Download Anna University (AU) MBA ( Master of Business Administration) Important Question Bank 2nd Sem 1915203 Financial Management (Latest Important Questions Unit Wise)
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
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DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
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DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
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DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
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DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
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?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
FirstRanker.com - FirstRanker's Choice
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
FirstRanker.com - FirstRanker's Choice
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
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DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
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(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
FirstRanker.com - FirstRanker's Choice
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
working capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
How would you explain receivable control techniques?
Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
FirstRanker.com - FirstRanker's Choice
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?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
working capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
How would you explain receivable control techniques?
Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
ii) Discuss the various opportunities available to thecompanies to
park their surplus funds for a short term.
(7)
5
What is the role of Credit terms and Credit standards in the credit
policy of a firm?
Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
Level 6 Creating
7
i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
(5)
8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
Level 2 Understanding
9
i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
Iii) What facts would you select to show the cash management
models proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
10
i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
ii) How would you explain factoring types?
(5)
11
PC ltd sells its product on a gross profit of 20% on sales. The
following information is extracted from its annual accounts for the
year ended 31.12.2011.
? Sales @ 3 months credit 40,00,000
? Raw material 12,00,000
? Wages paid ? avg time lag 15 days96,0000
? Manufacturing expenses paid ? 1 montharrear
12,00,000
? Admin expenses paid in 1 month arrear48,0000
? Sales promotion expenses payable half yearly in
advance 2,00,000
The company enjoys 1 month credit from the suppliers of raw
material and maintains 2 months stocks of a Raw materials &
1.5 month stock of a finished goods.
The cash balance is maintained as Rs 10, 0000 as a
precautionary measure assuming a 10% margin. Find out the
working capital requirement of PC Ltd.
Level 1
Remembering
12
From the following data prepare a statement showingrequirement
for
(a) Estimated output for the year 130000 units ( 52weeks)
(b) Stocks of R.M ? 2 weeks &materials in process for 2weeks,
50% of wages & OH are incurred
(c) Finished goods remains in storage for 2week
(d) Creditors 2 weeks
(e) Debtors 4 weeks
(f) Outstanding wages and overheads 2 weekseach
(g) Selling price / units RS 15
(h) Analysis of cost per unit is as below.
Raw Material 5 UNIT
Labour 3 UNIT
Level 2 Understanding
FirstRanker.com - FirstRanker's Choice
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
working capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
How would you explain receivable control techniques?
Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
ii) Discuss the various opportunities available to thecompanies to
park their surplus funds for a short term.
(7)
5
What is the role of Credit terms and Credit standards in the credit
policy of a firm?
Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
Level 6 Creating
7
i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
(5)
8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
Level 2 Understanding
9
i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
Iii) What facts would you select to show the cash management
models proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
10
i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
ii) How would you explain factoring types?
(5)
11
PC ltd sells its product on a gross profit of 20% on sales. The
following information is extracted from its annual accounts for the
year ended 31.12.2011.
? Sales @ 3 months credit 40,00,000
? Raw material 12,00,000
? Wages paid ? avg time lag 15 days96,0000
? Manufacturing expenses paid ? 1 montharrear
12,00,000
? Admin expenses paid in 1 month arrear48,0000
? Sales promotion expenses payable half yearly in
advance 2,00,000
The company enjoys 1 month credit from the suppliers of raw
material and maintains 2 months stocks of a Raw materials &
1.5 month stock of a finished goods.
The cash balance is maintained as Rs 10, 0000 as a
precautionary measure assuming a 10% margin. Find out the
working capital requirement of PC Ltd.
Level 1
Remembering
12
From the following data prepare a statement showingrequirement
for
(a) Estimated output for the year 130000 units ( 52weeks)
(b) Stocks of R.M ? 2 weeks &materials in process for 2weeks,
50% of wages & OH are incurred
(c) Finished goods remains in storage for 2week
(d) Creditors 2 weeks
(e) Debtors 4 weeks
(f) Outstanding wages and overheads 2 weekseach
(g) Selling price / units RS 15
(h) Analysis of cost per unit is as below.
Raw Material 5 UNIT
Labour 3 UNIT
Level 2 Understanding
Overheads 2 UNIT
Profit 5 UNIT
Find out the working capital requirement?
13
i)What are the methods of preparing short term cash forecast?
(7)
Level 4 Analysing
ii) Whatare the uses of long term cash forecasting?
(6)
14
i)What criteria are followed to select marketable securities for
investing cash surplus?
(6)
Level 1 Remembering
ii) What are the short term investments in India for investing short
term cash?
(7)
PART - C
S.NO QUESTIONS
1 Illustrate the methodology to raise working capital finance.
2
From the following information of VSGR Company Ltd., estimate working capital needed to
finance a level of activity of 1,10,000 units of production after adding a 10 per cent safety
contingency.
Raw materials Rs.78
Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
Total cost Rs.165
Profit Rs.24
Selling price Rs.189
Additional information:
(i) Average raw materials in stock : onemonth
(ii) Average materials?inprocess (50% completionstage):1/2month
(iii) Average finished goods in stock: one month
(iv)Credit allowed by suppliers: onemonth
(v) Credit allowed to customers : Twomonths
(vi) Time lag in payment of wages : one and halfweeks
(vii) Overhead expenses : onemonth
One fourth of the sales are on cash basis. Cash balance is expected to be Rs. 2, 15,000. You
may assume that production is carried on evenly throughout the year and wages and overhead
expenses accrue similarly.
3
Calculate the working capital allow 10% contingencies
Cost per unit
Raw Material Cost Rs.100
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?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
working capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
How would you explain receivable control techniques?
Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
ii) Discuss the various opportunities available to thecompanies to
park their surplus funds for a short term.
(7)
5
What is the role of Credit terms and Credit standards in the credit
policy of a firm?
Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
Level 6 Creating
7
i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
(5)
8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
Level 2 Understanding
9
i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
Iii) What facts would you select to show the cash management
models proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
10
i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
ii) How would you explain factoring types?
(5)
11
PC ltd sells its product on a gross profit of 20% on sales. The
following information is extracted from its annual accounts for the
year ended 31.12.2011.
? Sales @ 3 months credit 40,00,000
? Raw material 12,00,000
? Wages paid ? avg time lag 15 days96,0000
? Manufacturing expenses paid ? 1 montharrear
12,00,000
? Admin expenses paid in 1 month arrear48,0000
? Sales promotion expenses payable half yearly in
advance 2,00,000
The company enjoys 1 month credit from the suppliers of raw
material and maintains 2 months stocks of a Raw materials &
1.5 month stock of a finished goods.
The cash balance is maintained as Rs 10, 0000 as a
precautionary measure assuming a 10% margin. Find out the
working capital requirement of PC Ltd.
Level 1
Remembering
12
From the following data prepare a statement showingrequirement
for
(a) Estimated output for the year 130000 units ( 52weeks)
(b) Stocks of R.M ? 2 weeks &materials in process for 2weeks,
50% of wages & OH are incurred
(c) Finished goods remains in storage for 2week
(d) Creditors 2 weeks
(e) Debtors 4 weeks
(f) Outstanding wages and overheads 2 weekseach
(g) Selling price / units RS 15
(h) Analysis of cost per unit is as below.
Raw Material 5 UNIT
Labour 3 UNIT
Level 2 Understanding
Overheads 2 UNIT
Profit 5 UNIT
Find out the working capital requirement?
13
i)What are the methods of preparing short term cash forecast?
(7)
Level 4 Analysing
ii) Whatare the uses of long term cash forecasting?
(6)
14
i)What criteria are followed to select marketable securities for
investing cash surplus?
(6)
Level 1 Remembering
ii) What are the short term investments in India for investing short
term cash?
(7)
PART - C
S.NO QUESTIONS
1 Illustrate the methodology to raise working capital finance.
2
From the following information of VSGR Company Ltd., estimate working capital needed to
finance a level of activity of 1,10,000 units of production after adding a 10 per cent safety
contingency.
Raw materials Rs.78
Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
Total cost Rs.165
Profit Rs.24
Selling price Rs.189
Additional information:
(i) Average raw materials in stock : onemonth
(ii) Average materials?inprocess (50% completionstage):1/2month
(iii) Average finished goods in stock: one month
(iv)Credit allowed by suppliers: onemonth
(v) Credit allowed to customers : Twomonths
(vi) Time lag in payment of wages : one and halfweeks
(vii) Overhead expenses : onemonth
One fourth of the sales are on cash basis. Cash balance is expected to be Rs. 2, 15,000. You
may assume that production is carried on evenly throughout the year and wages and overhead
expenses accrue similarly.
3
Calculate the working capital allow 10% contingencies
Cost per unit
Raw Material Cost Rs.100
Labour cost Rs20
Overheads Rs.20
Total Cost Rs.140
Profit Rs.60
Selling price Rs.200
Additionalinformation:
No. of units sold =25000 units
Average Raw material stock 2months
Average work in process 1 month
Finished goods 2month
One fourth of the sales is based on cash.
Debtors 1 month
Lag in wages 1/2 month
Lag in payment to Creditors 1 month
Lag in payment in overhead expenses 1/2 month
Cash balance ?Rs.1, 00,000
4
?Maintaining optimum working capital is required?- Justify. Discuss the consequences
of inadequate or excess working capital.
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?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
working capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
How would you explain receivable control techniques?
Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
ii) Discuss the various opportunities available to thecompanies to
park their surplus funds for a short term.
(7)
5
What is the role of Credit terms and Credit standards in the credit
policy of a firm?
Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
Level 6 Creating
7
i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
(5)
8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
Level 2 Understanding
9
i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
Iii) What facts would you select to show the cash management
models proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
10
i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
ii) How would you explain factoring types?
(5)
11
PC ltd sells its product on a gross profit of 20% on sales. The
following information is extracted from its annual accounts for the
year ended 31.12.2011.
? Sales @ 3 months credit 40,00,000
? Raw material 12,00,000
? Wages paid ? avg time lag 15 days96,0000
? Manufacturing expenses paid ? 1 montharrear
12,00,000
? Admin expenses paid in 1 month arrear48,0000
? Sales promotion expenses payable half yearly in
advance 2,00,000
The company enjoys 1 month credit from the suppliers of raw
material and maintains 2 months stocks of a Raw materials &
1.5 month stock of a finished goods.
The cash balance is maintained as Rs 10, 0000 as a
precautionary measure assuming a 10% margin. Find out the
working capital requirement of PC Ltd.
Level 1
Remembering
12
From the following data prepare a statement showingrequirement
for
(a) Estimated output for the year 130000 units ( 52weeks)
(b) Stocks of R.M ? 2 weeks &materials in process for 2weeks,
50% of wages & OH are incurred
(c) Finished goods remains in storage for 2week
(d) Creditors 2 weeks
(e) Debtors 4 weeks
(f) Outstanding wages and overheads 2 weekseach
(g) Selling price / units RS 15
(h) Analysis of cost per unit is as below.
Raw Material 5 UNIT
Labour 3 UNIT
Level 2 Understanding
Overheads 2 UNIT
Profit 5 UNIT
Find out the working capital requirement?
13
i)What are the methods of preparing short term cash forecast?
(7)
Level 4 Analysing
ii) Whatare the uses of long term cash forecasting?
(6)
14
i)What criteria are followed to select marketable securities for
investing cash surplus?
(6)
Level 1 Remembering
ii) What are the short term investments in India for investing short
term cash?
(7)
PART - C
S.NO QUESTIONS
1 Illustrate the methodology to raise working capital finance.
2
From the following information of VSGR Company Ltd., estimate working capital needed to
finance a level of activity of 1,10,000 units of production after adding a 10 per cent safety
contingency.
Raw materials Rs.78
Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
Total cost Rs.165
Profit Rs.24
Selling price Rs.189
Additional information:
(i) Average raw materials in stock : onemonth
(ii) Average materials?inprocess (50% completionstage):1/2month
(iii) Average finished goods in stock: one month
(iv)Credit allowed by suppliers: onemonth
(v) Credit allowed to customers : Twomonths
(vi) Time lag in payment of wages : one and halfweeks
(vii) Overhead expenses : onemonth
One fourth of the sales are on cash basis. Cash balance is expected to be Rs. 2, 15,000. You
may assume that production is carried on evenly throughout the year and wages and overhead
expenses accrue similarly.
3
Calculate the working capital allow 10% contingencies
Cost per unit
Raw Material Cost Rs.100
Labour cost Rs20
Overheads Rs.20
Total Cost Rs.140
Profit Rs.60
Selling price Rs.200
Additionalinformation:
No. of units sold =25000 units
Average Raw material stock 2months
Average work in process 1 month
Finished goods 2month
One fourth of the sales is based on cash.
Debtors 1 month
Lag in wages 1/2 month
Lag in payment to Creditors 1 month
Lag in payment in overhead expenses 1/2 month
Cash balance ?Rs.1, 00,000
4
?Maintaining optimum working capital is required?- Justify. Discuss the consequences
of inadequate or excess working capital.
UNIT ? V ?LONG TERM SOURCES OF FINANCE
SYLLABUS:Indian capital and stock market, New issues market Long term finance: Shares, debentures
and term loans, lease, Types of Lease, hire purchase, venture capital financing, Private Equity.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define the term debenture.
Level 1 Remembering
2
How would you Compare debenture and preference share
capital?
Level 2 Understanding
3
What are the benefits of project financing?
Level 3 Applying
4
Can you list any four intermediaries ?associates with a company?
issue of capital.
Level 4 Analysing
5
How will you estimate risk in venture capital firms?
Level 5 Evaluating
6
Can you assess preferential issues of securities?
Level 6 Creating
7
Who is a lame duck?
Level 1 Remembering
8
Compare Hire Purchase and lease.
Level 2 Understanding
9
How do you examine the intermediaries associated with a
company?s issue of capital?
Level 3 Applying
10
What inference can you make from pre ? emptive right of equity
shares?
Level 4 Analysing
11 What facts can you compile for the lease financing? Level 5 Evaluating
12
How would you interpret ?Restrictive covenants?? State two
features of it.
Level 6 Creating
13
Define the internal financing of a firm.
Level 1 Remembering
14
What can you say about Venture Capital?
Level 2 Understanding
15
What approach would you use to classify ?BOOT? in project
financing? Quote a practical example.
Level 3 Applying
16
Can you make a distinction between term loans and bought out
deal.
Level 4 Analysing
17
Define Hire purchase.
Level 1 Remembering
18
What is book building and listing?
Level 2 Understanding
19
What is private equity?
Level 1 Remembering
20
What is the role of Indian capital market?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)List the features of various long term sources of finance.
(8)
Level 1 Remembering
ii)Recall the importance of long term sources offinance. (5)
2
Can you explain lease financing? How does it differ from a hire
purchase? What are the cash flows consequences of a lease?
Illustrate.
Level 2 Understanding
FirstRanker.com - FirstRanker's Choice
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
Finance, organization of financial functions, objectives of Financial management, Major financial
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of a
portfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
mature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
and covariance between the returns on the market portfolio and
that of security A is 800. What is the expected return?
Level 4 Analysing
11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
Level 1 Remembering
18
What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a coupon
rate of 14 percent and maturing after 5 years in Rs.1050. What is
the Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
Discuss the features of shares and bonds?
Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
Security market line?. How does it differ from capital market line?
(13)
Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend per
share is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
Rs.1, 000. The coupon interest rate on the bond is 10%. How
would you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
and the annual growth rate is 5%. Assume a required rate of return
of 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
dividend is expected to grow at a 15% annual rate for the three
years, then at 10%rate of the next three years, after which it is
expected to grow at a 5%rateforever.
(i) What is the present value of the share if the
capitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securities
based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow
at a 15% annual rate for three years then at 10% for next three years, after it is expected to
grow at a 5% rate forever. (a) What is the present value of the share if the
capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value?
4 Critically examine how the finance function is typically organized in a Large Organisation.
UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
relevant cash flows - Evaluation Techniques: Payback, Discounted Payback, Accounting rate of return,
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniques
Concept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
method.
Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
share next year and is expected to grow at 6% per year perpetually.
Determine the cost of equity capital, assuming the
market price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
ii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
require an initial cash outlay of Rs.10, 000 each and have a life of
5 years. The company?s required rate of return 10% and pays tax
at 50%. The project will be depreciated on a straight line basis.
The before tax cash flows expected to be generatedby the project
are as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
Machine X has a cost of Rs.75, 000 and net cash flow of
Rs.20000 per year, for six years. A substitute machine Y
would cost Rs.50, 000 and generate net cash flow of
Rs.14000 per year for six years. The required rate of return of
both machines is 11%. Calculate the IRR and NPV for the
machines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
Rs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
Rs.10 each the current market price of shares is Rs.24. During
the current year, the company has declared a dividend of Rs.6per
(7)
shares. The company has also previously issued 14% preference
shares of Rs.100 each aggregating Rs.3,00,000 at 5% discount
and 13% debentures of Rs.100 each for Rs.5,00,000. The
corporate tax rate is 40% the growth rate in dividends on equity
shares is expected at 5%. Show the overall cost of capital of the
company.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
also outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
per share next year and is expected to grow at 6.5% per year
perpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
ii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
Equity share Capital : Rs. 6,00,000
10%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
It has been paying dividends at a constant rate of 20% p.a. What
difference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
2 Justify ? ?Superior ranking criterion is profitability index or NPV?.
3 ?Debt is the cheapest source of funds?- Comment.
4
A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return
on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment
proposal costing Rs.40000with an expected return that will last forever. What amount must the
proposal yield per year so that the market price does not change?
UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net Income
Approach, Net Operating Income Approach, MM Approach - Determinants of Capital structure.
Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s model
and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
par. The tax rate is 50%. Find before tax and after tax cost of debt.
2
i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
Fixed cost per unit at current level of sales is Rs.15. What will be
the new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
Sales 50,000 units at Rs.12 per unit. Variable
cost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
b) The market price of the share at this payout
c) The market price of the share if pay-out is40%.
The market price of the share if pay-out is 80%
12
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 @
9% and equity of Rs.55,00,000
i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
iv) If the sale drops to Rs.50, 00,000, what will be the new
EBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
plans 1 and 2 respectively, from the following information
pertaining to the operation and capital structure of ABC Co.
Total assets Rs.30000
Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
Volume of Output and Sales 80000 units 100000 units
Variable Cost per Unit Rs.4 Rs.3
Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
You are required to calculate the overall cost of capital, from the following capital structure of a
company.
1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,000
10,000 Equity shares of Rs.10 each issued at par Rs.1,00,000
5,000 10% debentures of Rs.100 each issued at par Rs.5,00,000
12% term loan Rs.2,00,000
Retained Earnings Rs.1,50,000
The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share and
the dividend per share is expected to grow at 10%. The preference shares are redeemable after
7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable at
par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the company
is 40%.
3
Assume there are two firms, L and U, which are identical in all respects except that firm L has
10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of both
the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (k
e
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
(i) Explain the assumptions and implications of Net Income approach (5marks)
(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. The
company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (k
e
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
(iii) Let us suppose that the firm has decided to raise the amount of debenture by Rs.
1,00,000 and use the proceeds to retire the equity shares. The k
i
and k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
working capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
How would you explain receivable control techniques?
Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
ii) Discuss the various opportunities available to thecompanies to
park their surplus funds for a short term.
(7)
5
What is the role of Credit terms and Credit standards in the credit
policy of a firm?
Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
Level 6 Creating
7
i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
(5)
8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
Level 2 Understanding
9
i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
Iii) What facts would you select to show the cash management
models proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
10
i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
ii) How would you explain factoring types?
(5)
11
PC ltd sells its product on a gross profit of 20% on sales. The
following information is extracted from its annual accounts for the
year ended 31.12.2011.
? Sales @ 3 months credit 40,00,000
? Raw material 12,00,000
? Wages paid ? avg time lag 15 days96,0000
? Manufacturing expenses paid ? 1 montharrear
12,00,000
? Admin expenses paid in 1 month arrear48,0000
? Sales promotion expenses payable half yearly in
advance 2,00,000
The company enjoys 1 month credit from the suppliers of raw
material and maintains 2 months stocks of a Raw materials &
1.5 month stock of a finished goods.
The cash balance is maintained as Rs 10, 0000 as a
precautionary measure assuming a 10% margin. Find out the
working capital requirement of PC Ltd.
Level 1
Remembering
12
From the following data prepare a statement showingrequirement
for
(a) Estimated output for the year 130000 units ( 52weeks)
(b) Stocks of R.M ? 2 weeks &materials in process for 2weeks,
50% of wages & OH are incurred
(c) Finished goods remains in storage for 2week
(d) Creditors 2 weeks
(e) Debtors 4 weeks
(f) Outstanding wages and overheads 2 weekseach
(g) Selling price / units RS 15
(h) Analysis of cost per unit is as below.
Raw Material 5 UNIT
Labour 3 UNIT
Level 2 Understanding
Overheads 2 UNIT
Profit 5 UNIT
Find out the working capital requirement?
13
i)What are the methods of preparing short term cash forecast?
(7)
Level 4 Analysing
ii) Whatare the uses of long term cash forecasting?
(6)
14
i)What criteria are followed to select marketable securities for
investing cash surplus?
(6)
Level 1 Remembering
ii) What are the short term investments in India for investing short
term cash?
(7)
PART - C
S.NO QUESTIONS
1 Illustrate the methodology to raise working capital finance.
2
From the following information of VSGR Company Ltd., estimate working capital needed to
finance a level of activity of 1,10,000 units of production after adding a 10 per cent safety
contingency.
Raw materials Rs.78
Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
Total cost Rs.165
Profit Rs.24
Selling price Rs.189
Additional information:
(i) Average raw materials in stock : onemonth
(ii) Average materials?inprocess (50% completionstage):1/2month
(iii) Average finished goods in stock: one month
(iv)Credit allowed by suppliers: onemonth
(v) Credit allowed to customers : Twomonths
(vi) Time lag in payment of wages : one and halfweeks
(vii) Overhead expenses : onemonth
One fourth of the sales are on cash basis. Cash balance is expected to be Rs. 2, 15,000. You
may assume that production is carried on evenly throughout the year and wages and overhead
expenses accrue similarly.
3
Calculate the working capital allow 10% contingencies
Cost per unit
Raw Material Cost Rs.100
Labour cost Rs20
Overheads Rs.20
Total Cost Rs.140
Profit Rs.60
Selling price Rs.200
Additionalinformation:
No. of units sold =25000 units
Average Raw material stock 2months
Average work in process 1 month
Finished goods 2month
One fourth of the sales is based on cash.
Debtors 1 month
Lag in wages 1/2 month
Lag in payment to Creditors 1 month
Lag in payment in overhead expenses 1/2 month
Cash balance ?Rs.1, 00,000
4
?Maintaining optimum working capital is required?- Justify. Discuss the consequences
of inadequate or excess working capital.
UNIT ? V ?LONG TERM SOURCES OF FINANCE
SYLLABUS:Indian capital and stock market, New issues market Long term finance: Shares, debentures
and term loans, lease, Types of Lease, hire purchase, venture capital financing, Private Equity.
PART- A
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
Define the term debenture.
Level 1 Remembering
2
How would you Compare debenture and preference share
capital?
Level 2 Understanding
3
What are the benefits of project financing?
Level 3 Applying
4
Can you list any four intermediaries ?associates with a company?
issue of capital.
Level 4 Analysing
5
How will you estimate risk in venture capital firms?
Level 5 Evaluating
6
Can you assess preferential issues of securities?
Level 6 Creating
7
Who is a lame duck?
Level 1 Remembering
8
Compare Hire Purchase and lease.
Level 2 Understanding
9
How do you examine the intermediaries associated with a
company?s issue of capital?
Level 3 Applying
10
What inference can you make from pre ? emptive right of equity
shares?
Level 4 Analysing
11 What facts can you compile for the lease financing? Level 5 Evaluating
12
How would you interpret ?Restrictive covenants?? State two
features of it.
Level 6 Creating
13
Define the internal financing of a firm.
Level 1 Remembering
14
What can you say about Venture Capital?
Level 2 Understanding
15
What approach would you use to classify ?BOOT? in project
financing? Quote a practical example.
Level 3 Applying
16
Can you make a distinction between term loans and bought out
deal.
Level 4 Analysing
17
Define Hire purchase.
Level 1 Remembering
18
What is book building and listing?
Level 2 Understanding
19
What is private equity?
Level 1 Remembering
20
What is the role of Indian capital market?
Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
LEVEL
COMPETENCE
1
i)List the features of various long term sources of finance.
(8)
Level 1 Remembering
ii)Recall the importance of long term sources offinance. (5)
2
Can you explain lease financing? How does it differ from a hire
purchase? What are the cash flows consequences of a lease?
Illustrate.
Level 2 Understanding
3
Write a detailed note on Indian Stock Market.
Level 3 Applying
4
Discuss the various procedure involved in obtaining a term loan.
Level 4 Analysing
5
Can you elucidate about the Venture Capital financing and explain
its features & steps in detail.
Level 5 Evaluating
6
i)What facts can you compile to discuss the rights and position
ofequityshareholders?
(5)
Level 6 Creating
ii) Elaborately discuss the different classification of sharestraded
instockexchanges.
(8)
7
Discuss briefly the regulations given by SEBI to Venture Capital
Finance?
Level 1 Remembering
8
i)Can you explain debenture and attractive features of a debenture?
(9)
Level 2 Understanding
ii)How would you summarize the advantages and disadvantages
ofdebtfinancing?
(4)
9
i) Discuss in detail the process of selecting investment by venture
capitalists.
(7)
Level 3 Applying
iiii)Differentiate between Hire Purchase and leasing.
(6)
10
List the features of equity shares, preference shares and
Debentures as a source of long term finance. And define primary &
secondary Capital market.
Level 4 Analysing
11
i)How would you explain in detail about New issues market? (8)
Level 1 Remembering
ii)List the difference of primary & secondarymarket. (5)
12
i)Can you differentiate between term loan and working capital
loan.
(8)
Level 2 Understanding
ii)Explain the criteria in evaluating term loan proposalsand
working capital proposals.
(5)
13
i)Distinguish Shares, Debentures and Venture capitalfinance. (8)
Level 4 Analysing
ii)How would you classify the various instruments through which
venture capital investments is made.
(5)
14
Explain the types of leasing and discuss the advantages of lease
financing.
Level 1 Remembering
PART - C
S.NO QUESTIONS
1
Explore the current trends in Indian Capital market with specific reference to the secondary
market.
2
? Discuss.
3
Describe the SEBI regulations in IPO processing.
4
Do you agree that there is a significant growth in FDI equity inflows after the launch of ?Make In
India?? Critically examine the fact.
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This post was last modified on 29 February 2020