QUESTION BANK – INVESTMENT ANALYSIS & MANAGEMENT

MODULE 1

SECTION A

1. What is Investment?
2. Distinguish between Investment & Speculation.
3. Mention the four important functions of financial management.
4. Define Financial Management.
5. What is Capital Market?
6. What are the objectives of Financial Management?

SECTION B

1. Distinguish between Capital Market and Money Market.

2. List out the types of investors.
3. Briefly explain the interface of financial management with other management functions.
4. What is wealth maximation? How is it different from that of profit maximation?
5. What are the goals of financial manager?

SECTION C

1. “Investment is always a better alternative compared to speculation and gambling”.

Elucidate.
2. Explain in detail various investment options available for a investor.
3. Explain the concept of Money Market operations in India with suitable examples.

MODULE 2

SECTION A

1. Define capital budgeting?

2. What are the different techniques of evaluating Investment proposals?
3. Explain the concept of Time Value of Money
4. What do you mean by Discounted Cash flow technique?
5. What is the decision rule under Pay Back method?
6. Give any two demerits of IRR method.
SECTION B

1. Calculate NPV, IRR and Pay Back Period for the projects given below assuming a
discount rate of 10% and suggest which is a better alternative.

Particulars Project A Project B

0 Year (100,000) (100,000)

1st Year 10,000 8,000
2nd Year 25,000 18,500
3rd Year 45,000 60,000
4th Year 50,000 45,000

2. Briefly explain how to evaluate an investment proposal under ARR method with a
suitable example.
3. Calculate the Pay Back period for the project given below:

COL – 100,000

YEAR CFs
1 20,000
2 33,000
3 45,000
4 18,000
5 20,000
6 60,000
4. What is the ARR of the Project with a average Cash Inflow of Rs.20,000 and average
Investment of Rs. 200,000 ?

SECTION – C

Analyse the Case Study and give an appropriate solution

1. 5. Playmates Ltd. manufactures various types of toys. The R&D Department has
come up with an item that would make a good promotional gift for office
equipment dealers. As a result of efforts by the sales personnel, the firm has
commitments for this product. To produce the quantity demanded, Playmates Ltd
will need to buy additional machinery and rent additional space.
2. It appears that about 25,000 sq.ft. will be needed. 12,500 sq.ft. of presently
unused space, but leased at the rate of Rs.3 per sq.ft. Per year is available.
There is another 12,500 sq.ft. adjoining the facility available at the annual rent of
Rs. 4per sq.ft.
3. The equipment will be purchased for Rupees nine lakhs. It will require rupees
thirty thousand in modifications and rupees one and a half lakhs for installation.
The equipment will have a salvage value of about Rs.2, 80,000 at the end of the
 third year. It is subject to 25% depreciation on reducing balance basis. The firm
has no other assets in this block. No additional general overheads costs are
expected to be incurred. The estimates of revenues and costs for this product for
three years have been developed as follows:

Particulars Year 1 Year2 Year3

Sales 10,00,000 20,00,000 8,00,000
Less: Costs
Material, Labour 4,00,000 7,50,000 3,50,000
&Overheads

Overheads allocated 40,000 75,000 35,000

Rent 50,000 50,000 50,000

Depreciation 2,70,000 2,02,500 NIL
Total costs 7,60,000 10,77,500 4,35,000
EBT 2,40,000 9,22,500 3,65,000
Less : Taxes 84,000 3,22,875 1,27,750
EAT 1,56,000 5,99,625 2,37,250
If the company sets a required rate of return of 20% after taxes, should this project be
accepted?
(Note: PV factor @20% for year1=0.833, year2=0.694, year3=0.579)

2. Explain the concept of NPV method of evaluating an investment proposal.

3. What is IRR? Do you think IRR is a special method of evaluating investment

proposals and if so what is the reason? Calculate IRR of a project with a COL of
Rs.10,000 and CFs of Rs. 1000, Rs.1000, Rs.2000,Rs. 10000 respectively from
year one to four.

MODULE 3

SECTION – A

1. What is redeemable and irredeemable Debt?

2. What do you mean by component cost of capital?
3. What is WACC?
4. What is the formula for calculating cost of Pref. Stock?
SECTION – B

1. Bring out the importance of cost of capital in financial management.

2. Explain the concept of WACC with suitable examples.
3. What is meant by Venture Capital?
4. Distinguish between Debentures and Warrants.
5. Explain the concept of lease financing with suitable examples

SECTION – C

Calculate the WACC for the following data given below:

1. Equity share capital = Rs. 1000 lacs @ 18%

2. Bonds = Rs. 2000 lacs @ 13%
3. Fixed deposits = Rs. 500 lacs @ 12.5%
4. Tax rate = 38.5%
(Rupees in lacs)
Name of the component in the capital structure Value Weight Pre-tax cost Post-
tax cost Cost
5. Equity share capital 1000 2 -- 18%
36
6. Bonds 2000 4 13% 8%
32
7. Fixed deposits 500 1 12.5% 7.69%
7.69
8. Total costs
75.69
MODULE 4

SECTION – A

1. What do you mean by Capital Structure?

2. What is finance Leverage?
3. What is optimum capital structure?
4. Give any two examples of External Stake holders.
5. What are the various capital structure theories propounded?

SECTION – B

1. With suitable examples explain the NI approach

2. Explain in detail the concept of Optimum capital structure?
3. Distinguish between NI and NOI approach.
4. What is capital structure irrelevance theory?
SECTION – C

1. “Capital structure does not affect the value of the firm”. Elucidate.
2. What the various factors affecting capital structure of a firm?
3. Do you think NOI approach support the argument of MMs approach, if yes justify your
answer with suitable examples.

MODULE – 5

SECTION - A

1. What is dividend?
2. State any two dividend policy adopted by a firm.
3. Give any two factors affecting dividend policy of a firm.
4. Name the theories which argue for dividend relevance and irrelevance.
5. What do you mean by stock dividend?

SECTION – B

1. Briefly explain the Walter’s Dividend Model.

2. How Gordon’s Model is an improvement over Walter’s model.
3. What are the demerits of Walter’s & Gordon’s Model.

SECTION – C

1. “The Dividend Policy of a firm does not affect its share value”. Elucidate.
2. A firm has dividend of Rs. 25/- and growth rate of the company is 5%. If the cost of
equity is 18%, what is the price at which the stock would have been purchased?
3. Explain in detail various dividend policies adopted by companies.
4. What are the tax considerations in taking a dividend decisions?

MODULE – 6

SECTION – A

1. Define working capital?

2. List out some of the factors influencing Working Capital.
3. What are the components of Working Capital?
4. What is gross working and net working capital?

SECTION – B

1. What is Operating Cycle? Explain the important factors affecting it.

 2. Why should current assets be greater in value than current liabilities?
3. Calculate operating cycle for the following data given below:
Item in the current assets Number of days Value
of item (Rupees in lacs)
Materials 45 230
Work in progress 21 200
Finished goods 15 180
Receivables or debtors 30 500
Creditors outstanding or credit on 15 76
Purchases

4. What do you mean by EOQ? Explain with examples.

SECTION – C

1. Discuss at least 4 important factors that determine the quantum of working capital
required for any business with examples
2. From the following, determine the operating cycle in number of days and value,
investment per cycle from our side, total current assets, total current liabilities and
eligible bank finance at current ratio of 2:1. (Rupees in lacs)
♦ Raw materials - imported - annual consumption 1800 - holding 45 days
♦ Raw materials - indigenous - annual consumption 2400 - holding 20 days
♦ Packing materials - annual consumption 420 - holding 30 days
♦ Consumable stores and spares - annual consumption 360 - holding 60 days
♦ Work-in-progress - annual cost of production 6300 - holding 21 days
♦ Finished goods - annual cost of goods sold 7200 - holding 15 days
♦ Inland short-term receivables - gross sales 12720 - outstanding 2 months
♦ Other current assets - 10% of total current assets.
Other current liabilities - 10% of total current liabilities.