As the name implies, conservative policy aims to minimize the risks associated with the financing of the current assets.

Corporations can not print money and it is possible to default if they do not make their payments on time. They hold default risk, i.e., the risk that a bond issuer may default on its obligations. In order to invest in the bonds of corporations with higher default risk, investors require higher returns than the yields on government bonds. The higher the default risk, the higher is the yield on the bonds. The difference between the promised yield on the corporate bond and the yield on government bond with the same coupon rate and maturity is called default premium. The higher the probability of being defaulted, the higher default premium will be. Therefore, the correct option is A.

The financial plans should be realistic but also flexible in order to give future direction to the corporate and serve as benchmark. However, in order to prepare financial plans, some assumptions should be made in relation with the variables including, but not limited to inflation, economic growth, sales growth, foreign exchange rates etc. It is a fact that during the planning horizon those assumptions may fail. The planning process should be designed to be revised periodically to reflect the effects of those changes to the financial plans. The assumptions used may be:

• The effectiveness and length of cash conversion cycle
• The sales and collection policies,
• Capital budgeting techniques,
• The cost of capital and its revisions depending on the financial circumstances,
• Target capital structure,
• The cash dividend policy,
• The tendency to finance the working capital needs by short-term borrowings

Therefore, the correct option is D.

If the market price is greater than intrinsic value, then stock is overpriced in the
market.

Option E is about sales budget.

Letter of Credit: A letter of credit is an arrangement whereby a bank helps its customer to obtain credit from its (customer’s) suppliers. When a bank opens a letter of credit in favor of its customer for some specific purchases, the bank undertakes the responsibility to honor the obligation of its customer, should the customer fail to do so.The correct answer is E. 

The bond’s price may change over time even if there are no changes in interest rates. At maturity, the value of the bond is equal to its par value. Assuming that there is no change in market interest rates, as we approach to maturity, the value of the bond approaches to its par value. Therefore, the correct option is A.

Bonds carry reinvestment rate risk, which is the risk that cash flows received may not be able to be
reinvested at the expected rates if market rates have changed. 

Beta is used to measure the risk level of securities in relation to the overall market. Beta values do not have a limit, they can range from negative infinity to positive infinity. However, the vast majority of beta values will lie between 0 and +2. Beta values can be interpreted using the following guidelines:

(i) If Beta > 1, the security has above average risk and returns are expected to be more extreme and in the same direction as the market. If market returns go up 1%, security returns on average go up >1%.

(ii) If Beta = 1, then the security has average risk and returns are expected to be similar to the market. If market returns go up 1%, security returns on average go up 1%.

(iii) If 1> Beta >0, then the security has below average risk and returns are expected to be more less extreme and in the same direction as the market. If market returns go up 1%, security returns on average go up <1%.

(iv) If Beta = 0, then the security has below average risk. The security returns may be constant or if not constant then varying totally independently from market returns.

(v) If Beta < 0, then security has very low risk and returns are expected to move in opposite direction with the market. This type of security is not common and may be insurance related. These securities may be very useful in reducing portfolio risk.

Inventory management aims to keep the inventories on optimal level, without stockouts and excesses, by organizing, holding and replenishments for each item.

Value of Bond = Present Value (Coupons) + Present Value (Par Value)

80.000+82.000=162.000

working capital management has the following four dimensions: • Time: As a means of survival in the market place, timing and availability of the required funds is critical. • Investment: Although working capital management focuses on short-term asset and liabilities, the relevant decisions indirectly determines the available funding for investments. • Credibility: Working capital management has great significance for all companies, but it is more critical for smaller companies which have more restricted funding capabilities. . • Growth: The availability of funds contributes to the activity level in the short- run and potential growth by realizing investments in the long-run.

Order quantity of inventories can be determined with reference to the determinations of inventory peculiarly calculated for each company.Minimum Level: The minimum allowable level of inventory that should be hold at all times. If the stock level on a point of time is less than the minimum level, then the work will stop due to shortage of material.Re-order Level: Re-ordering level is fixed amount between the minimum and maximum level. Maximum Level: It is the maximum limit of the quantity of inventories to be maintained. Danger Level: It is the level below the minimum level. Average Stock Level: It represents the average holding of inventories. The correct answer is B. 

The Baumol model is based on the following assumptions: - The cash is used evenly over a period of time. - The cash requirements of the firm are known with certainty in advance. - The transaction cost is known and is constant. - By holding the cash balances, the firm would incur the opportunity cost of interest forgone by not investing in marketable securities. The rate of carrying cost is known and is assumed to be constant. - The short term marketable securities can be freely bought and sold.

The main source of financing secured internally has been by means of Accruals. The major accrual items are wages and taxes which in turn create obligations to payments to the employees and to the government.

Inventories can be classified into five major categories:

- Raw Material: It is the basic and the most important part of inventories. These are goods directly or used in the production process, and the expenses incurred for the procurement of raw materials are reflected to the cost per unit of product.

- Work in Progress: These include those materials which have been committed to production process but have not yet been completed.

- Consumables: These are the materials which are needed for smooth running of the manufacturing process.

- Finished Goods: These are the final output of the production process.

- Spares: It is also a part of inventories, which includes small spares and parts. 

Net Working Capital refers to the difference between the current assets and the current liabilities. Net working capital is a measure of company’s liquidity and ability to survive in case the only funding source is current assets.

Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends. Thus, it ows the ability of the company to generate cash after investing in new operating assets and making cash dividend payments to stockholders.

Long term financial plans are also called strategic plans because they show the long term financial plan of the firms. Short term financial plans on the other hand, are called operational plans.

X is preferable to Y because they have same rate of return but X is less risky. Also, X is preferable to Z because for same level of risk, X provides higher rate of return. Y and Z are feasible but not efficient. X is the single efficient point among them.