Financial Management and Financial Accounting Study Material

This study material on Financial Management and Financial Accounting covers topics like capital asset pricing model (CAPM), cost of capital, operational and financial gearing, and more. It includes solved assignments, essays, dissertations, and other study material. The material is relevant for students pursuing courses in Financial Management and Financial Accounting from various colleges and universities.

Financial Accounting

Table of Contents
Question 1..............................................................................................................................3
Question 2..............................................................................................................................4
Question 3..............................................................................................................................6
Question 4..............................................................................................................................6
REFERENCES...........................................................................................................................8

Question 1
a)
i)
Year
Deman
d Price Sales
Fixed
cost
Variable
cost
each
unit
Variable
cost
Cash
inflows
1 55000 30 1650000 150000 10 550000 950000
2 50000 30.6 1530000 150000 10.2 510000 870000
3 90000 31.212 2809080 150000 10.404 936360
172272
0
4 10000
31.8362
4
318362.
4 150000
10.6120
8
106120.
8 62241.6
NPV
Year
Cash
inflows
cost of
capita
l @
10%
Discounte
d cash
inflows
1 950000 0.909 863636
2 870000 0.826 719008
3
172272
0 0.751 1294305
4
62241.
6 0.683 42512
Total discounted
cash inflow 2919462
Initial investment 2800000
NPV (Total
discounted cash
inflows - initial
investment) 119462
ii)
IRR
Year
Cash
inflows
0
-
2800000

1 950000
2 870000
3
172272
0
4 62241.6
IRR 12%
iii)
ARR
Year
Cash
inflows
1 950000
2 870000
3
172272
0
4 62241.6
Average profit or
cash inflow
901240.
4
Average initial
investment 1400000
average initial
investment [(initial
investment + scrap
value) / 2] 64%
b)
From the valuation it can be identified that project can be financially acceptable as it has
positive net present value, higher ARR and IRR which are 64 & 12% respectively (Lima and
et.al., 2017).
c)
The biggest advantage is that it helps in getting information regarding future value of present
cash flow to have perspective of long terms so that rational decision can be taken
(Fehrenbacher, Kaplan and Moulang, 2020). Disadvantage is that presenting true investment
risk premium becomes difficult.

Question 2
(a)
(i)
Basis Operational gearing Financial gearing
Meaning It involves usage of such
assets in the business
operations for which has to
pay fixed cost is called as
operating gearing.
It involves making use of
debt in capital structure for
which interest is to be paid
is called financial gearing.
Measures Impact of Fixed operating
costs.
Impact of Interest expenses.
Ascertained by Company's Cost Structure Company's Capital Structure
(ii)
Operational gearing Disa Co. = Fixed Costs / Variable Costs
Fixed cost = 60000 * 40% = 24000
Variable cost = 60000 * 60% = 36000
Operational gearing = 24000 / 36000 = 0.66 or 66.67%
Financial gearing for Disa Co. = Debt / (Debt + equity) * 100
Debt = 12000
Debt + Equity = 12000 + 11000 = 23000
Financial gearing = 12000 / 23000 = 52.17%
(iii)
Operational gearing derived above indicates that the fixed cost is lower than the variable cost
of the company leading to lower operational gearing. The financial gearing indicates that the
company has utilized more of its debt in its total capital structure which 52.17% which
conveys higher financial burden over the company in regard to payment of interest.
(b)
Yield to maturity = (F/PV) ^1/n -1
= (100 / 60) ^1/7 – 1
= 7.57%
(c)

Using the relative purchasing power parity, forward exchange rate can be calculated using the
following formula:
F = s *[(1+Id)/(1+If)] ^n
F = 15 *[(1+4%) / (1+7%)] ^ 0.5
F = 15 * [1.04 / 1.07] ^ 0.5
F = 15 * 0.98 = 14.7 yen per $
Question 3
a)
CAPM is an capital asset pricing model which reflects relationship between systematic risk
and expected return of stock. There are 3 assumptions of CAPM are as follows:
 Investors are risk averse which requires a diversification technique to mitigate the
associated threat with assets
 Investors makes the selection on the basis of risk and reward that is measured by
mean & variance of portfolio (Nurwulandari, 2021.). There is assumption that
investor avoid unsystematic risk and systematic remains only.
 Third assumption that investor can freely access information without paying any cost.
b)
CAPM Model calculation
Particulars Formula Figures
Rf (Risk free rate) 3%
Beta 1.5
Rm (market return) 5%
CAPM Rf + Beta (Rm - Rf) 5.3%
Question 4
a)
Cost of equity
Ke = D1/P0 + g
= [16 * (1+8.8%) / 3] + 8.8% = 17.4 / 3 + 8.8% = 14.6%
Dividend growth rate is taken at 8.8% which is the average of the dividend growth rate.
Cost of preference shares = Kp= Dp/NP

= 3.5/100 = 3.5%
Cost of debentures
= I * (1- tax rate)
= 5.5 * (1 – 19%) = 4.45%
Cost of unsecured loans
Kd = I(1 – t) / Po
= 5 * (1 – 19%) / 83 = 4.8%
Sources Value Cost Weight WACC
Equity 39000 0.146 0.29 0.0423
Preference shares 8500 0.35 0.064 0.0224
Debentures 50750 0.0445 0.38 0.0169
Unsecured loans 32800 0.048 0.25 0.012
Total 131050 0.0936 or
9.36%
b)
1. It cannot be relied upon as it is based upon the expected return and not on the
historical return.
2. Conceptual issues regarding the relationship between the cost of capital and the
capital structure.
3. Problem in assigning weights as it will differ under book value method and market
value method.
4. Problem in computation of cost of equity as it is dependent upon the expected rate of
return.

REFERENCES
Books and Journals
Fehrenbacher, D. D., Kaplan, S. E. and Moulang, C., 2020. The role of accountability in
reducing the impact of affective reactions on capital budgeting decisions. Management
Accounting Research. 47. p.100650.
Lima, A. C. and et.al., 2017. A qualitative analysis of capital budgeting in cotton ginning
plants. Qualitative Research in Accounting & Management.
Nurwulandari, A., 2021. Analysis Of The Relationship Between Risk And Return Using The
Capital Asset Pricing Model (Capm) Method At Kompas 100. Enrichment: Journal of
Management, 11(2), pp.528-534.