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Paper 12 : Financial management and International Finance

Chapter 1 : Overview of Financial Management Short Notes :


( For etter !nderstanding" Please tr# to write a short note on #o!r own whatever that might e and then see the following$ 2%%1 &ec '() (a$ *o!ght O!t &eals: In bought out deal, a company allots shares in full or in lots to a single investor or a group of investors at a negotiated price between the company and the investor(s). After a particular period as agreed between the two parties, the shares are issued by investor to the public at a price depending upon the conditions of the market. The holding cost of the sponsor may be either paid by the company or the sponsor may retain the profit on issue as per terms and conditions of agreement. After the public offering the shares may be got listed in stock exchange. !" are used to takeover a running company. It is a process of investment by a sponsor directly in a company. +dvantages : 1, The company can use the fund immediately and is able to focus its attention to execution of pro#ect. 2, It is very suitable in situation when money needs to be arranged fast without which the pro#ect may suffer. -, $reliminary expenses are nil or very little. ., It is easier to convince an investor for an investment in a company rather than the general public. /, %hen the conditions are not favorable for bringing out a public issue, the bought out deals offer an immediate and an amicable solution. 0, %hen the shares are offered to public, the general public becomes more confident about the issue because a professional banker has already invested in it. The public expects high rewards in their investment and they are generally not disappointed. 2%%( &ec '1) (d$ Consorti!m 2ending : &onsortium means a group or association. %hen the cost of pro#ect is too high for a single bank, a consortium of banks is formed to finance the pro#ect. 'ormally a big bank like the ( I is made the leader of the group and called )ead anker for the pro#ect. )ead banker normally performs the evaluation of all aspects of the pro#ect however, each bank of the group can conduct its own due diligence analysis of the pro#ect in order to determine the financial parameters of client and pro#ect. The client does not have *to submit all the details to each bank separately. The ) employs the services of a lead engineer to monitor the progress of the pro#ect on behalf of all the lenders on a continuing basis. The finances are released by the consortium on the basis of report of lead engineer. (c$ Financial 3ngineering : +ngineering is the practical application of mathematical or scientific principles to solve problems or design useful products or services. (imilarly, financial engineering involves the design, development and implementation of new financial instruments and processes and the formulation of creative solutions to problems of finance. ,or instance, a civil engineer designing a bridge has many physical and budgetary constraints and has to answer -uestions like. how much load can it support at any point of time/ &an it withstand the worst0ever earth-uake/ %ill it be completed within 1s. 2* crores/

(imilarly, a financial engineer also works within given physical and budgetary constraints. 3e tries to answer the -uestions like. %ill the instrument deliver the desired result, even if the market moves in an erratic manner / !r how will it withstand the financial earth-uakes like default from one counterpart/ To succeed, both the engineers have to find optimal solutions within the constraints, which are conflicting in nature most of the time. 3ence, the crux of financial engineering lies in innovation and creativity to promote market efficiency. ,inancial engineering means designing financial instrument in a new way with new -ualities and parameters. (omething new and something better is what engineering is all about. (ame is true with financial engineering where new financial instruments with new features with better -ualities are designed, produced and presented. In particular, financial engineering may involve bringing into play instruments like bonds or debentures with warrants entitling shares after certain period, issued at discount or at par, being convertible or non0convertible. Investor should comprehend the rate of return easily on the investment made by him. ,inancial engineering would re-uire assessment of not only the company4s fund position but also circumstances in which funds are sought to be raised and deployed, and also the assessment of external costs that influence the source of such funds. 2%%1 4!ne 1 : 5rite short notes on : (e$ 6ole of m!t!al f!nds in the financial mar7et 8 (f$ secondar# mar7et +nswer : (e$ 6ole of M!t!al f!nds in the financial mar7et : A mutual fund is a collective investment scheme which has three components vi5. sponsor, trust and asset management company. The mutual fund is organi5ed as trust with a board of trustees. The A6& organi5ed as a #oint stock company, manages the funds of the investors under various schemes. The mutual fund have recorded a very impressive growth in India. In 2789 there was only one mutual fund i.e. :nit Trust of India now there are many many mutual funds operating in India. All of them sufficient funds from the general public showing their faith in the system. ((tudent may his or her own points here. This is simply illustrative answer.) (f$ Secondar# Mar7et : (econdary market is a market where transactions, transfers and transmissions of shares of existing companies are done. This is popularly known as stock market. This market is regulated by (+ I. The companies listed in the stock market have to enter into an agreement with (+ I which is called listing agreement. All the listed companies have to follow the terms and conditions of listing agreement. The shares allotted in the primary market ($ market) are traded in secondary market (( market). The ( market gives li-uidity to shares allotted in $ market. The $ and ( market exist together and each needs the other for its survival. There are mainly two reasons why people go to ( market. ,irst is information motivated reasons . It is purely sub#ective in nature hence all persons may have all kinds of reasons. !ne person may believe that some share should be sold because it is overpriced and will fall in prices in future. !n this information or knowledge or anticipation, the person sells his shares but there is another person who buys those shares and what does he think while buying/ ;ust opposite of what the first person thought at the time of selling. oth the types always present in the ( market making the market move.

The second reason may be li-uidity motivated reasons, the investor may be having lack or excess of li-uid cash and may find the ( market very convenient place to park or to get cash. 2%%1 dec 1 a : Off *alance sheet Financing : +nswer : A company when takes some assets on lease basis, it does not become owner of the asset though it is making full use of those assets and will ultimately own those assets if lease agreement has the terms and conditions to this effect. As the company is not owner of the assets taken on lease, it does not show those assets on its balance sheet. This is understatement of assets which may some time lead to some wrongful estimation of balance sheet figures. The non0appearance of leased assets on the balance sheet is sometimes referred to as !ff balance sheet financing. 2%%9 :!ne 1a : Financial Planning 3nvironment : +nswer : The financial planning is not same as it used to be some years ago. This is because of drastic change in the environment in which the financial planning is to be made and implemented. All the dimensions and aspects of financial planning have undergone basic changes in these years whether laws, rules, regulations, investors attitude and awareness, company<s responsibility, accountability and liability, international finance and exchange and many others. The financial planning environment is changing on daily bases with regard to national and international laws, exchange rates, interest rates and exim policy etc. The financial planning should have ade-uate measures to respond to these factors in an efficient and effective way. 2%1% 4!ne 1 c Commercial paper as a so!rce of financing d, 2imitation of financial planning, +nswer : Commercial paper is a financial instrument in which a company promises to pay a certain sum after a certain period. 'aturally the issue value is less than the maturity value. The &$ is not covered by any security as its life is short between some days to some weeks. !ther plus points of commercial paper are as follows . 2. It is transferable and can be used as ordinary currency or money. =. 6aturity can be made flexible to suit the re-uirements of the company. >. It can bring funds even if other instruments are not able to raise funds. ?. 6aturity can be delayed by replacing the old &$s with fresh &$s. @. The company can raise funds at lower rate than from other sources of finances. 'ormally rate of interest paid by the company on &$ is less than what it would have paid to the bank for raising the same amount of money. 2imitations of Financial planning : ($lease prepare your own short note before you see the following. :se your general knowledge on the basis of heading of the short note.) Any planning relates to future and future is uncertain. The facts relate to past and planning re-uires facts. Thus it is impossible to have full proof planning in any matter. That is true with financial planning as well. This is the first and most important limitation of financial planning. The forecasts provide the basis of planning and the forecasts are always doubtful. 6ore the time length of forecast and more doubtful it becomes.

$lanning becomes facts due to certain circumstances. A capital expenditure is made and some amount is to be paid every year as installment. The planning of payment of such installments is based on facts. (The reader may add hisAher own points)

&isting!ish etween :
2%%. :!ne 2 : &isting!ish etween;;;;;;;;;;;;, certificates, 2%%/ dec (a &isting!ish;;;;;;;;;,, certificates, +nswer : %hen the cash flows from the assets are directly and immediately given to the investors, it is called pay through certificate because the cash flows are paid to the investors immediately. %hen the cash flows from assets are collected at some point and then paid to the investors as per some predetermined schedule, such payments are called pass through certificate. 2%%/ &ec 2a &isting!ish etween : (ii$ Capital mar7et and Mone# mar7et (iv$ *oo7 !ilding and !nderwriting +nswer : (ii$ Capital Mar7et vis<=<vis Mone# Mar7et : Partic!lars Capital Mar7et Mone# Mar7et 1, >ime ,or longer term. Boes beyond one Benerally restricted to one accounting year. accounting year. 2, F!nds 6edium and long term funds. (hort term funds. -, Mar7et Place %ell defined. +.g. (tock exchange 'ot defined clearly, can be done on any location. ., &ivisions "efined as primary market and 'o such division. secondary market. /, ?ol!me )ess compared to money market. 6ore compared to capital market. 0, Instr!ments (hares and "ebentures 6any instruments like Inter0 bank call money, 'otice money, short term deposits, 720day treasury bills, commercial papers etc. (, Pla#ers Beneral investors, brokers, anks, 1 I and underwriters, ,inancial institutions etc. Bovernment. (iv$ *oo7 !ilding and !nderwriting : ook building is comparatively new to the underwriting. ook building is the process of discovery of price and final price is not known initially. In underwriting the final price is known well in advance and the underwriter commits to buy the shares at a fixed price if the subscription from the general public is less than 7*C.

&escriptive @!estions :
2%%2 :!ne .a : 5hat are the possi le ;;;;;;;;,, disc!ss roadl#, +nswer : 6elative merits of rights iss!e are as follows : 2. It is economical way of raising finances. =. It is a positive signal to the capital market. >. ,loatation costs can be high. ?. There is no dilution of existing shareholders.

@. "ebt e-uity ratio undergoes change. 6elative merits of p! lic iss!e are as follows : 2. It is economical way of raising finances. =. It is a positive signal to the capital market. >. ,loatation costs can be high. ?. There is dilution of existing shareholders as the number of shares is more. @. "ebt e-uity ratio undergoes change. 9. It does not pose any servicing re-uirement. 2%%/ :!ne -a : *riefl#;;;;;;,, val!e +nswer : (a$ S!staina le Arowth 6ate SA6: +arning of shareholders is utilised in two ways first being distributed as dividend and the other portion is retained by the company. This retained earning is used in the growth of the company. The growth rate is calculated as returns to shareholders less dividend paid to them and is expressed as percentage. ( $ Shareholder val!e : It is the value of the firm which is available to shareholders. The entire value does not belong to shareholders but some part of its goes to the creditors and lenders of the firm. The balance of all cash flows which is available to the shareholders is called the shareholder value.

$ractical -uestions . Take the answer as it is. oth the -uestions, take same answers.
2ist of !nsolved pro lems of this chapter 1 is as follows : Chapter 1 :4!ne 2%%2 '()(a$ Non<performing +ssets (NP+$ 2%%. 4!ne 2a repeat 2%%/ &ec (a 3Bplain the concept" str!ct!re and process of assets ased sec!ritiCation, 2%%/ &ec (a(iii$ 5hat are the enefits of sec!ritiCation to a ho!sing finance compan#, 2%%( 4!ne . *riefl# eBplain the following concepts : &e t Sec!ritiCation +nswer : A comprehensive answer to all the above -uestions is given below. &e t Sec!ritiCation : Asset based securiti5ation or debt securiti5ation or asset securiti5ation denote the same concept. "ebt securiti5ation is the process of converting debt instruments into security (like shares, debentures or negotiable instruments). %orded differently it is the process by which non0tradable assets are converted into tradable assets. "ebts are given by institutions and such debts are secured by some documents. A package of these documents is made and a guarantee is also given about the package. (uch packages are then sold like any security or negotiable instruments to investors. The package will naturally be made in accordance with the legal framework. In this process, non0li-uid assets like mortgage loans, auto loans etc are packaged and sold in the form of securities (like shares, debentures) to investors.
In securiti5ation the loan installments receivables are converted to negotiable instruments and then sold to customers. These negotiable instruments are backed or secured by assets on which original loan was taken (underlying assets). Assets which could be securiti5ed are auto loans, housing loans, consumer loans etc. Assets must be of good -uality for the purpose of securiti5ation.

Chapter 1 2%%0 dec -a : *riefl#;;;;;,, financing, Ch1 2%%9 :!ne .a comment;;;;;;, In India, +nswer : >a7e the same answer, 2%%9 &ec -a8 3Bplain riefl# the f!nctions performed # the S3*I , +nswer : F!nctions of S3*I :
The chief function of (+ I is to protect the interests of investors in the securities market. To achieve this main aim (+ I has been given various powers and with the use of those powers it can take various measures to fulfill its ob#ectives. 2. It is the central authority to enact (+ I Act 277=. =. It controls and monitors all activities related to stock exchanges. >. It regulates the business in stock exchanges. ?. It registers, controls and regulates all the persons relating to securities market. %ithout its registration certificate one cannot function in securities market. It registers and regulates stock brokers, sub0brokers, share transfer agents, fund managers, underwriters, portfolio managers, bankers to an issue, registrars to the issue. @. It registers and regulates various funds and schemes for the securities market like venture capital funds, mutual funds, collective investment scheme. 9. It checks insider trading, fraudulent and unfair trade practices in the securities market. D. It can call for any information, records or explanation from any bank, board, authority, company or corporation in respect of transactions in securities market. 8. Its chief function is to reduce the grievances of investors, it can take all actions and performs all functions in this regard.

Powers of S3*I : (+ I can 2. suspend the trading of any securities in a recognised stock exchange. =. prohibit any person to buy, sell or deal in securitiesE >. restrict or check any person to enter the securities market E ?. ask investigation of any transaction and to retain the securities or proceeds related to that transaction @. direct any intermediary in any manner relating to any transactions which are under investigation. 9. prohibit any company from issuing any prospectus or offer document for the issue of securitiesE D. specify terms and conditions under which any prospectus, offer document or any advertisement may be issued.

Chapter 2: Capital Str!ct!re and Cost of Capital Short notes :


2%%2 dec 1/ (ii$ >rading on eD!it# : In simple terms trading on e-uity means the trading of the firm is done on e-uity. %orded differently, the e-uity is the basis on which trading is done. The firm takes the loan on the basis of its e-uity (shareholders< funds). The term trading on e-uity describes a system of using borrowed funds and investing them in such way to earn more return than the rate of interest being paid on them. The excess income goes to the e-uity shareholders.

The use of the fixed charged sources of funds, such as debts or preference share capital with the owner<s e-uity in the capital structure, is described as financial leverage, gearing or trading on e-uity. The use of the term trading on equity is derived from the fact that it is owner<s e-uity that is used as a basis to raise debts. 2%%( dec 1f: 2everaged !# o!ts and Management !# o!ts +nswer : )everage in financial management means existence of debt. )everaged buy out is an ac-uisition of a company or part thereof mainly through debts. The purchaser uses very little of its own funds and use significant amount of debt to buy the assets. ) !s generally re-uire payment of cash to the seller. %orded simply, ) ! means buying assets with the funds provided by third parties usually by banks or by outside investors. The main ob#ective of ) ! is to increase wealth rapidly in short span of time. It is common to see that the share prices of a company do not match with the net assets of the company. +ven if company is performing well and earning good profit, its performance is not shown and reflected in the price of its share because share prices are a function of many variable and performance is #ust one of such variables. This situation when comes into notice of an investor, he or she makes an offer to buy such company because of two reasons (i) the assets of the company are undervalued and if sold in the market can fetch handsome amount (ii) company can go at a much faster rate if handled more efficiently. 6anagement buy outs or 6 !s mean the managers of the company buy their own company and run the company in their own style. A company with bright prospects and valuable assets but having no favour in share market is usually picked up for ) !s and 6 !s. 2%%1 4!ne 1 5rite short notes on : ( $ O :ectives of Portfolio Management (c$ Strategic 6oll !p +nswer 8 ( $ O :ectives of Portfolio Management (repeat in &ec 2%%0 $ +nswer : $ortfolio consists of shares, debentures and other financial instruments. It is managed to maximi5e or optimi5e the gains for the owner of portfolio. $ortfolio management is mainly concerned with effective and efficient management of various components of portfolio. The main ob#ectives of production management are as follows E (a$ (afely and security of an investment ( $ Ade-uate returns and capital gainsE (c$ Tax planning (d$ Interest and dividend income (e$ 1isk managementE (f$ "iversificationE (c$ Strategic roll !ps : (trategic roll up is multi merger strategy. A company ac-uires many private companies doing the same business. The new company goes public with a new I$!. The proceeds of the issue are used to pay the shareholders of the ac-uired (target) companies. :sually the payment is in the form of shares and cash both. This is also used for synergy effects e.g. many small companies are merged into one big company and the sum total is more than the aggregate of individuals. This allows the small companies to grow into big one. ,amily businesses that are going on for years are common targets of strategic roll ups.

&escriptive @!estions:
=**> dec ? Fou are re-uired GGGGGGGG profit and loss aAc and balance sheet. +nswer : (a$ !ver capitali5ation is the case when the capital is over and above than the re-uirement of the firm. %hen funds are raised in excess of the re-uirement, it is

over capitali5ation. A company is over capitalised when (i) when it can not profitably utili5e the funds available or (ii) when the assets represented by capital are not being used for profitable purposes. Idle assets are an example of over capitali5ation. A company earning profits and have no expansion plans is likely to be over capitalised with time. ( $ Ender capitaliCation or Over trading : %hen the company has inade-uate working capital, it is case of overtrading or under capitali5ation. %hen the growth of company is high but it has inade-uate working capital to match the growth, it is under capitali5ation which simply means that the company does not have enough capital to match its operations. (everal factors may be responsible for this situation e.g. inflation, rising prices of raw materials, excessive taxation, high proportion of fixed assets, use of short term funds for long term purposes, excessive payment of dividend etc. +xpanding business without proper arrangement and management of working capital is generally the main cause of overtrading. :nder capitali5ation takes the company to li-uidation if it is not handled properly. 2%%0 dec 0a : *riefl# eBplanin;;;;;;;;;; portfolio management , +nswer : see a ove, 2%%9 4!ne 2a : 5hat are the ;;;;;;;;,, C+PM, +nswer : 1, It makes a number of assumptions. eing assumptions, these are away from real situation. Thus the assumptions make the model weak, 2, It does not take into account the risk free return and market rate of return are variable over a period of time. It assumes them to be constant. -, It considers that any diversification can be done at any point of time which is not possible. 2%1% 4!ne 2a: 3Bplain the relevanc#;;;;;;;; of management,

2ist of !nsolved pro lems of this chapter 2 is as follows : 2%1% 4!ne 2a: 3Bplain the relevanc#;;;;;;;; of management,

Chapter - : Capital *!dgeting


2%%2 &ec 1/ : Sensitivit# +nal#sis in capital !dgeting : (ensitivity analysis (hereafter written as (A) between two parameters means an analysis which shows how a parameter moves or behaves with respect to changes in other parameter. In other words, it shows how sensitive one parameter is, with respect to changes in other parameter. (A takes care of estimation errors by using a number of variables of a particular item. The method adopted under (A is to evaluate a pro#ect using a number of estimated cash flows to study the '$H under different cash flows. The different cash flows may have different probability and may also be categori5ed as optimistic, most likely and pessimistic. 2%%- 4!ne (10$(d$ Profita ilit# IndeB : It is defined as the ratio of present value of all cash inflows to present value of all cash outflows. If this ratio is greater than one, it indicates positive net present value. At times it is good to know the productivity of the moneyE meaning how much do we get for every rupee we spend. This is crucial because money is always in short supply. $rofitability index #ust does that.

(teps in computation of $I. 2. &ompute the pv of cash inflows using the cost of capital as discounting rate =. &ompute the pv of cash outflows using the cost of capital as discounting rate. >. &ompute the $I Accept the pro#ect if the $I is greater than one. If there are two pro#ects, the pro#ect having higher $I should be preferred. 2%%1 &ec (.a$: 5hat are the main stages in the Capital !dgeting processF +nswer : The main stages in capital budgeting process are . 2. Identify and select the pro#ect. =. &ompute the funds re-uired for the pro#ect and stages of fund re-uirement. >. &ompute the various cash inflows under various conditions due to the pro#ect. ?. ,inalise the pro#ect for implementation. "evelop 6I(. @. "ecide control parameters for successful implementation of the pro#ect. 9. 6onitor regularly the progress of the pro#ect.

Chapter . : Financial Services and 2ease Financing


%rite short notes on . =**= ;une D (d) 6erchant banker . Answer . The term merchant banking has been used differently in different parts of the world and is so widely used that sometimes, it is applied to banks who are not merchants, sometimes to merchants who are not bank and sometimes to those agencies who are neither merchants not banks. 6erchant banking can be defined as a non0banking financial activity resembling banking being performed all over the world by both banking and non0banking institutions. 6erchant bank can be defined as an institution or an organi5ation which provides a number of services including management of share (and debenture) issues, portfolio management services, underwriting of shares, credit management and other financial services. The merchant banks offer services for a fee while commercial banks accept deposits and give loans on interests. 6erchant banks do not act as retail banks for general public and don<t accept deposits generally. The merchant banks are also different from the dealers, traders and brokers of shares and debentures. The merchant banks mainly deal in new issues while the dealers, traders and brokers mainly deal in secondary market. =**= "ec 2@ (b) ,actoring and its advantages In credit sales, the firm gives credit to the debtors who pay at a later date. The debtors generally give bills receivables payable at a particular date. The firm collects the bills on due dates. %hen business increases, the number of 1s also increases. The firm gives the #ob of collection of amount of bills receivables to some agent. ,actor is an agent who collects the amount on bills receivables on behalf of firm and it charges some commission for giving its services. Benerally the firm sells the bills receivables to the factor at an discounted rate. The factor gives immediate cash to the firm and re-uirement and gets bills receivables. As per factoring agreement, the factor may also give some cash in advance to the firm. !n due dates, the factor collects the amount of bills receivables. The factor is responsible for the credit control, sales accounting and the collection of dues from the debtors or buyers. "epending upon the agreement between the factor and the firm, the following advantages may be obtained from factoring services . 2. Immediate cash is received by the firm by selling the 1s.

=. The factor maintain all books and ledgers relating to sales. This is ma#or facility to the selling firm. >. ,actor assumes all risks related to credit sales. $roblem of bad debts, late collection, omission in collection, credit risks and restrictions are all transferred to the factor from the firm. ?. ,actor acts as an advisor regarding credit sales and administration. @. &ontinuous factoring may eliminate the need of credit and collection department. =**? "ec 8(a) . "istinguish between . International factoring and International forfaiting

International Factoring 2. It is selling of bills and trade debts to factors and obtaining cash advances against those bills. =. ,actors act as agent of exporters for collection of bills. >. ,actors do not cover the risk of exporters. ?. 1elationship is continuous after giving the bills to factors.

International Forfaiting 2. It is selling (exporting) of goods to the forfeiter and obtaining cash

=. ,orfaiters become owners after making payments to the exporters. >. ,orfeiters cover all risks because he is the owner. ?. 1elationship is over as soon as the goods are transferred by the exporter after receiving payments. @. It cover export of consumer goods for a @. It covers export of capital goods for relatively short period. medium and long period. 9.

=**9 "ec >b. "istinguish between . ,actoring and ,orfeiting (olution . >a7e the same answer

Chapter / : 5or7ing Capital Management


=**2 "ec 2a. +xplain the concept of operating cycle in regard to working capital. Answer . Take the same answer. 2%%2 4!ne 1a +xplain briefly the factors which are to be taken into consideration while planning the working capital re-uirement of a firm. +nswer : The estimation of working capital re-uirement is not an easy task and a number of factors are to be taken into account before assessing the re-uirement. The following factors (illustrative and not exhaustive) are important while making an estimate of working capital re-uirement. 2. Total costs incurred in materials, labour and wages. =. The time length for which the raw materials are to remain in stores before they are issued for production. >. The time length for which the work0in0progress will remain in cycle before conversion into finished goods.

?. The time length for which the finished goods will remain in stores. @. The average time allowed to customers for making payments and average amount of discounts likely to be allowed to them. 9. The credit period allowed by the suppliers. D. The time lag in payment of wages and overheads. 8. The re-uirement of cash for day to day operations of the firm. 2%1% 4!ne .a : A company is currentlyGGGGGGGGGGGGGGG. overcome the problem. +nswer : >a7e the same answer,

&hapter 9. "ividend policies =**= ;une @a %hat are the factorsGGGGGGGGGG discuss. Answer . Take the same answer. =**8 ;une ?c %hat are the determinants of "ividend policy/ Answer . Take the same answer. Chapter ( : Financial +nal#sis and Planning
2%%( &ec 1 : 5rite short notes on 3conomic val!e added (3?+$ Answer . +conomic value added and economic value addition both contain same meaning and both are abbreviated as +HA. The accounting profit as computed by the profit and loss aAc denotes the profit accrued to the owners i.e. shareholders. In accounting profit computations the cost of capital is ignored therefore it overstates profit and understates the loss. +HA is economic profit which takes into account the cost of e-uity and debt also. Any surplus generated from operating activities above the cost of capital is termed as +HA or economic value added. It is computed as +HA I 'et operating profit after tax J &ost of capital employed. The term capital employed includes e-uity and debt as employed into operations. '!$AT is related to operating income and expense related to normal course of business and does not include any non0recurring income and expenditure. +HA is used for #udging the financial performance of the business and wealth created by the enterprise. +HA takes stakeholders (shareholders K employees) into consideration for assessing the performance of the enterprise. The measure of +HA shows whether management is adding or destroying value over a period of time. 2%%1 &ec 1: 5rite short notes on : &! point Chart +nswer : >a7e the same sol!tion, &escriptive @!estions 2%%1 &ec .a : *riefl# eBplain the profita ilit# ratios, +nswer : >a7e the same sol!tion, 2%%0 4!ne / a: *riefl# eBplain the following concepts: (i$ 3conomic val!e added and (ii$ Shareholders val!e +nswer : (i$ See a ove in short notes, (ii$ The entire value of the company does not belong to shareholders. (ome part of value should be credited to lenders and creditors. (hareholder value is that value of the

company which belongs to the shareholders and is e-ual to total value of the company less debts. The shareholder value is given by . (H I $H of all future cash flows K &ash and cash e-uivalents J !utstanding debts. All strategies and decisions should be focused on creation and enhancement of (H. 2%%0 &ec ( : 3Bplain what is meant # Free Cash Flow, +nswer : >a7e the same sol!tion, 2%%( 4!ne -a 3Bplain what is meant # Free Cash Flow to 3D!it#, +nswer : >a7e the same sol!tion, 2%%1 &ec 2 : Profit margin and ;;;;;;;;;;;;;, S!ch as >ata SteelF +nswer : >a7e the same sol!tion,

&hapter 8 . )everage and &vp analysis


2%%1 &ec ( %rite short notes on business risk +nswer : usiness 1isk . usiness risks refer to changes in + IT with the changes in environment (internal and external both) conditions. It is unsystematic as well as systematic risk both and is related to the business itself. usiness risk can be internal and external both Internal risk may be due to improper product mix, non0 availability of raw materials, incompetence to face the competition etc. +xternal business risk occur due to change in operating conditions like business cycles, changes in level of govt. control, national and international market conditions. 2%%2 &ec 1/ : 5rite short notes (i$ Operating and cash c#cles Answer . Take the same solution. 2%%1 &ec 1 5rite short notes on (c$ Operating and Financial leverage (d$ *rea7 even point +nswer : >a7e the same answer as given,

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