Professional Documents
Culture Documents
PART - A
1st half
1. Define Financial Management. (U)
2. What are the objectives of financial management? (U)
3. Objectives of Financial manager is to maximize the wealth of the owners of the organization.
Comment (U)
4. What are the functions of financial management? (U)
5. What are the modern views on Financial management (U)
6. What is Time value of money? (U)
7.
(U)
(U)
Explain the debenture valuation models you would adopt for valuation of:
Redeemable debentures
Perpetual debentures
Explain the two approaches which are adopted for valuation of equity shares with appropriate
examples.(U)
5. What do you understand by growth in dividends? Explain with an example.
6. What is bond? What are its features and its types?
7. Differentiate between risk and uncertainty with appropriate examples.
8. Explain the various approaches for measurement of risk
9. Write short notes on methods of risk management
10. What is risk? What are its types?(U)
11. Business risk vs. financial risk outline the main cause of each.
12. What is an ordinary share? How does it differ from preference share and debenture? Explain its most
important features.
13. What are the advantages and disadvantages of ordinary shares to the company? What are the merits and
demerits of the shareholders?
UNIT -2: INVESTMENT DECISIONS
PART - A
1st half
1. What is capital budgeting? (U)
2. What are the features of capital budget? (U)
3. Explain the merits and demerits of time adjusted methods of evaluating investment proposals. (U)
4. A project costs Rs. 5,00,000/- and yields annually a profit of Rs. 80,000/- after depreciation at 12% per
annum but before tax of 50%. Calculate the payback period.
5. What is trading on equity? (U)
6. Define Payback period
7. Define Accounting Rate of Return (ARR)
8. Define Net Present Value (NPV)
9. What are the internal Sources of Finance? (U)
10. What are the external Sources of Finance?
11. Define Capital Budgeting
12. What are features of capital Budgeting decision?
13. What are the need and significance of capital budgeting decisions?
14. What are the types of investment Proposals? (U)
15. Explain the need and significance of capital budgeting.
16. Explain Capital Budgeting Process?
17. List the phases of capital budgeting process (U)
18. What is payback period method? List the two important limitations of this method?
(U)
2nd Half
1. What is Internal Rate of Return? (U)
2. Define Internal rate of return (IRR)
3. Define Profitability Index (PI).
4. Distinguish between NPV and IRR
5. What is capital rationing?
6. What is Cost of capital? (U)
7. What is Debt capital
8. What is Equity capital
9. What is Preference capital
10. What is Weighted Average Cost of capital
11. What is Marginal Cost of capital
12. What do you mean by a mutually exclusive decision? (U)
13. What are the elements to be considered while selecting the process and criteria for valuation of specific
project?
Year
Cash inflows
1
Projects
Project P
Project Q
Rs.
Rs.
10,000
2,000
Initial Investment
10,000 Rs.
Rs.
A
60,000
12,000
B
88,000
22,500
3
10,000
C
2,150
1,500
D
20,500
4,500
E
4,25,000
2,25,000
You may use the following table for your calculation:
Life in years
4,000
15
22
24,000 3
10
20
Period in years
3
10
Present value of an annuity of Re.1 per 2.5918 6.3213
15
7.768
20
22
8.6466 8.8919
From the following information, Rank the projects according to their desirability under
(i)
payback period
(ii)
(iii)
Net present value Index method assuming the cost of capital is 10%
7. The following data is available in respect of two mutually exclusive projects to be considered
by the management for investment. (U)
Particulars
years
Project X(Rs.)
Project Y(Rs.)
1
60,000
90,000
2
75,000
1,50,000
3
1,20,000
1,75,000
4
1,80,000
1,25,000
5
2,50,000
50,000
Project X cost Rs. 2, 75,000 and Project Y cost Rs. 3, 00,000. An investment of this type is expected to earn
a discounted rate of return of at least 12%. You are required to determine the more desirable project by
(i)
NPV
(ii)
2nd Half
1. What is capital rationing? Explain the steps for selecting the projects under such situation.
2. Discuss the methods used for evaluating and ranking investment proposals. Make a comparative study
of the internal rate of return approach with the present value approach in choosing a capital expenditure
project.
3. Explain the IRR method of a project evaluation.
4. Investment alternative yielding the highest discount rate of return is most applicable. Will this
always be true? Explain.(U)
5. Do you agree with the following statements? (give brief critical views in your own words)(U)
i.
Capital budgeting is the discounted cash flow analysis used to make decisions on capital
6.
7.
8.
9.
(ii)
(iii)
(iv)
(v)
23. P Enterprise is interested in assessing the cash flows associated with the replacement of an old
machine by anew machine. The old machine bought a few yeas ago has a book value of Rs.90, 000
and it can be sold for Rs.90, 000. It has a remaining life of 5 years after which its salvage value
will be zero. It is being depreciated annually at the rate of 20% (Written down Value method)
The new machine cost Rs. 4, 00,000. It is expected to fetch Rs. 2, 50,000 after 5 years when it will
no longer be required. It will be depreciated annually at the rate of 33 1/3% (W.D.V.M). The new
machine is expected to bring a saving of Rs. 1, 00,000 per year in manufacturing cost. The tax rate
applicable to the firm 50%. Assess the feasibility of investing in the new machine based on
incremental post tax cash flows of the replacement decision. (U)
24. A project has the following pattern of cash flows (U)
Year
Cash flow (Rs.)
(i)
0
- 40,00,000
1
15,00,000
2
8,00,000
3
7,50,000
4
- 8,00,000
5
35,23,000
Calculate IRR of the project (ii) with i= 8% calculate NPV of the project.
5.
6.
7.
8.
9.
3. Explain the concept of financial leverage. How does it magnify the revenue available for equity share
holders?
4. What is composite leverage? How it is computed? (U)
5. How does trading on equity related to financial leverage.(U)
6. Explain the impact of various combination of operating and financial leverage? Which combination
considered being a suitable solution to the company?
7. Explain the concept of working capital leverage.
8. What is meant by capital structure? Explain its significance.
9. What are the differences between financial structure and capital structure?
10. Briefly explain the factors determine the capital structure of a firm.
11. Describe various theories of capital structure.
12. Discuss the net income and net operating income approaches to capital structure.
13. Explain the traditional approach to capital structure.(U)
14. Define optimum capital structure explain its essential features.
15. A firm has sales of Rs. 75, 00,000 variable cost of Rs. 42, 00,000 and fixed cost of Rs. 6, 00,000. It
has a debt of Rs. 45, 00,000 at 9% and equity of Rs. 55, 00,000. Calculate operating, financial and
combined leverage of the firm. Also calculate the new EBIT, if the sale drops to Rs. 50, 00,000.
(U)
16. The following is the capital structure of M/S Kurukshetra Earning Works Ltd.:
Sources of Finance
Amount
Equity share capital (45,000 shares of rupees 4,50,000
Projections
45%
15%
10%
30%
100
1,50,000
1,00,000
3,00,00
10,00,000
The firms after tax component costs of the various sources of funds are as follows:
Debt 4.5%
(ii)
Market values as weights. Assume the market price of equity share is Rs. 20 per share.
17. From the following capital structure of a company, calculate the over all cost of capital, using (1)
Book value weights (2) Market value weights. (U)
Sources
Book value
Market value
45,000
15,000
10,000
30,000
90,000
--------10,000
30,000
Debentures 5%
18. V corporations presently has one million outstanding equity shares (Rs.10 par) selling at Rs.15 per
share. It needs Rs. 100 lakhs of additional funds which can be raised into two ways:
(1) Issue of 8 lakhs equity shares at Rs.12.50 per share
(2) Issue of debt capital carrying 15% interest.
The expected earnings before interest and taxes after the new funds are raised will be Rs.70 lakhs per
year with the standard deviation of Rs.30 lakhs. Tax rate 60% what is the probability that the debt
alternative is better than the equity alternative with respect to earnings per share. (U)
19. Assuming that a firm pays tax at a 50% tax, compute the after cost of capital in the following
case:
i. A 8.5% preference share sold at par
ii. A perpetual bond sold at par, coupon rate of interest being 7%
iii. A ten year 8%, Rs. 1,000 par bond sold at Rs. 950 less 4% underwriting
commission.
iv. A preference share sold at Rs. 100 with a 9% dividend and a redemption price of Rs.
110 if the company redeems it in 5 years.
v. An ordinary share selling at a current market price of Rs. 120, and paying a current
dividend of Rs.9 per share, which is expected to grow at a rate of 8%
(U)
20. The shares of chemical company are selling at Rs. 20per share. The firm had paid dividend at Rs.2
per share last year. The estimated growth of the company is approximately 5% per year.
Determine the cost of equity capital of the company. Also determine the estimated price of equity
shares if the anticipated growth rate of the firm (1) rises to 8% (2) falls to 3% (U)
21. Sagar Industries is planning to introduce a new product with projected life of 8 years. The project,
to be set up in a backward region, qualifies for one time (as its starting) tax free subsidy from the
government of Rs. 20 lakhs. Initial equipment cost will be Rs. 140 lakhs and additional equipment
costing Rs. 10 lakhs will be needed at the beginning of the third year. At the end of 8 years, the
original equipment will have no resale value, but the supplementary equipment can be sold for Rs.
1 lakh. A working capital of Rs. 15 lakhs will be needed. The sales volume over the eight years
period have been forecasted as follows:
Year
Units
1
80,000
2
1,20,000
3-5
3,00,000
6-8
2,00,000
A sale of price Rs. 100 per unit is expected and variable expenses will amount to 40% of sales revenue.
Fixed cash operating costs will amount to Rs. 16 lakhs per year. In addition, an extensive advertising
campaign will be implemented, requiring annual outlays as follows
Year
1
2
3-5
6-8
The company is subject to 50% tax rate and
Rs.(in lakhs)
30
15
10
04
considers 12% to be an appropriate after tax cost of
capital for this project. The company follows the straight line method of depreciation.
Should the project be accepted? Assume that the company has enough income from existing products. (U)
22. P Enterprise is interested in assessing the cash flows associated with the replacement of an old
machine by anew machine. The old machine bought a few yeas ago has a book value of Rs.90, 000
and it can be sold for Rs.90, 000. It has a remaining life of 5 years after which its salvage value
will be zero. It is being depreciated annually at the rate of 20% (Written down Value method)
The new machine cost Rs. 4, 00,000. It is expected to fetch Rs. 2, 50,000 after 5 years when it will
no longer be required. It will be depreciated annually at the rate of 33 1/3% (W.D.V.M). The new
machine is expected to bring a saving of Rs. 1, 00,000 per year in manufacturing cost. The tax rate
applicable to the firm 50%. Assess the feasibility of investing in the new machine based on
incremental post tax cash flows of the replacement decision. (U)
2nd Half
1. Explain the EBIT EPS approach with suitable example.
2. What are the factors determine the dividend policy of a company? How is stable dividend
policy advantageous to the investors as well as company? (U)
3. What are bonus shares? Do they differ from stock dividend? State the advantages of issuing bonus
4.
5.
6.
7.
8.
9.
shares?
What are the recent guidelines by the SEBI regarding bonus shares?
Write a lucid note on current dividend practices in India.
Explain the forms of dividend policy.
Discuss the various approaches of dividend policy.
Explain the concept of Buy back shares. (U)
(i) what are the various factors influencing Dividend policy? Explain.
ii. Firms X and Y are identical except that firm X is not levered while firm Yis levered. The
following data relate to them.
Particulars
Assets
Debt capital
Equity share capital (50,000
shares of Rs. 10 each)
Rate of return on assets
Firm X
5,00,000
0
5,00,000
Firm Y
5,00,000
2, 50,000(9% Int.)
2,50,000( 25,000 shares
20%
of Rs.10 each)
20%
Calculate EPS for both Firms, assuming a tax- rate of 50%. Will it be advantageous to Firm Y to raise the
level of debt capital to 75%? (U)
10. Determine the market value of equity shares of the company from the following information as
per Walters Model. (U)
Particulars
Amount
Rs.
Earnings of the company
5,00,000
Dividend paid
3,00,000
Number of shares outstanding
1,00,000
Price earning ratio
8
Rate of return on Investment
15%
Cost of capital
13.2%
11. The Evergreen Company has the choice in raising an additional sum of Rs. 50 lakhs either by
the sale of 10% debentures or by issue of additional equity shares Rs. 50 per share. The capital
structure of the company consists of 10 lakhs ordinary shares and not debt. At what level of
EBIT after the new capital is acquired, would EPS be the same whether new funds are raised
either by issuing ordinary shares or by issuing debentures? Also determine the level of EBIT at
which uncommitted EPS (UEPS) would be the same, if sinking fund obligation amount to Rs. 5
lakhs per year. Assume a 50% tax rate. Discuss the relevance of this calculation and also verify
your results. (U)
12. ABC has a total investment of Rs. 5, 00,000 in assets and 50,000 outstanding ordinary shares at
Rs. 10 per share (Par value). It earns a rate of 15% on its investment and has a policy of
retaining 50% of the earnings. If the appropriate discount rate of the firm is 10% determine
the price of its share using Gordons model. What shall happen to the price of the share if the
company has a pay out of 80 or 20%. (U)
13. i. What is Share split? Explain in detail with suitable example. (U)
ii. Calculate the operating leverage for each of the four firms A, B, C, and D from the following
data.
Particulars
Firms
A
Rs.
Rs.
Rs.
Rs.
Sale price / unit
20
32
50
70
Variable cost / unit
6
16
20
50
Fixed operating cost
80,000 40,000
2,00,000
Nil
14. i. Explain the factors which influence the dividend policy of a firm. (U)
ii. ABC Ltd. Provides following details.
Particulars
Profit
Less: Interest on debentures
Earnings before taxes
Less: taxes @ 35%
Earnings after taxes
No. of equity shares @Rs. 10 each
Earnings per share
Market price of share (Rs.)
P/ E ratio
Rs.
3,00,000
60,000
2,40,000
84,000
1,56,000
40,000
3.9
39
10
The company has undistributed reserves, Rs. 6, 00,000. It needs Rs. 2, 00,000 for expansion
which will earn the same rate as funds already employed. The debt equity ratio higher than
35% will push the P/ E ratio down to 8 and raise the interest rate on additional amount to be
borrowed to 14%. Calculate the price of equity share (1) If the additional funds are raised as
debt; (2) If the amount is raised by equity shares at current market price.
UNIT 4: WORKING CAPITAL MANAGEMENT
PART - A
1st half
1. What is working capital? What are its concepts?
2. What are the kinds of working capital?
3. What are the Factors that determine the need for working capital?
4.
5.
6.
7.
Method?
14. What are the benefits and limitations of The Adjusted Net Income Method?
15. What are the uses of Long-term Cash Forecasting? (U)
16. What are the methods of Managing Cash Collections and Disbursements?
17. What is Lock-box system?(U)
18. What are the components of credit policy?
19. What is Heuristic approach?
20. What do you mean by ageing schedule?
21. Z &co requires 2000 units of an item per year. The purchase price per unit is RS.30.The carrying
cost of inventory is 25%and the fixed cost per order is Rs.1000.Determine the economic ordering
quantity? (U)
22. What is Indifference Point? (U)
23. State any 4 features of commercial paper in India (U)
24. What is commercial paper? (U)
25. What is debt service coverage ratio? State the formula and name the variables (U)
cycle.(U)
5. What are the advantages of inadequate working capital?
6. Explain the factors which determine the working capital needs of the organization.
7. Explain the different methods of forecasting working capital requirements of a concern?(U)
8. What is meant by receivables management? How it is useful to business concern.(U)
9. What are the factors influencing the size of the receivables?
10. Receivables forecasting is important for the proper management of receivables forecasting.
11. Discuss the various aspects / dimensions of receivable management.
12. What is meant by factoring? Briefly explain the factoring.
13. Describe the functions of factoring services.(U)
14. Explain the benefits of factoring services in India.
15. What is meant by working capital finance?
16. Discuss the various sources for the financing of working capital.
17. Assuming a year of 50 weeks of 5 days each, calculate the working capital requirements, using the
following data, sales 1,50,000 units at Rs. 10/ piece on credit. Customers are allowed 60 days
credit. Production cost includes Rs. 5 / piece for raw material, Rs. 2/ piece for labour and
Rs.2.5/piece for other expenses. Production cycle time 20 days. Credit allowed by suppliers 50
days. Cash requirement is one quarter of the remaining current assets. Stock levels raw materials,
40 days of supply and finished goods 20 days. Ignore work in progress.(U)
18. A company has sales of Rs. 10, 00,000. Average collection period is 50 days, bad debt losses 6% of
sales and collection expenses Rs. 10,000. The cost of funds is 15% p.a. The company has two
alternative collection programmes. (U)
I
II
Average collection period reduced to
40 days
30 days
Bad debt losses reduced to
4% of sales
3% of sales
Collection expenses
Rs. 20,000
Rs.30,000
Evaluate which programme is viable.
19. A proforma cost sheet of a company provides the following particulars(U)
Element of cost
Raw material
Direct labour
Over heads
Total cost
Profits
Selling price
You are required to prepare a statement showing the working capital needed to finance a level of activity
of 104000 units of production. You may assume that production is carried on evenly throughout the year,
wages and overheads accrue similarly and a time period of 4 weeks is equivalent to a month.
20. Calculate the amount of working capital requirement for Jolly & co. Limited from the following
Information. (U)
particulars
(Rs. Per unit)
Raw material 160
Direct labour 60
Overheads
120
Total cost
340
Profit
60
Selling price
400
Raw materials are held in stock on average for one month. Materials are in process on average for half
month. Finished goods are in stock on an average for one month.
Credit allowed by suppliers in one month and credit allowed to debtors is two months. Time lag in
payment of wages is 1 weeks. Time lag in payment of overhead expenses is one month. One fourth of the
finished goods are sold against cash. Cash in hand and cash at bank is expected to be Rs. 50,000; and
expected level of production amounts to 1, 04,000 units.
You may assume that production is carried on evenly throughout the year, wages and overheads accrue
similarly and a time period of four weeks is equivalent to a month.
21. Assuming a year of 50 weeks of 5 days each, calculate the working capital requirements, using the
following data, sales 1,50,000 units at Rs. 10/ piece on credit. Customers are allowed 60 days
credit. Production cost includes Rs. 5 / piece for raw material, Rs. 2/ piece for labour and
Rs.2.5/piece for other expenses. Production cycle time 20 days. Credit allowed by suppliers 50
days. Cash requirement is one quarter of the remaining current assets. Stock levels raw materials,
40 days of supply and finished goods 20 days. Ignore work in progress.(U)
22. NMK brothers desire to purchase a business and has consulted you and one point on which you
are asked to advise them is the average amount of working capital which will be required in the
first year. You are given the following estimates and are instructed to add 10 per cent to your
computed figures to allow contingencies.(U)
Particulars
5000
8000
3,12,000
78,000
2,60,000
48,000
10,000
62,400
4,800
48,000
Payment in advance
8,000
11,000
Set up your calculations for the average amount of working capital required.
2nd Half
1.
2.
3.
4.
5.
What are the factors should be considered while forming a credit policy of the company?
Explain the meaning and objectives of cash management.(U)
Explain the basic problems involved in cash management. How will you overcome them?
What factors will you keep in mind while investing surplus cash?
Explain the techniques that you would adopt for controlling inflows of cash.
6. The need for maintaining cash balance arises from the non synchronization of the inflows and
outflows of cash. Elucidate the statement. Also point out the role of short costs in determining the cash
needs.
7. Write short note about concentration banking and lock box system to speed up recovery from debtors.
8. What is inventory management? Briefly explain the objectives of inventory management?
9. What is inventory? What are its types?(U)
10. What is meant by ABC analysis? What are its advantages?(U)
11. Discuss the various tools of inventory management.
12. What is meant by EOQ? What are the various costs which affect economic order quantity?
13. The management of inventory must meet two opposing needs? What are these? how is balance brought
in these opposing needs?
14. What is meant by commercial paper? Explain the conditions for issuing commercial paper.
15. What is meant by trade credit? Explain the importance of trade credit and accruals as source of working
capital. What is the cost of these sources?
16. Explain the rationale of the Tandon committees recommendation.
17. Describe the important features of Tandon committees recommendation.
18. Define commercial paper. Explain the pros and corn.(U)
19. What are the implications of the recommendations of chore committee?
20. A companys capital structure consists of the following: (U)
Particulars
Amount
Rs.
20 lakh
10 lakh
12 lakh
8 lakh
50 lakh
The company earns 12% on its capital. The income tax rate is 50%.
The company requires a sum of Rs. 25 lakhs to finance its expansion programme for which following
alternatives are available to it:
(i)
(ii)
(iii)
Issue of 8% debentures.
It is estimated that P/E ratios in the cases of equity, preference and debentures financing would be
21.4, 17 and 15.7 respectively.
Which of the three financing alternatives would you recommend and why?
UNIT -5: LONG TERM SOURCES OF FINANCE
PART - A
1st half
1. What is money market?
2.
3.
4.
5.
6.
7.
4. What developments have taken place in capital markets in India? What are their implications for financial
managers?(U)
5. Explain the role of merchant banking in capital markets. What is the status of merchant banking in India?
6. What are index funds and hedged funds? Explain their merits and de merits.
2nd Half
1. What is debenture? Explain the features of debentures.(U)
2. What are the pros and cons of debenture s from the company investors point of views?
3. What are term loans? What are its features?(U)
4. What is leasing? What are its types?
5. What are the steps involved in leasing?(U)
6. Differentiate between financial lease and operating lease.
7. Explain the roles played by different players in the lease market in India.
8. Why companies go for leasing rather than purchasing equipment?(U)
9. Describe the various legal provisions that govern the leasing business in India.
10. Distinguish between lease and term loan.
11. What are the salient features of a hire purchase agreement?
12. What are the differences between a lease and the hire purchase?
13. Briefly, trace the evolution of hire purchase in India.(U)
14. State the essential requisites of a valid hire purchase agreement.
15. What are the implied conditions and warranties of hire purchase?(U)
16. Describe the rights and duties of their hirer and hire vendor.(U)
17. Describe the tax treatment of hire purchase.
18. What are the various stages of evolution of venture capital business in India?(U)
19. Explain the mechanism of venture capital with examples.(U)
20. What are the various types of venture capitalist?(U)
21. Describe the types of venture capital firms.
22. Describe the different types of venture capital investors.(U)
23. What is meant by private equity? State its advantages and drawback of private placements.
24. .i. Discuss the features of any two long term sources of finance, in detail. (U)
ii. Elaborate the various activities involved in new issue management.
25. .i. Explain the features of hire purchase with suitable examples. (U)
iii.
Bring out the essential aspects of project financing, venture capital.
26. Define the term option. What are its features?
27. Explain the types of options
28. What are the assumptions of black schole option pricing model?