(a) A company has a capital of ₹ 100 crores with shares of ₹ 100 each. The shares are currently quoted at par in the market. The…

(a) Modigliani-Miller (MM) valuation

MM assumes perfect markets: no taxes, no flotation costs, rational investors and a given investment policy, so dividend policy does not affect value. The firm has 100 crore/100 = 1 crore shares, P₀ = ₹100 and ke = 10%. The model is P₀ = (P₁ + D₁)/(1 + ke).

(i) Price at the end of the year

• With dividend: 100 = (P₁ + 6)/1.10, so P₁ = 110 − 6 = ₹104.
• Without dividend: 100 = P₁/1.10, so P₁ = ₹110.

(ii) New shares to be issued (dividend paid)

Dividend = 1 crore × 6 = ₹6 crore, so retained earnings = 10 − 6 = ₹4 crore. Funds needed from outside = 20 − 4 = ₹16 crore.

New shares = 16 crore/104 = 15,38,462 shares (about 0.1538 crore) at the end-of-year price of ₹104.

(iii) Value of the firm

V₀ = [(n + Δn)P₁ − I + E]/(1 + ke).

• With dividend: [(1 + 0.1538) crore × 104 − 20 + 10]/1.10 = (120 − 10)/1.10 = ₹100 crore.
• Without dividend: new shares = (20 − 10)/110 = 0.0909 crore (9,09,091 shares), and V₀ = [1.0909 × 110 − 20 + 10]/1.10 = (120 − 10)/1.10 = ₹100 crore.

The value is the same in both cases, so dividend policy is irrelevant under MM.

(b) Techniques of inventory management in a manufacturing unit

Inventory management ensures that raw material, work in progress and finished goods are available for continuous production at the lowest total cost. The main techniques are:

• Economic order quantity (EOQ) = √(2AO/C), where A is annual use, O ordering cost per order and C carrying cost per unit. A steel plant uses it to balance ordering and storage costs.
• ABC analysis: items are classed by value. A items (about 70% of value, few in number, such as engines) get tight control, B items moderate control and C items (nuts, bolts) simple control.
• Reorder level, minimum, maximum and safety stock: order when stock reaches the reorder level (usage × lead time + safety stock) so that production does not stop.
• Just-in-time (JIT): materials arrive only as needed, which cuts holding cost, as in an automobile assembly line.
• VED analysis (vital, essential, desirable) for spares, and FSN analysis (fast, slow, non-moving) to identify obsolete stock.
• Material requirements planning (MRP/ERP): production schedules and bills of materials fix what to order and when.
• Perpetual inventory and stock verification: continuous recording and periodic physical checks to detect discrepancies.

(c) Key banking reforms in line with the Basel norms

The Basel Committee's norms were adopted by the RBI in stages.

• Basel I (1988) fixed a minimum capital-to-risk-weighted assets ratio of 8% for credit risk. India adopted it in 1992–93 and set 9% by 2000.
• Basel II (three pillars) added minimum capital with a charge for operational and market risk, supervisory review (ICAAP) and market discipline through disclosure. India implemented it from March 2008–09.
• Basel III (after the 2008 crisis) was phased in from 2013 and completed by 2019. It raised the quality and quantity of capital: minimum CRAR of 9%, a 2.5% capital conservation buffer, a countercyclical buffer and higher common equity (CET1) and Tier 1 minimums. It added a leverage ratio (4%, 4.5% for D-SIBs) and liquidity standards, the 30-day Liquidity Coverage Ratio and the Net Stable Funding Ratio. Domestic systemically important banks (SBI, ICICI Bank and HDFC Bank) carry extra capital.
• RBI's 2026 directions on the revised standardised approach for credit risk (and the market-risk rules) take effect from 1 April 2027.

These norms have strengthened capital and liquidity and risk management in banks, along with prompt corrective action and stress tests. Their costs are higher capital needs and some pressure on lending to small borrowers.