Download CUSTOMER_CODE SMUDE DIVISION_CODE SMUDE

CUSTOMER_CODE
SMUDE
DIVISION_CODE
SMUDE
EVENT_CODE
APR2016
ASSESSMENT_CODE MB0045_APR2016
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
9542
QUESTION_TEXT
Discuss the goals of financial management
SCHEME OF
EVALUATION
Profit maximization
Profit maximization is based on the cardinal rule of efficiency. Its goal is
to maximize the returns with the best output and price levels. Profit
maximization has been criticized on many accounts:
•The concept of profit lacks clarity. What does profit mean?
•In these sense, profit is neither defined precisely nor correctly. It creates
unnecessary conflicts regarding the earning habits of the business
concern. Differences in interpretation of the concept of profit thus
expose the weakness of profit maximization
•Profit maximization neither considers the time value of money nor the
net present value of the cash inflow. Is does not differentiate between
profits of current year with the profits to be earned in later years
•The concept of profit maximization fails to consider the fluctuations in
profits earned from year to year. Fluctuations may be attributed to the
business risk of the firm. Risks may be internal or external which will
affect the overall operation of the business concern
•The concept of profit maximization apprehends to be either accounting
profit or economic normal profit or economic supernormal profit
Wealth maximization
The term wealth means shareholder’s wealth or the wealth or the wealth
of the person’s those who are involved in the business concern.
•Wealth maximization is based on the concept of cash flows. Cash flows
are a reality and not based on any subjective interpretation. On the other
hand, profit maximization is based on accounting profit and it also
contains many subjective elements.
•Wealth maximization considers time value of money. Time value of
money translates cash flow occurring at different periods into a
comparable value at zero period. In this process, the quality of cash flow
is considered critical in all decisions as it incorporates the risk associated
with the cash flow stream. It finally crystallizes into the rate of return
that will motivate investors to part with their hard earned savings.
Maximising the wealth of the shareholders means positive net present
value of the decisions implemented
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
9543
QUESTION_TEXT
Describe the factors affecting the determination of working capital in an
organization
SCHEME OF
EVALUATION
Nature of business: Working capital requirements are basically
influenced by the nature of business of the firm. Trading organization are
forced to carry large stocks of finished goods, accounts receivables and
accounts payables. Public utilities require lesser investment in working
capital.
Size of business operation: Size of measured in terms of the scales of
operations. Normally, a firm with large scale of operation requires more
working capital than a firm with a low scale of operation
Manufacturing cycle: Capital intensive industries with longer
manufacturing process will have higher requirements of working capital,
because of the need of running their sophisticated and long production
process.
Products policy: Production schedule of a firm influences the
investments in inventories. A firm, exposed to seasonal changes in
demand that follows a steady production policy, will have to face the
costs and risks associated with inventory accumulation during the offseason periods. On the other hand, a firm with a variable production
policy will be facing different dimensions of management of working
capital. Such a firm has to effectively handle the problem of production
planning and control associated with utilization of installed plant
capacity, under conditions of varying volumes of production of products
of seasonal demand.
Volume of sales: There is a positive direct correlation between the
volume of scales and the size of working capital of a firm
Term of purchase and sales: A firm that allows liberal credit to its
customers will need more working capital than a firm with strict credit
policy. A firm, which enjoys liberal credit facilities from its suppliers
requires lower amount of working capital when compared to a firm,
which does not have such a facility
Operating efficiency: The firm with high efficiency in operation can
bring down the total investment in working capital to lower levels. Here,
effective utilization of resources helps the firm in bringing down the
investment in working capital
Price level changes: Inflation affects the working capital levels in a
firm. To maintain the operating efficiency under an inflationary set up, a
firm should examine the maintenance of working capital position under
constant price level. The financial capital maintenance demands a firm to
maintain higher amount of working capital, keeping pace with rising
price levels. Under inflationary conditions, the same levels of inventory
will require increased investment. The ability of a firm to revise its
products’ price with rising price levels will decide the additional
investment to be made to maintain the working capital intact.
Business cycle: During boom, sales rise as business expands. Depression
is marked by a decline in sale. During boom, expansion of business can
be achieved only by augmenting investment in various assets that
constitute working capital of a firm. When there is a decline in business
on account of depression in economy, the inventory glut forced a firm to
maintain the working capital at a level far in excess of the requirements
under normal conditions.
Processing technology: Longer the manufacturing cycle, larger is the
investment in working capital. When raw material passes through several
stages in the production, process inventory will increase
correspondingly.
Fluctuations in the supply of raw materials: Companies which use
raw materials available only from one or two sources are forced to
maintain buffer stock of raw materials to meet the requirements of
uncertainty in lead time. Such firms normally carry more inventory than
it would have done, had the materials been available in normal market
conditions
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
9545
QUESTION_TEXT
Examine the different types of costs associated with inventory
management
SCHEME OF
EVALUATION
Material cost: Material cost is the cost of purchasing goods and related
costs such as transportation and handling costs that are associated with it.
Ordering cost: The expenses incurred to place orders with suppliers and
replenish the inventory of raw materials are called ordering cost. They
include the costs of the following:
•Requisitioning
•Purchase ordering or set–up
•Transportation
•Receiving, inspecting and receiving at the ware house.
These costs increase in proportion to the number of orders placed. Firms
maintaining large inventory levels, place a few orders and incur less
ordering costs.
Carrying cost: Costs incurred for maintaining the inventory in
warehouses are called carrying costs. They include interest locked up in
inventory, storage, insurance, taxes, obsolescence, deterioration spoilage,
salaries of warehouse staff and expenses on maintenance of warehouse
building. The greater the inventory held, the higher the carrying costs.
Shortage costs or stock-out costs: These are the costs associated with
either a delay in meeting the demand or inability to meet the demand due
to shortage of stock. These costs include:
•Loss of profit on account of sales and loss caused by the stock out
•Loss of future sales as customers migrate to other dealers
•Loss of customer goodwill
•Extra costs associated with urgent replenishment purchases
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
9546
QUESTION_TEXT
Discuss the different forms of dividend
SCHEME OF
EVALUATION
Cash Dividend: Most companies pay dividends in cash. The investors
also, especially the old and retired investors, depend on this form of
payment for want of current income.
Scrip dividend: In this form of dividend, equity shareholders are issued
transferable promissory notes with shorter maturity periods, which may
or may not bear interest. This form is adopted if the firm has earned
profits and it will take some time to convert its assets into cash. Payment
of dividend in this form is done only if the firm is suffering from weak
liquidity position.
Bond dividend: Scrip and bond dividend are the same, except that they
differ in terms of maturity. Bond dividends carry longer maturity periods
and bear interest, whereas scrip dividends carry shorter maturity periods
and they may or may not carry interest.
Stock dividend( bonus shares): Stock dividend, as known as USA or
bonus shares, as known in India, is the distribution of additional shares
to the shareholders at no additional cost. This has the effect of increasing
the number of outstanding shares of the firm. The reserves and surplus
are capitalized to give effect to bonus issue. This decision has the effect
of recapitalization, that is, transfer from reserves to share capital and not
changing the total net worth. The investors are allotted shares in
proportion to their present shareholding. Declaration of bonus shares has
a favourable psychological effect on investors. They associated it with
prosperity.
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
125903
QUESTION_TEXT
Explain the factors related to internal constraints in capital
rationing.
(Each point carries 2 marks each)
SCHEME OF
EVALUATION
a.
b.
c.
d.
Private owned company
Divisional constraints
Human resource limitations
Dilution
e.
Debt constraints
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
125909
QUESTION_TEXT
Write a short note on Net Income approach and net Operating
Income approach.
Net Income approach explanation and formula
SCHEME OF
EVALUATION
Net Operating Income approach
explanation and formula
(5 marks)
(5 marks)