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Section A:
Part
one:
Multiple
choices:
1.
Capital turnover ratio is calculated as
a)
Sales *Capital employed
b)
Sales / Capital employed
c)
Sales /Total Assets
d)
Total assets / Owners fund
2.
In ABC analysis C class consist of ________.
a)
a very large number of items which are less important
b)
a very less number of items which are important
c)
quaintly if items which take place after a long time
d)
that quantity which is fixed in such a way that the total variable cost of
managing the inventory can be minimized
3.
The real owners of the company are
a)
Equity shareholders
b)
Dividend holders
c)
Preference shareholders
d)
Stakeholders
4.
The Proprietary concern is owned by
a)
Three persons
b)
Only one person
c)
any one but s persons must
d)
None of the above
5.
Assets and liabilities in the Balance Sheet are shown at ________ prices
a)
Latest
b)
Current
c)
Nominal
d)
Historical
6.
Financing consists of the raising, providing, managing of all the money,
capital or funds of any kind to be used in connection with the business’s is
defined by
a)
Ronald Burns
b)
Orichad d. maningous
c)
Bonneville and Dewey
d)
Kenneth Midgley
7.
Shareholders of a joint stock company appoint their representative in the form
of ________ to carry on the day-to-day affairs of the company
a)
Directors
b)
Stakeholders
c)
Partners
d)
owner
8.
The cost which remains constant irrespective of changes in the sales revenue is
termed as
a)
Fixed cost
b)
Variable cost
c)
Runtime cost
d)
Normal cost
9.
The comparison of the ratios of one organisation with that of the other
organisation is termed as ________ comparison
a)
Inter-firm
b)
out-side firm
c)
Other firm
d)
All the above
10.
A systematic record of the events of the business leading to a presentation of
a complete financial picture is known as
a)
Financial statement
b)
Balance Sheet
c)
Trading account
d)
Accounting
11.
Retained earnings is a source of ________ finance
a)
Internal
b)
External
c)
Quick
d)
Liquid
Part
Two:
1.
What is Annuity kind of cash flow?
2.
What do understand by ‘Portfolio risk ?
3.
What do you understand by yield to maturity (YTM)?
4.
Elaborate ‘Central limit theorem’.
5.
What is the Difference Between NPV and IRR?
Section
B: Caselets
Caselet
1
Introduction
Patel
Housing finance Corporation (PHFC), the first private sector housing finance
company of India is the brainchild of D.H. Patel who was doyen of financial
world. The company began operations on July 18, 1978. In its earlier years,
Patel was able to mobilize funds and get support from diverse sources namely
IEIEI, of which Patel was Chairman at that time, IFC, his Royal Highness,
Rashid Oberoi and most importantly the Indian Government. D.H. Patel was a man
ahead of his times; though he was a product of the system, yet he had a
different philosophy. He was a man who constantly thought out of the box. A man
who never asked the question: Why? But rather, why not? For many years he
nurtured the idea of enabling households in India to access housing earlier in
their life cycle rather than at the end when lumpsum payments were received.
The first five years of this company were spent in “Learning by Doing”, a
philosophy which had been imbibed by the organization. From its inception, PHCF
had been a pioneer in the activities they had undertaken. For example, they
began to accept mortgages on deposit of title basis rather than a registered
“English Mortgage”, thus saving considerable stamp duty for the borrower. They
also introduced resource raising products like “Certificate of Deposit”. Their
efforts got a boost when the government decided to give income tax exemptions
under Section 80L to their deposit.
During
the initial years, PHFC was supported by large loans from USAID which stands testimony
to the fact that even in their infancy, their credibility as an institution was
accepted internationally, which led to a strong growth in their initial years.
By the end of their fifth year, they had a disbursement of Rs.109 crores and
the profit after tax was Rs.4.33 crores. The first five years formed the solid
foundation for the epic journey of this institution. The institution was being
exposed to the international management practices courtesy USAID. PHFC was in
the process of establishing itself as a company, which was flexible in its
interaction with customers and at the same time responsive to their stated and
unstated needs. By the end of the last century, PHFC had created a network of
institutions providing services in banking, real estate, mutual funds, IT
enabled services, stock market, credit rating and in Insurance (both life and
general). Till mid -1990s PHFC was the biggest name in the Housing Finance
industry having no real competition. The second largest operator was in the
public sector domain and was no real competition to them. PHFC had demonstrated
that simple products, well executed can catch the imagination of the people.
PHFC, from its very first day of operations, had built a principle-centered
organization, an organization that has been built on the basis of fairness,
kindness, efficiency and effectiveness. It gradually built trust between
people, strengthening communications and a participative management style. Trust
was the very cement for meaningful relationships and an open and creative
management style.
Services
in PHFC is not the icing on the cake – it is the ingredient that the cake!!
This emphasis on service epitomized the culture at the company, but somehow the
sheer size of the organization and its early domination had made the staff and
the management complacent. With liberalization, nationalized banks were forced
by market conditions to enter the retail loan sector which saw PHFC (the
Elephant) being attacked from all sides by the new entrants who took pot shots at
the leader who because of its size was too big to miss and it could not
retaliate. Salt was rubbed into wounds when IEIEI, the promoter of PHFC,
entered the housing finance industry, and in a short of five years, reached the
top position.
Product
Profile
Since
liberalization commenced in 1991, PHFC had substantially with an average rate
of 30% per annum in terms of housing loans disbursed. During the earlier years
of its operations, PHFC had a monopoly in the housing finance market in India,
providing plain vanilla products to people who opted for housing finance. The
main thrust was on processing applications, which arrived at its doorsteps. The
proliberalisation policies of the government saw a large number of players
entering the market along with an increased demand for home loans. Thus, to
meet increased demand and to compete with the increased supply, PHFC took up
the challenge through product innovation as well as improved marketing focus.
Product innovation, carried out at its New Delhi office, involved a changeover
in terms of providing flexibility in repayment of loans.
Till
1997, PHFC was a single product company but later on adopting a proactive
strategy, the company began offering products, which suited the
customer-specific requirements. Flexible repayment options like step-up
repayment facility (surf), flexible loan installment plan (flip), balloon payment,
and structured repayment plan were introduced. These flexible repayment options
gave the customers the freedom to structure the repayment schedule to suit
them. Till 1999, fixed rate loans were provided on annual rest basis. Later,
the flexible interest rate regime began along with monthly rest calculations
only in November 2001. The company offered specially designed life insurance cover
at attractive price from PHFC standards life, home / accident insurance
products from PHFC Chabra General Insurance Company Ltd., automatic repayment
of PHFC bank savings account with the low average quarterly balance, free PHFC
bank international credit card and lower interest for other loans availed from
PHFC bank.
Earlier,
salaried class employees formed a major segment of the customer because the
income proof was easily documented. In the case of self-employed persons,
although cash rich, the lack of supporting documents for income proved to be a
hindrance. Later, to compete with the market forces, the Gwalior office of the
company devised strategies to exploit the self-employed group of customers by
offering collateralized loans. Due to lack of documented income, loan was
provided on the basis of various liquid securities such as NSC and fixed
deposits which were kept as mortgage with the company. This segment now
contributed up to 6-7% of the customers in value terms at the Indore branch
(the national average being 5% only). The interest rates on loans were
subjected to negotiations from customer to customer depending upon the loan
amount and profile of the customers. The deal was negotiated considering the
risk profile, creditworthiness of the customer, his past track record with
respect to loan repayment as well as his present financial and social status.
As part of its policy, the company charged 2% of the balance principle amount
as prepayment charges in a fixed interest rate loans. However, this was not
applicable for flexible interest rate loans. The company also provided
refinance facility to housing loan customers of other institutions as well as rental
discounting for reputed and creditworthy builders and contractors.
Marketing
The
marketing efforts of PHFC centered around its customers. Its major strength was
its vast database and experienced personnel. In addition to providing housing
finance, quality services were rendered to customers through additional
services such as loan counseling, property identification, technical and legal
advice, and other property related solutions. In order to cater to the needs of
the customers, PHFC had a wide network of 173 offices across the country. It
conducted outreach programs at over 90 locations. The company had a tie up with
a number of blue chip companies whereby, the employees of the company were
provided with easy home loans and the blue chip company automatically deducted
EMI payments from employee salaries. This arrangement benefited the blue chip
companies as they were able to show it as a staff welfare activity and at the
same time, in case of employee default, PHFC did not hold the company liable.
As on March 2004, the company had a number of subsidiary companies like PHFC
Developers Ltd., PHFC Investments Ltd., PHFC
Holding
Ltd., PHFC Asset Management Company Ltd., PHFC Standards Life Insurance Company
limited to name a few. It was able to cross-sell and offers customers a wide
range of customer products and services under the PHFC brand. The company had a
three-pronged approach to target customers. First, it had a call centre, where
loan queries from existing and potential customers were attended. Secondly, the
referral channel where existing customers referred potential customers and thirdly,
a subsidiary called Patel Housing Finance Services India Limited, the employees
of which were called “feet on street”. The customers identified by any of the
three methods were directly contacted and negotiated by PHFC personal, ensuring
that at all times service quality was maintained. In case of a high level lead
i.e., a commercially important customer or where loan amount was high, or
customer enjoying a high stature in society, the customer was directly handled
by the operation’s head. The company did not believe in a brand ambassador nor
did it advertise in electronic media. It believed that its existing customers
were its best brand ambassadors. This was contrast to its immediate rival IEIEI
Bank, which used celebrity endorsement for product promotion. Customers, especially
non-resident Indians could use the services of PHFC through a website www.PHFC.com
which proved to be a good marketing tool. The company also participated in
property fairs and exhibition fairs in different parts of the country.
PHFC
was known for its service quality and the speed of loan disbursement which was
a minimum of two hours and a maximum of five days. The bank had the advantage
of a wide network and as an employee put it, “ at PHFC a customer can take a
loan from Indore buy a property in Manipur take a disbursement in Hyderabad and
service his loan from Nagpur “. The company accepted Cheques from anywhere
without any clearing charges. PHFC used various promotional tools to attract
customers like its Diwali Bonanza where the loans were available at lower rates
of interest. These programs proved to be very successful. The company was a
member of the Credit Information Bureau Ltd (CIBIL). The Bureau traced the
payments record of customers and collated individual credit information. The
customers who had defaulted on previous loans and credit card payments with other
banks were recorded by CIBIL and this record was shared with member banks. This
ensured quality credit appraisal of customers and allowed PHFC to offer more
attractive rates to customers. The bank adopted a humane approach in collecting
its receivables, which was also a unique feature highly appreciated by its
customers. PHFC had the lowest NPA of 1.10% in the industry.
Human
Resource
Human
resources were PHFC’s most valuable assets. The efficiency of PHFC’ staff was evident
from the fact that the number of offices Increased from 41 in 1998 to 173 as on
2004 as against the number of employees, which increased from 806-1,230 during
the same period. Total assets per employees as on March 31,2004 stood at Rs
26.08 crores as compared to Rs 22.85 crores in the previous year. The net
profit per employee as on March 31,2004 was Rs 69 lakhs as compared to Rs 60
lakhs in the previous year. The biggest challenge faced by the company was
employee retention. The new players in the market found PHFC an attractive
target for employee recruitment as the company had a comprehensive training
program, which helped to develop human skills. PHFC has a training centre at
Shimla, near Delhi. Training took place at all levels in mixed groups. So a
young recruit could attend the training program with vice-president of the company.
The training programmes consisted of attitudinal change workshops,
international skill to name a few. Each branch nominated employees across all
levels for a minimum of 2-3 workshops a year.
PHFC
was extremely people-focused and ensured a healthy work environment. Branch offices
had their own in-house pantry, gymnasium, and library, to serve their
employees. The work culture was westernized with an open door policy and
employees at all levels were on first name basis. Top-level executives enquired
about personal problems of lower level employees and met personal needs for
recognition and concern. Financial needs were also fulfilled, as the salary was
at par with the best in the industry. Employee’s stock options were also
provided as incentives to employees. At the employee put it “monetary
incentives tend to get spent but stock options provided a security for the
future “.The performance appraisal followed by PHFC was unique. 80% of it was quantifiable
and 20% was based on superior on superior review. The company had hired one of
the HR consultants in the country who had devised a unique system of appraisal
for the company. Key result areas of each level were identified and quantified.
Thus, even an accounts officer was evaluated on the number of times accounting
reports had reached the head office on time. This reduced personal bias to a
great extent. Due to these practice, the company had the lowest employee
turnover in industry.
Financial
PHFC
has improved financial performance over the years. The loan approvals increased
to Rs 15,216 crores in 2003-04 from Rs 1,494 crores in 1994-95. Whereas
disbursements were Rs 1,212 crores in 1994-95, increasing to Rs 12,697 crores
in 2003-04. Its gross income increased from Rs 780 crores (in 1994-95) to Rs
2976 crores (in 2003-04). Profit after tax has also registered growth from Rs
146 crores (in 1994-95) to 852 crores (in 203-04) The share price of PHFC has
also increased from Rs 102.50 (on 01-04-1995) to Rs 645 (1-04-2004).
Future
Ahead
Although
PHFC had tried to change itself from initially a monopoly regime to a market
competition scenario, the company faced a number of issues. IEIEI, the current
market leader in home loan disbursements was able to undercut interest rates.
Being the original player, competitors targeted PHFC customers for refinance
facility, trying to get the customer to switch banks and offering them attractive
schemes in the bargain. Secondly, PHFC had a low employee turnover and
therefore had to teach its old employees new tricks. Nationalized banks which
have so far not been very aggressive in the home loan market have a distinct
advantage as far as cost of funds is concerned, customer base and distribution
network. It is a matter of time before they aggressively expand operations.
Foreign banks are already operating in the market using high quality of
services as their USP. In this scenario, the top management wonders whether the
elephant can dance.
1.
Evaluate the strategies used by the management in the changed scenario.
2.
Which strategies the company adopt for the future?
3.
Evaluate the performance of the company financially, using financial ratios and
figures.
4.
Analyze the case using SWOT analysis.
Caselet
2
Telecommunications
is one of the fastest growing service industries in the world. The accent of growth
is on the value added services, such as e-mail, cellular phones, etc. This
sector plays a crucial role in spurring growth, especially industrial services,
in the Indian economy. Multinational companies are investing in India because
of huge latent demand .Telecommunications in India has been a state initiated
and controlled sector. The last two decades have witnessed a restructuring of
the entire sector due to Liberalization, Privatization and Globalization. This
has triggered an influx of foreign capital and technology. India’s 21.59
million-line telephone networks is one of the largest in the world and the
third largest among emerging economies (after China and Republic of Korea). Given
the low telephone penetration rate 2.2 per 100 people of population, which is
much below the global average, India offers vast scope for growth. It is
therefore, not surprising that India has on of the fastest growing
telecommunication systems in the world with system size (total connections)
growing
at an average of more than 20% over the last 4 years. The industry is
considered as having the highest potential for investment in India. The growth
in demand for telecom services is not limited to basic telephone services but
has witnessed rapid growth in cellular, radio paging, value-added services,
Internet and global mobile communication by satellite (GMPCS) services. This
demand is expected to soar in the next few years.
The
Telestar Company Ltd (TCL) was formed in 1985 as a public sector undertaking.
Till 1986, it was the only telecom service provider in India. It played a role
beyond that of a service provider by acting as a policy maker, planner,
developer as well as an implementation body. In spite of being profitable, its non-corporate
entity status ensured that it did not have to pay taxes. In 1998, the company
having a total asset value of Rs 630 billion turned corporate u/s 619 of
Companies Act 1956. Although, the company still continued to have a 100%
government owned equity, it planned to disinvest this in the next 5 years. As
on date, the company enjoyed a sales of Rs. 1,160 billion and had an authorized
capital base of Rs 1,000 billion Telestar being a government department was initially
laden with several social obligations, which burdened it with several
financially unviable connections. The company therefore, faced a number of
shortcomings due to its bureaucratic setup. It was used to a monopolistic
environment, which resulted in hardened attitudes, limited skills resistance to
change, lack of flexibility in decision-making, low level of motivation of its
employees and a total lack of cost benefit accounting system. Telestar had its operations
in all the states in India with a large network of 25 circles. The company
therefore, enjoyed the benefits of economies of scale. It was in a sector,
which required a large amount of infrastructure facilities. Fixed costs therefore,
formed the major cost component. The approximate cost of landline was twenty
seven thousand for a new rural connection and eighteen thousand for a
connection in an urban area. The Uttar Pradesh Circle had 43 Basic Administrative
Units .In U.P. the company faced competition from two major players namely,
Telenet and Express Net Pvt. Ltd. These companies had recently entered the
telecom industry with a wide range of services and were highly price
competitive.
These
companies were providing competition to Telestar and seeking market penetration
by price-cutting with technologically superior products. Telestar initially
offered landline services and wireless service in U.P. However, due to the
increased competition in the recent years it had introduced a number of value
added services, like voice mail services, intelligent networking services, advanced
roaming services and others .Although, the company’s Lucknow unit had been
recording profits for the year ending 2001 ,it did not have a systematic
costing system. For example, the investment decisions of the company were made
by comparing the estimated revenue generated with the estimated cost of the
project. The estimated revenue was calculated on the basis of revenue generated
in the neighbouring circle. TSL had been following a traditional method of
accounting and practically no costing system existed. V.K. Gupta, General
Manager Finance, Lucknow Unit was thinking of revamping the accounting system.
He was trying to devise an online, real time, vibrant accounting system that
would enable him to generate information required for decision making. He hoped
to have an accounting system which would provide data in the area of costing,
pricing, investment decisions, tax planning and controllable and non
controllable costs.
1.
Evaluate the company’s ability to sustain its performance in the present
scenario.
2.
Suggest the possible costing techniques which can help V.K. Gupta its
decision-making (Illustrate using examples).
3.
Conduct a financial analysis of the company of the company and comment its
financial performance?
4.
Suggest the various funding patterns that may be adopted by the company in
light of the company’s capital structure.
Section
C: Applied Theory
1.
Explain the norms suggested by Tondon Committee for providing bank credit? How did
the recommendations of Chore Committee bring modifications?
2.
A population is made up of groups that have wide variations within the groups
and less variations from group to group. Which is the appropriate type of
sampling method?
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