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MBA (PT) Financial management Internal assignment

Maximum marks 40. Assignment is to be submitted in soft copy only. Latest by 16th March 2011 Relax as you are competing with yourself Section A Each question carry 2 marks each. Give reasons for your answers. 1. Firms can pay out cash to their shareholders in the following ways: (I) Dividends (II) Share repurchases (III) Interest payments A) I only

B) II only C) III only D) I and II only

2. Dividends are decided by: (I) The managers of a firm (II) The government (III) The board of directors

A) I only B) II only C) III only D) I and II only

3. Generally, firms resort to repurchase of stock because: (I) Firms have accumulated large amount of excess cash (II) Firms want to change their capital structure (III) Firms want to substitute it for regular dividends A) I only B) II only C) I and II only D) III only

4. One key assumption of the Miller and Modigliani dividend irrelevance argument is that: A) Future stock prices are certain B) There are no capital gains taxes 1

C) All investments are risk-free D) New shares are sold at a fair price

5. One key assumption of the Miller and Modigliani dividend irrelevance is that: A) Future stock prices are certain B) There are no capital gains taxes C) Capital markets are efficient D) All investments are risk-free

6. The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy. A) The level of investment does not influence or matter to the dividend decision B) Once the dividend policy is set the investment decision can be made as desired C) The investment policy is set before the dividend decision and not changed by dividend policy D) None of the above

7. Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price after the dividend payment. (The required rate of return is 10%) A) $110 B) $ 90 C) $100 D) None of the above

8. If a firm grants credit with terms of 3/10 net 30, the creditor: A) Must pay a penalty of 3% when payment is made in more than 10 days after the sale B) Must pay a penalty for 10% when payment is made in more than 3 days after the sale

C) Receives a discount of 3% when payment is made in less than 10 days after the sale D) Receives a discount of 10% when payment is made in less than 3 days after the sale

9. The net credit period for a company with terms of 3/10 net 60 is: A) 50 days B) 60 days C) 10 days D) 57 days

10. Factoring refers to: A) Determining the aging schedule of the firm's accounts receivable B) The sale of a firm's accounts receivable to another firm C) The determination of the average collection period D) Scoring a customer based on the 5 C's of credit

11. The market for short-term investments is called: A) Capital market B) Stock market C) Bond market D) Money market

12. The main difference between short-term and long-term finance is: A) The risk of long-term cash flows being more important than short-term risks B) The present value of long-term cash flows being greater than short-term cash flows C) The timing of short-term cash flow being within a year or less D) All of the above

13. The cash cycle is represented by the following sequence: A) Cash, raw materials, finished goods, and receivables, cash B) Cash, receivables, finished goods, and raw materials, cash

C) Cash, raw material, receivables, finished goods, cash D) None of the above

14. A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $200; February, $140; March, $100. 50% of sales are usually paid for in the month that they take place, 30% in the following month, and the final 20% in the next month. Receivables at the end of December were $100 million. What are the forecasted collections on accounts receivable in March? A) $132 million B) $100 million C) $240 million D) $92 million

15. Determining the appropriate target cash balance involves assessing the trade-off between: A) Income and diversification B) The benefit and cost of liquidity C) Balance sheet strength and transaction needs D) All of the above

Section B Each question carry 2.5 marks 16. Explain the risk-return trade-off of current assets financing with the help of an example. 17. Derive cash equation from the basic balance sheet equation: asset= liability +equity 18. The variance of the daily net cash flow of a company is RS. 1.44 million. The opportunity cost to the firm of holding cash is 8% . The fixed cost of buying and selling securities is Rs 600 per transactions. What should be the target cash level and upper limit if the tolerance lower limit has been established at Rp. 20 000? 19. Define three ratios which are useful in management of current asset. What is the practical difficulty in calculating them?

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