IGNOU| FINANCIAL MANAGEMENT (MMPC - 014)| SOLVED PAPER – (DEC - 2022)| (MBA/ MBF)
MASTER OF BUSINESS
ADMINISTRATION/MASTER OF BUSINESS FINANCE (BANKING/FINANCE) (MBA/MBF)
Term-End Examination
December - 2022
MMPC-014
FINANCIAL MANAGEMENT
Time: 3 hours
Maximum Marks: 100
Note: Attempt any five questions. All questions carry equal marks.
1. Discuss different types of Financial Decisions that
are taken in an organisation.
Ans:- If carefully reviewed what business is all
about, we would come to the conclusion that there are two things that matter,
money and decisions. Without money, a company cannot survive and without
decisions, money cannot survive. Is. An administration has to take countless
decisions over the lifetime of the company. Thus, the most important ones are
related to money. Decisions related to money are called 'financial decisions'.
Financial
managers must make three decisions:
(i) Investment
decision
(ii) Financial
decisions and
(ii) Dividend
decision
(i)
Investment decisions: These are also known as capital budgeting decisions.
The assets and resources of a company are scarce and must be utilized to the
maximum. A firm must choose where to invest in order to obtain the highest
possible returns. This decision is related to the careful selection of assets
in which funds will be invested by the firms. The firm invests its money in the
purchase of fixed assets and current assets. When a choice is made with respect
to a fixed asset it is known as a capital budgeting decision.
Factors
influencing investment decision:-
(i) Cash flow
of the enterprise: When an organization starts an enterprise it invests
large capital in the beginning. Nevertheless, the organization hopes to
generate at least some form of income to meet everyday expenses. Therefore,
there must be some regular cash flow within the enterprise to help maintain it.
(ii) Profit:
The basic criteria of starting any enterprise is to earn profits along with
income. The most important criterion in choosing an enterprise is the rate of
return the organization gets in the nature of profit, for example, if
enterprise A is getting 10% returns and enterprise B is getting 15% returns,
then one should choose the project. B should be given priority. be given.
(iii)
Investment Criteria: Various capital budgeting processes are accessible to
a business that can be used to assess various investment proposals. Above all,
these are based on calculations regarding the amount of investment, interest
rates, cash flows and rates of return associated with the offer. These
processes are applied to investment proposals to select the best proposal.
(ii) Financial
Decisions: Financial decisions are important for taking wise decisions
about when, where and how a business should receive funds. Because a company
gets the most profit when the estimate of an organization's share in the market
increases and it not only signals growth for the company but also increases the
wealth of the investor. As a result, it deals with the composition of various
securities in the capital structure of the company.
Factors
influencing financing decisions:-
(i) Cost:
Financing decisions are all about allocation of funds and cutting costs. The
cost of raising funds from different sources varies greatly. The most cost
effective source should be selected.
(ii) Risk:
The risks of starting an enterprise vary with the funds obtained from different
sources. There is more risk associated with borrowed funds than equity funds.
This risk assessment is one of the main aspects of financing decisions.
(iii) Cash
flow position: Cash flow is the regular day-to-day earnings of the company.
Good or bad cash flow position gives or discourages investors confidence to
invest money in the company.
(iv) Control: In
a situation where existing investors need to retain control over the business,
finance can be raised by borrowing money, however, when they are ready to
reduce control over the business, they can raise funds. Can. Equity can be
used. How much control to give up is one of the major financing decisions.
(v) Market
conditions: Market conditions matter a lot for financial decisions. During
boom periods equity issue is in majority but during recession, a firm has to
use debt. These decisions are an important part of financing decisions.
(iii)
Dividend Decisions: Dividend decisions are related to the distribution of
profits earned by the organization. The major choice is whether the earnings
profits are retained or distributed to the shareholders.
Factors
influencing dividend decisions:-
(i) Earnings:
Investors are paid returns from current and past earnings. As a result,
earnings are a significant determinant of dividends.
(ii)
Dependence in earnings: An organization with high and stable earnings can
declare higher dividends than an organization with low earnings.
(iii)
Balancing the dividend: For the most part, organizations try to balance the
dividend per share. Dividends are paid continuously every year. The change is
made when not only the current year's income of the organization but also the
earning capacity increases.
(iv) Growth
Opportunities: Organizations have great opportunities for growth if they keep
cash in excess of their earnings for their required investments. Dividends
declared in developing organizations are lower than those in non-growth
companies.
2. What is the meaning of Investment Risk? Explain
briefly the various sources of risk in investments.
Ans:- Investment risk is the possibility that the
actual return of an investment may differ from the expected return, potentially
resulting in financial loss. It is a measure of the level of uncertainty about
achieving returns in line with the investor's expectations.
Investment risk
refers to the degree of uncertainty and/or potential financial loss inherent in
an investment decision. In other words, when you invest your money, you don't
know for sure whether you will get the desired returns or experience unexpected
losses.
The various
sources of risk in investment are:-
(i) Market
Risk: Market risk is the risk of losing the value of investments due to
various economic events that may affect the entire market. The main types of
market risk include:
(a) Equity
Risk: This risk is related to investment in shares. The market value of
shares is volatile and keeps increasing or decreasing depending on various
factors. Thus, equity risk is the decline in the market value of shares.
(b) Interest
Rate Risk: Interest rate risk applies to debt securities. Interest rates
have a negative impact on debt securities i.e., the market value of debt
securities increases when interest rates fall.
(c) Currency
Risk: Currency risk relates to foreign currency investments. Currency risk
is the risk of losing money on foreign currency investments due to fluctuations
in exchange rates. For example, if the value of the US dollar depreciates
against the Indian rupee, an investment in US dollars will be worth less than
the Indian rupee.
(ii)
Liquidity Risk: Liquidity risk is the risk of not being able to sell
securities at fair value and convert them into cash. Due to low liquidity in
the market, an investor may have to sell securities at a very low price,
resulting in a loss in value. Another important thing to note is that there are
some assets that cannot be liquidated easily. Investors thus demand higher
returns for such investments as compensation for holding them for a longer
period of time and not being able to use them when needed.
(iii)
Concentration Risk: Concentration risk is the risk of loss on the amount
invested because it was invested in only one security or one type of security.
In concentration risk, if the market value of a particular security invested in
decreases, the investor loses almost the entire amount invested. For this
reason, it is very important to diversify investments across different
opportunities so that a decline in one asset can be balanced by growth or gains
from another. Otherwise, the investor must have a high level of investment risk
tolerance.
(iv) Credit
Risk: Credit risk applies to the risk of default on bonds issued by a
company or government. The bond issuer may face financial difficulties due to
which it may not be able to pay interest or principal to bond investors and,
thus, may default on its obligations. It also applies to loans given by banks
and financial institutions to borrowers. Banks give loans to borrowers, invest
their money and earn interest as returns. However, if the borrower defaults
during loan repayment, it is a bad debt for the financial institutions and a
source of huge risk for them.
(v)
Reinvestment Risk: Reinvestment risk is the risk of losing high returns on
principal or income due to low interest rates. Suppose a bond yielding 7% has
matured, and the principal has to be invested at 5%, thus the opportunity to
earn higher returns is lost.
(vi)
Inflation risk: Inflation risk is the risk of loss of purchasing power
because investments do not yield returns greater than inflation. Inflation
erodes returns and reduces the purchasing power of money. If investment returns
are less than inflation, investors are more sensitive to inflation, reducing
their investment risk tolerance.
(vii)
Horizon Risk: Horizon risk is the risk of the investment horizon being
shortened due to personal events such as job loss, marriage or buying a house,
etc. The preferences and needs of investors vary according to changes in
financial condition or situation. Of economy. Investments made for a particular
purpose may lose their value due to any sudden emergency. The investor has to
cut down the time he holds his investment, thus losing out on the returns he
could have earned from it if he had held it for a longer period.
(viii)
Longevity Risk: Longevity risk is the risk of exhausting savings or investments,
especially related to individuals retired or near retirement. They can live
longer than their savings. This proves to be a big risk as they usually have no
steady source of income and their savings may be depleted due to lack of
opportunity for replenishment.
(ix)
Foreign investment risk: Foreign investment risk is the risk of investing
abroad. If the entire country is at risk of falling GDP, high inflation, or
civil unrest, money will be lost in investments.
3. Explain the need for 'Valuation'. Describe the Three-Step
(EIC) Valuation Process.
[COMING SOON]
***
FINANCIAL MANAGEMENT PAPERS PAGE LINK - Click here
IGNOU PAGE LINK - CLICK HERE
Also Read: