Financial Management (VV2)

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1. Explain why debt is usually considered the cheapest source of financing

available?
2 . Differenciate between financial and business risks?
3. Discuss the different approaches of financing of working capital
requirements?
4. Describe any two methods of incorporating risk in capital budgeting
decisions?
5. Explain the merits of using market value weights in computing weighted
average cost of capital?
6. Explain any two methods of cash management?
7. State with illustration the practical application of time value of money?
8. Critically explain the factors affecting dividend decisions?
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Case Detail :
Working capitalDo you have enough?
Lending institutions are scrutinizing an operations working capital status as
part of the lending decision. Now more than ever, its time to do a little
scrutinizing yourself. When I hit the road to speak, one of the most important
slides I regularly use highlights how lending criteria has changed since the
financial crisis. To illustrate that point, the slide includes a quote from Nick
Parsons, head of research with the National Australia Bank: So capitalism
has changedthe owner or the custodian of capital [i.e. lending institutions] is
much more careful about where they use that capital.
To that end, most readers have likely experienced increased scrutiny from
their lenders in this post-crisis world. And one of the key criteria that lenders
use to make decisions revolves around availability of working capital within
any operation; working capital being a function of current assets less current
liabilities. Its a measure of an operations buffer to meet its short-term
obligations, hence the importance to lenders.
Perhaps equally important, its a key indicator of cash reserve availability to
meet unexpected emergencies. Thus, it is an important component of risk
management to ensure business continuity within the operation without the
need to borrow additional funds. As an example, albeit simplified, a pickup is
typically a critical operational asset for most cow-calf operations. What if it
catches on fire and suddenly needs to be replaced, else the cows dont get
fed? After insurance provides some portion towards replacement, does the
operation have sufficient working capital to meet the remainder of the
obligation? This type of assessment has become more important to lenders
since the financial crisis.
This weeks graph highlights USDAs updated aggregate working capital
estimates in agriculture. Clearly, as last weeks illustration depicts, declining
revenue has taken a big hit out of working capital reserves for agriculture.
Working capital has declined nearly 50% the loss exceeds $82 billion in just
three years. Thats a concerning trend and if it continues, will clearly have
implications in the coming years.
What are you doing to maintain strong cash and working capital reserves
amidst declining revenue? What new expectations do you your lenders have
during the past several years and going into 2017? How will you adjust going
forward? Leave your thoughts in the comments section below.

1. Provide the brief summary of the case in your own words?

2. What new expectations do your lenders have during the past several years
and going into future?
3. What should be done to maintain strong cash and working capital reserves
amidst declining revenue?

1. Dividend has no relationship with the value of the firm as per Walter Model.
Yes
No
Cant say
Sometimes

2. Wealth management and profit maximisation are the

concepts.
Yes
Sometimes
No
Cant say
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3. Traditionally the role of finance manager was restricted to . Of

funds.
Use
Procurement
Management
Administration
4. The sales of a business or other form of revenue from operations of the
business is called as .
Profit
Margin
Contribution
Turnover
5. Implicit cost is the cost of using the funds.
TRUE
FALSE
None
Sometimes False
6. The process of calculating present value of projected cash flows.
Discounting
Brokerage
Benefit
Budgeting
7. A part of the organisation where the manager has responsibility for
generating revenues, controlling costs and producing a satisfactory return on
capital invested in the division.
Brekarage
Brokerage
Division
Recasting
8. Business practices designed by companies to make production and
delivery systems more competitive in world markets by eliminating or
minimizing waste, errors, and costs.
Reengineering
Restructuring
Revaluation
Recasting
9. Cash in hand and cash at bank are examples of . Assets.
Current
Fixed
Working
Permanent
10. Baumol model and the Miller-Orr model belong to .
Management.
Cash
Credit
Inventory
Purchase
11. Current assets /Current liabilities describes . Ratio.
Fixed Asset
Quick
Liquidity
Asset Turnover

12. Inventory and receivables are both current assets.

FALSE
Cant Say
Sometimes
TRUE
13. Credit analysis, or the assessment of creditworthiness, is undertaken by
analysing and evaluating information relating to a customers
history?
Non-Financial
Non-Monetary
Financial
Monetary
14. The objective of liquidity ensures that companies are able to meet their
liabilities as they fall due, and thus remain in business.
Rare
TRUE
Sometimes
FALSE
15. Funds held in the form of cash do not earn a return.
TRUE
Sometimes
FALSE
Rare
16. Holding costs can be . by reducing the level of inventory held
by a company.
minimised
control
increased
reduced
17. Which technique brings inventory and cash requirment drastically down?
LIFO
Baumal
ABC
JIT
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18. Which model belongs to cash management?

LIFO
Miller Orr
HIFO
ABC
19. JIT stands for just in . .
totality
technical
tenure
time
20. The factors to be considered in formulating a trade receivables policy
relate to credit analysis, credit control and receivables collection.
TRUE
Sometimes
Rare
FALSE
21. Companies with the same business operations may have
levels of investment in working capital as a result of adopting different working
capital policies.
lower
higher
different
Same
22. Receibles management is all about?
Cash Management
Loan Management
Credit Management
All
23. The main reason that companies fail, though, is because they run out of
.
Customers
Inventory
Cash
Stock
24. Is it right to say that good cash management is an essential part of good
working capital management.
Sometimes
never
Always
Cant say
25. Optimum cash balance must reflect the expected need for cash in the next
budget period.
never
Always
Cant say
Sometimes

26. The cash operating cycle is the average of time between

paying trade payables and receiving cash from trade receivables.
Lag
period
length
gap
27. The length of the cash .. depends on working capital policy
in relation to the level of investment in working capital, and on the nature of
the business operations of a company.
requirement
Operating Cycle
disbursal
Management
28. Liquid funds, for example cash, earn no return and so will not increase
profitability.
TRUE
FALSE
rare
Sometimes
29. .. are your business scores that come from your Income
Statement and Balance Sheet, not the Cash Flow Statement.
Marks
Financial Scores
Points
Ratios
30. Working capital investment policy is concerned with the level of investment
in assets, with one company being compared with another.
Permanent
Temporary
Current
Fixed
31. .. can also be used to cover some of the risks associated
with giving credit to foreign customers.
Locking
Awards
Insurance
Rewards
32. Aggressive working capital finance means using more . term
finance
Credit
Short
Medium
Long
33. Short-term finance is more flexible than long-term finance.
TRUE
FALSE
Never
Sometimes
34. Short-term finance tends to be more .. than long-term finance.
Softer
Rigid
Flexible
harder
35. Sales made but not collected is known as.?
A/Cs Payables
A/Cs Receivables
Both
None
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36. . Interest rate depends upon an index and increases or

decreases.
Stationary
Variable
Stable
Fixed
37. Short-term finance is more risky than long-term finance.
FALSE
Never
Sometimes
TRUE
38. Rate risk refers to the fact that when short-term finance is renewed, the
rates may vary when compared to the .. rate.
Current
Previous
Accounting
Industry
39. The . principle suggests that long-term finance should be used for
long-term investment.
Matching
Traditional
Dual Aspect
Monetary
40. Money paid (cost of credit) for the use of money.
Interest
Dividend
Usage Money
Principal