A- 2 Financial Management

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  U NIVERSITY    OF  P ETROLEUM  & E NERGY   S TUDIES C ENTRE   FOR  C ONTINUING  E DUCATION E XECUTIVE  MBA (O IL  & G AS  M ANAGEMENT ) S EMESTER  I YEAR: 2014SESSION: JULY A SSIGNMENT  – 2F OR Financial ManagementM!OF #2D$  T O   BE   FILLED   BY   THE   STUDENT $ N AME %S AP  N O 'R EGN  N O %  Section A (20 Marks) Write short notes on any four of the following1.Leasing as a Source of Finance 2.Portfolio Diversification and Risk 3.heories of ca!ital structure .Different ca!ital #udgeting a!!raisal $ethods%.&o$!onents of working ca!ital Section B (30 marks)(Attempt any three) 1.Define the ter$ 'cono$ic value added. (ow is it calculated)2.Descri#e the #asic as!ects of the conce!t of cost of ca!ital.3.'*!lain the conce!t of financial leverage and its i$!act on 'PS. .What is $eant #y ca!ital rationing) What are the ste!s involved in ca!ital rationing) Section C (50 marks)(Attempt all questions. Eery question carries !0 marks) Read the case +'cono$ic ,alue -dded .” and answer the following uestions/ Case Stu y# Economic $alue A e While 0value is a general ter$ +value added has s!ecific $eanings. 4 teach 5anage$ent-ccounting and when 4 say +What is value added) $ost of the students would say that it is0adding a feature to a !roduct. 4t $ay #e !roduct develo!$ent #ut not necessarily valueaddition. 4 !oint to a $ulti$edia hanging fro$ the ceiling and say +his is !resently rotated$anually. 4ts !resent !rice is Rs. %666. 4f the $anufacturer introduces a feature for rotatingthrough a re$ote control at an additional cost of Rs.1%666 would it #e called value addition)5ost $ay#e inclined to say +7es Sir #ut it is +8o Sir. Why no one would !ay a hefty su$ of Rs.1%666 for the new feature. 'ven if so$eone is willingto !ay it still does not add any value. 4t is only when the $anufacturer can fetch say Rs.9%666value addition has occurred. 4n this way #y using a feature costing Rs.1%666 the $anufacturer has reali:ed an additional Rs.26666 there#y increasing the #otto$ line #y Rs.%666.4ts Profit ; Loss -ccounts for the last year are given #elow/  -n entity can increase ,alue addition #y <i=#ringing u! new !roducts or services which have ahigher value in the eyes of a custo$er than the cost of in!uts used such as $aterials co$!onentsand services used to $ake the$ <ii= ca!ture un>ta!!ed $arket of new seg$ents or geogra!hicalareas <iii= i$!roving uality and raising !rices <iv= reducing costs #y switching over to chea!er raw $aterials si:e reduction and co$#inations and finally <v= reducing as far as !ossi#le non>value added activities such as setu! storage trans!ortation wait and ins!ection.4n econo$ics the value addition is calculated #y the following for$ula/,alue -dded ? ,alue of sales less the cost of #ought>in goods and services.4n this for$ula only cost of #ought>in goods and services has #een accounted for. 4t co$!letelyignores la#our cost de!reciation $ark>u! etc. 4n fact they are factors of !roduction <landla#our and ca!ital=. hey !rovide +services which raise value of +in!uts to a $uch higher reali:ed value. he difference would #e shared a$ong the$.he ,alued added in our e*a$!le and its distri#ution is shown in the #elow ta#le/hen what is 'cono$ic ,alue -dded)'cono$ic ,alue -dded <',-= concentrates only on one of the factors of !roduction i.e. &a!ital.4t $easures sur!lus value created #y total invest$ents which include funds !rovided #y #anks #ond>holders and share holders. 4t is $ore useful than Rate of Return <R@4= or 4nternal Rate of Return <4RR=in evaluating o!erations of an enter!rise.  -ccounting !rofessor Steven @r!urt fro$ Singa!ore 5anage$ent Aniversity e*!lains/ +@ne of the !ri$ary insights fro$ the ',- conce!t is recognition that growing earnings does notnecessarily increase fir$ value or stock !rice. ',- focuses attention on how a fir$ uses itsca!ital #y asking +4s a fir$ generating earnings a#ove and #eyond that e*!ected #y the $arket<the !roviders of the ca!ital=)(ow relevant is ',- today) Res!onds Stern +So$e $ay say that ',- was a fad of the 1BB6s #ut earning $ore than the cost of ca!ital is not a fad. 4t is what all co$!anies should do all of theti$e. hat they do not is sur!rising. -ll of the talk on governance also not a fad never de$anded this si$!le reuire$ent. Antil #oards do ',- will re$ain as relevant as it was in the1BB6s.he relevant for$ula is/',-? <Return on &a!ital > &ost of &a!ital= * otal &a!italWe need three figures/1.8@P-2.4nvest$ent3.W-&&Cy dividing 8@P- with 4nvest$ent we get returns in !ercentage. Fro$ this we deduct -W&&which is also in !ercentage the difference would show E!rofit !er ru!ee. Cy $ulti!lying thiswith total ca!ital we ca!ture ',- in ru!ee>ter$s. %uestions# 1.'*!lain the ter$ value added.2.(ow can an entity increase its value addition)3.Descri#e with for$ula how is value addition calculated) .(ow do we get returns in !ercentage)%.Read and su$$arise the case in a#out %6 words.
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