CUSTOMER_CODE
SMUDE
DIVISION_CODE
SMUDE
EVENT_CODE
JULY15
ASSESSMENT_CODE MB0045_JULY15
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
9547
QUESTION_TEXT
What is capital budgeting decision? Highlight its types
SCHEME OF
EVALUATION
Meaning of capital budgeting: Capital budgeting is a blue–print of
planned investments in operating assets. Thus, capital budgeting is the
process of evaluating the profitability of the projects under consideration
and deciding on the proposal to be included in the capital budget for
implementation.
Types:
●Decision to replace the equipments for maintenance of current level of
business or decisions aiming at cost reductions, known as replacement
decisions
●Decisions expansion through improved network of distribution or on
expenditure for increasing the present operating level
●Decisions for production of new goods or rendering of new services
●Decisions on penetrating into new geographical area
●Decisions to comply with the regulatory structure affecting the
operations of the company, like investments in assets to comply with the
conditions imposed by Environmental Protection Act
●Decisions on investment to build township for providing residential
accommodation to employees working in a manufacturing plant
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
73185
QUESTION_TEXT
What is risk? Explain the types of risk?
SCHEME OF
EVALUATION
Risk may be termed as a degree of uncertainty. It is the possibility
that the actual result from an investment will differ from the
expected result. 2M
Types
1. Stand-alone risk
2.
3.
Portfolio risk
Market risk
4. Corporate risk
2M each with explanation
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
125906
QUESTION_TEXT
Explain Economic Order Quantity. What are the assumptions of EOQ?
Economic order quantity (EOQ) refers to the optimal order size that will
result in the lowest ordering and carrying costs for an item of inventory
based on its expected usage, carrying costs and ordering cost.
EOQ is defined as the order quantity that minimises the total cost
associated with inventory management.
(4 marks)
EOQ is based on the following assumptions:
Constant or uniform demand – The demand or usage is even throughout the period.
SCHEME OF
EVALUATION
Known demand or usage – Demand or usage for a given period is
known i.e. deterministic.
Constant unit price – Per unit price of material does not change and is
constant irrespective of the order size.
Constant carrying costs – The cost of carrying is a fixed percentage of
the average value of inventory.
Constant ordering cost – Cost per order is constant and is not affected
by the size of the order.
Inventories can be replenished immediately as the stock level reaches
exactly equal to zero. Constantly there is no shortage of
inventory.
(1 mark each)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
125908
QUESTION_TEXT
Explain the steps in Financial Planning.
There are six steps in Financial Planning
1. Establish corporate objectives
(2 marks)
SCHEME OF EVALUATION
2. Formulate strategies
(1 mark)
3. Assign responsibilities
(1 mark)
4. Forecast financial variables
(2 marks)
5. Develop plans
(2 marks)
6. Create flexible economic environment
(2 marks)
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)