larger
b) smaller
29. ____________ is used to estimate working capital requirement of a firm.
a) Trend analysis
b) Risk analysis
c) Capital rationing
d) Operating cycle
30. Operating cycle approach is based on the assumption that production and sales occur on
____________.
a) Continuous basis
b) Alternate basis
c) Alternate & Continuous basis
d) None of the above
31. ____________ is considered to be superior to RADR.
a) IRR
b) NPV
c) CE
D) PI
32. ____________ analyse the changes in the project NPV on account of a given change in one of the
input variables of the project.
a) Sensitivity analysis
b) Profitability Index
c) Project evaluation
d) Risk analysis
33. Examining and defining the mathematical relation between the variable of the NPV is one of the
steps of _____________.
a) Sensitivity analysis
b) Profitability Index
c) Project evaluation
d) Risk analysis
34. Forecasts under Sensitivity analysis are made under different ____________.
a) Political conditions
b) Economic conditions
c) Industry conditions
d) Regional conditions
35. Receiving a required inventory item at the exact time needed.

a) ABC
b) JIT
c) FOB
d) PERT
36. Post completion audit is ____________ in the phases of capital budgeting decisions.
a) First Step
b) Last step
c) Middle step
d) None of the above
37. Why is a discount rate used to calculate net present value?
a) Money has value
b) Money has enhancing value
c) Money has diminishing value
d) Money has constant value
38. What does net present value give?
a) future values of present cash flows
b) present value of present cash flow
c) present value of future cash flows
d) future values of future cash flows
39. Of what is sinking fund an example of ?
a) Perpetuity
b) Annuity
c) Gratuity
d) None of the above
40. What stream of cash flows continues indefinitely?
a) Perpetuity,
b) Annuity
c) Futurity
d) None of the above
References
Brealey & Meyers (2003), Principles of Corporate Finance, Seventh Edition McGraw-Hill USA
Smriti Chand (2012) 6 Most Important Techniques of Inventory Control System
http://www.yourarticlelibrary.com/inventory-control/6-most-important-techniques-of-inventory-controlsystem/26159/ accessed 30/05/2015

Professional Management Education

http://professional-edu.blogspot.com/2010/07/214-risk-adjusted-discount-rate.html