exm_1201 - financial management

7/23/2019 Exm_1201 - Financial Management

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National Institute of Business ManagementChennai - 020

FIRST SEMESTER EMBA/ MBA

Subjet ! Finanial Management

Attend any 4 questions. Each question carries 25 marks

(Each answer should be of minimum 2 pages / of !! words"

1. Explain the Indian Financial Systems.

2. Explain debentures as instruments for raising long-term

debt capital.

3. What is Woring !apital !ycle" #iscuss.

$. What are the characteristics and uses of ratio analysis"Explain %ith examples.

&. Explain ho% you %ill estimate cash 'o%s.

(. Explain )erformance *udgeting.

2& x $+1,, mars


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Ans"e# $ - E%&lain the In'ian FinanialS(stems)

Economic deelopments and gro%th at constant pace is only possible%ith the help of %ell-nit nancial system for any country. /he solenancial systems hae many sub-systems %ith many processes.Financial sub-systems comprise of nancial institutions0 nancialmarets0 nancial instruments and serices that assists in capitaliingthe reenue. Its a mechanism by %hich saings are transformedinestments and it can be said that nancial system play an signicantrole in economic gro%th of the country by mobiliing surplus funds and

utiliing them eectiely for productie purpose.

/he nancial system is characteried by the presence of integrated0organied and regulated nancial marets0 and institutions that meetthe short term and long term nancial needs of both the householdand corporate sector. *oth nancial marets and nancial institutionsplay an important role in the nancial system by rendering ariousnancial serices to the community. /hey operate in close combination%ith each other in a reciprocal behaior.

/he %ord 4system40 in the term 4nancial system40 implies a set of

complex and closely connected or interlined institutions0 agents0practices0 marets0 transactions0 claims0 and liabilities in the economy./he nancial system is concerned about money0 credit and nance-thethree terms are intimately related yet are some%hat dierent fromeach other. Indian nancial system consists of nancial maret0nancial instruments and nancial intermediation.

Com&onents/ Constituents of In'ian Finanial s(stem5

/he follo%ing are the four main components of Indian Financial system

1. Financial institutions

2. Financial 6arets

3. Financial Instruments78ssets7Securities

4. Financial Serices.


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Finanial institutions!

Financial institutions are the intermediary %ho facilitates smoothfunctioning of the nancial system by maing inestors and borro%ers

meet. /hey mobilie saings of the surplus units and allocate them inproductie actiities promising a better rate of return. Financialinstitutions also proide serices to entities seeing adise on ariousissues ranging from restructuring to diersication plans. /hey proide%hole range of serices to the entities %ho %ant to raise funds fromthe marets else%here. Financial institutions act as #nancialintermediariesbecause they act as middlemen bet%een saers andborro%ers. Were these nancial institutions may be of *aning or 9on-*aning institutions.

Finanial Ma#*ets!

Finance is a prere:uisite for modern business and nancial institutionsplay a ital role in economic system. It;s through nancial marets thenancial system of an economy %ors. /he main functions of nancialmarets are5

1. /o facilitate creation and allocation of credit and li:uidity

2. /o sere as intermediaries for mobiliation of saing

3. /o assist process of balanced economic gro%th

$. /o proide nancial conenience

Finanial Inst#uments

8nother important constituent of nancial system is nancialinstruments. /hey represent a claim against the future income and%ealth of others. It %ill be a claim against a person or an institution0 forthe payment of the some of the money at a specied future date.

Finanial Se#+ies!

E


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!onsolidating it all0 the Indian nancial system has undergone muchstructural transformation oer the past decade. /he nancial sectorhas ac:uired strength0 e#eeloped !ountry?

Answer 2 $ E%&lain 'ebentu#es asinst#uments fo# #aising long-te#m 'ebta&ital)

#ebentures are ital instruments for raising long-term debt capital.

#ebenture holders are nothing but the creditors of the company. /heobligation of the company to%ards its debenture holders is similar tothat of a borro%er %ho promises to pay interest and capital at speciedtimes. Interest payment on debenture is a statutory obligation0 unliediidend payments on e:uity shares. Interest paid on debentures is atax-deductible expense. #ebentures hae to be compulsorily retired inaccordance %ith the terms of the issue0 %hereas e:uity share capitalneed not be redeemed. #ebenture holders are not entitled to ote.#ebentures are usually secured by a charge on the immoableproperties of the company. /he interests of the debenture holders isusually represented by a trustee0 %hich is usually an insurance

company0 a ban0 or a rm of attorneys and this trustee is responsiblefor ensuring that the borro%ing company fulls the contractualobligations embodied in the contract. #ebentures can be classiedbased on conersion0 security and redemption. @n the basis ofconertibility0 they can be classied into5

i. 9on !onertible #ebentures A9!#sB/hese debentures cannot be conerted into e:uity shares and%ill be redeemed at the end of the maturity period

ii. Fully !onertible #ebentures AF!#sB/hese debentures %ill be conerted into e:uity shares after aspecied period of time at one stroe or in installments. /hesedebentures may or may not carry interest till the date ofconersion. In the case of a fully established company %ith anestablished reputation and good0 stable maret price0 F!#s areery attractie to the inestors as their bonds are getting


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automatically conerted to shares %hich may at the time ofconersion be :uoted much higher in the maret compared to%hat the debenture holders paid at the time of F!# issue.

iii. )artly conertible #ebentures A)!#sB/hese are debentures0 a portion of %hich %ill be conerted intoe:uity share capital after a specied period0 %hereas the non-conertible A9!#B portion of the )!# %ill be redeemed as per theterms of the issue after the maturity period.

#ebenture capital oers the follo%ing adantages to the issuingcompany5

a. /he cost of debt capital represented by debentures is muchlo%er than the cost of preference or e:uity capital.

b. #ebenture nancing does not result in dilution of control since

debenture holders are not entitled to otec. /he call proision found in many debenture issues proides

'exibility in changing the capital structured. In a period of rising prices0 debenture issue is adantageous. /he

burden of sericing debentures0 %hich entails a xed monetarycommitment for repayment of interest and principal0 decreasesin real terms as price leel increases.

#isadantagesa. #ebenture interest and capital repayments are obligatory

payments. Failure to meet these payments =eopardies the

solency of the rm.b. /he protectie coenants associated %ith a debenture issue may

be restrictie.c. !onsidering inestors perspectie0 the interest earned from the

debentures is taxable.d. 9o oting right for a debenture holder.

Ans"e# ,! hat a#e the ha#ate#istis

an' uses of #atio anal(sis. E%&lain "ithe%am&les)

Catio 8nalysis is a form of Financial Statement 8nalysis that is used toobtain a :uic indication of a rm;s nancial performance in seeraley areas. /he ratios are categoried as Short-term Solency Catios0


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#ebt 6anagement Catios0 8sset 6anagement Catios0 )rotabilityCatios0 and 6aret Dalue Catios.

Catio 8nalysis as a tool possesses seeral important features. /he

data0 %hich are proided by nancial statements0 are readily aailable./he computation of ratios facilitates the comparison of rms %hichdier in sie. Catios can be used to compare a rm;s nancialperformance %ith industry aerages. In addition0 ratios can be used ina form of trend analysis to identify areas %here performance hasimproed or deteriorated oer time.

!omparing ratios oer time can help a business mae reasonablepredictions about %hat it should expect in the future if conditionsremain the same or similar. *reaing data do%n to ratios andcomparing the ratios oer time also can help businesses see if trends

or cycles emerge. *ecause Catio 8nalysis is based upon accountinginformation0 its eectieness is limited by the distortions %hich arise innancial statements due to such things as istorical !ost 8ccountingand in'ation. /herefore0 Catio 8nalysis should only be used as a rststep in nancial analysis0 to obtain a :uic indication of a rm;sperformance and to identify areas %hich need to be inestigatedfurther.ses of ratio analysis include breaing data do%n so that it can becompared. When comparing t%o sets of data0 ratios can help bring thenumbers to e:uialent gures.

Fo# e%am&le0 if the business %ants to compare its monthly cost ofgoods sold for the past year0 it should not loo at the ra% numbers.Instead0 the business should calculate the cost of goods sold as apercentage of the total sales in order to determine if costs truly haeincreased or decreased.

Standard ratios hae been deeloped to accomplish certain types ofanalysis %ithin dierent areas of business. Fo# e%am&le0 in nance itis common to use the earnings per share0 gross prot margin0 return onassets0 and inentory turnoer ratios. 9ot only does this help abusiness in comparing historical data bet%een itself and competitors0

but employees are generally trained in using these specic ratiosbefore being hired. Een though most ratios are easy to compute0 theanalyst must understand the signicance of each ratio in order to aoidmaing false assumptions.


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Ans"e# ! E%&lain e#fo#mane Bu'geting)

8s a fresh and some%hat dierent budgeting method0 )erformance

*udgeting considers all conentional methods of scrutiniing and usingthe budgetary documents as insu


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nances0 etc. /oday0 the concept of *alanced Scorecard is %idelypracticed in the priate commercial sectors0 and less in the publicsectors0 o%ing to the adent of )erformance *udgeting. In fact0Scorecard can be regarded as the nascent stage of the concept of

)erformance *udgeting0 %hich follo%s a similar0 but far more adancedprocedure.

Bene1ts of &e#fo#mane bu'get!

Shortens the lengthy0 traditional budgeting and reporting

procedures %hich sae money and time simultaneously andassists %ith fresh regulatory necessities.

6anagers in the public sectors are empo%ered for eectie

promotion of resources.

6aes the agencies more focused0 on a constant basis0 on the

reduction of resources0 as being their highest priority actiity.

/here is a remarable alignment in the data collection and

reporting procedures of the agencies inoled.

Improes performance on a continuous basis in the public

sectors.

exm_1201 - financial management

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