BBS 2nd year finance model question solution part 1

Fundamentals of financial management (MGT215)

  BBS/ 4 Years Program / II year

BBS 2nd year finance model questions solution

Brief Answer question:

1. What do you mean by financial decision?

Financing decision is also known as capital structure decision which is concerned with determining the sources of funds and deciding upon the proportionate mix of funds from the different sources. In other words, financial decision is a crucial decision that is concerned with collection of funds from the appropriate sources.

2. What is discounting and describe how is it related to compounding?

Discounting is the process of converting future sum or value of money to the present time. Compounding is the process of converting present sum or value of money to future time. From the definition of both compounding and discounting they both are just opposite to each other.

3. Define the term coefficient of variation. What does it measure?

Coefficient of variance is defined as the ratio of standard deviation and mean. It is a relative measure of risk. It measures risk in terms of per unit of return.

4. What is capital structure?

Capital structure is a mixture or combination of debt and equity which is used by company and organizations to fund its day to day operations and achieve their future goal.

5. What is the meaning of mutually exclusive project with example.

Mutually exclusive projects are those project which is compared between each other having same functions. In other words such projects which cannot be taken both in hand, only one project can be chosen between two is said to be mutually exclusive project. 
For example : There are two projects A and B and a manager has to choose between those two projects such type of projects are said to be mutually exclusive.

6. How does a firm's investment opportunity affects its dividend policy?

Firm's investment opportunity directly affects its dividend policy. If a firm has a number of investment opportunities and it invests in those projects then the fund which will be invested in the project will be lost/used from the retained earning from which dividend is distributed.

Descriptive Answer Questions :

11. What is working capital? Explain/describe the major factors affecting size of working capital?

Working capital simply means management of the current assets and their financing. It is the fund which is used for the day to day operation of the business. There are two types of concept of working capital. Gross concept and net concept. According to gross concept the firm's total investment in current assets is working capital while net concept of working capital refers to the difference between current assets and current liabilities.

The major factors affecting size of working capital are as follow:

A. Size and nature of the business :

Nature and size of business affects the level of working capital. For example a firm with large scale of operation requires more amount of working capital compare to the firm with small scale operation.

B. Cash conversion cycle :

Cash conversion cycle is the time interval between outflow of cash and its inflow through sale and collection through costumers. CCC and working capital are directly related to each other. A business firm with longer CCC requires larger amount of working capital and vice versa because longer cash conversion cycle requires more investment in current assets.

C. Seasonal Fluctuations :

Some firms have seasonal nature of business. For example in summer season season more ice creams are demanded for which more investments are required during peak season season which ultimately requires more working capital during season.

D. Growth and expansion :

A growing firm requires large amount of working capital for its expansion. Such firms needs to maintain additional investment in inventories of raw materials, finished goods, salaries and wages which requires more working capital.

E. Credit policy:

Credit policy of a firm also affects the size of working capital though the investment in account receivables.  If a firm adopt liberal credit policy then it may grant credit to the costumers which requires more working capital while a firm which adopts strict credit policy it requires less working capital. Such firms have less account receivable.

F. Trade cycle or Business Cycle :

The business cycle also affects the working capital. During the prosperity phase of the business cycle there is economic boom in which firm increases its production which requires more working capital. On contrary during depression phase the sale decreases which ultimately decreases the amount of working capital required.

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