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MBA Semester 2
MB0045: FINANCIAL MANAGEMENT
Q1. Explain the liquidity decisions and its important elements. Write complete
information on dividend decisions.
Liquidity decisions
The liquidity decision is concerned with the management of the current assets, which is a
pre-requisite to long-term success of any business firm.This is also called as working capital
decision. The main objective of the current assets management is the trade-off between
profitability and liquidity, and there is a conflict between these two concepts. If a firm does
Q2. Explain about the doubling period and present value. Solve the below given
problem:
Under the ABC Banks Cash Multiplier Scheme, deposits can be made for periods
ranging from 3 months to 5 years and for every quarter, interest is added to the
principal. The applicable rate of interest is 9% for deposits less than 23 months and
10% for periods more than 24 months. What will be the amount of Rs. 1000 after 2
years?
Doubling period
A very common question arising in the minds of an investor is how long will it take for the
amount invested to double for a given rate of interest. There are 2 ways of answering this
question:
1. One way is to answer it by a rule known as rule of 72. This rule states that the period Get
business risk factors, which can be viewed as the uncertainty inherent in estimates of future
operating income.
Q4. Explain the factors affecting Capital Structure. Solve the below given problem:
Given below are two firms, A and B, which are identical in all aspects except the
degree of leverage employed by them. What is the average cost of capital of both
firms?
Details of Firms A and B
Firm A
Rs 1,00,000
Nil
Rs. 1, 00, 000
15%
10%
Rs. 6, 66, 667
Firm B
Rs 1,00,000
Rs 25,000
Rs. 75, 000
15%
10%
Rs. 5,00, 000
Nil
Rs. 6, 66, 667
Q5. Explain all the sources of risk in capital budgeting with examples.
Solve the below given problem:
An investment will have an initial outlay of Rs 100,000. It is expected to generate cash
inflows. Cash inflow for four years.
Year
1
2
3
4
Cash Inflow
40000
50000
15000
30000
Sources of risk
The five different sources of risk are:
Project-specific risk
Industry-specific risk
International risk
Market risk
Q6. Explain the objectives of Cash Management. Write about the Baumol model with
their assumptions.
Objectives of Cash Management
The major objectives of cash management in a firm are: