Financial Management Assignment - Sem II

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Financial Management (VV2)

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1. Explain why debt is usually considered the cheapest source of financing available?

2 . Differenciate between financial and business risks?

3. Discuss the different approaches of financing of working capital requirements?

4. Describe any two methods of incorporating risk in capital budgeting decisions?

5. Explain the merits of using market value weights in computing weighted average cost of capital?

6. Explain any two methods of cash management?

7. State with illustration the practical application of time value of money? 8. Critically explain the factors affecting dividend decisions?

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Working capital—Do you have enough?

Lending institutions are scrutinizing an operation’s working capital status as part of the lending decision. Now more than ever, it’s time to do a little

scrutinizing yourself. When I hit the road to speak, one of the most important slides I regularly use highlights how lending criteria has changed since the

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financial crisis. To illustrate that point, the slide includes a quote from Nick Parsons, head of research with the National Australia Bank: “So capitalism has changed…the owner or the custodian of capital [i.e. lending institutions] is much more careful about where they use that capital.”

To that end, most readers have likely experienced increased scrutiny from their lenders in this post-crisis world. And one of the key criteria that lenders use to make decisions revolves around availability of working capital within any operation; working capital being a function of current assets less current liabilities. It’s a measure of an operation’s buffer to meet its short-term

obligations, hence the importance to lenders.

Perhaps equally important, it’s a key indicator of cash reserve availability to meet unexpected emergencies. Thus, it is an important component of risk management to ensure business continuity within the operation without the need to borrow additional funds. As an example, albeit simplified, a pickup is typically a critical operational asset for most cow-calf operations. What if it catches on fire and suddenly needs to be replaced, else the cows don’t get fed? After insurance provides some portion towards replacement, does the operation have sufficient working capital to meet the remainder of the

obligation? This type of assessment has become more important to lenders since the financial crisis.

This week’s graph highlights USDA’s updated aggregate working capital estimates in agriculture. Clearly, as last week’s illustration depicts, declining revenue has taken a big hit out of working capital reserves for agriculture. Working capital has declined nearly 50% – the loss exceeds $82 billion in just three years. That’s a concerning trend – and if it continues, will clearly have implications in the coming years.

What are you doing to maintain strong cash and working capital reserves amidst declining revenue? What new expectations do you your lenders have

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during the past several years and going into 2017? How will you adjust going forward? Leave your thoughts in the comments section below.

1. Provide the brief summary of the case in your own words?

2. What new expectations do your lenders have during the past several years and going into future?

3. What should be done to maintain strong cash and working capital reserves amidst declining revenue?

1. Dividend has no relationship with the value of the firm as per Walter Model. Yes

No

Can’t say Sometimes

2. Wealth management and profit maximisation are the ……… concepts.

Yes

Sometimes No

Can’t say

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3. Traditionally the role of finance manager was restricted to …………. Of funds.

Use

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Management Administration

4. The sales of a business or other form of revenue from operations of the business is called as ………… .

Profit Margin Contribution Turnover

5. Implicit cost is the cost of using the funds. TRUE

FALSE None

Sometimes False

6. The process of calculating present value of projected cash flows. Discounting

Brokerage Benefit Budgeting

7. A part of the organisation where the manager has responsibility for

generating revenues, controlling costs and producing a satisfactory return on capital invested in the division.

Brekarage Brokerage Division Recasting

8. Business practices designed by companies to make production and delivery systems more competitive in world markets by eliminating or minimizing waste, errors, and costs.

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Reengineering Restructuring Revaluation Recasting

9. Cash in hand and cash at bank are examples of …………. Assets. Current

Fixed Working Permanent

10. Baumol model and the Miller-Orr model belong to ………. Management.

Cash Credit Inventory Purchase

11. Current assets /Current liabilities describes ………. Ratio. Fixed Asset

Quick Liquidity

Asset Turnover

12. Inventory and receivables are both current assets. FALSE

Can’t Say Sometimes TRUE

13. Credit analysis, or the assessment of creditworthiness, is undertaken by analysing and evaluating information relating to a customer’s ……… history?

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Non-Financial Non-Monetary Financial Monetary

14. The objective of liquidity ensures that companies are able to meet their liabilities as they fall due, and thus remain in business.

Rare TRUE Sometimes FALSE

15. Funds held in the form of cash do not earn a return. TRUE

Sometimes FALSE Rare

16. Holding costs can be ………. by reducing the level of inventory held by a company.

minimised control increased reduced

17. Which technique brings inventory and cash requirment drastically down? LIFO

Baumal ABC JIT

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18. Which model belongs to cash management? LIFO

Miller Orr HIFO ABC

19. JIT stands for just in …………. . totality

technical tenure time

20. The factors to be considered in formulating a trade receivables policy relate to credit analysis, credit control and receivables collection.

TRUE Sometimes Rare

FALSE

21. Companies with the same business operations may have ……… levels of investment in working capital as a result of adopting different working capital policies.

lower higher different Same

22. Receibles management is all about? Cash Management

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Credit Management All

23. The main reason that companies fail, though, is because they run out of ……… .

Customers Inventory Cash Stock

24. Is it right to say that good cash management is an essential part of good working capital management.

Sometimes never Always Can’t say

25. Optimum cash balance must reflect the expected need for cash in the next budget period.

never Always Can’t say Sometimes

26. The cash operating cycle is the average ……… of time between paying trade payables and receiving cash from trade receivables.

Lag period length gap

27. The length of the cash ……….. depends on working capital policy in relation to the level of investment in working capital, and on the nature of

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the business operations of a company. requirement

Operating Cycle disbursal

Management

28. Liquid funds, for example cash, earn no return and so will not increase profitability.

TRUE FALSE rare

Sometimes

29. ……….. are your business’ “scores” that come from your Income Statement and Balance Sheet, not the Cash Flow Statement.

Marks

Financial Scores Points

Ratios

30. Working capital investment policy is concerned with the level of investment in ………… assets, with one company being compared with another.

Permanent Temporary Current Fixed

31. ……….. can also be used to cover some of the risks associated with giving credit to foreign customers.

Locking Awards Insurance

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Rewards

32. Aggressive working capital finance means using more …………. term finance

Credit Short Medium Long

33. Short-term finance is more flexible than long-term finance. TRUE

FALSE Never Sometimes

34. Short-term finance tends to be more ………….. than long-term finance. Softer

Rigid Flexible harder

35. Sales made but not collected is known as……….? A/Cs Payables

A/Cs Receivables Both

None

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36. …………. Interest rate depends upon an index and increases or decreases.

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Stationary Variable Stable Fixed

37. Short-term finance is more risky than long-term finance. FALSE

Never Sometimes TRUE

38. Rate risk refers to the fact that when short-term finance is renewed, the rates may vary when compared to the ………….. rate.

Current Previous Accounting Industry

39. The …………. principle suggests that long-term finance should be used for long-term investment.

Matching Traditional Dual Aspect Monetary

40. Money paid (cost of credit) for the use of money. Interest

Dividend Usage Money Principal