SBS Swiss Business School (pdf)

SBS Swiss Business School
Final Assignment
Course Code Course Name Principles Of Finance
Date 24.07.2020 Time Duration
Maximum Marks 60 Weight
Learning Outcomes
Student Name Ahmed Rayyan
Student ID SBS-180-70166
For Examiner’s Use Only
Total Points: _______/ 60 points= _________% Grade:
Tasks A
Marks Allocated 60
Marks Obtained

Principles of Finance -II
Assignments (60 marks)
1. Define working capital and the operating cycle. ( 5 marks)
2. Explain the determinants of working capital . (10 marks)
3. Write the duration of operating cycle. (5 marks)
Period Covered 365 days
Average period of credit allowed by suppliers 16 days
Average total of debtors outstanding 480,000
Raw Material Consumption 4,400,000
Total Production Cost 10,000,000
Cost of Sales for the Year 10,500,000
Sales per year 16,000,000
Value of average stock maintained:
Raw Materials 320,000
Work-in-progress 350,000
Finished Goods 260,000
4. From the following information extracted from the books of a
manufacturing concern, compute the operating cycle in days:
(10 marks)
5. Explain derivatives and its types of contracts. ( 10 marks)
6. Elaborate what is risk management and its process. ( 10 marks)
7. Write briefly the approaches to deal the risk. ( 10 marks)
***************

Principles Of Finance
Assignment
Ahmed Rayyan
SBS-180-70166
24 July 2020

1. Define working capital and the operating cycle. ( 5 marks)
Ans.) Working capital is cash that’s to be had to a business enterprise
for its daily operations. Simply put, running capital shows a business
enterprise's working liquidity and efficiency. A business enterprise's running
capital displays a bunch of business enterprise activities, such as cash, stock,
debts receivable, debts payable, and the part of debt due inside one year (in
addition to some other short-time period debts). This can enlarge to stock
management, debt management, sales collection, and bills to suppliers.
According to Weston & Brigham - “Working capital refers to a firm’s
investment in short term assets, such as cash amounts receivables,
inventories etc.
The operating cycle is the common time period required for an
enterprise to make a preliminary outlay of coins to supply goods, promote
the goods, and obtain coins from clients in trade for the goods. If an agency
is a retailer, then the working cycle does now no longer encompass any time
for production: it's far in reality the date from the preliminary coins outlay to
the date of coins receipt from the customer. The operating cycle is beneficial
for estimating the quantity of operating capital that an agency will want to be
able to preserve or develop its enterprise. An agency with a very quick

working cycle calls for much less coins to preserve its operations, and so can
nonetheless develop even as promoting at pretty small earnings margins.
2. Explain the determinants of working capital. (10 marks)
Ans.) The Determinants of working capital include Internal Factors
and External Factors. Please see the below explanation:
1. Internal Factors
1. Nature and size of the business
The working capital necessities of an organization are essentially
inspired through the character and length of the commercial enterprise. An
organization with large scale of operations will want extra running capital
than a small organization. Similarly, the character of the commercial
enterprise - impact the working capital decisions. Trading and monetary
companies have much less funding in constant assets. But require a big
amount of cash to be invested in running capital. Retail stores, commercial
enterprise gadgets require large quantity of working capital, in which as,
public utilities want much less running capital and extra finances to spend
money on constant assets.

2. Firm’s production policy
The firm’s manufacturing coverage (production cycle) is a crucial
component to determine the running capital requirement of a firm. The
manufacturing cycle begins off evolved with the acquisition and use of
uncooked fabric and completes with the manufacturing of completed goods.
On the opposite hand manufacturing coverage is uniform manufacturing
coverage or seasonal manufacturing coverage etc., additionally impacts the
running capital decisions.
3. Firm’s credit policy
The credit score coverage of a company affects credit score coverage
of operating capital. A company following liberal credit score coverage to
all clients calls for funds. On the alternative hand, the company adopting
strict credit score coverage and supply credit score centers to few ability
clients would require much less quantity of operating capital.
4. Availability of credit
The working capital necessities of an organization also are tormented
by credit score phrases granted via way of means of its suppliers – i.e.
Creditors. An organization will want much less running capital if liberal
credit score phrases are to be had to it. Similarly, the provision of credit

score from banks additionally affects the working capital wishes of the
organization. An organization, that could get financial institution credit score
effortlessly on favorable conditions, may be operated with much less
running capital than an organization without the sort of facility.
5. Growth and expansion of business
Working capital requirement of an enterprise company have a
tendency to growth in correspondence with boom in income extent and
glued property. A developing company may also want budget to put money
into constant property with the intention to maintain its developing
manufacturing and income. This will, in turn, growth funding in cutting-
edge property to aid elevated scale of operations. Thus, a developing
company desires extra budget continuously.
6. Profit margin and dividend policy
The importance of running capital in an organization relies upon its
income margin and dividend coverage. An excessive internet income margin
contributes toward the running capital pool. To the quantity the internet
income has been earned in coins, it will become a supply of running capital.
This relies upon the dividend coverage of the organization. Distribution of
excessive percentage of income in the shape of coins dividends effects in a

drain on coins assets and for this reason reduces company’s running capital
to that quantity. The running capital function of the organization is
reinforced if the control follows conservative dividend coverage and vice
versa.
7. Operating efficiency of the firm
Operating performance manner the most suitable utilization of a
company’s sources at minimal cost. If a company efficaciously controls
working cost, it is going to be capable of enhance internet income margin
which, will, in turn, launch extra price range for operating capital purposes.
8. Coordinating activities in firm
The operating capital necessities of an organization are rely upon the
co-ordination among manufacturing and distribution activities. The extra and
powerful the co-ordinations, the stress at the operating capital could be
minimized. In the absence of co-ordination, call for operating capital is
reduced.

2. External Factors
1. Business fluctuations
Most firms experience fluctuations in call for his or her merchandise
and services. These commercial enterprise versions have an effect on the
running capital requirements. When there's an upward swing in the
economy, income will boom, correspondingly, the corporation’s funding in
inventories and book money owed will even boom. Under boom, extra
funding in constant belongings can be made via way of means of a few
corporations to boom their effective capacity. This act of the corporation
would require extra funds. On the alternative hand when, there's a decline in
economy, income will come down and therefore the conditions, the
corporation try and lessen their short-time period borrowings. Similarly the
seasonal fluctuations may additionally have an effect on the requirement of
running capital of a corporation.
2. Changes in the technology
The technological modifications and tendencies in the place of
manufacturing will have instantaneously results at the want for operating
capital. If the company want to put in a brand new gadget in the location of
antique gadget, the brand new gadget can utilize much less luxurious

uncooked materials, the stock wishes can be decreased there via way of
means of operating capital wishes.
3. Import policy
Import coverage of the Government can also impact the tiers of
operating capital of a company because they should set up finances for
uploading items at specific times.
4. Infrastructural facilities
The corporations can also additionally require extra finances to keep
the tiers of stock and different contemporary assets, whilst there is a superb
infrastructural facility in the organization like transportation and
communications.
5. Taxation policy
The tax guidelines of the Government will have an effect on the
operating capital decisions. If the Government follows regressive taxation
policy, i.e. implementing heavy tax burdens on enterprise firms, they're left
with little or no earnings for distribution and retention purpose.
Consequently the company has to borrow extra finances to satisfy their
extended operating capital needs. When there's a liberalized tax policy, the
strain on operating capital requirement is minimized.

Thus the operating capital necessities of a company are encouraged
via way of means of the inner and outside factors.
3. Write the duration of operating cycle. (5 marks)
Ans.) The duration of the operating cycle is equal to the sum of the duration
of each of these stages less the credit period allowed by the suppliers of the
firm. In symbols, O = R + W + F + D – C
Where,
O = Duration of operating cycle.
R = Raw material conversion period.
W= Work-in-process period.
F = Finished goods storage period.
D =Debtors collection period, and
C = Creditors payment period.
The components of the operating cycle may be calculated as follows:
R = AVERAGE STOCK OF RAW MATERIAL
RAW MATERIAL CONSUMPTION PER DAY
W = AVERAGE STOCK OF WIP
TOTAL COST OF PRODUCTION PER DAY
F = AVERAGE STOCK OF FINISHED GOODS
TOTAL COST OF SALES PER DAY
D = AVERAGE ACCOUNTS RECEIVABLES
NET CREDIT SALES PER DAY
C = AVERAGE ACCOUNTS PAYABLE
NET CREDIT PURCAHSES PER DAY

4. From the following information extracted from the books of a
manufacturing concern, compute the operating cycle in days:
Period Covered 365 days
Average period of credit allowed by suppliers 16 days
Average total of debtors outstanding 480,000
Raw Material Consumption 4,400,000
Total Production Cost 10,000,000
Cost of Sales for the Year 10,500,000
Sales per year 16,000,000
Value of average stock maintained:
Raw Materials 320,000
Work-in-progress 350,000
Finished Goods 260,000
(10 marks)
Ans.)
R = 320,000
4,400,000
W = 350,000
10,000,000
F = 260,000
10,500,000
D = 480,000
16,000,000
TOTAL PERIOD OF OPERATING CYCLE = 27+13+9+11 = 60 DAYS
*365 = 27 DAYS
*365 = 13 DAYS
*365 = 9 DAYS
*365 = 11 DAYS

NET PERIOD OF OPERATING CYCLE = TOTAL PERIOD OF
OPERATING CYCLE – AVERAGE PERIOD OF CREDIT ALLOWED
BY SUPPLIERS
I.E.
NET PERIOD OF OPERATING CYCLE = 60 – 16 = 44 DAYS
5. Explain derivatives and its types of contracts. ( 10 marks)
A derivative is a settlement among events which derives its fee/rate
from an underlying asset. The maximum common forms of derivatives are
futures, alternatives, forwards and swaps. It's an economic protection with a
fee this is reliant upon or derived from, an underlying asset or organization
of belongings—a benchmark. The derivative itself is a settlement among or
extra events, and the by-product derives its rate from fluctuations in the
underlying asset. The maximum common underlying belongings for
derivatives are stocks, bonds, commodities, currencies, interest quotes, and
marketplace indexes. These assets are usually bought thru brokerages.
Derivatives can exchange over-the-counter (OTC) or on an exchange. OTC
derivatives represent an extra share of the derivatives marketplace. OTC-
traded derivatives, commonly have an extra opportunity of counterparty
threat. Counterparty threat is the hazard that one of the events concerned in
the transaction may default. These events exchange among non-public
events and are unregulated. The types of contracts are as below:

Future:
A futures contract is a unique sort of forwarding contract wherein an
agreement is made among events to shop for or promote an asset at a certain
time in the future at a specific rate.
Option:
Options are contracts among an alternative writer and a customer that
offers the customer the proper to shop for/promote the underlying inclusive
of assets, other derivatives etc. At a said rate on a given date. Here, the
customer will pay the choice top class to the choice creator i.e. the vendor of
the choice. The option writer has to oblige if the customer comes to a
decision to work out the proper given thru the alternatives settlement.
Forward:
It is a custom designed contract among events in which the settlement
occurs on a selected date in the future at a rate agreed upon at the settlement
date.

Swaps:
Swaps are non-public contracts among events in which an alternate of
coins flows of the economic units owned with the aid of using the events
takes place. The 2 types of swaps are as below:
Interest Rate Swaps: An interest rate swap is a forward settlement
wherein one circulate of future interest payments is exchanged for any other
primarily based totally on an exact primary amount. Interest fee swaps
commonly contain the alternate of a set interest fee for a floating fee, or vice
versa, to lessen or growth publicity to fluctuations in interest rates or to
attain a touch decrease interest fee than could were viable without the
switch.
Currency Swaps: A currency swap, sometimes called a cross-
currency swap, involves the alternate of interest – and sometimes of primary
– in a single currency for the same in another currency. Interest bills are
exchanged at constant dates thru the existence of the settlement. It is taken
into consideration to be a forex transaction and isn't required with the aid of
using regulation to be proven on a company's stability sheet.

6. Elaborate what is risk management and its process. ( 10 marks)
Risk management refers back to the practice of figuring out capacity
dangers in advance, analyzing them and taking precautionary steps to
reduce/lower the hazard. When an entity makes a funding decision, it
exposes itself to some of economic dangers. The quantum of such dangers
relies upon at the sort of economic instrument. These economic dangers is
probably in the shape of excessive inflation, volatility in capital markets,
recession, bankruptcy, etc. So, with the intention to reduce and manage the
publicity of funding to such dangers, fund managers and traders exercise
hazard control. Not giving due significance to hazard control whilst making
funding choices may wreak havoc on funding in instances of economic
turmoil in an economy. Different tiers of hazard come connected with one of
a kind classes of asset classes. For example, a hard and fast deposit is taken
into consideration a much less unstable funding. On the alternative hand,
funding in fairness is taken into consideration an unstable venture. While
training hazard control, fairness traders and fund managers generally tend to
diversify their portfolio with a view to reduce the publicity to hazard. Below
are 5 process of Risk Management:

Identify potential risks:
The 4 major risk categories of risk are hazard risks, such as fires or
injuries; operational risks, along with turnover and dealer failure; financial
dangers, together with financial recession; and strategic dangers, which
consist of new competition and logo reputation. Being capable of pick out
what types of risk you have is critical to the risk control technique. An
enterprise can pick out their dangers thru revel in and inner history,
consulting with enterprise professionals, and external research.
Measure frequency and severity:
Many groups use a warmth map to degree their dangers in this scale.
A hazard map is a visible device that information which dangers are
common and that are severe (and accordingly require the maximum
resources). This will assist you pick out that are not possible or could have
low effect, and that are very likely and could have a vast effect. Knowing the
frequency and severity of your dangers will display you in which to spend
some time and money, and permit your group to prioritize their resources.
Examine alternative solutions:
Organizations typically have the alternatives to accept, keep away
from, manage, or transfer a risk. Accepting the risk manner determining that

a few risks are inherent in doing commercial enterprise and that the
advantages of an activity outweigh the capacity dangers. To keep away from
a risk, the enterprise sincerely has to not take part in that activity. Risk
control includes prevention (decreasing the probability that the hazard will
occur) or mitigation, that's decreasing the effect it's going to have if it does
occur. Risk transfer includes giving responsibility for any bad results to any
other party, as is the case while an enterprise purchases insurance.
Decide which solution to use and implement it:
Once all affordable capacity answers are listed, select out the only this
is maximum in all likelihood to obtain favored results. Find the wanted
resources, together with employees and funding, and get the important buy-
in. senior control will in all likelihood need to approve the plan, and group
individuals will need to be knowledgeable and skilled if important. Set up a
proper technique to put into effect the answer logically and continuously
throughout the enterprise, and inspire employees each step of the way.
Monitor results:
Risk management is a process, now no longer a venture that could be
“finished” after which forgotten about. The enterprise, its surroundings, and
its dangers are continuously changing, so the technique need to be

continuously revisited. Determine whether or not the tasks are powerful and
whether or not adjustments or updates are required. Sometimes, the group
might also additionally need to begin over with a brand new technique if the
applied method isn't always powerful. If an enterprise steadily formalizes its
hazard control technique and develops a hazard culture, it becomes greater
resilient and adaptable in the face of change. This will even imply making
greater knowledgeable choices primarily based totally on an entire picture of
the enterprise’s running surroundings and developing a stronger backside
line over the long-term.
7. Write briefly the approaches to deal the risk. ( 10 marks)
Ans.) The 4 ways to approach risk are as follows:
 Avoiding The Risk
 Transferring The Risk
 Controlling The Risk
 Insuring Against The Risk
Avoiding the Risk
One way to lessen risk is to prevent doing anything it's far that creates
the danger. For example, many companies use cheques or direct deposits to
keep away from dangers related to having huge quantities of coins at the

premises. Some companies have casual practices wherein clean cheques are
signed through one co-signatory, with the alternative cosignatory filling out
the information at a later stage. Sensible companies, and those who
countersign cheques, continually keep away from this practice.
Transferring the Risk
Risk transfer happens when you get a person else to endure the danger
for a selected activity. For example, an infant care middle may are trying to
find to switch the dangers related to an time out through having mother and
father signal a shape waiving their rights to sue if their infant is injured.
Similarly, in case you are buying a brand new pc, you'll likely need a
warranty.
Warranties are a means of spreading risks from one party (the person
buying the equipment) to another party (the organization selling the
equipment). Remember however that there is often a cost in transferring
risks to another party. For example, extended warranties can be purchased
for office equipment, vehicles, and so forth. These warranties transfer certain
risks to another party, but clearly at a price.

Controlling the Risk
Work through every of the risks you've got identified and spot if there
are approaches that you could lessen the chance of the danger happening or
of lessening the effects of the danger. Some not unusual techniques which
may be used each to lower the chance of danger, and reduce the effects,
consist of:
Make certain that there are clean tactics in location for regions with
diagnosed excessive dangers. These tactics may consist of what to do in the
occasion of tactics for coping with opposed clients, or economic control
tactics.
Provide good enough supervision for excessive-danger regions. For
example, wherein the green personnel is coping with doubtlessly opposed
clients, good enough supervision should be supplied.
Provide information - humans want to recognize what to do if they're
uncovered to danger. Consider “hearth place exit” symptoms and symptoms,
“warning” symptoms and symptoms close to risky materials, and so forth.
Information on the way to use the gadget and what to do the occasion of
injuries have to be quite simply available.

Keep matters so as - spark off repairs, elimination of rubbish, and
commonly keeping a smooth and tidy paintings surroundings does plenty to
reduce the frequency and effect of dangers. A brought gain of preserving
matters so as is that it makes for an extra best surroundings.
Provide training - the chance of danger might be substantially
decreased whilst personnel and volunteers have obtained right training, as an
example in coping with tough clients.
Look for technological answers - many dangers may be decreased this
manner. Fire alarms and extinguishers, private alarms, and burglar alarms
every serve to reduce dangers. Technical answers have to be used on a case
through case basis, and have to commonly be used wherein the value of the
danger being protected exceeds the value of technology.
Make backups - the effect of the loss, theft, or harm of documents
may be decreased if paper and pc copies or backups of vital documents are
kept.
Insuring Against the Risk
Insurance is the remaining motel in danger control, and have to
simplest be used whilst the alternative techniques mentioned above have
now no longer been capable of lessen danger to a stage your agency is ready

to tolerate. Having stated that, coverage stays a vital a part of maximum
danger control plans.
There are fundamental varieties of coverage:
General coverage
Life coverage
Workers’ Compensation
This is obligatory coverage required through all employers to cowl
injury, sickness, or loss of life in their personnel no matter whether or not
the organization is negligent. Failure to take out workers' repayment
coverage will depart the agency open to any claims for repayment through
personnel and problem to a fine. Besides, in case your worker or contractor
claims and obtained fee from work cover whilst you do not have a coverage,
work cover has the proper to get better double your ordinary top class and
one and a 1/2 of instances the quantity paid in your worker.
Motor Vehicle Comprehensive
This coverage covers harm in your agency's automobile and harm to
different humans’ assets of any type, such as vehicles. It covers theft, hearth
place, criminal prices, and might cowl towing prices. These varieties of

guidelines typically require the claimant to pay an extra on any claim. In a
few circumstances, the insurer will put off the extra in go back for the fee of
a better top class.
Motor vehicle third party property, fire and theft - this is a cheaper
type of insurance which covers damage to other people's property, but only
covers the insured's vehicle for fire and theft. No cover is provided for
damage to the insured's vehicle. If the insured's vehicle is stolen and then
later found in a damaged state, this type of insurance will not cover the cost
of repairs.
Building Insurance
This covers harm to systems owned through your agency. Policies
might also additionally cowl harm due to storm, tempest, rainwater,
lightning, and explosion, effect through vehicles, animals or aircraft,
earthquakes, riots, malicious acts, and, if agreed, flood.
A coverage typically covers simplest the depreciated cost of the
constructing insured on the time of loss. This sort of "indemnity" coverage
will now no longer cowl the value of alternative of the constructing and for
this reason, reinstatement or alternative coverage is recommended. Consider
additionally extending your constructing coverage to cowl "more prices of

reinstatement", inclusive of prices of complying with the necessities of
public government and "elimination of debris" which may be an expensive
exercise.