Bba 301
Bba 301
Bba 301
SECTION A
Q.1.
i.
iv.
Cash Requirements
• Volume of Sales
• Inventory Turnover
• Business Turnover
• Repayment Ability
• Cash Reserves
• Operation Efficiency
• Change in Technology
v.
Safety stock is the stock held by a company in excess of its requirement for the
lead time. Companies hold safety stock to guard against stock-out.
Safety Stock = (Maximum Daily Usage − Average Daily Usage) × Lead Time
Lead time is the time which supplier takes in ordering the items
formula of EOQ:
vii.
The payback period is the length of time required to recover the cost of an
investment. The payback period of a given investment or project is an
important determinant of whether to undertake the position or project, as
longer payback periods are typically not desirable for investment positions.
The payback period ignores the time value of money (TVM), unlike other
methods of capital budgeting such as net present value (NPV), internal rate of
return (IRR), and discounted cash flow.
viii.
x.
Factoring therefore relieves the first party of a debt for less than the total
amount providing them with working capital to continue trading, while the
buyer, or factor, chases up the debt for the full amount and profits when it is
paid. The factor is required to pay additional fees, typically a small percentage,
once the debt has been settled. The factor may also offer a discount to the
indebted party.
SECTION B
Q.2.
2. Economic Growth and Stability: Proper financial planning will ensure your
economic growth. Gradually you will expand your wealth creation which will
help you to grow financially. Important thing in someone’s life is financially
stability. Only way to ensure your financial stability is through economic
growth and only option to ensure the same is through financial management.
3. Improve Standard of Living: Once you have learned and taken good
knowledge on financial management, this will not only provide you financial
stability and peace of mind but also it will improve your standard of living. Your
economic growth will transform into better standard of living.
4. Tax Planning: Your financial planning should also include your tax planning.
When failing to plan your taxes appropriately, it will lead you spend more out
of your pocket. For example: If you can analyze that current fiscal year you will
be spending less on taxes but in next year you are more likely to pay heavy
taxes then you should manage your budget and saving accordingly. This will
help you towards economic growth else you may run out of cash and may lead
in disturbance in your investment decisions.
Objectives of Financial Management
3. To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
Q.3.
1. Easy to understand the financial position of the firm: The ratio analysis
facilitates the parties to read the changes taken place in the financial
performance of the firm from one time period to another.
5. Possibility for Financial planning and control: It not only guides the firm
to earn in accordance with the financial forecasting but also facilitates
the firm to identify the major source of expense which drastically has
greater influence on the earnings.
2. Ambiguity in the handling of terms: If the tool of analysis taken for the
study of inter firm analysis on the profitability of the firms lead to
various complications. To study the profitability among the firms, most
required financial information are profits of the enterprise. The profit of
one enterprise is taken for analysis is Profit After Taxes (PAT) and
another is considering Profit Before Interest and Taxes (PBIT) and third
one is taking Net profit for study consideration. The term profit among
the firms for the inter firm analysis is getting complicated due to
ambiguity or poor clarity on the terminology.
3. Qualitative factors are not considered: Under the ratio analysis, the
quantitative factors only taken into consideration rather than qualitative
factors of the enterprise. The qualitative aspects of the customers and
consumers are not considered at the moment of preparing the financial
statements but while granting credit on sales is normally considered.
5. Time value of money is not considered: It does not give any room for
time value of money for future planning or forecasting of financial
performance; the main reason is that the fundamental base for
forecasting is taken from the yester periods which never denominate the
timing of the benefits.
Q.7.
Capital structure means the proportion of debt and equity used for financing
the operations of business.
capital structure represents the proportion of debt capital and equity capital in
the capital structure. What kind of capital structure is best for a firm is very
difficult to define. The capital structure should be such which increases the
value of equity share or maximizes the wealth of equity shareholders.
Debt and equity differ in cost and risk. As debt involves less cost but it is very
risky securities whereas equity is expensive securities but these are safe
securities from companies’ point of view.
Equity securities are safe securities from company’s point of view as company
has no legal obligation to pay dividend to equity shareholders if it is running in
loss but these are expensive securities.
Capital structure of the business affects the profitability and financial risk. A
best capital structure is the one which results in maximizing the value of equity
shareholder or which brings rise in the price of equity shares. Generally
companies use the concept of financial leverage to set up capital structure.
the types of leverages:
1. Operating Leverage:
2. Financial Leverage:
Financial leverage is mainly related to the mix of debt and equity in the capital
structure of a firm. It exists due to the existence of fixed financial charges that
do not depend on the operating profits of the firm. Various sources from which
funds are used in financing of a business can be categorized into funds having
fixed financial charges and funds with no fixed financial charges. Debentures,
bonds, long-term loans and preference shares are included in the first category
and equity shares are included in the second category.
3. Combined Leverage:
A firm incurs total fixed charges in the form of fixed operating cost and fixed
financial charges. Operating leverage is concerned with operating risk and is
expressed quantitatively by DOL. Financial leverage is associated with financial
risk and is expressed quantitatively by DFL. Both the leverages are concerned
with fixed charges. If we combine these two we will get the total risk of a firm
that is associated with total leverage or combined leverage of the firm.
Combined leverage is mainly related with the risk of not being able to cover
total fixed charges.
Q.8.
Fund flow is the net of all cash inflows and outflows in and out of various
financial assets. Fund flow is usually measured on a monthly or quarterly basis;
the performance of an asset or fund is not taken into account, only share
redemptions, or outflows, and share purchases, or inflows. Net inflows create
excess cash for managers to invest, which theoretically creates demand for
securities such as stocks and bonds.
A roaring bull market attracted investors from the sidelines into the fray in the
early part of 2018, as was evidenced by the direction of fund flows. Investors
poured $58 billion into mutual funds and exchange-traded funds (ETFs) in the
four weeks ended Jan. 17, the fastest pace of all time. Passively managed
equity ETFs recorded $38.2 billion in outflows for the first several weeks of
January, while a net four-year peak of $5.6 billion flowed into mutual funds,
suggesting a return of positive sentiment toward active management after
years of outflows as managers underperformed the market but expected
higher fees than passive management.
b) Cost of capitat