Program: Post Graduate (PG)
Course: Advanced Financial Management
Target Group: MBA Students
Individual Assignment One
NATURE OF FINANCIAL MANAGEMENT
Q1. How does the modern financial manager differ from the traditional financial manager? Does the modern financial manager’s role differ for the large diversified firm and the small to medium size firm?
Q2. What are the basic financial decisions? How do they involve risk-return trade-off?
Q3. In what ways is the wealth maximize objective superior to the profit maximize objective? Explain.
Q4. How should the finance function of an enterprise be organized? What functions do the financial officers perform?
Q5. When can a conflict arise between shareholders and managers goals? How does wealth maximization goal take care of this conflict?
FINANCIAL STATEMENTS ANALYSIS
Q1. What do you mean by the liquidity of a firm? How can the liquidity of a firm be assessed?
Q2. What are the leverage or capital structure ratios? Explain the significance and limitations of the debt-equity ratio as a measure of the firm’s solvency?
Q3. Explain the calculation and significance of the various measures of rate of return on investment.
Q4. What is the firm’s earning power? How are the net profit margin and the assets-turnover related?
Q5. Ratios are generally calculated from historical data. Of what use are they in assessing the firm’s future financial condition?
FINANCIAL PLANNING AND STRATEGY
Q1. Explain the steps involved in preparing a financial plan. What are the merits of a financial planning?
Q2. What is a financial model? Illustrate the development of a simple financial model. What are the advantages and limitations of a financial model?
VALUATION OF BONDS & SHARES
Q1. Explain the concept of valuation of securities? Why is the valuation concept relevant for financial decision-making purposes?
Q2. Illustrate the method of valuing (i) bonds in perpetuity and (ii) bonds with maturity.
Q3. Define a yield curve. What are the reasons for an upward sloping yield curve? What is an inverted yield curve?
Q4. What is an ordinary share? What are its features? How does it differ from a preference share and a debenture?
Q5. What is the perpetual growth model? What are its assumptions? Is this model applicable in a finite case?
Q6. What is the difference between the expected and the required rates of return in the context of ordinary shares? When would this difference banish?
Q7. What is meant by growth opportunities? How are they valued? Illustrate.
THE COST OF CAPITAL
Q1. Define cost of capital? Explain its significance in financial decision-making.
Q2. How is the cost of debt computed? How does it differ from the cost of preference capital?
Q3. The basic formula to calculate the cost of equity is: (DIV1/Po)+g. Explain its rationale.
Q4. What is the CAPM approach for calculating the cost of equity? What is the difference between this approach and the constant growth approach? Which one is better? Why?
Q5. How is the weighted average cost of capital calculated? What weights should be used in its calculation?
Q6. ‘Marginal cost of capital is nothing but the average cost of capital.’ Explain.
CAPITAL BUDGETING DECISIONS
Q1. Despite its weaknesses, the payback period method is popular in practice? What are the reasons for its popularity?
Q2. Explain the merits and demerits of the time-adjusted methods of evaluating the investment projects.
Q3. Under what circumstances do the net present value and internal rate of return methods differ? Which method would you prefer and why?
Q4. What is profitability index? Which is a superior ranking criterion, profitability index or the net present value?
Q5. “The payback reciprocal has wide applicability as a meaningful approximation of the time adjusted rate of return. But it suffers from certain major limitations.” Explain.
FINANCIAL AND OPERATING LEVERAGE
Q1 Does financial leverage always increase the earnings per share? Illustrate your answer.
Q2 If the use of financial leverage magnifies the earnings per share under favorable economic conditions, why companies do not employ very large amount of debt in their capital structures?
Q3 Explain the merits and demerits of the various measures of financial leverage.
Q4 Define operating and financial leverage. How can you measure the degree of operating and financial leverage? Illustrate with an example.
Q5 What is the degree of combined leverage? What do you think is the appropriate combination of operating and financial leverage?