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.