PAPER 2: PROJECT APPRAISAL AND FINANCING
Contents
PAPER 2: PROJECT APPRAISAL AND FINANCING
01. What do the critics of the goal of maximising shareholder wealth say? What is the rebuttal provided by the advocates of maximising shareholder wealth?
02. How is the finance function organised in a large company?
03. Discuss the relationship of financial management to economics and accounting?
04. Discuss the functions performed by the financial system in an economy.
05. What functions are performed by financial markets? What are the different ways of classifying financial markets?
06. What is the rationale of financial intermediaries? Describe briefly various financial intermediaries in India.
07. Discuss the important facets of project analysis.
08. What are the weaknesses found in capital budgeting in practice?
09. Explain the nature of the following portfolio planning tools:
(a) BCG Product Portfolio Matrix and
(b) General Electric Stoplight Matrix.
10. Discuss the basic strategies associated with the SPACE approach.
11. How can conglomeration help in overcoming the institutional weaknesses in the emerging markets?
12. Discuss the organisational capabilities that enable firms to exploit opportunities.
13. Discuss the forces that drive the profit potential of an industry according to Michael Porter.
14. What are the sources of positive NPV?
15. What qualities and traits are required to be a successful entrepreneur?
16. Discuss the steps involved in a sample survey.
17. Explain briefly various demand forecasting techniques.
18. Discuss the aspects covered in market planning.
19. a. What factors have a bearing on the choice of technology? b. What factors have a bearing on the plant capacity?
20. Explain the properties of the NPV rule.
21. Discuss the problems associated with IRR.
22. Discuss the guidelines to be borne in mind while estimating the cash flows of a project.
23. Discuss the biases characterising cash flow estimation.
24. Discuss the approaches used for estimating the cost of equity.
25. What are the common misconceptions surrounding cost of capital in practice? How would you dispel them?
26. What steps are involved in stimulation analysis?
27. What are the devices commonly used for managing project risk?
28. Discuss the principal sources of discrepancy between social costs and benefits on the one hand and monetary costs and benefits on the other.
29. Why a gulf may exist between strategic planning and financial analysis and show how the differences between the two may be reconciled?
30. Discuss the distorting effects of the following types of informational asymmetry on capital budgeting.(a) Informational asymmetry between shareholders and bond holders. (b) Informational asymmetry between managers and shareholders.
31. Discuss the salient features of infrastructure project finance
32. Briefly describe the key elements of a VC investment appraisal and management as a VC transaction evolves through the life cycle of a deal within a VC fund's system
33. Discuss the human aspects of project management.
34. What are the pre-requisites for successful project implementation?
35. a. What is the difference between economic accounting and mental accounting? b. Discuss measures for injecting greater rationality in project termination decisions.
01. What do the critics of the goal of maximising shareholder wealth say? What is the rebuttal provided by the advocates of maximising shareholder wealth?
ANS: Pg 7, FINANCIAL MANAGEMENT
Business objective of any company shall be:
· Maximization of returns on stakeholders capital and,
· Profit Maximization
Earlier profit maximization was given highest priority. But these days we have understood that if you want to continue in the market the prime focus shall be in maximizing returns of its stakeholders, which means maximizing the price of the stock/shares, paying back healthy dividends, issuing bonus shares when necessary, etc.
Stockholders wealth maximization is a long term goal as they are investing in a company expecting good future returns.
Much of the theory in corporate finance, based on the assumption that the goal of the firm, should be to maximize the wealth of its current shareholders. This goal has been defended by many finance scholars, economists and practitioners.
Critique | Defence |
capital market skeptics argue that stock market displays myopic tendencies | In developed financial markets, share prices are the least based on estimates of intrinsic values. |
Strategic visionaries are inclined towards increasing the product market goal like market share, customer satisfaction, zero defect level. | Beyond certain point the customer satisfaction comes at the cost of shareholder value. When that happens, the conflict should be resolved in favour of shareholders to enhance the long-term viability and competitiveness of the firm. |
Balancers argue that a firm should seek to balance the interest of various stakeholders, viz. customers, employees, shareholders, creditors, suppliers, community and others. | This is not practical. This can lead to confusion and chaos. |
Advocates of social responsibility argue that a business firm must view itself as a socially responsive entity and assume wider responsibilities. | If the businesses engage in social programmes it may become vulnerable to competitive encroachment. |
02. How is the finance function organised in a large company?
ANS:
Finance functions are:
1. Financing decisions
2. Investment decisions
3. Dividend decisions
4. Liquidity decisions
1. Financing decisions
Financing Decisions are decisions regarding process of raising the funds. This function of finance is concerned with providing answers to various questions like -
+ What should be amount of funds to be raised?
+ What are the various sources available to organisation for raising the required amount of funds? For this purpose, the organization can go for internal & external sources.
+ What should be proportion in which internal & external sources should be used by organisation?
+ If organisation, wants to raise funds from different sources, it is required to comply with various legal & procedural formalities.
+ What kinds of changes have taken place recently affecting capital market in the country?
2. Investment decisions
The assets in which funds can be invested are of 2 types
+ Fixed assets: are the assets which bring returns to organisation over a longer span of time. The investment decisions in these types of assets are “capital budgeting decisions.” Such decisions include:
+ How fixed assets should be selected to make investment? What are various methods available to evaluate investment proposals in fixed assets?
+ How decisions regarding investment in fixed assets should be made in situation of risk & uncertainity?
+ Current assets: are assets which get generated during course of operations & are capable of getting converted in form of cash within a short period of one year. Such decisions include
+ What is meaning of Working Capital management & its objectives?
+ Why need for working capital rises?
+ What are factors affecting requirements of working capital?
+ How to quantity requirements of working capital?
+ What are sources available for financing the requirement of working capital?
3. Dividend decisions
+ What are forms in which dividend can be paid to shareholders?
+ What are legal & procedural formalities to be completed while paying dividend different forms?
4. Liquidity Decisions Current assets should be managed efficiently for safe guarding firm against of liquidity & insolvency. In order to ensure that neither insufficient nor unnecessary funds are invested in current assets, the financial manager should develop sound technique of managing current assets.
The organisation of finance function is not similar in all businesses but it is different from one business to another. The organisation of finance function for a business depends on the nature, size financial system and other characteristics of a firm. For a /small business/, no separate officer is appointed for the finance function. Owner of the business himself looks after the functions of finance including the estimation of requirements of funds, preparation of cash budget and arrangement of the required funds, examination of all receipts and payments, preparation of credit policy, collecting debtors etc. with the increase in the size of business, specialists were appointed for the finance function and the decentralisation of the finance functionbegan. For a /medium sized business/, the responsibility of the finance function is given to a separate officer who is known as financial controller, finance manager, deputy chairman (finance), finance executive or treasurer.
Treasurer | Controller |
Obtaining finance | Financial Accounting |
Banking relationships | Internal Audit |
Cash Management | Taxation |
Credit Administration | Management Accounting |
Capital Budgeting | Mgmt Acct and control |
03. Discuss the relationship of financial management to economics and accounting?
ANS:
04. Discuss the functions performed by the financial system in an economy.
ANS:
05. What functions are performed by financial markets? What are the different ways of classifying financial markets?
ANS:
06. What is the rationale of financial intermediaries? Describe briefly various financial intermediaries in India.
ANS:
07. Discuss the important facets of project analysis.
ANS:
Examples: Service: 3G mobile service launch in India;
Setup a plant for advanced technology battery operated car.
1. Market Analysis (Aggregate Demand, Market Share)
Mobile broadband usage in India, Cost Structure, Elasticity of Demand, Consumer Behaviour, Distribution Channels, Administrative, Technical and legal constraints, Structure of competition.
2. Technical Analysis (Technical Viability, Sensible Choices)
Preliminary tests and studies,
Availability of raw material, power, other inputs
Scale of operation
Production Process
Equipment and machines chosen
Auxiliary equipments and supplementary engineering works
Work schedules for production
Layout of the site, buildings and plant
3. Financial Analysis (Risk, Return)
Investment outlay
Means of financing
Cost of capital
Projected profitability
Break-even point
Cash Flows of the project
Investment worthiness
Projected financial position
Level of risk
4. Economic Analysis (Benefits and Costs in Shadow Prices, Other Impacts)
Social cost benefit analysis
Impact of the project on distribution of income in the society
Level of savings and investments in the society
Self-sufficiency, employment, and social order
5. Ecological Analysis (Environmental Damage, Restoration Measures)
Likely damage to environment
Restoration measures required to ensure balance
08. What are the weaknesses found in capital budgeting in practice?
ANS:
09. Explain the nature of the following portfolio planning tools:
(a) BCG Product Portfolio Matrix and
(b) General Electric Stoplight Matrix.
ANS:
10. Discuss the basic strategies associated with the SPACE approach.
ANS:
11. How can conglomeration help in overcoming the institutional weaknesses in the emerging markets?
ANS:
12. Discuss the organisational capabilities that enable firms to exploit opportunities.
ANS:
13. Discuss the forces that drive the profit potential of an industry according to Michael Porter.
ANS:
14. What are the sources of positive NPV?
ANS:
15. What qualities and traits are required to be a successful entrepreneur?
ANS:
16. Discuss the steps involved in a sample survey.
ANS:
17. Explain briefly various demand forecasting techniques.
ANS:
18. Discuss the aspects covered in market planning.
ANS:
19. a. What factors have a bearing on the choice of technology? b. What factors have a bearing on the plant capacity?
ANS:
20. Explain the properties of the NPV rule.
ANS:
21. Discuss the problems associated with IRR.
ANS:
22. Discuss the guidelines to be borne in mind while estimating the cash flows of a project.
ANS:
23. Discuss the biases characterising cash flow estimation.
ANS:
24. Discuss the approaches used for estimating the cost of equity.
ANS:
25. What are the common misconceptions surrounding cost of capital in practice? How would you dispel them?
ANS:
26. What steps are involved in stimulation analysis?
ANS:
27. What are the devices commonly used for managing project risk?
ANS:
1. Fixed and Variable cost (FIN) change proportion of fixed vs variable. Ford getting parts from suppliers. Reduced breakeven levels.
2. Sequential Investment (FIN) start small and later expand
3. Financial Leverage (FIN)
4. Insurance (FIN)
5. Derivatives (FIN)
6. Improving Information (MKT)
7. Pricing Strategy (MKT)
8. Long term arrangements (OPR)
9. Strategic Alliance (STR)
28. Discuss the principal sources of discrepancy between social costs and benefits on the one hand and monetary costs and benefits on the other.
ANS:
29. Why a gulf may exist between strategic planning and financial analysis and show how the differences between the two may be reconciled?
ANS:
30. Discuss the distorting effects of the following types of informational asymmetry on capital budgeting.(a) Informational asymmetry between shareholders and bond holders. (b) Informational asymmetry between managers and shareholders.
ANS:
31. Discuss the salient features of infrastructure project finance.
ANS:
32. Briefly describe the key elements of a VC investment appraisal and management as a VC transaction evolves through the life cycle of a deal within a VC fund's system.
ANS:
33. Discuss the human aspects of project management.
ANS:
1. Authority – Influence, rationale, logic, project benefit.
2. Orientation – change the mindset from engineering view to managerial view.
3. Motivation – reward and punishment model. Theory of motivation (Maslow), etc
4. Group functioning – formal informal groups, ‘we/they’ attitude, team cycle – forming, storming, performing.
34. What are the pre-requisites for successful project implementation?
ANS:
1. Adequate Preparation before actual start
Any deficiencies in preliminary analysis or investigation can have unrecoverable impact at later stages. This could include superficial field investigation, incomplete assessment of input requirements, flawed judgment due to lack of experience, execution before planning or deliberate over estimation of benefits.
2. Sound Project organization
Four levels of Project Maturity Levels.
a) Hero
b) Anyone is Hero
c) Benefits
d) Portfolio Management and Strategic
3. Proper implementation planning
Planning before execution
4. Advance action
Preliminary analysis and prerequisites readiness. Activities that take large cycle time, such as Govt approvals should be initiated during early stages.
5. Timely availability of funds
Budget planning and expenses. Lineup suppliers and contacts with third parties.
6. Judicious equipment tendering and procurement
Turnkey contracts, foreign suppliers and indigenous suppliers. Dependence and over-reliances. Have at least 2 suppliers.
7. Better contract management
Choosing right partners, choosing right contract models, evaluation of buy-rent decisions.
8. Effective monitoring
Anticipate deviations and take corrective actions.
35. a. What is the difference between economic accounting and mental accounting? b. Discuss measures for injecting greater rationality in project termination decisions.
ANS:
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