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INTERNALASSIGNMENTNO-2
Q-1 (I) Differentiate arbitrationandspeculationinforeignexchange market.
. Differentiate “arbitration” and “speculation” in foreign exchange
market. Ans. Arbitration is simultaneous purchase and sale of foreign
exchangesin two or more markets to profit from discrepancies
inquotations whereas A speculation in the Forex market means that
youbuy and sell currencies.
(ii) marginal cost of capital.
Marginal cost of capital is the weighted average cost of the last dollar of new capital raised by a
company. It is the composite rate of return required by shareholders and debt-holders for
financing new investments of the company. It is different from the average cost of capital which
is based on the cost of equity and debt already issued.
(iii) Write a short not on JIT.
The just-in-time (JIT) inventory system is a management strategy that aligns raw-
material orders from suppliers directly with production schedules. Companies
employ this inventory strategy to increase efficiency and decrease waste by
receiving goods only as they need them for the production process, which
reduces inventory costs. This method requires producers to forecast demand
accurately.
The JIT inventory system contrasts with just-in-case strategies, wherein
producers hold sufficient inventories to have enough product to absorb maximum
market demand.
(iv) What are the conditions for the redemption of redeemable preference share?
Conditions for redemption of Preference Shares:
1. There must be a provision in the Articles of Association regarding the redemption of preference
shares.
2. The redeemable preference shares must be fully paid up. If there is any partly paid share, it
should be converted in to fully paid shares before redemption.
3. The redeemable preference shareholders should be paid out of undistributed profit/ distributable
profit or out of fresh issue of shares for the purpose of redemption.
4. If the shares are redeemed at a premium, it should be should be provided out of securities
premium or profit and loss account or general reserve account.
5. The proceeds from fresh issue of debentures cannot be utilized for redemption.
6. The amount of capital reserve cannot be used for redemption of preference shares.
7. If the shares are redeemed out of undistributed profit , the nominal value of share capital, so
redeemed should be transferred to Capital Redemption Reserve Account. This is also known as
capitalization profit.
(v) Mention the different types of dividend paid by companies.
A dividend is generally considered to be a cash payment issued to the holders of company stock.
However, there are several types of dividends, some of which do not involve the payment of
cash to shareholders. These dividend types are:
 Cash dividend. The cash dividend is by far the most common of the dividend types used. On
the date of declaration, the board of directors resolves to pay a certain dividend amount in cash
to those investors holding the company's stock on a specific date. The date of record is the date
on which dividends are assigned to the holders of the company's stock. On the date of payment,
the company issues dividend payments.
 Stock dividend. A stock dividend is the issuance by a company of its common stock to its
common shareholders without any consideration. If the company issues less than 25 percent of
the total number of previously outstanding shares, then treat the transaction as a stock dividend.
If the transaction is for a greater proportion of the previously outstanding shares, then treat the
transaction as a stock split. To record a stock dividend, transfer from retained earnings to
the capital stock and additional paid-in capital accounts an amount equal to the fair value of the
additional shares issued. The fair value of the additional shares issued is based on their fair
market value when the dividend is declared.
 Property dividend. A company may issue a non-monetary dividend to investors, rather than
making a cash or stock payment. Record this distribution at the fair market value of the assets
distributed. Since the fair market value is likely to vary somewhat from the book value of the
assets, the company will likely record the variance as a gain or loss. This accounting rule can
sometimes lead a business to deliberately issue property dividends in order to alter their taxable
and/or reported income.
 Scrip dividend. A company may not have sufficient funds to issue dividends in the near future,
so instead it issues a scrip dividend, which is essentially a promissory note (which may or may
not include interest) to pay shareholders at a later date. This dividend creates a note payable.
ANS-2 Define cash management.discuss in detail the factors that determine the
needs cash of a firm.
Factors Determining Cash Needs:
The working capital needs of a firm are influenced by numerous factors. The important ones are:
Nature of business:
The working capital requirement of a firm is closely related to the nature of
its business. A service firm, like an electricity undertaking or a transport
corporation which has a short operating cycle and which sells predominantly
on cash basis, has a modest working capital requirement. On the other hand, a
manufacturing concern likes a machine tools unit, which has a long operating
cycle and which sells largely on credit, has a very substantial working capital
requirement.
Seasonality of operations:
Firms which have marked seasonality in their operations usually have highly
fluctuating working capital requirements. To illustrate, consider a firm
manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the
summer months and drops sharply during the winter period. The working capital
need of such firm is likely to increase considerably in summer months and
decrease significantly during the winter period. On the other hand, a firm
manufacturing productlike lamps, which have even sales round the year, tends to
have stable working capital needs.
Market conditions:
The degree of competition prevailing in the market has an important bearing on working
capital needs. When competition is keen, a larger inventory of finished is required to
promptly serve customers who may not be inclined to wait because other manufacturers
are ready to meet their needs.
Further, generous credit terms may have to be offered to attract customers in a highly
competitive market. Thus, working capital needs tend to be high because of greater
investment in finished goods inventory and accounts receivable.
If the market is strong and competition weak, a firm can manage with a smaller
inventory of finished goods becausecustomers can be served with some delay.
Further, in sucha situation the firm can insist on cash payment and avoid lock-ups
of funds in accounts receivable –it can even ask for advance payment, partial or
total.
Conditions of supply:
The inventory of raw materials, spares, and stores on the conditions of supply. If
the supply is prompt and adequate, the firm can manage with small inventory.
However, if the supply is unpredictable and scant, then the firm, to ensure
continuity of production, would have to acquire stocks as and when they are
available and carry large inventory on an average. A similar policy may have to be
followed when the raw material is available only seasonally and production
operations are carried out round the year.
ANS-3
What is the ratio analysis to management? Explain briefly any two ratios each of
measuring:
Ratio Analysis
When investors and analysts talk about fundamental or quantitative analysis,
they are usually referring to ratio analysis. Ratio analysis involves evaluating the
performance and financial health of a company by using data from the current
and historical financial statements.
Ratio analysis is a quantitative method of gaining insight into a company's
liquidity, operational efficiency, and profitability by comparing information
contained in its financial statements. Ratio analysis is a cornerstone
of fundamental analysis.
Outside analysts use several types of ratios to assess companies, while
corporate insiders rely on them less because of their access to more detailed
operational data about a company.
The data retrieved from the statements is used to compare a company's
performance over time to assess whether the company is improving or
deteriorating, to compare a company's financial standing with the industry
average, or to compare a company to one or more other companies operating in
its sector to see how the company stacks up.
Liquidity Ratio Definition
Liquidity ratios are an important class of financial metrics used to determine a
debtor's ability to pay off current debt obligations without raising external capital.
Liquidity ratios measure a company's ability to pay debt obligations and its
margin of safety through the calculation of metrics including the current
ratio, quick ratio, and operating cash flow ratio.
Current liabilities are analyzed in relation to liquid assets to evaluate the
coverage of short-term debts in an emergency.
Liquidity ratios measure a company's ability to pay off its short-term debts as
they come due using the company's current or quick assets. Liquidity ratios
include the current ratio, quick ratio, and working capital ratio.
Profitability Ratios
These ratios show how well a company can generate profits from its operations.
Profit margin, return on assets, return on equity, return on capital employed, and
gross margin ratio are all examples of profitability ratios.
Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating costs,
balance sheet assets, and shareholders' equity over time, using data from a
specific point in time.
For most profitability ratios, having a higher value relative to a competitor's ratio
or relative to the same ratio from a previous period indicates that the company is
doing well. Ratios are most informative and useful when used to compare a
subject company to other, similar companies, the company's own history, or
average ratios for the company's industry as a whole.
For example, gross profit margin is one of the most often-used profitably or
margin ratios. Some industries experience seasonality in their operations, such
as the retail industry. Retailers typically experience significantly higher revenues
and earnings during the year-end holiday season. It would not be useful to
compare a retailer's fourth-quarter gross profit margin with its first-quarter gross
profit margin because it would not reveal directly comparable information.
Comparing a retailer's fourth-quarter profit margin with its fourth-quarter profit
margin from the same period a year before would be far more informative.
Internal assignment no 2 mba109

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Internal assignment no 2 mba109

  • 1. INTERNALASSIGNMENTNO-2 Q-1 (I) Differentiate arbitrationandspeculationinforeignexchange market. . Differentiate “arbitration” and “speculation” in foreign exchange market. Ans. Arbitration is simultaneous purchase and sale of foreign exchangesin two or more markets to profit from discrepancies inquotations whereas A speculation in the Forex market means that youbuy and sell currencies. (ii) marginal cost of capital. Marginal cost of capital is the weighted average cost of the last dollar of new capital raised by a company. It is the composite rate of return required by shareholders and debt-holders for financing new investments of the company. It is different from the average cost of capital which is based on the cost of equity and debt already issued. (iii) Write a short not on JIT. The just-in-time (JIT) inventory system is a management strategy that aligns raw- material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately. The JIT inventory system contrasts with just-in-case strategies, wherein producers hold sufficient inventories to have enough product to absorb maximum market demand. (iv) What are the conditions for the redemption of redeemable preference share? Conditions for redemption of Preference Shares: 1. There must be a provision in the Articles of Association regarding the redemption of preference shares.
  • 2. 2. The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption. 3. The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption. 4. If the shares are redeemed at a premium, it should be should be provided out of securities premium or profit and loss account or general reserve account. 5. The proceeds from fresh issue of debentures cannot be utilized for redemption. 6. The amount of capital reserve cannot be used for redemption of preference shares. 7. If the shares are redeemed out of undistributed profit , the nominal value of share capital, so redeemed should be transferred to Capital Redemption Reserve Account. This is also known as capitalization profit. (v) Mention the different types of dividend paid by companies. A dividend is generally considered to be a cash payment issued to the holders of company stock. However, there are several types of dividends, some of which do not involve the payment of cash to shareholders. These dividend types are:  Cash dividend. The cash dividend is by far the most common of the dividend types used. On the date of declaration, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company's stock on a specific date. The date of record is the date on which dividends are assigned to the holders of the company's stock. On the date of payment, the company issues dividend payments.  Stock dividend. A stock dividend is the issuance by a company of its common stock to its common shareholders without any consideration. If the company issues less than 25 percent of the total number of previously outstanding shares, then treat the transaction as a stock dividend. If the transaction is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split. To record a stock dividend, transfer from retained earnings to the capital stock and additional paid-in capital accounts an amount equal to the fair value of the additional shares issued. The fair value of the additional shares issued is based on their fair market value when the dividend is declared.  Property dividend. A company may issue a non-monetary dividend to investors, rather than making a cash or stock payment. Record this distribution at the fair market value of the assets distributed. Since the fair market value is likely to vary somewhat from the book value of the assets, the company will likely record the variance as a gain or loss. This accounting rule can
  • 3. sometimes lead a business to deliberately issue property dividends in order to alter their taxable and/or reported income.  Scrip dividend. A company may not have sufficient funds to issue dividends in the near future, so instead it issues a scrip dividend, which is essentially a promissory note (which may or may not include interest) to pay shareholders at a later date. This dividend creates a note payable. ANS-2 Define cash management.discuss in detail the factors that determine the needs cash of a firm. Factors Determining Cash Needs: The working capital needs of a firm are influenced by numerous factors. The important ones are: Nature of business: The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. On the other hand, a manufacturing concern likes a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement. Seasonality of operations: Firms which have marked seasonality in their operations usually have highly fluctuating working capital requirements. To illustrate, consider a firm manufacturing ceiling fans. The sale of ceiling fans reaches a peak during the summer months and drops sharply during the winter period. The working capital need of such firm is likely to increase considerably in summer months and decrease significantly during the winter period. On the other hand, a firm manufacturing productlike lamps, which have even sales round the year, tends to have stable working capital needs.
  • 4. Market conditions: The degree of competition prevailing in the market has an important bearing on working capital needs. When competition is keen, a larger inventory of finished is required to promptly serve customers who may not be inclined to wait because other manufacturers are ready to meet their needs. Further, generous credit terms may have to be offered to attract customers in a highly competitive market. Thus, working capital needs tend to be high because of greater investment in finished goods inventory and accounts receivable. If the market is strong and competition weak, a firm can manage with a smaller inventory of finished goods becausecustomers can be served with some delay. Further, in sucha situation the firm can insist on cash payment and avoid lock-ups of funds in accounts receivable –it can even ask for advance payment, partial or total. Conditions of supply: The inventory of raw materials, spares, and stores on the conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory. However, if the supply is unpredictable and scant, then the firm, to ensure continuity of production, would have to acquire stocks as and when they are available and carry large inventory on an average. A similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year. ANS-3 What is the ratio analysis to management? Explain briefly any two ratios each of measuring: Ratio Analysis When investors and analysts talk about fundamental or quantitative analysis, they are usually referring to ratio analysis. Ratio analysis involves evaluating the
  • 5. performance and financial health of a company by using data from the current and historical financial statements. Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by comparing information contained in its financial statements. Ratio analysis is a cornerstone of fundamental analysis. Outside analysts use several types of ratios to assess companies, while corporate insiders rely on them less because of their access to more detailed operational data about a company. The data retrieved from the statements is used to compare a company's performance over time to assess whether the company is improving or deteriorating, to compare a company's financial standing with the industry average, or to compare a company to one or more other companies operating in its sector to see how the company stacks up. Liquidity Ratio Definition Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio. Current liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term debts in an emergency. Liquidity ratios measure a company's ability to pay off its short-term debts as they come due using the company's current or quick assets. Liquidity ratios include the current ratio, quick ratio, and working capital ratio.
  • 6. Profitability Ratios These ratios show how well a company can generate profits from its operations. Profit margin, return on assets, return on equity, return on capital employed, and gross margin ratio are all examples of profitability ratios. Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholders' equity over time, using data from a specific point in time. For most profitability ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well. Ratios are most informative and useful when used to compare a subject company to other, similar companies, the company's own history, or average ratios for the company's industry as a whole. For example, gross profit margin is one of the most often-used profitably or margin ratios. Some industries experience seasonality in their operations, such as the retail industry. Retailers typically experience significantly higher revenues and earnings during the year-end holiday season. It would not be useful to compare a retailer's fourth-quarter gross profit margin with its first-quarter gross profit margin because it would not reveal directly comparable information. Comparing a retailer's fourth-quarter profit margin with its fourth-quarter profit margin from the same period a year before would be far more informative.