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7/30/2019 MB0045 Financial Management MBA Sem2 Assignment
1/4
Srimathe Ramanujaya Namaha
Name Krishnan ChariRegistration no 1208001521Course MBA Semester -2Subject & Code Financial Management MBA0045Date 19th May 2013
Answer To Q2
PV of an annuity factor of Rs 500 for 4 years
Annuity 500
discountrate 10%
tenor 4 years
formulae = PV=A*((1+i)^n-1)/(i*(1+i)^n)
Year=n
Cash
flow
Present value discounted at 10%,
given by ( cash flow/(1+0.10)^n
Present
value
annuity
factor
Present value of cash flow
=PV annuity factor x cash
flow,
1 500 (500/(1+0.10)^1 0.909 454.5
2 500 (500/(1+0.10)^2 0.827 413.5
3 500 (500/(1+0.10)^3 0.751 375.5
4 500 (500/(1+0.10)^4 0.683 341.5
Total sum ( PV FACTOR) 3.17 1585
The present value of an annuity cash flow of Rs 500 received every year for 4 years is therefore Rs 1585
7/30/2019 MB0045 Financial Management MBA Sem2 Assignment
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Answer q3.
Based on the data provided, we use the dividend growth model to estimate the cost of equity capital
Currnet market price per share Rs 110
Dividend expectation in period is Rs 5 per share
Growth rate in dividends is 10% p.a
The dividend growth rate model for cost of equity is given by Cost of equity (K)= (D/Pe)+g
Where D = dividend expectation
Pe= current price of equity
g= the growth rate in equity dividends
using the above data , the cost of equity as per dividend growth model works out to be as follows
Cost of equity =(5/110)+(10%)= 4.55%+10% =14.54% p.a
Answer to question 5
Initial outlay of investment is Rs 1,00,000
The risk free rate and the risk premium is 10% p.a
Based on the cash flow structure, the NPV is computed first using the discount rate as risk free rate at
10% as follows
Year
Cash flow
outflow
Cash
inflow
PV factor
formula
PV
factor
PV of cash
inflows
PV of cash
outflows
0 -100000 0 1 10000
1 40000 1/(1+0.10)^1 0.909 36364
2 50000 1/(1+0.10)^2 0.826 413223 15000 1/(1+0.10)^3 0.751 11270
4 30000 1/(1+0.10)^4 0.683 20490
109446 10000
NPV of the project is
he PV of cash inflow-
PV of Cash outflow 9446
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Answer Q5 continued
Under the second scenario, the NPV of the project is computed using the risk free rate of 10% and also
the risk premium of 10% which results in the discount rate being increased to 20%. The NPV of the
project after valuing the cash inflows and outflows of the project at 20% p.a is as follows
Year Cash flow outflow Cash inflow
PV
factor PV of cash inflows PV of cash outflow
0 -100000 0 1 1000
1 40000 1/(1+0.20)^1 0.833 33333
2 50000 1/(1+0.20)^2 0.694 34722
3 15000 1/(1+0.20)^3 0.579 8681
4 30000 1/(1+0.20)^4 0.482 14468
91204 1000
NPV of the project is the
PV of cash inflow-PV of
Cash outflow -8796
When the discount rate includes the risk premium the NPV of the project is in the negative
and indicates that the project should rejected as it does not recover the financial risk of the project
investments
Answer to Q4.
The basic assumptions of the Modiflani Miller model of capital structure and firm valuations are as
under :
Perfect capital markets : According to this assumption, securities can be freely traded where in
investors can buy and sell securities without transaction cost , securities are infinitely divisible and
availability of all required information at all times.
Rationale behavior of investors : Investors are assumed to behave rationally meaning using the right
combination of risk and return.
Homogenous risk perception : It is assumed that risk perception across investors is the same in term sof
business risk and uncertainty of returns.
Dividend payout is assumed to be 100% of the corporate earnings.
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The value of the firm is independent of the degree of financial leverage obtained by the firm. This is a
proposition of MM approach to value of the firm.
Answer to Q6.
Credit policy of the company sets standards for management of the account receivable or debtors of the
company and also the terms of doing business with its customers.
Some of the critical areas that a credit policy must address or focus on are as follows.
1.Credit terms : The credit policy should specify the reasonable terms on which the company should
offer credit terms for customers say in no of days credit such as 30 days or 45 days etc. The policy should
specify clearly the distinct credit terms that should be offered as between institutional and retail clients.
For institutional clients who form part of distributional chain, credit terms may be longer than that
offered for retail clients. Companies generally sell their commodities in cash for the retail segment and
only
2. Cash discount : The credit policy should also address the cash discounts that it needs to offer for
customers for any early payments made. For example it may be clearly state that cash discount of 2%
will be provided for any early payments over the traditional 30 day credit period.
3. Receivables management : The credit policy should also adhere to management of receivables in the
sense it should lay down the standard operating procedure for the following
a) Routine follow up and reporting of aging of receivables
b) Methods of dealing with doubtful and default receivables