Presentation on

Financial Management Assignment

Presented to Presented by
Professor Mohd. Mujahidul Islam Md. Hafizur Rahman
Director of MTM Program ID 52064003
Department of Banking & Insurance 6th Batch 2nd Semester
Faculty of Business Studies July 20 to December 20.
University of Dhaka
01. a) What do you understand by the time value of money? Distinguish between the
present value and the future value. How is the present value of future inflow calculated?

• Money todays is more valuable than money tomorrow’s that is called time value
of money. Money todays and money tomorrow’s does not carry same value.
• Usually 100 taka at present has more value than taka 100 to be received at the end
of the year. So, for the proper evaluation of return future inflows from an
investment should be discounted with a time value factor. Value of money that
change of time.
Distinguish between the present value and the future value.

• Present and future values are the terms which are used in the financial world to
calculate the future and current net worth of money which we have today with us.
Generally, both Present Value vs Future Value concept is derived from the time
value of money and its monetary concept use by business owner or investors
every day. 
 Particulars Present Value Future Value
Meaning Present value is the current value of a It is defined as the value of the future cash flow after
future amount of money or a series of a certain future period. This is the amount of cash
payments, It is basically the amount of which will be received at a specified future date.
cash in hand on today’s date.
Time Frame It is the current value of an asset or It is that value of the asset or investment at the end of
investment at the beginning of a a particular time period.
particular time period.

Rates While calculating present value both While calculating future value only interest rate is
applicable discount rate and interest rate are taken taken into account.
into account.

Decision Present value is very much important for Since this reflects the future profits from an
Making the investors as it helps to decide whether investment it has lesser importance in decision
to invest or not. making regarding investments.

Reliability Present value is a more reliable value, Since the future value is a projected figure, no one
and an analyst can be almost certain can fully rely on that figure as in the future,
about that value. something can happen, which can affect the
projections.
 How is the present value of future inflow calculated
• Present value is calculated by taking the future cash flows expected from an investment
and discounting them back to the present day. To do so, the investor needs three key
data points: First one is the expected cash flows, Second one is the number of years in
which the cash flows will be paid, and the third one is their discount rate. The discount
rate is a very important factor in influencing the present value, with higher discount
rates leading to a lower present value, and vice-versa. Using these variables, investors
can calculate present value using the formula:
• Present Value =
• where:
• FV = Future Value
• R = Rate of return
• N = Number of periods
 1. b) IFIC Bank Ltd. has agreed to sanction a short term loan amounting tk. 2, 00,000 to ABC
company at 16% nominal interest rate for 1 year. Calculate the effective rate of interest if the
rate of interest is calculated on
c. Monthly installment Basis :
• Effective Interest Rate of ABC Company :
• Installment size = Tk. (200000+32000) ÷12
Total interest Amount = 2, 00,000*16% = Tk. 32,000 = 232,000 ÷12
• a. Collect Basis :
= Tk. 19,333 which will be paid per month.
EIR = 100 =100=16%
Here, interest amount is added to the loan
amount to calculate each installment.
•   b. Discount Basis :
• So EIR= {2PC÷A (N+1)} × 100
EIR= 100= 100=19.05%
= (2×12×32000) ÷ {200000×(12+1)} ×100
 
=29.54%
Interest is deducted from the initial loan and the
residual amount allowed to be used by borrowers. Here, P=No. of yearly installments =12
But here, interest is charged on the total loan N =No. of total installments = 12
amount. As a result, effective rate of interest on a
discount basis is higher than the stated rate A =Total loan = Tk. 2, 00,000
C= Total interest = Tk. 32,000
01. c) Mr Aslam has taken a car loan amounting tk. 20,00,000 from National
Bank Ltd.at an annual interest rate of 18%. Amortize the loan if semi-annual
payments are made for 4 years. Show the amortization schedule.

• PV0 = R (PVIFA i%,n)

• 20,00,000 = R (5.5348)
• R = 20,00,000/5.5348
• R = 361,350 This is the installment size of loan.
Loan Amortization Schedule :
No of
Installment Payment Interest Principal Ending Balance
0       2,000,000
01 361,350 180,000 181,350 1,818,650
02 361,350 163,678 197,672 1,620,978
03 361,350 145,888 215,462 1,405,516
04 361,350 126,496 234,854 1,170,662
05 361,350 105,360 255,990 914,672
06 361,350 82,320 279,030 635,642
07 361,350 57,208 304,142 331,500
08 361,335 29,835 331,500 0.00
Total 2,890,785 890,785 2,000,000  
2. Discuss the importance of working capital management for a typical
manufacturing firm. Distinguish between permanent and temporary working
capital. Graphically explain the conservative, aggressive and maturity
matching approaches to finance working capital of a firm.
• Working Capital Management refers to the management of the
capital that the company requires for financing its day-to-day business
operations and it is important for the company in order to maximize
its operational efficiency, manage its short-term liabilities and assets
properly, avoiding the underutilization of the resources and
overtrading, etc.
• In a typical manufacturing firm current assets is more than one half of
total assets.
• Importance of working capital is discussed below-
 Importance of working capital :
• Higher Return on Capital : Firms with lower working capital will post a
higher return on capital. Therefore, shareholders will benefit from a higher
return for every dollar invested in the business.
• Improved Credit Profile and Solvency: The ability to meet short-term
obligations is a pre-requisite to long-term solvency. And it is often a good
indication of counterparty’s credit risk. Working capital management will
allow a business to pay on time its short-term obligations. This could include
payment for a purchase of raw materials, payment of salaries, and other
operating expenses.
• Higher Liquidity: Liquidity is the ability to pay short term obligation A large
amount of cash can be tied up in working capital, so a company managing it
efficiently could benefit from additional liquidity and be less dependent on
external financing.
Importance of working capital :
• Increased Business Value : Firms with more efficient working capital
management will generate more free cash flows which will result in higher
business valuation and enterprise value.
• Uninterrupted Production : A firm paying its suppliers on time will also
benefit from a regular flow of raw materials, ensuring that the production
remains uninterrupted and clients receive their goods on time.
• Competitive Advantage : Firms with an efficient supply chain will often be
able to sell their products at a discount versus similar firms with inefficient
sourcing.
Difference between permanent and temporary working
capital :
Sl No Permanent working Capital Temporary working capital
01 Permanent working capital is constant Temporary working capital is the excess amount a
throughout business operations. Companies business needs over and above its permanent
need to maintain such an amount to meet its working capital. Since sales and production
basic financial requirements, like paying rent & fluctuate throughout a year, working capital
salaries, repaying creditors, etc. requirements may also vary.

02 It’s the minimum capital to maintain in order to It’s the additional working capital to permanent
meet operational levels. working capital.

03 Fixed working capital. Variable working capital.

04 Independent of variable factors. Dependent on variable factors.
05 Stable in nature. Sometimes increase/decreases (fluctuates from
time to time) in nature.

06 Financed through long term funds. Financed through short term funds.
07 Categorized into Regular working capital and Categorized into seasonal working capital and
reserve working capital. special working capital.
 Graphically explain the conservative, aggressive and maturity matching
approaches to finance working capital of a firm.
• There are three strategies or approaches or methods of working capital financing – Maturity
Matching, Conservative and Aggressive. Hedging approach is an ideal method of financing with
moderate risk and profitability. Other two are extreme strategies. Conservative approach is
highly conservative with very low risk and therefore low profitability. An aggressive approach is
highly aggressive having high risk and high profitability.
• Conservative Approach:
• An organization undertakes this strategy only when it requires minimizing risk to the furthest.
Under this policy, the management regulates the credit limits stringently to ensure low risk.
Moreover, current assets are always above par against the current liabilities to ascertain sufficient
availability of funds. Observing a conservative working capital financing policy, hence, leads to
underutilization of funds, thus cutting down on returns and compromising growth.
• From above graph we can see that long term financing is covering the fixed assets and a
large portion of current assets and a little portion of fluctuating current assets is
covering by the short-term financing. It means firm is reducing the risks associated with
short-term borrowing by using a large proportion of long-term financing.
Aggressive Approach:

• As the name may suggest, aggressive policies involve the maximum risk, and thus, also bring the
potential for multiplied growth. When observing this strategy, companies ensure their current assets,
such as the value of debtors, are minimized by ensuring timely receipts or minimum credit sales. At
the same time, management also maintains that payments to creditors are delayed to the furthest.
Organizations aiming at accelerated growth can opt for this working capital policy.

From above graph we can see that long term financing is covering the fixed assets and a small portion
of fluctuating current assets. Most of the fluctuating current assets is covering by the short-term
financing. It means firm increases risks associated with short-term borrowing by using a large
proportion of short-term financing.
 Maturity Matching Approach:

• Matching means a financial manager should be taken loan from the source and used in right
sector. It should be matching in terms of duration between the source and the use of the funds. In
this approach, fund requirement for short term investment should be collect from short term
source and loan requirement for long term investment should be collected from long term source.

From above graph we can see that long term financing is covering the fixed assets and a current
assets fixed portion. Remaining fluctuate portion of current assets is covering by the short-term
financing. It means firm is balancing its risk associated with short-term borrowing by going for
short term financing only when it is needed.
 3. Describe the sources of long-term financing. a. Discuss briefly the framework for
financial analysis. Discuss about the external use of ratio analysis. Discuss the
characteristics of short-term loans. What is cost of trade credit? Explain with the terms
of sale “2 /10, net 40”
• Sources of long-term financing:
• Long term capital is generally used to purchase the long-term asset such as land, equipment, building etc.
Long-term financing may be defined as the process of collection & utilization of capitals which is needed
for long-term investment & fulfillment of requirement of fixed assets of any firm.
• There are two sources of long-term financing. They are-
1) Internal sources.
2) Externals sources.
• Internal Sources: When the fund is collected from owners and firm’s earnings or cash flow of the
business, not from outside institutions is known as Internal Sources. Initial Capital, Retained Earnings,
Provident Fund, Outstanding expenses etc. are the internal sources of financing.
• There are two types of internal sources:
• 1) Promoter’s initial capital - Promoter’s initial capital is the first source of internal financing. It varies
according to the business capital, changes of capital & accounting process of the company.
• 2) Retained earnings - A major source of long-term finance for a business is retained income, profit,
which is not distributed to the shareholders in the form dividends at year end, but instead retained within
the business.
Sources of long-term financing:

• External Sources : When the fund is collected from outside of the business firm
is known as external sources. Creditors, Institutional credit, Non-institutional
credit, Trade credit etc. are the external sources.
• External sources are two types.
• a) Owners Capital from Capital Market -when Joint Stock Company collects
additional capital for further expansion and activities of the company from capital
market by selling shares to the public, it is considered as external source of
financing
• b) Institutional sources - There are several types of institutional sources from
where firm can collect money. For example - Commercial Bank, Investment
Bank, Insurance Company, Underwriter, Development Financing Institutions,
Leasing Company, Specialized Financial Institutions
 The framework for financial analysis:

• The financial statement analysis framework is a generic term used to describe the process by
which analysts take steps to assess financial statements, supplemental information and other
sources of information in order to draw conclusions and make informed recommendations such as
whether or not to invest in a company or extend a loan to it.
• Step 1: Analysis of the funds needs of the firm.
• First of all we need to find out how much funds we are required to meet the future demand. To
find it out we can analyze data either by using
• Trend/seasonal component: Seasonality refers to periodic fluctuations in certain business areas
and cycles that occur regularly based on a particular season. A season may refer to a calendar
season such as summer or winter, or it may refer to a commercial season such as the holiday
season. It is important to consider the effects of seasonality because, a business that experiences
higher sales during certain seasons may appear to make significant gains during peak seasons and
significant losses during off-peak seasons.
• Analytical tools : To find out the fund requirement we can also go for analytical tools that come
from analyzing the financial statement of a specific firm. For example - cash flow statement,
budget etc.
• Step 2: Analysis of the financial condition and profitability of the firm
• To understand the health of a firm, we can calculate the financial ratios and based on that we can
understand the fund requirement in near future.
• Step 3: Analysis of the business risk of the firm
• The last step of financial analysis framework is to analyze the business risk. It is relates to the risk
inherent in the operations of the firm, for examples – volatility in sales, volatility in costs,
proximity to break-even point etc.
• A financial manager must consider all three (stated above) jointly when determining the financing
needs of the firm and based on that he/she can negotiation with the suppliers of capital.
• The external use of ratio analysis
• A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one
number by the other.
• Users of financial ratios include parties both internal and external to the firm. Internally, managers
use ratio analysis to monitor performance and pinpoint strengths and weaknesses from which
specific goals, objectives, and policy initiatives may be formed.
On the other hand External users include security analysts, current and potential investors,
creditors, competitors, and other industry observers. External uses involve comparing the ratios of
one firm with those of similar firms or with industry averages.
The characteristics of short-term loans:

Usually to meet the day to day operational expenditure of an organization, the collection of the
required capital is called short term financing. Short term fund is required for financing working
capital or more precisely for current assets like inventories, wages, and utilities payments, etc. The
duration of this loan is one year or less.
• “Fund available for a period of one year or less is called Short term finance.”
I. M. Pandey
The characteristics of short term financing are as follows:
• Time: Short-term financing is generally used for one year or less. If any organization borrows
funds for short-term from any source then that organization needs to pay that loan within one year
or less than one year.
• Purpose: The purpose of short term financing is to fulfill the current capital requirements. For
example, an organization collects fund by short-term financing to purchase raw materials, to pay
labor wages and to meet other daily expenditures.
• Size of the loan: Since the capital raised from short term financing is used to buy the current
assets, the size of this fund is generally smaller.
 The characteristics of short-term loans:
• Costly and Risky: Since, in short-term financing process, an organization needs to pay back the loan within one year or
less. So, there prevails a high risk of repaying the money timely. And for this reason, the supplier of short-term finance
charges high.
• Security: Since it is used for current expenditures and helpful to purchase the current assets, it is possible to repay the due
by producing and selling the goods within a short period of time. So, security is not essential in short term financing.
• Recycling: One of the major advantages of short-term financing is that a firm can raise its fund continuously from this
source. It means there is a recycling advantage in this type of financing. For example, if any organization buys some raw
materials on credit and then repays the money timely (within one year), the creditors will remain satisfied and will agree to
sell goods again on credit to the firm.
• Renewal: By repaying the short-term loan to the commercial bank and other financial institution timely, it becomes easier
to get the loan again. Thus, there creates a good relationship between borrower and lender which leads to the renewal of the
loan agreement.
• Size and Nature of the firm : Generally, all types of organization use short term financing. But the trading firm needs
short term loans more than the manufacturing companies. Again, the larger firms do not use this type of loan so much. But
the smaller and medium firms usually collect a great part of their capital by short term financing.
• Cost of trade credit: Explanation with the terms of sale “2 /10, net 40”
• Cost of trade credit is called Cost of Not Taking the Discount. For Example: Let's say that supplier offered terms of trade of
2/10, net 40. This means that the supplier offered 2 percent discount if I pay the bill in 10 days or else I have to pay the full
amount within 40 days.
• 4. The balance sheet of Moon Corporation is shown below. Sales, Cost of goods sold and net
profit for the year were tk. 5,00,000, tk. 4,00,000 and tk. 1,00,000 respectively.
• Balance Sheet of Moon Corporation as at 31 December 2014
Assets Liabilities and Stockholder’s Equity
• Cash tk.3,00,000 Accounts payable tk. 3,20,000
• Accounts receivables tk.2,80,000 Accrued taxes tk. 80,000
• Inventory tk.2,40,000 Bonds payable (Long term) tk. 2,50,000
• Plant and Equipment tk.2,80,000 Common Stock tk. 3,00,000
• Investment tk.1,00,000 Retained earnings tk. 1,50,000
• Total Assets tk.11,00,000 Total liabilities and equity tk. 11,00,000
• Compute ratios as many as you can
Ratio analysis of Moon Corporation as on 31st December 2014 :
Current Assets : Current Liability :
Cash Tk. 3,00,000 Accounts payable Tk. 3,20,000
Accounts Receivable Tk. 2,80,000 Accrued taxes Tk. 80,000
Inventory Tk. 2,40,000 Total Current liability Tk. 4,00,000
Total Current Assets Tk. 8,20,000
• Current Ratio : = = 2.05 times
• Shows a firm’s ability to cover its current liabilities with its current assets.

• Quick Ratio : = = = 1.45 times

• Debt to Equity Ratio : = = 1.44

• The debt to equity ratio of moon corporation is 1.44 or 1.44 : 1. It means the liabilities are 144%
of stockholders equity.
Ratio analysis of Moon Corporation as on 31st December 2014 :

• Asset Turnover Ratio : = =0.45 times

• Receivable Turnover Ratio : = =1.79 times

• Average collection period : = =204 days

• Payable Turnover Ratio : = =1.25 times

• Inventory Turnover Ratio : = =1.67 times

Ratio analysis of Moon Corporation as on 31st December 2014 :

• Return on Investment (ROI) : = =0.091 times

• Gross Profit Margin : = =20%

• Gross profit margin and net profit margin is same because no other cost incurred in this
business.

• Return on Equity : = =22%

 5.a) Discuss the impact of the level of current assets on liquidity, profitability and risk.
• To see the impact of the level of current assets on liquidity, profitability and risk, we are considering
that, all others factors will be constant and there will be 3 policy based on level of current assets.
• Policy A – Higher level of current assets
• Policy B – Average level of current assets
• Policy C – Lower level of current assets
• Liquidity Analysis
Greater current asset levels generate more liquidity all other factors held constant. So, Liquidity
position in three policy will be –
• Policy Liquidity Profitability Risk
• A High Low Low
• B Average Average Average
• C Low High High
• Profitability Analysis
As current asset levels decline, total assets will decline and the ROI will rise. So, profitability position
in three policy will be –  
• Risk Analysis
As decreasing cash reduces the firm’s ability to meet its financial obligations, it increase risk. Besides
that stricter credit policies reduce receivables and possibly lose sales and customers and it also
increase risk. Moreover, lower inventory levels increase stockouts and lost sales and it create more
risk.
• 5. b) Following is the cost statement of Good-luck Corporation :
• Raw materials cost tk. 6,00,000 .00, Direct labor cost tk. 2,00,000.00, Overheads cost
2,00,000.00, Profit 2,00,000.00 and Selling Price Tk. 12,00,000.00
• The following additional information should be taken in to account
• a. Expected cash balance is: Tk. 3,00,000.00
• b. Raw material conversion period: 20 days
• c. Work in process conversion period: 20 days
• d. Average age of Stock of Finished goods: 25 days
• e. Credit allowed to customers 45 days
• f. Credit allowed by suppliers 1 month
• g. Time Lag in payment of wages: 7 days
• I. Time lag in Payment of Overhead: 30 days
• Prepare the statement showing the working capital requirement of Good-Luck Corporation if
the company has a policy of Selling 20% in cash and 80% on credit
 Investment of Inventory :

• b. Inventory in raw material : =

= = Tk. 33,333/= 
• c. Inventory in W.I.P : = = Tk. 55,556/=
• Cost of production = (RM+ Direct labor + Overhead cost)
= (6,00,000+2,00,000+2,00,000) = Tk. 10,00,000/=

• d. Finished goods inventory : = =Tk. 69,444/=

• Total Investment in Inventory = Tk. 158,333/=
• e. Investment in debtors : = = Tk. 100,000/=
• a. Cash balance = Tk. 300,000/=
• Total current assets (a+b+c+d+e) = Tk. 558,333/=
 Current Liabilities :

• f. Creditors : = = = Tk. 50,000/=

• g. Deferred wages : = = Tk. 3,889/=

• h. Deferred Overhead Exp. : = = Tk. 16,667/=

• Total Current Liabilities (f+g+h) = Tk. 70,556/=
• Net working capital (Total current assets-current liabilities) = Tk. 487,777/=

The End