Dba Financial Management Essay

1. What is Annuity kind of bills work? decla ration Annuity is fixed sum of bills paid every trend in at whatever other fixed interval shorter than a year. This annuity may be by way of return of just ab out(a) principal plus interest payment of against money invested or by way of payment of other dues such as pensions after retirement. In any case it re sticks out flow of immediate payment from one enumerate to in flow of funds to another account. In this way completely annuities involve movements of cash or funds. thus all annuities atomic number 18 cash flows that can be suitably represented in cash flow statements.An annuity leave be represented as inflow of cash in the cash flow statement for the recipient of the annuity and out flow of cash in the cash flow statement of the individual or unwaveringly compensable out the annuity.2. What do understand by Portfolio risk?Answer In business and finance the term portfolio refers to the ball clubof various enthrone ment of an individual or a stiff in various bonds, stocks or other securities and instruments. Portfolio risk is refers to the extent of risk or possible variation associated regarding the descend of return the individual or the firm is likely to earn on the portfolio. Broadly a specific investment in a portfolio can be judged for its riskiness along a plateful. On one end of this scale a risk slight investment offers a guaranteed rate of return on the quantity invested, alone generally the quantity of return is low. On the other end of the scale be very risky investments which may end giving a very high return or may actually payoff in a heavy loss. The risk of the wide-cut portfolio is assessed on the solid ground of combined likelihood of variation in the combined take in or loss on all the investments in the portfolio.3. What do you understand by Loan Amortization?Answer Loan amortization is the process of stipendiary back a loan over an extended duration of metre a long with the interest incurred. The interest to be paid for the amount borrowed, public treasury the loan is completely repaid, is calculated in advance. This is divided by the total number of payments being do and added with the principal payments to arrive at an amount that consists of both the principal as well as the interest. The payments induct to be made consort to this amortization schedule, which is decided before the loan is issued and could be in the skeletal frame of simple monthly or annual payments. in the beginning the principal amount is issued, the terms for calculation of the interest are in addition fixed.4. What is the Difference between NPV and IRR?Answer The digression between net present lever and internal rate of return both of these measurements are in the first place intent in hood budgeting, the process by which companies determines whether a reinvigorated investment or blowup opportunity is worthwhile. Given an investment opportunity, a firm needs to decide whether undertaking the investment will fetch net economic advances or losses for the party. The main difference however should be more evident in the regularity or should I say the units used. While NPV is calculated in cash, the IRR is a dowery value expected in return from a capital project. receivable to the fact that NVP is calculated in currency, italways seems to resonate more soft with the general public as the general public comprehends monetary value better as compared to other values.This does not necessarily mean that the NPV is automatically the best picking when evaluating a firms progress. The best option would depend on the perception of the individual doing the calculation, as well as, his documental in the whole exercise. It is evident that managers and administrators would prefer the IRR as a method, as per pennyimeages give a better outlook that can be used to receive strategic decisions over the firm. Another major shortfall associate d with the IRR method is the fact that it cannot be conclusively used in circumstances where the cash flow is inconsistent. While operative out figures in such move circumstances may prove tricky for the IRR method, it would pose no dispute for the NPV method since all that it would take is the appeal of all the inflows- bounces and finding an average out over the entire period in focus.Evaluating the viability of a project apply the IRR method could cloud the true picture if the figures on the inflow and outflow remain to fluctuate persistently. It may even give the false plan that a short term venture with high return in a short time is more viable as compared to a bigger long-term venture that would otherwise make more profits.In order to make a decision between any of the two methods, it is fundamental to take note of the following significant differences.Section B outcome letsCASE 11. Which type of financing is appropriate to each firm?Answer APT Inc. can go in for de bt with warrants since it is nearly a zero debt corporation and is overly willing to accept any form of security. Sandford Enterprises can go in for callable debentures since it has a low debt blondness ratio combined with excellent track record of servicing debt. Its future cash flows also suggest a strong capability to good future debt. Sharma Brother Inc. can go in for issue of preferable stock considering that its fund requirements of $20 million cannot be met by debt issue. Sachetee capacity Systems can consider issue of common stock for meeting its expansion requirements. Ranbaxy Industries can issue convertible bonds or debt with warrant considering that it is averse to divesting charge control.2. What types of securities must be issued by a firm which is on the development stage in order to meet the monetary requirements?Answer for a participation which is in a growing stage, issue of debt may be the most optimum mode of rising fresh funding, this is because futur e say-so cash flows would be sufficient to service the debt obligation or make a premature payment. This would also be in line with the probable risk appetite of the organization to sustain its growth and earn additive returns. Issue of equity is another option which such a company can look at. This would however depend on the management school of thought of retaining or divesting management control. A mix of debt and equity could also be a authorisation source of financing. Cost of raising debt or equity would be an of the essence(predicate) consideration in deciding the option.CASE 21. How would you judge the potential profit of Bajaj Electronics on the first year of gross sales to Booth Plastics and give your views to increase the profit.Answer Sales fluctuate seasonally and the average show period tends to run 40 days. Bad-debt losses are less than 0.6 per penny of sales. The Perluences invoice dept estimated a 24 per cent markup as the average for items sold to Pucca Electronics. Bajaj Electronics, in turn, resold the items to yield a 17 per cent markup. Bajaj Electronics incurred out-of pocket expenses that were not considered in calculating the 17 per cent markup on its items. mob would receive a 3 per cent perpetration on all sales. a agency paid whether or not the receivable was collected. In addition to the sales commission, the company would incur shifting lives as a result of handling the merchandise for the red-hot account.As a general guideline, warehousing and other administrative covariant bes would run 3 per cent sales. First of all, he considered the potential profit from the account. James had estimated first-year sales to Booth Plastics of $65,000. Assuming that make love Booth took the, 3 per cent discount. Bajaj Electronicswould cod a 17 per cent markup on these sales since the average markup was calculated on the basis of the guest taking the discount. His department probably spent three times as much money and effor t managing a marginal account as compared to a strong account. He also figured that overdue and gather funds had to be financed by Bajaj Electronics at a rate of 18 per cent.2. Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit entry limit that electronics give to Booth Plastics.Answer- Strand Electronics has 950 employees and get overs a volume of $85 million in sales annually. About $6 million of the sales represents items manufactured by Perluence. He supervises five employees who handle credit application and prayers on 4,600 accounts. The accounts range from $120 to $85,000.Thefirmsells on terms, with 2/10, net 30 mostly. Sales fluctuate seasonally and the average collection period tends to run 40 days. Bad-debt losses are less than 0.6 % of sales. The company was founded in 1977 by Neck and has grown steadily. The Perluences cost-accounting department estimated a 24 % markup as the average for items sold to Pucca.Bajaj, in turn, resold the items to yield a 17 per cent markup. Bajaj incurred out-of pocket expenses that were not considered in calculating the 17 per cent markup on its items. James would receive a 3 % commission on sales made to Booth, a commission that would be paid. a general guideline, administrative uncertain costs would run 3 %. James estimated first-year sales to Booth of $65,000.Assuming that Neck took the, 3 portion discount. Bajaj would realize a 17% markup on these sales since the average markup was calculated on the basis of the customer taking the discount. If Neck did not take the discount, the markup would be slightly higher. In addition to the potential profit from the account. He also figured that overdue and uncollected funds had to be financed by Bajaj at a rate of 18 %. All in all, slow paying or marginal accounts were very costly to Bajaj.SECTION C1. honey Well Company is contemplating to liberalize its collectioneffort. Its present sales are Rs. 10 lakh, its averag e collection period is 30 days, its expected variable cost to sales ratio is 85 percent and its bad debt ratio is 5 per cent. The Companys cost of capital is 10 per cent and tax are is 40 per cent. He proposed liberalization in collection effort increase sales to Rs. 12 lakh increases average collection period by 15 days, and increases the bad debt ratio to 7 percent. look the change in net profit.Answer- At 85 percent variable cost the gross ploughshare of various costs including cost of bad debt and and capital cost amount tied up as receivables to be collected will be 15 percent of the sales. From this contribution of 15 percent all other expenses except the bad debt and cost of capital tied up in receivable will change. Therefore we can calculate the impact of liberalization in collection on profit as follows. Original Amount Changed Amount1. Sales per year 1,000,000 1,200,000 2. component 15% 0f (1) 150,000 180,000 3. Receivable (1)*Days/365 82,192 147,945 4. Cost of receiva bles (3)*0.1 8,219 14,794 5. Cost of bad debts (1)*% 50,000 84,000 6. (4) + (5) 58,219 98,794 7. Balance share (2) (6) 91,781 81,206 - We can see from above table that that the balance contribution on tap(predicate) will decrease by Rs. 10,575 from Rs. 91,781 to Rs. 81,206. The profit before tax will also reduce by the same amount. The reduction in profit after tax will beReduction in profit after tax = 10575*60/100 = Rs. 63452. Explain the concept of works capital. What are the factors which influence the working capital? Answer- The management of the menses assets deals with the determination, maintenance, control and monitoring of level of all the individuals authorized assets. Current assets have short life span. Each current asset is swiftly born-again into other assets forms. Theexistence and necessity of current assets is implied for the efficient and optimal use of the fixed assets. This project reveals the various aspects of working capital management in general, and also at the same time sneaks into the practical aspect of applying supposed concepts of the company. The importance of working capital management is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities.These include arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering accounts receivables and investing short-term surplus funds. For the analysis part, the selective information collection was done by primary and secondary sources where the primary sources includes the personalized interaction with the industry guide and secondary sources includes external and internal sources involving company annuals. Thus the presentation of data collected was done in the form of graphs and tables. In summer training I was given the project link to working capital management and CMA forms which were discussed later in the project. For this purpose, I regularly int eracted with my industry guide and the other staff of the Corporate Finance Department.For the proviso of the project, I had a look on the company profile and made a plan by going through its previous accounting reports. Then, I had analyzed the plan and accordingly I filled the CMA forms and communicate as per the instructions of my industry guide.The basic objective of this project is to greet the factors that determine the working capital requirements and to analyze the different approaches available for the financing. Basically, working capital is composed of various items. Most of the time you got inventories and retained profits. fit in to the US GAAP (Generecally accepted accounting principles), the inventories must follow any appreciation (or depreciation) of the items in inventory.Lets say that you have a pencil in your companys inventory whose value is US$1, 00. If from October 2008 to November 2008 the value of the pen would go from US$1,00 to US$1,20, your working ca pital would be affected in 20%. On the opposite, if the value had dropped to US$0,80, your working capital would have depreciated in 20%. But this is according one of the many accounting principles. On the other side, if you have money invested in any kind of product or fund, you have to countersink properly, reflecting its appreciation or depreciation. But in this case, other factors play an important role.