ASSIGNMENT

DRIVE SPRING 2017

PROGRAM MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER II
SUBJECT CODE & NAME MB0045 – FINANCIAL MANAGEMENT
BOOK ID B1628
CREDITS 4
MARKS 60

Note: Answer all questions. Kindly note that answers for 10 marks questions should be
approximately of 400 words. Each question is followed by evaluation scheme.

Q. Questions Marks Total

No Marks
1. Explain Investment Decision and Liquidity Decisions.
Explanation of Investment Decision 5 10
Explanation of Liquidity Decisions. 5
2. Explain Cost Theory and Earnings theory. Also, the merits and demerits of both theories.
Explanation of Cost theory, merits and demerits 5 10
Explanation of Earnings theory, merits and demerits 5
3. Explain Operating Leverage and its classifications
Explanation of Operating Leverage 4 10
Explanation of Classifications of Operating Costs 6
4. There are two firms, A and B, similar in all aspects except in the degree of leverage employed
by them. Financial data for these firms are given below: Calculate average cost of capital for
both the firms. Details of Firms A and B

Amount (in Rs.) Firm A Firm B

Net operating income 10,000 10,000
Interest on debt 0 3,000
Equity earnings 10,000 7,000
Cost of equity capital 10% 10%
Cost of debt capital 6% 6%
Market value of equity 100,000 70,000
Market value of debt 0 50,000
Total value of firm 100,000 120,000
Average cost of capital for Firm A 5 10
Average cost of capital for Firm A 5
5. The below table describes the cash inflows of three projects. Compute the NPV and profitability
index of all the three projects and rank them on the basis of capital rationing. Cost of Capital is
15 %

Details of the Projects

Cash Inflows
 Project Initial Cash Year 1 Year 2 Year 3
outlay
A 1,00,000 60,000 50,000 40,000
B 50,000 20,000 40,000 20,000
C 50,000 20,000 30,000 30,000
Solution for the problem 10
6. Explain the costs associated with maintaining receivables

Explanation of the different varieties of costs associated with maintaining 10

receivables