Dba Financial Management Essay

1. What is Annuity kind of specie pay heed? coiffe Annuity is fixed sum of chapiter paid every year in at either other fixed interval shorter than a year. This rente may be by port of return of some principal plus interest payment of against money invested or by way of payment of other dues such as pensions aft(prenominal) retirement. In any case it re dumbfounds out flow of cash from one account to in flow of cash to another account. In this way each annuities involve movements of cash or funds. Therefore solely annuities argon cash flows that can be suitably represented in cash flow statements.An annuity will 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 person or firm paying out the annuity.2. What do understand by Portfolio happen?Answer In business and finance the term portfolio refers to the collectingof various coronation of an individual or a firm in various bond s, stocks or other securities and instruments. Portfolio assay is refers to the extent of risk or possible variation associated regarding the make sense 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 home base. On one end of this scale a risk less investment offers a guaranteed rate of return on the amount invested, but generally the quantity of return is low. On the other end of the scale are very risky investments which may end giving a very high return or may actually result in a heavy loss. The risk of the total portfolio is assessed on the basis of combined likelihood of variation in the combined returns or loss on all the investments in the portfolio.3. What do you understand by Loan Amortization?Answer Loan amortization is the process of paying back a impart over an extended duproportionn of time along with the interest incurred. The interest to be paid for the amount borrowed, till the loan is completely repaid, is calculated in advance. This is divided by the total number of payments being made and added with the principal payments to arrive at an amount that consists of both the principal as hale as the interest. The payments have to be made according to this amortization schedule, which is decided before the loan is swerved and could be in the form of simple monthly or yearbook payments. Before the principal amount is issuingd, the terms for calculation of the interest are as well fixed.4. What is the Difference between NPV and IRR?Answer The difference between net income present value and internal rate of return both of these measurements are primarily use in capital budgeting, the process by which companies determines whether a rude(a) investment or expansion opportunity is worthwhile. Given an investment opportunity, a firm needs to decide whether undertaking the investment will generate net economical lettuces or losses fo r the company. The main difference however should be more evident in the method or should I say the units used. piece of music NPV is calculated in cash, the IRR is a percentage value expected in return from a capital project. Due to the fact that NVP is calculated in currency, it everlastingly seems to resonate more easily with the general public as the general public comprehends monetary value better as compared to other values.This does not needs mean that the NPV is automatically the best option when evaluating a firms progress. The best option would depend on the perception of the individual doing the calculation, as well as, his objective in the whole exercise. It is evident that managers and administrators would prefer the IRR as a method, as percentages give a better out discover that can be used to impart strategic decisions over the firm. Another major shortfall associated with the IRR method is the fact that it cannot be conclusively used in circumstances where the cas h flow is inconsistent. While on the job(p) out figures in such fluctuating circumstances may prove tricky for the IRR method, it would pose no challenge for the NPV method since all that it would take is the assembling of all the inflows-outflows and finding an average over the entire period in focus.Evaluating the viability of a project using the IRR method could cloud the certain picture if the figures on the inflow and outflow remain to fluctuate persistently. It may even give the false impression that a short term danger 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 alpha to take note of the go withing significant differences.Section B Case letsCASE 11. Which type of financing is appropriate to each firm?Answer APT Inc. can go in for debt with warrants since it is nearly a zero debt company and is also willing to accept any form of security. Sandford Enterprises can go in for callable debentures since it has a low debt equity ratio combined with excellent track record of servicing debt. Its future cash flows also suggest a strong capability to service future debt. Sharma companion Inc. can go in for issue of preferred stock considering that its fund requirements of $20 million cannot be met by debt issue. Sachetee Energy 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 management control.2. What types of securities must be issued by a firm which is on the growing stage in order to meet the financial requirements?Answer for a company which is in a growing stage, issue of debt may be the most optimum mode of rising fresh funding, this is because future potential cash flows would be sufficient to service the debt obligation or make a premature payment. This wou ld also be in line with the potential 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 philosophy of retaining or divesting management control. A mix of debt and equity could also be a potential source of financing. Cost of raising debt or equity would be an important consideration in deciding the option.CASE 21. How would you judge the potential profit of Bajaj Electronics on the first year of gross gross sales to Booth Plastics and give your views to development the profit.Answer Sales fluctuate seasonally and the average collection period tends to run 40 days. Bad-debt losses are less than 0.6 per cent of sales. The Perluences accounting 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-o f pocket expenses that were not considered in compute the 17 per cent markup on its items. James would receive a 3 per cent commission on all sales. a commission paid whether or not the receivable was collected. In addition to the sales commission, the company would incur inconsistent costs as a result of handling the merchandise for the new account.As a general guideline, warehousing and other administrative variable costs 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 Neck Booth took the, 3 per cent discount. Bajaj Electronicswould realize a 17 per cent markup on these sales since the average markup was calculated on the basis of the customer taking the discount. His department probably spent three times as much money and cause managing a marginal account as compared to a strong account. He also figured that overdue and uncollected funds had to be fin anced 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 limit that electronics give to Booth Plastics.Answer- Strand Electronics has 950 employees and handles a volume of $85 million in sales annually. About $6 million of the sales represents items manufactured by Perluence. He supervises vanadium employees who handle credit application and collections 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 calcu lating 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 variable costs would run 3 %. James estimated first-year sales to Booth of $65,000.Assuming that Neck took the, 3 percent 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, slowly 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 average 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 assess are is 40 per cent. He proposed liberalization in collection effort cast up sales to Rs. 12 lakh increases average collection period by 15 days, and increases the bad debt ratio to 7 percent. Determine the change in net profit.Answer- At 85 percent variable cost the gross contribution 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 miss 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. function 15% 0f (1) 150,000 180,000 3. Receivable (1)*Days/365 82,192 147,945 4. Cost of receivables (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 Contribution (2 ) (6) 91,781 81,206 - We can see from above table that that the balance contribution available 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 working capital. What are the factors which influence the working capital? Answer- The management of the ongoing assets deals with the determination, maintenance, control and monitoring of aim of all the individuals current assets. Current assets have short life span. Each current asset is swiftly converted 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 mulish aspect of applying theoretical 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 information collection was done by primary and secondary sources where the primary sources includes the personal interaction with the industry guide and secondary sources includes external and internal sources involving company annuals. therefrom the presentation of data collected was done in the form of graphs and tables. In summer training I was given the project related to working capital management and CMA forms which were discussed later in the project. For this purpose, I regularly interacted with my industry guide and the other staff of the Corporate Finance Department.For the preparation of the project, I had a loo k on the company profile and made a plan by going through its previous accounting reports. Then, I had analyzed the plan and then I filled the CMA forms and projected as per the instructions of my industry guide.The basic objective of this project is to know the factors that determine the working capital requirements and to analyze the divers(prenominal) approaches available for the financing. Basically, working capital is composed of various items. Most of the time you got inventories and retained profits. According 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 capital 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 adjust properly, reflecting its appreciation or depreciation. But in this case, other factors play an important role.