The Islamia University of Bahawalpur

Faculty of Engineering
Department of Electrical (Power) Engineering

B.S. Electrical (Power) Engineering Last Submission date:

Assignment # 1
Course: Power Economics and Management (MGMT-00629) Instructor: Engr. Qazi Naeem

Q.No.1: Explain the Valuation of Financial Assets.

Valuation is the process of determining the fair value of a financial asset. The process is also
referred to as “valuing” or “pricing” a financial asset. The fundamental principle of valuation is
that the value of any financial asset is the present value of the expected cash flows. This
principle applies regardless of the financial asset.

Thus, the valuation of a financial asset involves the following three steps:
1. Estimate the expected cash flows;
2. Determine the appropriate interest rate or interest rates that should be used to
discount the cash flows
3. Calculate the present value of the expected cash flows using the interest rate or interest
rates.

Asset valuation plays a key role in finance and often consists of both subjective and objective
measurements. 

Key Takeaways:

 Asset valuation is the process of determining the fair market value of an asset.
 Asset valuation often consists of both subjective and objective measurements.
 Net asset value is the book value of tangible assets, less intangible assets and liabilities.
 Absolute value models value assets based only on the characteristics of that asset, such
as discounted dividend, discounted free cash flow, residential income and discounted
asset models.
 Relative valuation ratios, such as the P/E ratio, help investors determine asset valuation
by comparing similar assets.
Q.No.2: Describe briefly the Capital Budgeting Decision.

The capital budgeting decisions are central to the company’s success or failure. The company’s
all capital budgeting decisions can be broadly categorized under the following three types:

1. Accept / Reject Decision: This type of arrangement is fundamental and mostly applies
to the independent projects which are not affected by the acceptance possibility of other
projects. The projects which generate a high rate of return or cost of capital are accepted,
and the plans which do not fulfil the criteria are rejected.

2. Mutually Exclusive Project Decision: These projects compete with one another, i.e., the
possibility of accepting one project excludes the acceptance of the other.

3. Capital Rationing Decision: The term itself explains that the limitation of capital
dominates such decisions. In a situation where the firm has multiple investment options
demanding huge funds, the management rank the projects on specific criteria; such as
the rate of return of each project. Then, the projects with the highest percentage of profit
or those which fulfil the requirements most can be selected.

Q.No.3: Describe briefly the Financing Decision.

Financing decisions are the financial decisions related to raising of finance. It involves
identification of various sources of finance and the quantum of finance to be raised from long-
term and short-term sources.

A firm can raise long term finance either through shareholders’ funds or borrowed capital.
The financial management as part of financing decision, calculates the cost of capital and the
financial risks for various options and then decides the proportion in which the funds will be
raised from shareholders’ funds and borrowed funds.

Factors affecting Financing Decisions

 Cost: Financing decisions are all about allocation of funds and cost-cutting. The cost of
raising funds from various sources differ a lot. The most cost-efficient
source should be selected.
 Risk: The dangers of starting a venture with the funds from various sources differ.
Larger risk is linked with the funds which are borrowed, than the equity
funds. This risk assessment is one of the main aspects of financing
decisions.

 Cash flow position: Cash flow is the regular day-to-day earnings of the company. Good or
bad cash flow position gives confidence or discourages the investors to
invest funds in the company.

 Control: In the situation where, existing investors need to hold control of the
business then finance can be raised through borrowing money, however,
when they are prepared for diluting control of the business, equity can be
utilized for raising funds. How much control to give up is one of the
main financing decisions.

 Condition of the market: The condition of the market matter a lot for the financing
decisions. During boom period issue of equity is in majority but
during a depression, a firm will have to use debt. These decisions
are an important part of financing decisions.