CORPORATE FINANCE NOV-DEC 2008REG-2005 (X 4527)PART-A1. What is an working capital cycle? Working capital is a short term funds which is used for the day to day business operations of business. The working capital shows the circular flow of cash with different stages of production and operation.2. What are the components of cost of capital? It comprises of three components, such us return at zero risk level, premium for business risk and premium for financial risk.3. Why do companies use debt capital? A company borrows capital in order to maximize the profits for its shareholders i.e. to pay higher dividend to them. It would continue to use this source of finance until the incremental return is higher than the incremental cost of debt capital.4. What is Line of credit? Line of credit is an informal arrangement under which a customer can borrow up to a specified limit. The maximum amount known as the limit is determined according to the financial position of the borrower. It is available to the firms of high credit-standing only.5. What are the steps involved in decision tree analysis? The two steps in decision tree analysis are Delineate the decision tree Evaluate the alternatives6. What is risk-adjusted discount rate method? If the risk of the project is less than the risk of the existing investments of the firm the discount rate used is less than the average cost of capital of the firm. The Risk-adjusted discount rate is rk =I+n+dk.7. What are the components of financing decisions? The major components of financing decisions are investment decisions, capital budgeting decisions, and cost of capital decisions.8. Describe the objectives of Ratio analysis. Ratio analysis is to facilitate the comparison of financial statements and evaluation of various aspects such as financial health profitability and operational efficiency.9. What is meant by stake holders theory? Stake holders theory, in brief, says that corporations should attempt to maximize not the value of their shares, but rather the total value that is distributed among all corporate stakeholders , including employees, customers, suppliers, local communities, and tax collectors.10. What is corporate governance? The term corporate governance refers to the relationship among these three groups in determining the direction and performance of the corporation such as capital, enterprises and investors.PART-B11 (a). What do you mean by share capital? Explain the different forms of share can a company issue. The capital market is a place where the medium term and long-term financial needs of business and other undertakings are met by financial institutions, which supply medium and long-term resources to and borrowers. These institutions may further be classified in two as Investing institutions comprises those financial institutions which garner the savings of the people long term funds. Development Institutions which provide the sinews of the development, I.E, capital enterprises and know-how to business enterprises capital market Vs. Money market. Six functions of capital market like collection of funds, maintaining liquidity, promoting countrys economy, organizing sub markets and issuing of securities.

11 (b). Discuss the factors which exercise influence on the demand for working capital in a manufacturing concern. A company needs finance to meet its various types of requirements. Some funds are required for a fairly long time for the purpose of acquiring fixed assets and some others are required for day to day working.The long term sources are Equity shares Preference shares Debentures Bonds Leasing Long term bank loansThe short term bank loans Short term working capital loans Trade credit Credit papers Customer credit FactoringFive advantages of each of these above sources of finance.12 (a). Discuss the role of commercial banks as financial intermediaries. Commercial banks constitute another important segment of the money market. These banks are concerned with accepting deposits of money from the public at large. The same is repayable on demand (or) otherwise, and employing deposit so pooled in the form of loans ad investment to meet the financial needs of business and other classes of society. The commercial banks are acting as an financial intermediaries like It produces resources It generate capital It supply capital to the industries in various forms It product the savings of the public It provides opportunities to wise investment It provides an attractive outlet for investment of funds It also play an stabilizing role It also helps to bear liquidity and carry out administrative task of the country12 (b). Explain the various sources of finance, which is provided by Exim banks to exporters in India. The export import bank provides finance to exporters in many ways. The basic finance facilities are Pre-shipment finance is in the form for packing credit facility.Packing credit is bank advance provide to an exporter for the purpose of buying/manufacturing/packing/ shipping goods to foreign buyers.The packing credit such as Clean packing credit Packing credit against hypothecation of goods, and Packing credit against pledge of goods.The other finance provide by EXIM bank are Direct financing of exporters Finance of export of technology and consultancy services Post-shipment credit Refinance of export credit Export bill discounting The Student should explain the above finance schemes13 (a). Evaluate sensitivity analysis as a method for assessing risk. Since the future is uncertain, we may like to know what will happen to the viability of the project when some variable like sales or investment derivatives from its expected value. In other words we may want to do what if analysis or sensitivity analysis.Evaluation A very popular method for assessing risk , sensitivity analysis has certain merit; It shows how robust or vulnerable a project is to changes in values of the underlying variables. It indicate where future work may be done. It is intuitively very appealing as it articulates the concerns that project evaluators normally have.

13 (b). Discuss the various risk associated with the investment of funds. The financial investment security has many risk in their investment pattern and its choice of selection. The major risk are Business risk, Interest rate risk and Market risk.Business risk: This may be caused by a variety of factors like heightened completion, emergence of new technologies, development of substitute products, shift in consumer preferences, in adequate supply of essential inputs, changes in government policies and so on.Interest rate risk : The changes in interest rate have a bearing on the welfare of investors. As the interest rate goes up, the market price of existing fixed income securities falls, and vice versa.Market rate risk: Even if the earning power of the corporate sector and the interest rate structure remains more or less unchanged, price of securities, equality shares in particular, tend to fluctuate. While there can be several reasons for this fluctuation , the main cause appears to be the changing psychology of the investors.

14 (a). Apply the Black-Scholes option pricing formula to value a call option under the following circumstances:Stock price : Rs.100Exercise Price : Rs. 95Interest Rate : 0.10Time to expiration : 0.25Standard deviation : 0.5

Answer:Applying the Black scholes formula : d = In (100/95) + (0.10 + 0.5 / 2) X 0.25 0.5 /0.25 = 0.43 d = 0.43-0.5/0.25 = 0.18Nd(0.43) = 0.6664Nd(0.18) = 0.574Thus the value of the call option is = 100 X 0.664 (95 e-0.10 X 0.25) X 0.5714 = 66.64 52.94 = Rs. 13.70

14 (b). Discuss the factors which influence the dividend policy of a firm. Dividend is the return that a shareholders get from the company, out of its profits on his shareholdings. The basic question before the board of the Directors is how much profits should be divided among shareholders as dividend and how much to be retained in the business as reserves to meet the future contingencies and for expansion of the business.Divided policy determines the division of earnings between payments to shareholders and retained earnings . The firm divided policy represent a plan of action to be followed the dividend decision must be made.

15 (a). Explain the key elements of organizational design and corporate governance. Corporate Governance is a mechanism established to allow different parties to contribute capital, expertise, and labour, for their mutual benefit. The investors/shareholder participates in the profits of the enterprises without being responsible for personally providing the funds.The term Corporate Governance refers to the relationship among these three groups in determining the direction an performance of the corporation such as capital, enterprises and investors.Corporate Ethics code of EthicsIt specify how an organization expects its employees to behave while on the job. Developing of ethics can be a useful way to promote ethical behavior, especially for people who are operating at Kohl bergs conventional level of moral development.15 (b). Discuss the importance of social responsibilities of present day Business. The concept social responsibility proposes that a private corporation has responsibilities to society that extend beyond making a profit. Strategic decisions often affect more than just the corporation . A decision to retrench by closing some plants and discontinuing products lines, for example, affects not only the firms workforce, but also the communities where the plants are located and the customers with no other sources of the discontinued products.The major responsibilities of present day business are Economic Responsibility Legal Responsibility Ethical Responsibility Discretionary Responsibility