GALAXY INSTITUTE OF MANAGEMENT

AUGUST 2014 - PGDM DEGREE EXAMINATION

FINANCIAL MANAGEMENT - II
III TRIMESTER

PART A
Answer all the questions
I) Multiple Choice Question: (20 x 1 = 20 Marks)
1. The market value of the firm is the result of
a. Trade off between risk and return
b. Dividend decisions
c. Working capital decisions
d. Capital budgeting decisions
2. The primary capital market
a. Imparts liquidity and marketability to long term financial instruments
b. Helps companies to raise funds to finance their projects
c. Provides an auction market for long term securities
d. Operates through the medium of stock exchanges
3. In stock market, the delivery of traded share is completed
a. On the same day of trade
b. On the next day of trade
c. Two days after trade
d. Four days after trade
4. Which of the following members would you not find in the secondary stock market?
a. Investors
b. Stock exchanges
c. Stock brokers
d. Companies
5. Money has time value because
a. The individuals prefer future consumption to present consumption
b. A rupee today is worth more than a rupee tomorrow in terms of its purchasing power
c. A rupee today can be productively deployed to generate real returns tomorrow
d. Both b & c
6. Investment in Post Office time deposit is
a. Zero risk investment
b. Low risk investment
c. Medium risk investment
d. High risk investment
7. Portfolio beta
a. Is the risk of a portfolio
b. Business risk
c. Interest risk
d. Market risk
8. Risk return trade off implies
a. Increasing the profit of the firm through increased production
b. Not taking any loans which increases the risk of the firm
c. Not granting credit to risky customers
d. Taking decisions in such a way which optimizes the balance between risk and return
9. Standard deviation is the most preferred measure of risk because
a. Many calculator and computers are programmed to calculate it
b. Standard deviation considers every possible event and assigns each event a weigh equal
to its probability
c. Standard deviation considers every possible event and assigns each event a equal weigh
d. Both a & b
10. The price of the share will increase if
a. Dividend decreases
b. Company makes good profit
c. Demand for share increases
d. None of the above
11. Which of the following is not a capital budgeting decision?
a. Expansion Programme
b. Merger
c. Replacement of an Asset
d. Inventory Level.

12. Which of the following is not used in Capital Budgeting?
a. Time Value of Money
b. Sensitivity Analysis
c. Net Assets Method
d. Cash Flows.
13. Consider the below mentioned statements: 1. Financial management is closely
associated with human resource management. 2. The most important goal of financial
management is maximisation of net wealth of the company. State True or False:
a. 1-True, 2-True
b. 1-False, 2-True
c. 1-False, 2-False
d. 1-True, 2-False
14. A combination of ____________and ____________ is used to fund the activities of a
company.
a. Debt, Equity
b. Debt , Debentures
c. Loan, Equity
d. Loan, Debentures
15. Which of the following is not a source of long term finance?
a. Equity capital
b. Preference capital
c. Debenture capital
d. Term loan
16. "Shareholder wealth" in a firm is represented by:
a. the number of people employed in the firm.
b. the book value of the firm's assets less the book value of its liabilities.
c. the amount of salary paid to its employees.
d. the market price per share of the firm's common stock.


17. Assume that a project requires an outlay of Rs50,000 and yields annual cash inflow of
Rs12,500 for 7 years. The payback period for the project is:
a. 4 years
b. 4.5 years
c. 5 years
d. 5.2 years
18. Which is the most expensive source of funds?
a. New Equity Shares
b. New Preference Shares
c. New Debts
d. Retained Earnings
19. Financial Leverage arises because of:
a. Fixed cost of production
b. Variable Cost
c. Interest Cost
d. None of the above
20. NOI Approach advocates that the degree of debt financing is:
a. Relevant
b. May be relevant
c. Irrelevant
d. May be irrelevant.

II) Short Answers (10 x 2 = 20 Marks)
1. List few type of securities
2. Write short notes on the rights of shareholders.
3. What are the functions of stock market in India?
4. List few short term source of finance.
5. List few long term source of finance.
6. List few risks in business.
7. What do you mean by capital structure?
8. The initial cash outlay of a project is Rs1,00,000 and it can generate cash inflow of
Rs40000, Rs30000, Rs50000 and Rs20000 in year 1 through 4. Assume a 10%
discount rate and calculate Profitability Index.
9. What are the various methods of Capital Budgeting?
10. What impact does debt have in the value of the firm?

PART B
Answer all the questions (3 x 15 = 45 Marks)
1. (a)
Find the optimal proportion of stocks in an efficient portfolio that maximizes the portfolio
rate of return for a given level of risk.
Security in Portfolio Beta
()
Return
(r)
Proportion in portfolio
(x)
A 1.2 0.02 0.4
B 1.1 0.01 0.3
C 0.8 0.01 0.3

Maximize r
1
x
1
+ r
2
x
2
+ r
3
x
3
(maximum-return objective)
Subject to
1
x
1
+
2
x
2
+
3
x
3
= 1.1 (fixed beta for the portfolio)
x
1
+ x
2
+ x
3
= 1 (proportions should add up to 1)
x
1,
x
2,
x
3
0 (no short-selling)

(or)
(b)




Suggest which of the following company is safe for investment:
Year Rate of Return -
shares(%)

Company1

Company2
1 2.2 1.1
2 -3.5 1.1
3 11.6 4.2
4 -2.1 7.1
5 -2.1 -3.8
6 -3.1 -2.9
7 -8.8 -9.1
8 1.4 31.1
9 1.4 33.9
10 -5.8 13.6
11 5.5 30.4
12 10.1 -4.3
13 -4.4 -12.9
14 -5.3 22.1
15 21.7 8.4
16 -5.5 -5.4
17 -2.5 28.7
18 -3.4 15.6
19 -1.6 -9.6
20 2.3 13.5

2. (a) XYZ Co Ltd has produced and sold 100 units of goods at Rs55/- each, for which it
incurred a fixed cost of Rs3000/- and a variable cost of Rs5/- each. How much profit did
XYZ Co Ltd make? How much profit will it make if variable cost is reduced to Rs1/-, Rs2/-,
Rs3/-, Rs4/- and selling quantity is increased to 150, 200, 250 & 300 units.
(or)
(b) Calculate the value of the firm and cost of equity for the following capital structure and
sugesst which is optimum.
EBIT = Rs2,00,000/-, WACC(k
o
) = 10%, K
d
= 6%, Debt = Rs3,00,000/- (or)
Rs4,00,000/- (or) Rs5,00,000/-
3. (a) Describe various capital structure theories
(or)
(b) Describe various dividend theories.

PART C
CASE STUDY (5 x 3 = 15 Marks)

1) You are buying a copier. Would you rather pay $11,000 today or $3,000 a year for five
years? Assume the cost of capital is 12 percent per year.
2) If at the end of each of the next 40 years I invest $2,000 a year toward my retirement and
earn 8 percent a year on my investments, how much will I have when I retire?
3) I am borrowing $10,000 for 10 months with an annual interest rate of 8 percent. What are
my monthly payments? How much principal and interest am I paying each month?
4) I want to borrow $80,000 and make monthly payments for 10 years. The maximum
monthly payment I can afford is $1,000. What is the maximum interest rate I can afford?

5) If I borrow $100,000 at 8 percent interest and make payments of $10,000 per year, how
many years will it take me to pay back the loan?