Sunday, February 01, 2015

IGNOU SOLVED ASSIGNMENT: ECO - 01 (2013-2014)


Answer of Question No.1. (a)

Advantages of Road Transport:
There are numerous advantages of road transport in comparison to other modes of transport. 
1. Less capital quality:- Road transport required much less capital investment as compared to other modes of transport such as railways and air transport. 

2. Door to door services: - The outstanding advantage of road transport is that it provides door to door or warehouse to warehouse services. 

3. Services in rural areas:- Road transport is most suited for carrying goods and people to and from rural areas which are not served by rail, water or air transport. 

4. Flexible services:- Road transport has a great advantage over other modes of transport for its flexible services. Its routes and timings can be adjusted and changed to individual requirements without much inconvenience. 

5. Suitable for short distance:- Delays in transit of gods on account of intermediate loading and handling are avoided. Goods can be loaded direct into a road vehicle and transported straight to their place of destination. 

6. Lesser risk of damage in transmit: - Road transport is most suited for transporting delicate goods like chinaware and glassware, which are likely to be damaged in the process of loading and unloading. 

7. Rapid speed:- If the goods are to be sent immediately are quickly, motor transport is more suited than the railways or water transport. Water transport is very slow. 

8. Saving in packing cost: - As compared to other modes of transport, the process of packing in motor transport is less complicated. Goods transported by motor transport require less packing or no packing in several cases. 

9. Private owned vehicles: - Another advantage of road transport is that big businessmen can afford to have their own motor vehicles and initiate their own road services to market their products without causing any delay. 

10. Feeder to other modes of transport: - The movement of goods beings and ultimately ends by making use of roads. Road and motor transport act as a feeder to the other modes of transport such as railway, ships and airways. 

Disadvantages of Road Transport:
In spite of various merits road/motor has some serious limitations: 
1. Seasonal nature: - Motor transport is not as reliable as rail transport. During rainy or flood season, roads become unfit and unsafe for use. 

2. Accidents and breakdown: - There are more chances of accidents and breakdown in case of motor transport. Thus, motor transport is not as safe as rail transport. 

3. Unsuitable for long distance and bulky traffic: - This mode of transport is unsuitable and costly for transporting cheap and bulky gods over long distances. 

4. Slow speed: - The speed of motor transport is comparatively slow and limited. 

5. Lack of organization: - The road transport is comparatively less organized. More often, it is irregular and undependable.  The rates charged for transportation are also unsuitable and unequal.

Answer of Question No.1.(b)
Five steps in risk management listed below: 
a)      Risk Identification
b)      Risk Analysis
c)       Risk Management Planning
d)      Risk Review
e)      Risk Communications 

a)      Risk Identification:  Risk is an undesirable situation or circumstance, which has both a probability of occurring and a potential consequence to project success. Risk has an impact on cost, schedule, and performance. Risk identification is the process of identifying uncertainty within all aspects of a project. cIn other words, what might go wrong and what happens if it does. For most information system projects, these risks may be grouped in the following categories: 
Ø  Technical. Risk associated with creating a new capability or capacity 
Ø  Supportability. Risk associated with implementing, operating, and maintaining a new capability 
Ø  Programmatic. Risk caused by events outside the project's control, such as public law changes 
Ø  Cost and Schedule. Risk that cost or schedule estimates are inaccurate or planned efficiencies are not realized
Risks should be identified continuously by project participants (at all levels) and the project management team should capture these risks in definitive statements of probability and impact. Lessons-Learned from previous projects may be a significant source for identifying potential risks on a new project. 

b)      Risk Analysis: The first step in risk analysis is to make each risk item more specific. Risks such as, “Lack of management buy-in,” and “people might leave,” are a little ambiguous. In these cases the group might decide to split the risk into smaller specific risks, such as, “manager decides that the project is not beneficial,” “Database expert might leave,” and “Webmaster might get pulled off the project.”

The next step is to set priorities and determine where to focus risk mitigation efforts. Some of the identified risks are unlikely to occur, and others might not be serious enough to worry about. Pareto’s law studied earlier applies here. During the analysis, discuss with the team members each risk item to understand how devastating it would be if it did occur, and how likely it is to occur. This way we can gauge the probability of occurrence and the impact created.

To determine the priority of each risk item, calculate the product of the two values, likelihood and impact. This priority scheme helps push the big risks to the top of the list, and the small risks to the bottom. It is a usual practice to analyse risk either by sensitivity analysis or by probabilistic analysis.
Risk analysis can be performed by calculating the expected value of each alternative and selecting the best alternative. Now that the group has assigned a priority to each risk, it is ready to select the items to manage. Some projects select a subset to take action upon, while others choose to work on all of the items.

c)       Risk Management Planning: After analysing and prioritising, the focus comes on management of the identified risks. In order to maximise the benefits of project risk management, we must incorporate the project risk management activities into our project management plan and work activities.

There are two things we can do to manage risk. The first is to take action to reduce (or partially reduce) the likelihood of the risk occurring. For example, some project that work on process improvement make their deadlines earlier and increases their efforts to minimise the likelihood of team members being pulled off the project due to changing organisational priorities. In a software product, a critical feature might be developed first and tested early.
Second, we can take action to reduce the impact if the risk does occur. Sometimes this is an action taken prior to the crisis, such as the creation of a simulator to use for testing if the hardware is late. At other times, it is a simple backup plan, such as running a night shift to share hardware.
For the potential loss of a key person, for example, we might do two things. We may plan to reduce the impact by making sure other people become familiar with that person’s work, or reduce the likelihood of attrition by giving the person a raise, or by providing extra benefits.

d)      Review Risks: After we have implemented response actions, we must track and record their effectiveness and any changes to the project risk profile. We need to review the risks periodically so that we can check how well mitigation is progressing. We can also see if the risk priorities need to change, or if new risks have been discovered. In such case, we might decide to rerun the complete risk process if significant changes have occurred on the project.
Significant changes might include the addition of new features, the changing of the target platform, or a change in project team members. Many people incorporate risk review into other regularly scheduled project reviews. In summary, risk management is the planning to potential problems, and the management of actions taken related to those problems.

e)      Risk Communication: Risk information should be communicated to all levels of the project organization and to appropriate external organizations. This ensures understanding of the project risks and the planned strategies to address the risk. Risk information then feeds the decision processes within the project and should establish support within external organizations for mitigation activities. For example, an agency comptroller who understands the project risks is more likely to allow the project manager to have a management reserve within the project budget. 
Communicating risk information in a clear, understandable, balanced, and useful manner is difficult. The ability to state the problem at hand clearly, concisely, and without ambiguity is essential. 



Answer of Question No. 2(a).
Capital Structure
Financing and investment are two major decision areas in a firm. In the financing decision the manager is concerned with determining the best financing mix or capital structure for his firm. Capital structure could have two effects. First, firms of the same risk class could possibly have higher cost of capital with higher leverage. Second, capital structure may affect the valuation of the firm, with more leveraged firms, being riskier, being valued lower than less leveraged firms. If we consider that the manager of a firm has the shareholders' wealth maximisation as his objective, then capital structure is an important decision, for it could lead to an optimal financing mix which maximises the market price per share of the firm.
A finance manager for procurement of funds, is required to select such a finance mix or capital structure that maximises shareholders wealth. For designing optimum capital structure he is required to select such a mix of sources of finance, so that the overall cost of capital is minimum. Capital structure refers to the mix of sources from where long term funds required by a business may be raised i.e. what should be the proportion of equity share capital, preference share capital, internal sources, debentures and other sources of funds in total amount of capital which an undertaking may raise for establishing its business.
The 3 major considerations evident in capital structure planning are risk, cost and control, they assist the management in determining the proportion of funds to be raised from various sources. The finance manager attempts to design the capital structure in a manner, that his risk and cost are least and there is least dilution of control from the existing management. There are also subsidiary factors as, marketability of the issue, maneuverability and flexibility of capital structure and timing of raising funds. Structuring capital, is a shrewd financial management decision and is something that makes or mars the fortunes of the company. The factors involved in it are as follows :
1) Risk : Risks are of 2 kinds viz. financial and business risk. Financial risk is of 2 kinds as below :
i) Risk of cash insolvency : As a business raises more debt, its risk of cash insolvency increases, as the higher proportion of debt in capital structure increases the commitments of the company with regard to fixed charges. i.e. a company stands committed to pay a higher amount of interest irrespective of the fact whether or not it has cash. And the possibility that the supplier of funds may withdraw funds at any point of time.
Thus, long term creditors may have to be paid back in installments, even if sufficient cash to do so does not exist. Such risk is absent in case of equity shares.
ii) Risk of variation in the expected earnings available to equity share-holders : In case a firm has a higher debt content in capital structure, the risk of variations in expected earnings available to equity shareholders would be higher; due to trading on equity. There is a lower probability that equity shareholders get a stable dividend if, the debt content is high in capital structure as the financial leverage works both ways i.e. it enhances shareholders' returns by a high magnitude or reduces it depending on whether the return on investment is higher or lower than the interest rate. In other words, there is relative dispersion of expected earnings available to equity shareholders, that would be greater if capital structure of a firm has a higher debt content.
The financial risk involved in various sources of funds may be understood with the help of debentures. A company has to pay interest charges on debentures even in case of absence of profits. Even the principal sum has to be repaid under the stipulated agreement. The debenture holders have a charge against the company's assets and thus, they can enforce a sale of assets in case of company's failure to meet its contractual obligations. Debentures also increase the risk of variation in expected earnings available to equity shareholders through leverage effect i.e. if return on investment remains higher than interest rate, shareholders get a high return and vice versa. As compared to debentures, preference shares entail a slightly lower risk for the company, as the payment of dividends on such shares is contingent upon the earning of profits by the company. Even in case of cumulative preference shares, dividends are to be paid only in the year in which company earns profits. Even, their repayment is made only if they are redeemable and after a stipulated period. However, preference shares increase the variations in expected earnings available to equity shareholders. From the company's view point, equity shares are least risky, as a company does not repay equity share capital except on its liquidation and may not declare dividends for years. Thus, as seen here, financial risk encompasses the volatility of earnings available to equity shareholders as also, the probability of cash insolvency.

2) Cost of capital : Cost is an important consideration in capital structure decisions and it is obvious that a business should be atleast capable of earning enough revenue to meet its cost of capital and also finance its growth. Thus, along with risk, the finance manager has to consider the cost of capital factor for determination of the capital structure.

3) Control : Along with cost and risk factors, the control aspect is also an important factor for capital structure planning. When a company issues equity shares, it automatically dilutes the controlling interest of present owners. In the same manner, preference shareholders can have voting rights and thereby affect the composition of Board of directors, if dividends are not paid on such shares for 2 consecutive years. Financial institutions normally stipulate that they shall have one or more directors on the board. Thus, when management agrees to raise loans from financial institutions, by implication it agrees to forego a part of its control over the company. It is thus, obvious that decisions concerning capital structure are taken after keeping the control factor in view.
4) Trading on equity : A company may raise funds by issue of shares or by borrowings, carrying a fixed rate of interest that is payable irrespective of the fact whether or not there is a profit. In case of ROI the total capital employed i.e. shareholders' funds plus long term borrowings, is more than the rate of interest on borrowed funds or rate of dividend on preference shares, the company is said to trade on equity. It is the finance manager's main objective to see that the return and overall wealth of the company both are maximised, and it is to be kept in view while deciding on the sources of finance. Thus, the effect of each proposed method of new finance on EPS is to be carefully analysed. This, thus, helps in deciding whether funds should be raised by internal equity or by borrowings.
5) Corporate taxation : Under the Income tax laws, dividend on shares is not deductible while interest paid on borrowed capital is allowed as deduction. Cost of raising finance through borrowings is deductible in the year in which it is incurred. If it is incurred during the pre-commencement period, it is to be capitalised. Cost of share issue is allowed as deduction. Owing to such provisions, corporate taxation, plays an important role in determination of the choice between different sources of financing.
6) Government Policies : Government policies is a major factor in determining capital structure. For instance, a change in the lending policies of financial institutions would mean a complete change in the financial pattern followed by companies.
7) Legal requirements : The finance manager has to keep in  view the legal requirements at the time of deciding as regards the capital structure of the company.
8) Marketability : To obtain a balanced capital structure, it is necessary to consider the company's ability to market corporate securities.
9) Flexibility : It refers to the capacity of the business and its management to adjust to expected and unexpected changes in circumstances. In other words, the management would like to have a capital structure providing maximum freedom to changes at all times.

10) Size of the company : Small companies rely heavily on owner's funds while large companies are usually considered, to be less risky by investors and thus, they can issue different types of securities.

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