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answers set 1 fin-1

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SET 1
1. Financial managements
Strategic planning, organizing, directing, and controlling, financial undertaking in an
organization also include applying managements principle to the financial assets of an
organization. like certification, documentation, justification(reasons) and timelines.
2. Function of financial manager
Procurements function(investments)
Disposal of profit (dividend decision)
Managements of cash (liquidity)
Capital requirements (financing)
3. Would finance manager involved in merger or acquisition
YES?
4. Can board of director make decision regarding dividend without consulting finance
manager
NO?
5. Aim of working capital managements
Liquidity
Profitability
6. When does capital rationing arise?
o Act of putting or placing restriction of amount of new investment
o Arise when past investments return was lower than expected
7. Financial intermediaries and example
o An institutional such as bank ,building society or unit trust company that hold
fund from lenders in order to make loan to borrower
o Pension fund, insurance company, depository institution
8. In financial managements, what assumed to be financial objective
Profitability able to make profit
Liquidity, able to meet short term obligation
Efficiency ability to utilize assets comparative to its revenue and profit
Stability strength and potency of company financial state
9. Principle agency and relationship between shareholder and manager and how give rise to
agency problem
Agent should act in the best interest of the principal and should not aim to benefit
at the expense of the principal
Principal should hire another person called agents to perform some services on
behalf and delegate some decision-making authority to that other person
In practice manager may not act in the best interest of shareholder and may pursue
their own interest or personal goals, that is agency problem
10. Meaning of goal congruence
Situation where goals of different group coincide example goal between
manager and director or shareholder aimed to reach the same objective
11. Methods for achieving goal congruence between shareholders and directors
Incentive to managers
Rewarding manager with share option
Pay or bonuses related size of profit
12. What is meant by the term ‘corporate governance’?
Corporate governance refers broadly to the rules, processes, or laws by which
businesses are operated, regulated, and controlled.
The term can refer to internal factors defined by the officers, stockholders or
constitution of a corporation, as well as to external forces such as consumer
groups, clients, and government regulations
13. State whether the following statements are true or false:
i. The impact of an economic slowdown in one country is restricted to that
region alone.
ii. Non-financial stakeholders have no role in financing decisions.
iii. Weak management may face the pressure of takeovers by firms in the
same industry who may wish to take over the company and improve its
financial position through efficient management.
SET 2
1. Concept of working capital
There two concept of working capital that is;
 Gross working capital
Refers to the firm’s investment in current assets. Current asset are
assets which can be converted into cash, within an accounting year and
include cash, short term securities, debtor, bill receivable and inventory
 Net working capital
Refers to the difference between current assets and current liabilities.
Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills
payable, and outstanding
The net working capital can be positive or negative, the positive working
capital arises when current assets exceeds current liabilities but negative
working capital occurs when the current liabilities exceeds the current
assets
2. Advantages of maintaining an adequate working capital in a small business
3. (i) collection of receivables
Average receivables x 365 days
Sales
2,000 x 365 days
50,000
14.6 days
(ii)
(iii) Payment to creditors
Average creditor x 365 days
Purchases
Purchases = cost of goods sold + closing stock – opening stock
= 30,000 + 7,000 – 5,000
= 3,2000
Average creditor = opening creditor + closing creditor
2
= 2700 + 4800
2
= 3750
From payment to creditor = 3750 x 365 days = 42.7 days
32000
(iv)
(v)
4. Cash Conversion Cycle = Gross Operating Cycle – Days Payable Outstanding
But, Gross Operating Cycle = Days inventory outstanding + Days sales outstanding
(a) Cash conversion cycle when the average age of inventory changes
to 90 days
CCC = 90 + 75 – 60
= 105 days
(b) Cash conversion cycle when collection period changes to 60 days
CCC = 105 + 60 – 60
= 105 days
(c) Cash conversion cycle when payment period changes to 105 days
CCC = 105 + 75 – 105
= 75 days
5. Risk return trade off
Refer to the financial management principles which states that the more risk an
investment has, the higher will be its expected return. The investment alternatives have
different amounts of risk and expected returns. Investor sometimes choose to put their
money in risky investment because these investments offer higher expected returns.
6. (c)
INCOME STATEMENT FOR STRONG, AVERAGE & WEAK ECONOMIES
DETAILS
AGGRESSIVE
BETWEEN
CONSERVATIVE
WEA
AVE
STR
WEA
AVE
STR
WEA
AVE
STR
K
R
O
K
R
O
K
R
O
"000"
"000"
"000"
Sales
800
900
1,000 900
1,000 1,100 1,000
1,100 1,200
Cost of sales -760
-830
-900
-790
-850
-910
-900
-960
1,020
EBI
40
70
100
110
150
190
100
140
180
T
Int (CL) 8%
-16
-16
-16
-8
-8
-8
-4
-4
-4
Int (LD)10% 0
0
0
-10
-10
-10
-20
-20
-20
Taxable inc
24
54
84
92
132
172
76
116
156
Tax 50%
-12
-27
-42
-46
-66
-86
-38
-58
-78
Net income
12
27
42
46
66
86
38
58
78
ROA EBIT
AST
S
ROE
EBIT
EQT
40
350
70
350
100
350
110
400
150
400
190
400
100
500
140
500
180
500
0.114
0.2
0.286
0.275
0.375
0.475
0.2
0.28
0.36
40
150
0.267
70
150
0.467
100
150
0.667
110
200
0.55
150
200
0.75
190
200
0.95
100
250
0.4
140
250
0.56
180
250
0.72
7.
8. Transaction motive
 Means maintaining cash to meet routine daily cash requirements to finance the
transaction which firm carries on in the ordinary course of business
 To ensure firm can meet obligation when payments became due in the situation
in which disbursements are in excess of currents receipts, it must have cash
balance.
9. Cost of firm of holding excess cash
 If large cash is idle means that firm has missed opportunities to invest those
funds and thereby lost interest which it would otherwise have earned.
10.
(a).
TABLE INDICATING LOT SIZE
1
2
3
4
5
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
50,000
100,000
200,000
250,000
500,000
20
10
5
4
2
(d). Average holding cash(b/2)
25000
50000
100000
125000
250000
(E).Oport of hold cash(d*0.05)
1250
2500
5000
6250
12500
(f). Fixed conv cost
1,000
1,000
1,000
1,000
1,000
(G) total conv cost (c*f)
(h) total cost
(e+g)
20000
10000
5000
4000
2000
21250
12500
10000
10250
14500
(a). Annual require cash
(b). Lot size of security
(c). Number of lot size, (A/B)
(b) economic lot size (Baumol model)
2𝑐𝑇
C=√
𝐾
Where C =economic lot size
c=annual requirements of cash
T= fixed conversation cost per transaction
K= yield in security
2(1000000∗1000)
C=√
0.05
C= 200,000
11. TK
12. Compute upper control limit and return point as per miller -Orr model
Z= 3( ¾* transaction cost * variance of cash flow))1/3
Interest rate
Z= 3(3/4* 50(10000)2)(1/3)
0.0001
Z= 100,415
 Then upper control limit of cash balance
Lower limit + spread between upper and lower
100,000 + 100,415
200,415
 Return point
Lower limit + spread
3
= 100,000 + 100,415
3
= 133,472
13. Ghjk
14. Determinant of term of sale
 Cash discount – incentive for early payments
 Discount periods – time to which discount available to customer
 Credit period -length to which customer must make payments
 Credit instruments -evidence of indebtedness, which sent to customer
when goods delivered
15. Explain 3/45 net 90
 3% cash discount
 45 discount period
 90 credit period
16. Credit analysis
 Are procedure to determine the like hood a customer will its bills
17. C’s of credit
 Character, applicant past record
 Capacity, ability to pay
 Collateral, available asset to secure credit
 Capital, financial strength of applicant
 Condition, current economic and business condition
18. Factor determine length of credit period
 Buyer inventory period
 Perishability and collateral value
 Customer demand
 Credit risk
 Competition
19. Aspect of receivable managements
 Size of credit sales
 Credit policies
 Term of trade
 Expansion plan
 Credit collection effort
 Habit of customer
 Relation with profit
20. Objective of inventory managements
 Operational, ensure that sufficient quantity of stock so that work is not disrupted,
due caution for future price fluctuation, unforeseen demand
 Financial, avoiding, ensure than minimum working capital should be looked to
avoid to much investments in stock and under stocking in stock
21.
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