QUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENTRegulation ? 2019
Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
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Ms.A.UmaDevi ? Asst. Professor(OG)FirstRanker.com - FirstRanker's Choice
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(An
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DEPARTMENT OF MANAGEMENT STUDIES
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QUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENTRegulation ? 2019
Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
--- Content provided by FirstRanker.com ---
Ms.A.UmaDevi ? Asst. Professor(OG)--- Content provided by FirstRanker.com ---
(An? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
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SEM / YEAR : II SEMESTER / I YEARUNIT ? 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
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decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of aportfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
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Define Financial Management.Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
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3Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
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mature after 5 years. Compute the value of bond, if the discountrate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
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Level 5 Evaluating6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
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7Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
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view.Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
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Level 3 Applying10
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?
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Level 4 Analysing11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
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12Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
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Level 1 Remembering14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
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How is bond different from equity?Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
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17What is Risk Premium?
Level 1 Remembering
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DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
--- Content provided by FirstRanker.com ---
Dr.L.Sujatha ? Asst. Professor(Sel.G)Ms.A.UmaDevi ? Asst. Professor(OG)
--- Content provided by FirstRanker.com ---
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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SUBJECT : 1915203 ? FINANCIAL MANAGEMENTSEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
--- Content provided by FirstRanker.com ---
Finance, organization of financial functions, objectives of Financial management, Major financialdecisions ? 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
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1Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
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Level 2 Understanding3
Identify the two aspects of financial management.
Level 3 Applying
4
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A Rs.10, 000 per value bond bearing a coupon rate of 12% willmature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
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Discuss the objectives and goals of financial management.Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
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Level 6 Creating7
Explain Financing decision.
Level 1 Remembering
8
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Compare modern view of financial management with its traditionalview.
Level 2 Understanding
9
How is the term finance more comprehensive than money
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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
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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
?
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Level 5 Evaluating12
Interpret modern view on financial management.
Level 6 Creating
13
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Define Risk analytics.Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
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15How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
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Level 4 Analysing17
What is Risk Premium?
Level 1 Remembering
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18
What is the main idea of Financial Risk?
Level 2 Understanding
19
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Define yield to call.Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
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PART- B
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
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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
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YTM?(6)
2
Discuss the features of shares and bonds?
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Level 2 Understanding3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
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Level 3 Applyingii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
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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
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shares?(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
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(6)6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
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Level 6 Creating7
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
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share is Rs.4. If its capitalization rate is 12 per cent, what is thedividend growth rate?
(6)
8
What is return? Write the various types of total return.
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Whether unrealised capital gain or loss is included in thecalculations of returns?
Level 2 Understanding
9
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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?
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(6)10
i) What inference can you make from the three major decisions in
financial management?
(7)
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Level 4 Analysingii) What ideas justify the scope of financial management in any
organization?
(6)
11
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A bond has 3 years remaining until maturity. It has a par value ofRs.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?
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Level 1Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
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(7)Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
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FirstRanker.com - FirstRanker's Choice(An
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DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
--- Content provided by FirstRanker.com ---
Dr.L.Sujatha ? Asst. Professor(Sel.G)Ms.A.UmaDevi ? Asst. Professor(OG)
--- Content provided by FirstRanker.com ---
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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SUBJECT : 1915203 ? FINANCIAL MANAGEMENTSEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
--- Content provided by FirstRanker.com ---
Finance, organization of financial functions, objectives of Financial management, Major financialdecisions ? 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
--- Content provided by FirstRanker.com ---
1Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
--- Content provided by FirstRanker.com ---
Level 2 Understanding3
Identify the two aspects of financial management.
Level 3 Applying
4
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A Rs.10, 000 per value bond bearing a coupon rate of 12% willmature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
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Discuss the objectives and goals of financial management.Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
--- Content provided by FirstRanker.com ---
Level 6 Creating7
Explain Financing decision.
Level 1 Remembering
8
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Compare modern view of financial management with its traditionalview.
Level 2 Understanding
9
How is the term finance more comprehensive than money
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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
--- Content provided by FirstRanker.com ---
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
?
--- Content provided by FirstRanker.com ---
Level 5 Evaluating12
Interpret modern view on financial management.
Level 6 Creating
13
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Define Risk analytics.Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
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15How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
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Level 4 Analysing17
What is Risk Premium?
Level 1 Remembering
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18
What is the main idea of Financial Risk?
Level 2 Understanding
19
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Define yield to call.Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
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PART- B
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
--- Content provided by FirstRanker.com ---
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
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YTM?(6)
2
Discuss the features of shares and bonds?
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Level 2 Understanding3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
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Level 3 Applyingii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
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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
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shares?(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
--- Content provided by FirstRanker.com ---
(6)6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
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Level 6 Creating7
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
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share is Rs.4. If its capitalization rate is 12 per cent, what is thedividend growth rate?
(6)
8
What is return? Write the various types of total return.
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Whether unrealised capital gain or loss is included in thecalculations of returns?
Level 2 Understanding
9
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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?
--- Content provided by FirstRanker.com ---
(6)10
i) What inference can you make from the three major decisions in
financial management?
(7)
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Level 4 Analysingii) What ideas justify the scope of financial management in any
organization?
(6)
11
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A bond has 3 years remaining until maturity. It has a par value ofRs.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?
--- Content provided by FirstRanker.com ---
Level 1Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
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(7)Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
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13Analyse 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%?
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Level 4 Analysing14
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
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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?
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Year 1 2 3 4 5 6PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
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Level 1 Remembering
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PART - CS.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
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Probability Return X Return Y0.5 4 0
0.4 2 3
0.1 0 3
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The investor has decided to invest 1/3rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
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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
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Security Y -20 10 20 10 20Security 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
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at a 15% annual rate for three years then at 10% for next three years, after it is expected togrow 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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FirstRanker.com - FirstRanker's Choice
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?DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
--- Content provided by FirstRanker.com ---
Regulation ? 2019Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
--- Content provided by FirstRanker.com ---
(An
? .
--- Content provided by FirstRanker.com ---
DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
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UNIT ? I ?FOUNDATIONS OF FINANCESYLLABUS: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.
--- Content provided by FirstRanker.com ---
PART- AS.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
--- Content provided by FirstRanker.com ---
2Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
--- Content provided by FirstRanker.com ---
Level 3 Applying4
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%?
--- Content provided by FirstRanker.com ---
Level 4 Analysing5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
--- Content provided by FirstRanker.com ---
Interpret any four functions of finance manager in anorganisation.
Level 6 Creating
7
Explain Financing decision.
--- Content provided by FirstRanker.com ---
Level 1 Remembering8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
--- Content provided by FirstRanker.com ---
9How is the term finance more comprehensive than money
management?
Level 3 Applying
10
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
How would you have a fresh look at the finance function in?
Level 5 Evaluating
12
Interpret modern view on financial management.
--- Content provided by FirstRanker.com ---
Level 6 Creating13
Define Risk analytics.
Level 1 Remembering
14
--- Content provided by FirstRanker.com ---
Can you explain Rule 72 and Rule 69?Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
--- Content provided by FirstRanker.com ---
16What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
--- Content provided by FirstRanker.com ---
Level 1 Remembering18
What is the main idea of Financial Risk?
--- Content provided by FirstRanker.com ---
Level 2 Understanding19
Define yield to call.
Level 1 Remembering
20
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What is effective rate of interest?Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i) State and explain the functions of finance. Why is wealthmaximization 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
--- Content provided by FirstRanker.com ---
rate of 14 percent and maturing after 5 years in Rs.1050. What isthe Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
--- Content provided by FirstRanker.com ---
Discuss the features of shares and bonds?Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
--- Content provided by FirstRanker.com ---
assets and of a portfolio?(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
--- Content provided by FirstRanker.com ---
4Can 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
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5i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
--- Content provided by FirstRanker.com ---
ii) Can you assess the concept and significance of risk and return ofa portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
--- Content provided by FirstRanker.com ---
operationally useful criterion? ? ExplainLevel 6 Creating
7
i) Define the concept of risk return trade off with diagram.
--- Content provided by FirstRanker.com ---
(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)
--- Content provided by FirstRanker.com ---
8What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
--- Content provided by FirstRanker.com ---
Level 2 Understanding9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
--- Content provided by FirstRanker.com ---
ii) Can you explain the features & scope of the modern approachesto financial management?
(6)
10
i) What inference can you make from the three major decisions in
--- Content provided by FirstRanker.com ---
financial management?(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
--- Content provided by FirstRanker.com ---
(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
--- Content provided by FirstRanker.com ---
Rs.1, 100 assuming interest is paid annually?Level 1
Remembering
12
--- Content provided by FirstRanker.com ---
i) How would you explain the various concepts of value? Statethe formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
of 10%. What will be the value of the share if the annual growth is8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
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dividend is expected to grow at a 15% annual rate for the threeyears, 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%?
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(ii) If the share is held for 3 years, what shall be itspresent value?
Year 1 2 3 4 5 6
PVF
@
--- Content provided by FirstRanker.com ---
9%0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
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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
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0.1 0 3The investor has decided to invest 1/3
rd
of investment in X and 2/3
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rdin 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
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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
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3A 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?
--- Content provided by FirstRanker.com ---
4 Critically examine how the finance function is typically organized in a Large Organisation.--- Content provided by FirstRanker.com ---
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UNIT ? II ? INVESTMENT DECISIONSSYLLABUS: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.
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PART- AS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
--- Content provided by FirstRanker.com ---
Level 2 Understanding3
Identify any two important advantages of payback period
method.
Level 3 Applying
--- Content provided by FirstRanker.com ---
4What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
--- Content provided by FirstRanker.com ---
Level 5 Evaluating6
Interpret the significance of capital budgeting.
Level 6 Creating
7
--- Content provided by FirstRanker.com ---
How would you measure the time value of money in capital budgeting?Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
--- Content provided by FirstRanker.com ---
9What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
--- Content provided by FirstRanker.com ---
Level 4 Analysing11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
--- Content provided by FirstRanker.com ---
Interpret the adjusted NPV with NPV.Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
--- Content provided by FirstRanker.com ---
14Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
--- Content provided by FirstRanker.com ---
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.
--- Content provided by FirstRanker.com ---
Determine the cost of equity capital, assuming themarket price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
--- Content provided by FirstRanker.com ---
Level 4 Analysing17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
--- Content provided by FirstRanker.com ---
Compare NPV & IRR.Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
--- Content provided by FirstRanker.com ---
20Define cost of retained earnings.
Level 1 Remembering
FirstRanker.com - FirstRanker's Choice
--- Content provided by FirstRanker.com ---
(An?
DEPARTMENT OF MANAGEMENT STUDIES
--- Content provided by FirstRanker.com ---
QUESTION BANKII SEMESTER
1915203 ? FINANCIAL MANAGEMENT
--- Content provided by FirstRanker.com ---
Regulation ? 2019
Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
--- Content provided by FirstRanker.com ---
(An
--- Content provided by FirstRanker.com ---
? .DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
portfolio ? Risk Analytics.PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
--- Content provided by FirstRanker.com ---
Level 1 Remembering2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
rate is 15%?Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
--- Content provided by FirstRanker.com ---
6Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
--- Content provided by FirstRanker.com ---
Explain Financing decision.Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
--- Content provided by FirstRanker.com ---
Level 2 Understanding9
How is the term finance more comprehensive than money
management?
Level 3 Applying
--- Content provided by FirstRanker.com ---
10Return 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
--- Content provided by FirstRanker.com ---
11How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
--- Content provided by FirstRanker.com ---
Interpret modern view on financial management.Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
--- Content provided by FirstRanker.com ---
14Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
--- Content provided by FirstRanker.com ---
Level 3 Applying16
What inference can you make from real and financial assets?
Level 4 Analysing
17
--- Content provided by FirstRanker.com ---
What is Risk Premium?Level 1 Remembering
18
--- Content provided by FirstRanker.com ---
What is the main idea of Financial Risk?Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
--- Content provided by FirstRanker.com ---
20What is effective rate of interest?
Level 1 Remembering
--- Content provided by FirstRanker.com ---
PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
--- Content provided by FirstRanker.com ---
1i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
--- Content provided by FirstRanker.com ---
Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a couponrate 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)
--- Content provided by FirstRanker.com ---
2Discuss the features of shares and bonds?
Level 2 Understanding
3
--- Content provided by FirstRanker.com ---
i) What is risk? Discuss the methods of Calculating risk for singleassets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
--- Content provided by FirstRanker.com ---
(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)
--- Content provided by FirstRanker.com ---
Level 4 Analysing5
i) How would you evaluate the general principles of valuation of
shares?
(7)
--- Content provided by FirstRanker.com ---
Level 5 Evaluatingii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
--- Content provided by FirstRanker.com ---
Evaluate ?The goal of profit maximization does not provide anoperationally useful criterion? ? Explain
Level 6 Creating
7
--- Content provided by FirstRanker.com ---
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?
--- Content provided by FirstRanker.com ---
(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?
--- Content provided by FirstRanker.com ---
Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
--- Content provided by FirstRanker.com ---
Level 3 Applyingii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
--- Content provided by FirstRanker.com ---
i) What inference can you make from the three major decisions infinancial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
would you compute the yield to maturity at current market price ofRs.1, 100 assuming interest is paid annually?
Level 1
Remembering
--- Content provided by FirstRanker.com ---
12i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
--- Content provided by FirstRanker.com ---
ii) Can you explain the relationship between coupon rate, requiredyield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
--- Content provided by FirstRanker.com ---
and the annual growth rate is 5%. Assume a required rate of returnof 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
--- Content provided by FirstRanker.com ---
ABC company currently paying a dividend of Rs.2 per share. Thedividend 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
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
@9%
0.917 0.842 0.772 0.708 0.650 0.596
--- Content provided by FirstRanker.com ---
Level 1 RememberingPART - C
S.NO QUESTIONS
--- Content provided by FirstRanker.com ---
1Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
--- Content provided by FirstRanker.com ---
0.4 2 30.1 0 3
The investor has decided to invest 1/3
rd
--- Content provided by FirstRanker.com ---
of investment in X and 2/3rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
--- Content provided by FirstRanker.com ---
There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securitiesbased 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
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
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.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
Concept and measurement of cost of capital - Specific cost and overall cost of capital.PART- A
S.NO QUESTIONS
BT
LEVEL
--- Content provided by FirstRanker.com ---
COMPETENCE1
Define ?pay back period? method.
Level 1 Remembering
2
--- Content provided by FirstRanker.com ---
Compare operating risk and financial risk?Level 2 Understanding
3
Identify any two important advantages of payback period
method.
--- Content provided by FirstRanker.com ---
Level 3 Applying4
What are the needs of capital Budgeting?
Level 4 Analysing
5
--- Content provided by FirstRanker.com ---
Discuss the significance of IRR.Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
--- Content provided by FirstRanker.com ---
7How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
--- Content provided by FirstRanker.com ---
Level 2 Understanding9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
--- Content provided by FirstRanker.com ---
What are the merits of NPV method?Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
--- Content provided by FirstRanker.com ---
12Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
--- Content provided by FirstRanker.com ---
Level 1 Remembering14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
--- Content provided by FirstRanker.com ---
CFAT 100000 20000 30000 40000 50000 60000Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
18Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
--- Content provided by FirstRanker.com ---
Level 1 Remembering20
Define cost of retained earnings.
Level 1 Remembering
PART- B
--- Content provided by FirstRanker.com ---
S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
--- Content provided by FirstRanker.com ---
i)Analyze the different techniques of Capital budgeting withpractical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
--- Content provided by FirstRanker.com ---
of their selection?(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
--- Content provided by FirstRanker.com ---
ii)Capital expenditure decisions are by far the most importantdecisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
5 years. The company?s required rate of return 10% and pays taxat 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
--- Content provided by FirstRanker.com ---
Year 1 2 3 4 5Project
A
4,000 4,000 4000 4000 4000
Project
--- Content provided by FirstRanker.com ---
B5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
--- Content provided by FirstRanker.com ---
4i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
Rs.14000 per year for six years. The required rate of return ofboth 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%
--- Content provided by FirstRanker.com ---
PVF6
th
year
(4.231)
--- Content provided by FirstRanker.com ---
4.111 3.998 3.889 3.784 3.685 3.589 3.498(7)
Level 5 Evaluating
(6)
--- Content provided by FirstRanker.com ---
6i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
--- Content provided by FirstRanker.com ---
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)
--- Content provided by FirstRanker.com ---
Level 1 Rememberingii)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)
--- Content provided by FirstRanker.com ---
8i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
--- Content provided by FirstRanker.com ---
ii)GURU Ltd has paid up equity capital 60000 equity shares ofRs.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)
FirstRanker.com - FirstRanker's Choice
--- Content provided by FirstRanker.com ---
(An
?
DEPARTMENT OF MANAGEMENT STUDIES
--- Content provided by FirstRanker.com ---
QUESTION BANK
II SEMESTER
--- Content provided by FirstRanker.com ---
1915203 ? FINANCIAL MANAGEMENTRegulation ? 2019
Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
--- Content provided by FirstRanker.com ---
Ms.A.UmaDevi ? Asst. Professor(OG)--- Content provided by FirstRanker.com ---
(An? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
--- Content provided by FirstRanker.com ---
SEM / YEAR : II SEMESTER / I YEARUNIT ? 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
--- Content provided by FirstRanker.com ---
decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of aportfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
--- Content provided by FirstRanker.com ---
Define Financial Management.Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
--- Content provided by FirstRanker.com ---
3Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
--- Content provided by FirstRanker.com ---
mature after 5 years. Compute the value of bond, if the discountrate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
--- Content provided by FirstRanker.com ---
Level 5 Evaluating6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
--- Content provided by FirstRanker.com ---
7Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
--- Content provided by FirstRanker.com ---
view.Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
--- Content provided by FirstRanker.com ---
Level 3 Applying10
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?
--- Content provided by FirstRanker.com ---
Level 4 Analysing11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
--- Content provided by FirstRanker.com ---
12Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
--- Content provided by FirstRanker.com ---
Level 1 Remembering14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
--- Content provided by FirstRanker.com ---
How is bond different from equity?Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
--- Content provided by FirstRanker.com ---
17What is Risk Premium?
Level 1 Remembering
--- Content provided by FirstRanker.com ---
18What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
--- Content provided by FirstRanker.com ---
Level 1 Remembering20
What is effective rate of interest?
Level 1 Remembering
--- Content provided by FirstRanker.com ---
PART- B
S.NO QUESTIONS
BT
LEVEL
--- Content provided by FirstRanker.com ---
COMPETENCE1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
--- Content provided by FirstRanker.com ---
(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?
--- Content provided by FirstRanker.com ---
(6)2
Discuss the features of shares and bonds?
Level 2 Understanding
--- Content provided by FirstRanker.com ---
3i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
--- Content provided by FirstRanker.com ---
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?
--- Content provided by FirstRanker.com ---
(13)Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
--- Content provided by FirstRanker.com ---
(7)Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
--- Content provided by FirstRanker.com ---
6Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
--- Content provided by FirstRanker.com ---
7i) 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
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
calculations of returns?Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
--- Content provided by FirstRanker.com ---
(7)Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
--- Content provided by FirstRanker.com ---
10i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
--- Content provided by FirstRanker.com ---
ii) What ideas justify the scope of financial management in anyorganization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
--- Content provided by FirstRanker.com ---
Rs.1, 000. The coupon interest rate on the bond is 10%. Howwould you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
--- Content provided by FirstRanker.com ---
Remembering12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
--- Content provided by FirstRanker.com ---
Level 2 Understandingii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
--- Content provided by FirstRanker.com ---
Analyse the value of a share for which the current dividend is Rs.3and 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
--- Content provided by FirstRanker.com ---
14ABC 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.
--- Content provided by FirstRanker.com ---
(i) What is the present value of the share if thecapitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
--- Content provided by FirstRanker.com ---
PVF@
9%
0.917 0.842 0.772 0.708 0.650 0.596
--- Content provided by FirstRanker.com ---
Level 1 Remembering
PART - C
--- Content provided by FirstRanker.com ---
S.NO QUESTIONS1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
--- Content provided by FirstRanker.com ---
0.5 4 00.4 2 3
0.1 0 3
The investor has decided to invest 1/3
--- Content provided by FirstRanker.com ---
rdof investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
--- Content provided by FirstRanker.com ---
2There 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
--- Content provided by FirstRanker.com ---
Security z -20 -10 -5 10 303
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
--- Content provided by FirstRanker.com ---
grow at a 5% rate forever. (a) What is the present value of the share if thecapitalization 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.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
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,
--- Content provided by FirstRanker.com ---
Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniquesConcept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
--- Content provided by FirstRanker.com ---
LEVELCOMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
--- Content provided by FirstRanker.com ---
2Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
--- Content provided by FirstRanker.com ---
method.Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
--- Content provided by FirstRanker.com ---
5Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
--- Content provided by FirstRanker.com ---
Level 6 Creating7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
--- Content provided by FirstRanker.com ---
Explain the concept IRR.Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
--- Content provided by FirstRanker.com ---
10What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
--- Content provided by FirstRanker.com ---
Level 5 Evaluating12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
--- Content provided by FirstRanker.com ---
How would you explain the meaning of Capital Rationing?Level 1 Remembering
14
Determine the payback period from the following cash flows
--- Content provided by FirstRanker.com ---
Year 0 1 2 3 4 5CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
--- Content provided by FirstRanker.com ---
Suppose the dividend per share of firm is expected to beRe.1 pershare 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
--- Content provided by FirstRanker.com ---
16Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
--- Content provided by FirstRanker.com ---
Level 1 Remembering18
Compare NPV & IRR.
Level 2 Understanding
19
--- Content provided by FirstRanker.com ---
What are the features of ARR method?Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
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ii) How would you rank capital budgeting proposals for the purposeof their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
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Level 2 Understandingii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
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i) How is accounting rate of return calculated? Explain its meritsand demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
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require an initial cash outlay of Rs.10, 000 each and have a life of5 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.
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Before tax cash flowsYear 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
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ProjectB
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
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(6)4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
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Level 4 Analysingii)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
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would cost Rs.50, 000 and generate net cash flow ofRs.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?
--- Content provided by FirstRanker.com ---
11% 12% 13% 14% 15% 16% 17% 18%PVF
6
th
year
--- Content provided by FirstRanker.com ---
(4.231)4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
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(6)6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
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Level 6 Creatingii)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.
--- Content provided by FirstRanker.com ---
(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.
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(6)8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
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Level 2 Understandingii)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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shares. The company has also previously issued 14% preferenceshares 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
--- Content provided by FirstRanker.com ---
company.9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
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ii)How would you show your understanding of the concept capitalrationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
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also outline the conditions that should be satisfied for using a firm?soverall cost of capital for evaluating new investments.
Level 4 Analysing
11
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i)What is Modigliani-Miller approach to the problem of cost ofcapital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
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Rememberingii) 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.
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(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
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of capital of the firm?(6)
13
How would you explain about Specific cost and overall cost of
capital?
--- Content provided by FirstRanker.com ---
Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
--- Content provided by FirstRanker.com ---
Equity share Capital : Rs. 6,00,00010%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
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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
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PART - C
S.NO QUESTIONS
1
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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
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A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of returnon 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?
--- Content provided by FirstRanker.com ---
FirstRanker.com - FirstRanker's Choice
(An
?
--- Content provided by FirstRanker.com ---
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
--- Content provided by FirstRanker.com ---
II SEMESTER1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
--- Content provided by FirstRanker.com ---
Academic Year 2019 - 2020--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared byDr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
--- Content provided by FirstRanker.com ---
(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
--- Content provided by FirstRanker.com ---
QUESTION BANKSUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
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SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions ofFinance, 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
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S.NO QUESTIONS BT LEVEL COMPETENCE1
Define Financial Management.
Level 1 Remembering
2
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Differentiate Systematic Risk and Unsystematic Risk.Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
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4A 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
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5Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
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organisation.Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
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8Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
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How is the term finance more comprehensive than moneymanagement?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
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and covariance between the returns on the market portfolio andthat 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
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?Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
--- Content provided by FirstRanker.com ---
13Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
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Level 2 Understanding15
How is bond different from equity?
Level 3 Applying
16
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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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18
What is the main idea of Financial Risk?
Level 2 Understanding
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19Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
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Level 1 RememberingPART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
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maximization considered as the prime objective of financialmanagement 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
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the Yield To Maturity (YTM) on this bond? What is the approximateYTM?
(6)
2
Discuss the features of shares and bonds?
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Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
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(6)Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
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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
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i) How would you evaluate the general principles of valuation ofshares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
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a portfolio and single asset?(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
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Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
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Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend pershare is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
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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
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9i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
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to financial management?(6)
10
i) What inference can you make from the three major decisions in
financial management?
--- Content provided by FirstRanker.com ---
(7)Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
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11A 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?
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Level 1
Remembering
12
i) How would you explain the various concepts of value? State
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the formula for bond valuation.(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
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(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
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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
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years, then at 10%rate of the next three years, after which it isexpected 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
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present value?Year 1 2 3 4 5 6
PVF
@
9%
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0.917 0.842 0.772 0.708 0.650 0.596Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
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Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
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The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
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in Y. Find out (i) Portfolioreturn (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.
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Security X 30 20 22 33 15Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
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A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to growat 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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UNIT ? II ? INVESTMENT DECISIONS
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SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifyingrelevant 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
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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Define ?pay back period? method.Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
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3Identify any two important advantages of payback period
method.
Level 3 Applying
4
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What are the needs of capital Budgeting?Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
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6Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
--- Content provided by FirstRanker.com ---
Level 1 Remembering8
Explain the concept IRR.
Level 2 Understanding
9
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What is meant by Weighted average cost of capital?Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
--- Content provided by FirstRanker.com ---
11Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
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Level 6 Creating13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
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Determine the payback period from the following cash flowsYear 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
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Level 2 Understanding15
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
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market price per share is Rs.25.Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
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17Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
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Level 2 Understanding19
What are the features of ARR method?
Level 1 Remembering
20
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Define cost of retained earnings.Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
--- Content provided by FirstRanker.com ---
LEVELCOMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
--- Content provided by FirstRanker.com ---
(7)Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
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2i) 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.
--- Content provided by FirstRanker.com ---
(9)3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
--- Content provided by FirstRanker.com ---
Level 3 Applyingii)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.
--- Content provided by FirstRanker.com ---
The before tax cash flows expected to be generatedby the projectare as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
--- Content provided by FirstRanker.com ---
A4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
--- Content provided by FirstRanker.com ---
Calculate for each project i) PBP ii) NPV iii) PI. Which projectshould be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
--- Content provided by FirstRanker.com ---
capital budgeting decisions?(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
--- Content provided by FirstRanker.com ---
Machine X has a cost of Rs.75, 000 and net cash flow ofRs.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
--- Content provided by FirstRanker.com ---
machines. Which machine should be accepted and why?11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
--- Content provided by FirstRanker.com ---
thyear
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
--- Content provided by FirstRanker.com ---
(7)Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
--- Content provided by FirstRanker.com ---
Importanceof it.(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
--- Content provided by FirstRanker.com ---
i)Analyse the important techniques used for decision making underrisk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
corporate tax rate is 40% the growth rate in dividends on equityshares 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?
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(7)Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
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10Discuss 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.
--- Content provided by FirstRanker.com ---
Level 4 Analysing11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
--- Content provided by FirstRanker.com ---
(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
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perpetually. Determine the cost of equity capital, assuming themarket price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
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Level 2 Understandingii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
--- Content provided by FirstRanker.com ---
How would you explain about Specific cost and overall cost ofcapital?
Level 4 Analysing
14
--- Content provided by FirstRanker.com ---
The following information has been taken from the balance sheetof 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
--- Content provided by FirstRanker.com ---
Total Rs.30,00,000Determine 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
--- Content provided by FirstRanker.com ---
Rs.200?Level 1 Remembering
PART - C
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S.NO QUESTIONS1
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?.
--- Content provided by FirstRanker.com ---
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
--- Content provided by FirstRanker.com ---
proposal yield per year so that the market price does not change?UNIT ? III ? FINANCING AND DIVIDEND DECISION
--- Content provided by FirstRanker.com ---
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree ofOperating & 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 -
--- Content provided by FirstRanker.com ---
Issues in Dividend Decisions.PART- A
S.NO QUESTIONS
BT
LEVEL
--- Content provided by FirstRanker.com ---
COMPETENCE1
Define stock split and reverse split.
Level 1 Remembering
2
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Compare ?bonus issue? and ?share ?split? on four aspects.Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
--- Content provided by FirstRanker.com ---
4What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
--- Content provided by FirstRanker.com ---
Level 5 Evaluating6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
--- Content provided by FirstRanker.com ---
7Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
--- Content provided by FirstRanker.com ---
Level 2 Understanding9
How do you calculate operating leverage?
Level 3 Applying
10
--- Content provided by FirstRanker.com ---
How does interest coverage ratio affect the Capital Structure?Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
--- Content provided by FirstRanker.com ---
12Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
--- Content provided by FirstRanker.com ---
Level 1 Remembering14
Compare the different forms of dividend policy.
Level 2 Understanding
15
--- Content provided by FirstRanker.com ---
How would you show your understanding about trading on equity?Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
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17Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
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Level 2 Understanding19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
--- Content provided by FirstRanker.com ---
Define composite leverage.Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
--- Content provided by FirstRanker.com ---
LEVELCOMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
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(7)Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
FirstRanker.com - FirstRanker's Choice
--- Content provided by FirstRanker.com ---
(An?
DEPARTMENT OF MANAGEMENT STUDIES
--- Content provided by FirstRanker.com ---
QUESTION BANKII SEMESTER
1915203 ? FINANCIAL MANAGEMENT
--- Content provided by FirstRanker.com ---
Regulation ? 2019
Academic Year 2019 - 2020
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
--- Content provided by FirstRanker.com ---
(An
--- Content provided by FirstRanker.com ---
? .DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
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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
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portfolio ? Risk Analytics.PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
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Level 1 Remembering2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
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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
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rate is 15%?Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
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6Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
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Explain Financing decision.Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
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Level 2 Understanding9
How is the term finance more comprehensive than money
management?
Level 3 Applying
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10Return 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
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11How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
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Interpret modern view on financial management.Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
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14Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
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Level 3 Applying16
What inference can you make from real and financial assets?
Level 4 Analysing
17
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What is Risk Premium?Level 1 Remembering
18
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What is the main idea of Financial Risk?Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
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20What is effective rate of interest?
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
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Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a couponrate 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)
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2Discuss the features of shares and bonds?
Level 2 Understanding
3
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i) What is risk? Discuss the methods of Calculating risk for singleassets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
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(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)
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Level 4 Analysing5
i) How would you evaluate the general principles of valuation of
shares?
(7)
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Level 5 Evaluatingii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
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Evaluate ?The goal of profit maximization does not provide anoperationally useful criterion? ? Explain
Level 6 Creating
7
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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?
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(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?
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Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
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Level 3 Applyingii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
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i) What inference can you make from the three major decisions infinancial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
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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
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would you compute the yield to maturity at current market price ofRs.1, 100 assuming interest is paid annually?
Level 1
Remembering
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12i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
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ii) Can you explain the relationship between coupon rate, requiredyield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
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and the annual growth rate is 5%. Assume a required rate of returnof 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
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ABC company currently paying a dividend of Rs.2 per share. Thedividend 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
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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
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@9%
0.917 0.842 0.772 0.708 0.650 0.596
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Level 1 RememberingPART - C
S.NO QUESTIONS
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1Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
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0.4 2 30.1 0 3
The investor has decided to invest 1/3
rd
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of investment in X and 2/3rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
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There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securitiesbased 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
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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
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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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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
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Concept and measurement of cost of capital - Specific cost and overall cost of capital.PART- A
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
Define ?pay back period? method.
Level 1 Remembering
2
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Compare operating risk and financial risk?Level 2 Understanding
3
Identify any two important advantages of payback period
method.
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Level 3 Applying4
What are the needs of capital Budgeting?
Level 4 Analysing
5
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Discuss the significance of IRR.Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
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7How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
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Level 2 Understanding9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
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What are the merits of NPV method?Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
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12Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
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Level 1 Remembering14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
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CFAT 100000 20000 30000 40000 50000 60000Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
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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
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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
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18Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
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Level 1 Remembering20
Define cost of retained earnings.
Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i)Analyze the different techniques of Capital budgeting withpractical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
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of their selection?(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
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ii)Capital expenditure decisions are by far the most importantdecisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
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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
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5 years. The company?s required rate of return 10% and pays taxat 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
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Year 1 2 3 4 5Project
A
4,000 4,000 4000 4000 4000
Project
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B5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
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4i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
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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
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Rs.14000 per year for six years. The required rate of return ofboth 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%
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PVF6
th
year
(4.231)
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4.111 3.998 3.889 3.784 3.685 3.589 3.498(7)
Level 5 Evaluating
(6)
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6i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
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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)
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Level 1 Rememberingii)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)
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8i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
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ii)GURU Ltd has paid up equity capital 60000 equity shares ofRs.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
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shares of Rs.100 each aggregating Rs.3,00,000 at 5% discountand 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.
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9i)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
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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
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overall cost of capital for evaluating new investments.Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
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capital structure? Under what assumptions do their conclusion holdgood?
(7)
Level 1
Remembering
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ii) Suppose the dividend per share of firm is expected to be Rs.1.50per 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)
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12i)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?
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(6)13
How would you explain about Specific cost and overall cost of
capital?
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Level 4 Analysing14
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
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10%Debentures :Rs.6,00,00015%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
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It has been paying dividends at a constant rate of 20% p.a. Whatdifference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
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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
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on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investmentproposal 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?
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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.
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Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s modeland MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
Define stock split and reverse split.
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Level 1 Remembering2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
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Identify the different forms of Dividend.Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
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5Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
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Capital Structure?Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
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8What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
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Level 3 Applying10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
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Discuss the different forms of capital structureLevel 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
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13Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
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Level 2 Understanding15
How would you show your understanding about trading on equity?
Level 3 Applying
16
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How would you categorize the term leverage?Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
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18Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
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Level 1 Remembering20
Define composite leverage.
Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i) How would you explain the impact of financial leverage onearnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
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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)
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Level 2 Understandingii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
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Variable cost per unit: Rs.20Fixed 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
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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
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example. State the criticism against Gordon?s model.Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
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policy?(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
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i) Examine the legal and procedural aspects of dividend accordingto Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
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7i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
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(7)8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
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Level 2 Understandingii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
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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
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Prove that changing dividend will affect the value of the firmaccording to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
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(3)10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
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Level 4 Analysingii)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.
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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)
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Level 1Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
FirstRanker.com - FirstRanker's Choice
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(An
?
DEPARTMENT OF MANAGEMENT STUDIES
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QUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENTRegulation ? 2019
Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
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Ms.A.UmaDevi ? Asst. Professor(OG)--- Content provided by FirstRanker.com ---
(An? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
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SEM / YEAR : II SEMESTER / I YEARUNIT ? 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
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decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of aportfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
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Define Financial Management.Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
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3Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
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mature after 5 years. Compute the value of bond, if the discountrate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
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Level 5 Evaluating6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
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7Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
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view.Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
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Level 3 Applying10
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?
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Level 4 Analysing11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
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12Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
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Level 1 Remembering14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
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How is bond different from equity?Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
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17What is Risk Premium?
Level 1 Remembering
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18What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
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Level 1 Remembering20
What is effective rate of interest?
Level 1 Remembering
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PART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
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(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?
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(6)2
Discuss the features of shares and bonds?
Level 2 Understanding
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3i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
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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?
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(13)Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
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(7)Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
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6Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
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7i) 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
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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
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calculations of returns?Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
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(7)Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
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10i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
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ii) What ideas justify the scope of financial management in anyorganization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
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Rs.1, 000. The coupon interest rate on the bond is 10%. Howwould you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
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Remembering12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
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Level 2 Understandingii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
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Analyse the value of a share for which the current dividend is Rs.3and 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
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14ABC 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.
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(i) What is the present value of the share if thecapitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
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PVF@
9%
0.917 0.842 0.772 0.708 0.650 0.596
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Level 1 Remembering
PART - C
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S.NO QUESTIONS1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
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0.5 4 00.4 2 3
0.1 0 3
The investor has decided to invest 1/3
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rdof investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
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2There 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
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Security z -20 -10 -5 10 303
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
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grow at a 5% rate forever. (a) What is the present value of the share if thecapitalization 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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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,
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Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniquesConcept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
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2Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
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method.Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
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5Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
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Level 6 Creating7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
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Explain the concept IRR.Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
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10What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
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Level 5 Evaluating12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
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How would you explain the meaning of Capital Rationing?Level 1 Remembering
14
Determine the payback period from the following cash flows
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Year 0 1 2 3 4 5CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
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Suppose the dividend per share of firm is expected to beRe.1 pershare 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
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16Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
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Level 1 Remembering18
Compare NPV & IRR.
Level 2 Understanding
19
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What are the features of ARR method?Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
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ii) How would you rank capital budgeting proposals for the purposeof their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
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Level 2 Understandingii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
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i) How is accounting rate of return calculated? Explain its meritsand demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
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require an initial cash outlay of Rs.10, 000 each and have a life of5 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.
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Before tax cash flowsYear 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
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ProjectB
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
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(6)4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
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Level 4 Analysingii)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
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would cost Rs.50, 000 and generate net cash flow ofRs.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?
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11% 12% 13% 14% 15% 16% 17% 18%PVF
6
th
year
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(4.231)4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
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(6)6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
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Level 6 Creatingii)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.
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(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.
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(6)8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
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Level 2 Understandingii)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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shares. The company has also previously issued 14% preferenceshares 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
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company.9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
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ii)How would you show your understanding of the concept capitalrationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
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also outline the conditions that should be satisfied for using a firm?soverall cost of capital for evaluating new investments.
Level 4 Analysing
11
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i)What is Modigliani-Miller approach to the problem of cost ofcapital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
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Rememberingii) 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.
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(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
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of capital of the firm?(6)
13
How would you explain about Specific cost and overall cost of
capital?
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Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
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Equity share Capital : Rs. 6,00,00010%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
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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
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PART - C
S.NO QUESTIONS
1
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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
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A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of returnon 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?
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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
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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
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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Define stock split and reverse split.Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
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3Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
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Level 4 Analysing5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
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Can you interpret the existence of Operating leverage in a firm?sCapital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
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Level 1 Remembering8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
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How do you calculate operating leverage?Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
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11Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
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Level 6 Creating13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
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Compare the different forms of dividend policy.Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
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16How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
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Level 1 Remembering18
Classify NI & NOI approaches.
Level 2 Understanding
19
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Define Walter?s & Gordon model of Dividend.Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
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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?
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(7)Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
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Selling price per unit: Rs.50Variable 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)
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3Explain the different types of Dividend and also its policy.
Level 3 Applying
4
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What are the essentials of Gordon?s model? Illustrate with anexample. State the criticism against Gordon?s model.
Level 4 Analysing
5
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i)What are the practical considerations in formulating the dividendpolicy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
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6i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
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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
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its shortcomings.(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
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(8)Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
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9i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
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Eps(Rs) 10 10 10Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
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ii) What is Walter model?(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
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(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
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cost at Rs.8 per unit.Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
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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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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
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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 @
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9% and equity of Rs.55,00,000i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
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iv) If the sale drops to Rs.50, 00,000, what will be the newEBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
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13Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
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Level 4 Analysing14
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
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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
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Equity 30000 1000010% Debenture 10000 30000
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
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Particulars Company X Company YVolume 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
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Selling price per unit Rs.10 Rs.8On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
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You are required to calculate the overall cost of capital, from the following capital structure of acompany.
FirstRanker.com - FirstRanker's Choice
(An
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?DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
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Regulation ? 2019Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
? .
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DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
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UNIT ? I ?FOUNDATIONS OF FINANCESYLLABUS: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.
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PART- AS.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
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2Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
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Level 3 Applying4
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%?
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Level 4 Analysing5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
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Interpret any four functions of finance manager in anorganisation.
Level 6 Creating
7
Explain Financing decision.
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Level 1 Remembering8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
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9How is the term finance more comprehensive than money
management?
Level 3 Applying
10
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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
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How would you have a fresh look at the finance function in?
Level 5 Evaluating
12
Interpret modern view on financial management.
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Level 6 Creating13
Define Risk analytics.
Level 1 Remembering
14
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Can you explain Rule 72 and Rule 69?Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
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16What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
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Level 1 Remembering18
What is the main idea of Financial Risk?
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Level 2 Understanding19
Define yield to call.
Level 1 Remembering
20
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What is effective rate of interest?Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i) State and explain the functions of finance. Why is wealthmaximization 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
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rate of 14 percent and maturing after 5 years in Rs.1050. What isthe Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
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Discuss the features of shares and bonds?Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
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assets and of a portfolio?(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
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4Can 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
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5i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
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ii) Can you assess the concept and significance of risk and return ofa portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
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operationally useful criterion? ? ExplainLevel 6 Creating
7
i) Define the concept of risk return trade off with diagram.
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(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)
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8What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
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Level 2 Understanding9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
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ii) Can you explain the features & scope of the modern approachesto financial management?
(6)
10
i) What inference can you make from the three major decisions in
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financial management?(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
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(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
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Rs.1, 100 assuming interest is paid annually?Level 1
Remembering
12
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i) How would you explain the various concepts of value? Statethe formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
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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
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of 10%. What will be the value of the share if the annual growth is8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
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dividend is expected to grow at a 15% annual rate for the threeyears, 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%?
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(ii) If the share is held for 3 years, what shall be itspresent value?
Year 1 2 3 4 5 6
PVF
@
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9%0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
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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
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0.1 0 3The investor has decided to invest 1/3
rd
of investment in X and 2/3
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rdin 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
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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
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3A 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?
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4 Critically examine how the finance function is typically organized in a Large Organisation.--- Content provided by FirstRanker.com ---
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UNIT ? II ? INVESTMENT DECISIONSSYLLABUS: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.
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PART- AS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
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Level 2 Understanding3
Identify any two important advantages of payback period
method.
Level 3 Applying
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4What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
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Level 5 Evaluating6
Interpret the significance of capital budgeting.
Level 6 Creating
7
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How would you measure the time value of money in capital budgeting?Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
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9What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
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Level 4 Analysing11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
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Interpret the adjusted NPV with NPV.Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
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14Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
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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.
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Determine the cost of equity capital, assuming themarket price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
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Level 4 Analysing17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
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Compare NPV & IRR.Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
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20Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
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practical examples.(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
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(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
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decisions in the field of management ? Justify.(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
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(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
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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
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ProjectA
4,000 4,000 4000 4000 4000
Project
B
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5,000 5,000 2000 5000 5000Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
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i)How would you show your understanding on factors influencingcapital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
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5Machine 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
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both machines is 11%. Calculate the IRR and NPV for themachines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
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6th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
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(7)
Level 5 Evaluating
(6)
6
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i)Explain capital budgeting and discuss in detail the need andImportanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
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7i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
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ii)A project costs Rs.20, 00, 000 and yields annually a profit ofRs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
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i)Explain the conditions that should be satisfied for using a firmsoverall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
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Rs.10 each the current market price of shares is Rs.24. Duringthe 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
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and 13% debentures of Rs.100 each for Rs.5,00,000. Thecorporate 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
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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?
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(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.
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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
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good?(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
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per share next year and is expected to grow at 6.5% per yearperpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
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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)
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13How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
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14The 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
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15%termloan :Rs.18,00,000Total 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
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difference will it make if the current price of Rs.100 share isRs.200?
Level 1 Remembering
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PART - CS.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
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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
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proposal costing Rs.40000with an expected return that will last forever. What amount must theproposal yield per year so that the market price does not change?
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UNIT ? III ? FINANCING AND DIVIDEND DECISIONSYLLABUS: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
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and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
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2Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
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Level 3 Applying4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
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Discuss the meaning of Dividend policy.Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
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Level 6 Creating7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
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What is meant by debt equity ratio and interest coverage ratio?Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
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10How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
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Level 5 Evaluating12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
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Define dividend payout ratio? Brief with a simple illustration.Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
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15How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
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Level 4 Analysing17
Define Operating Leverage.
Level 1 Remembering
18
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Classify NI & NOI approaches.Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
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20Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
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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.
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2i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
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ii) Show the operating leverage for Maruti Ltd., from thefollowing information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
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Fixed cost per unit at current level of sales is Rs.15. What will bethe new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
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Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
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Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
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(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
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to Company?s Act.(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
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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)
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8i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
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ii)How would you summarize the factors to be considered indetermining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
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PARTICULARS A B CK 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
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according to Walter model. Use payout ratio 0%, 50%, 100%.(10)
Level 3 Applying
ii) What is Walter model?
(3)
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10i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
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ii)Find out operating, financial and combined leverages from thegiven 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).
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(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
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Rememberingii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
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18%. Under Walter?s Model, Determinea) 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%
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12A 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?
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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?
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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
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cost of capital. What are the factors affecting weighted averagecost of capital?
Level 4 Analysing
14
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Calculate financial and operating leverage under situations whenfixed 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
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Total assets turnover based on sales 2Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
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Level 1 Remembering
PART - C
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S.NO QUESTIONS1
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
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Variable Cost per Unit Rs.4 Rs.3Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
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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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1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,00010,000 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
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Retained Earnings Rs.1,50,000The 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
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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
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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)
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(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. Thecompany 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.
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(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
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ewould remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
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FirstRanker.com - FirstRanker's Choice
(An
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?DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
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Regulation ? 2019Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
? .
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DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
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UNIT ? I ?FOUNDATIONS OF FINANCESYLLABUS: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.
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PART- AS.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
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2Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
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Level 3 Applying4
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%?
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Level 4 Analysing5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
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Interpret any four functions of finance manager in anorganisation.
Level 6 Creating
7
Explain Financing decision.
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Level 1 Remembering8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
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9How is the term finance more comprehensive than money
management?
Level 3 Applying
10
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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
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How would you have a fresh look at the finance function in?
Level 5 Evaluating
12
Interpret modern view on financial management.
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Level 6 Creating13
Define Risk analytics.
Level 1 Remembering
14
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Can you explain Rule 72 and Rule 69?Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
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16What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
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Level 1 Remembering18
What is the main idea of Financial Risk?
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Level 2 Understanding19
Define yield to call.
Level 1 Remembering
20
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What is effective rate of interest?Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i) State and explain the functions of finance. Why is wealthmaximization 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
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rate of 14 percent and maturing after 5 years in Rs.1050. What isthe Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
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Discuss the features of shares and bonds?Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
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assets and of a portfolio?(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
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4Can 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
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5i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
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ii) Can you assess the concept and significance of risk and return ofa portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
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operationally useful criterion? ? ExplainLevel 6 Creating
7
i) Define the concept of risk return trade off with diagram.
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(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)
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8What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
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Level 2 Understanding9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
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ii) Can you explain the features & scope of the modern approachesto financial management?
(6)
10
i) What inference can you make from the three major decisions in
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financial management?(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
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(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
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Rs.1, 100 assuming interest is paid annually?Level 1
Remembering
12
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i) How would you explain the various concepts of value? Statethe formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
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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
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of 10%. What will be the value of the share if the annual growth is8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
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dividend is expected to grow at a 15% annual rate for the threeyears, 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%?
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(ii) If the share is held for 3 years, what shall be itspresent value?
Year 1 2 3 4 5 6
PVF
@
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9%0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
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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
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0.1 0 3The investor has decided to invest 1/3
rd
of investment in X and 2/3
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rdin 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
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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
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3A 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?
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4 Critically examine how the finance function is typically organized in a Large Organisation.--- Content provided by FirstRanker.com ---
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UNIT ? II ? INVESTMENT DECISIONSSYLLABUS: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.
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PART- AS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
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Level 2 Understanding3
Identify any two important advantages of payback period
method.
Level 3 Applying
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4What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
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Level 5 Evaluating6
Interpret the significance of capital budgeting.
Level 6 Creating
7
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How would you measure the time value of money in capital budgeting?Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
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9What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
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Level 4 Analysing11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
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Interpret the adjusted NPV with NPV.Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
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14Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
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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.
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Determine the cost of equity capital, assuming themarket price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
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Level 4 Analysing17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
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Compare NPV & IRR.Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
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20Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
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practical examples.(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
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(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
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decisions in the field of management ? Justify.(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
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(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
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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
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ProjectA
4,000 4,000 4000 4000 4000
Project
B
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5,000 5,000 2000 5000 5000Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
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i)How would you show your understanding on factors influencingcapital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
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5Machine 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
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both machines is 11%. Calculate the IRR and NPV for themachines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
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6th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
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(7)
Level 5 Evaluating
(6)
6
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i)Explain capital budgeting and discuss in detail the need andImportanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
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7i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
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ii)A project costs Rs.20, 00, 000 and yields annually a profit ofRs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
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i)Explain the conditions that should be satisfied for using a firmsoverall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
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Rs.10 each the current market price of shares is Rs.24. Duringthe 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
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and 13% debentures of Rs.100 each for Rs.5,00,000. Thecorporate 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
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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?
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(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.
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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
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good?(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
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per share next year and is expected to grow at 6.5% per yearperpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
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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)
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13How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
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14The 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
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15%termloan :Rs.18,00,000Total 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
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difference will it make if the current price of Rs.100 share isRs.200?
Level 1 Remembering
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PART - CS.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
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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
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proposal costing Rs.40000with an expected return that will last forever. What amount must theproposal yield per year so that the market price does not change?
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UNIT ? III ? FINANCING AND DIVIDEND DECISIONSYLLABUS: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
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and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
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2Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
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Level 3 Applying4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
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Discuss the meaning of Dividend policy.Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
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Level 6 Creating7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
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What is meant by debt equity ratio and interest coverage ratio?Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
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10How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
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Level 5 Evaluating12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
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Define dividend payout ratio? Brief with a simple illustration.Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
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15How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
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Level 4 Analysing17
Define Operating Leverage.
Level 1 Remembering
18
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Classify NI & NOI approaches.Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
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20Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
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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.
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2i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
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ii) Show the operating leverage for Maruti Ltd., from thefollowing information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
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Fixed cost per unit at current level of sales is Rs.15. What will bethe new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
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Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
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Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
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(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
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to Company?s Act.(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
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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)
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8i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
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ii)How would you summarize the factors to be considered indetermining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
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PARTICULARS A B CK 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
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according to Walter model. Use payout ratio 0%, 50%, 100%.(10)
Level 3 Applying
ii) What is Walter model?
(3)
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10i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
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ii)Find out operating, financial and combined leverages from thegiven 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).
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(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
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Rememberingii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
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18%. Under Walter?s Model, Determinea) 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%
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12A 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?
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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?
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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
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cost of capital. What are the factors affecting weighted averagecost of capital?
Level 4 Analysing
14
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Calculate financial and operating leverage under situations whenfixed 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
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Total assets turnover based on sales 2Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
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Level 1 Remembering
PART - C
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S.NO QUESTIONS1
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
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Variable Cost per Unit Rs.4 Rs.3Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
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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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1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,00010,000 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
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Retained Earnings Rs.1,50,000The 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
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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
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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)
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(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. Thecompany 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.
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(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
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ewould remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
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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
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capital finance: Trade credit, Bank finance and Commercial paper.PART- A
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
Define ?Commercial paper?.
Level 1 Remembering
2
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Explain the different types of working capital.Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
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Level 3 Applying4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
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State the meaning of Working Capital Management.Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
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7How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
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Level 2 Understanding9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
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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?
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Level 5 Evaluating12
What is your opinion about NWC?
Level 6 Creating
13
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How would you explain credit evaluation?Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
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15How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
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16Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
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Define Cash Management.Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
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19What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
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Level 1 RememberingPART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
How would you explain receivable control techniques?
Level 1 Remembering
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2i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
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i) What services are provided by a factor?(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
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FirstRanker.com - FirstRanker's Choice(An
?
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DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
Academic Year 2019 - 2020
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Prepared by
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Dr.L.Sujatha ? Asst. Professor(Sel.G)Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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SUBJECT : 1915203 ? FINANCIAL MANAGEMENTSEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions of
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Finance, organization of financial functions, objectives of Financial management, Major financialdecisions ? 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
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1Define Financial Management.
Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
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Level 2 Understanding3
Identify the two aspects of financial management.
Level 3 Applying
4
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A Rs.10, 000 per value bond bearing a coupon rate of 12% willmature after 5 years. Compute the value of bond, if the discount
rate is 15%?
Level 4 Analysing
5
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Discuss the objectives and goals of financial management.Level 5 Evaluating
6
Interpret any four functions of finance manager in an
organisation.
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Level 6 Creating7
Explain Financing decision.
Level 1 Remembering
8
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Compare modern view of financial management with its traditionalview.
Level 2 Understanding
9
How is the term finance more comprehensive than money
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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
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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
?
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Level 5 Evaluating12
Interpret modern view on financial management.
Level 6 Creating
13
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Define Risk analytics.Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
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15How is bond different from equity?
Level 3 Applying
16
What inference can you make from real and financial assets?
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Level 4 Analysing17
What is Risk Premium?
Level 1 Remembering
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18
What is the main idea of Financial Risk?
Level 2 Understanding
19
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Define yield to call.Level 1 Remembering
20
What is effective rate of interest?
Level 1 Remembering
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PART- B
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
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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
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YTM?(6)
2
Discuss the features of shares and bonds?
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Level 2 Understanding3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
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Level 3 Applyingii) What approach would you use to value bonds and shares?
(7)
4
Can you list the types of risk & classify Non ?diversifiable risk?&?
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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
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shares?(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
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(6)6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
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Level 6 Creating7
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
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share is Rs.4. If its capitalization rate is 12 per cent, what is thedividend growth rate?
(6)
8
What is return? Write the various types of total return.
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Whether unrealised capital gain or loss is included in thecalculations of returns?
Level 2 Understanding
9
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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?
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(6)10
i) What inference can you make from the three major decisions in
financial management?
(7)
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Level 4 Analysingii) What ideas justify the scope of financial management in any
organization?
(6)
11
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A bond has 3 years remaining until maturity. It has a par value ofRs.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?
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Level 1Remembering
12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
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(7)Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
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13Analyse 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%?
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Level 4 Analysing14
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
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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?
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Year 1 2 3 4 5 6PVF
@
9%
0.917 0.842 0.772 0.708 0.650 0.596
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Level 1 Remembering
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PART - CS.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
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Probability Return X Return Y0.5 4 0
0.4 2 3
0.1 0 3
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The investor has decided to invest 1/3rd
of investment in X and 2/3
rd
in Y. Find out (i) Portfolio
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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
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Security Y -20 10 20 10 20Security 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
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at a 15% annual rate for three years then at 10% for next three years, after it is expected togrow 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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UNIT ? II ? INVESTMENT DECISIONS
SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifying
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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
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BTLEVEL
COMPETENCE
1
Define ?pay back period? method.
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Level 1 Remembering2
Compare operating risk and financial risk?
Level 2 Understanding
3
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Identify any two important advantages of payback periodmethod.
Level 3 Applying
4
What are the needs of capital Budgeting?
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Level 4 Analysing5
Discuss the significance of IRR.
Level 5 Evaluating
6
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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
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8Explain the concept IRR.
Level 2 Understanding
9
What is meant by Weighted average cost of capital?
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Level 3 Applying10
What are the merits of NPV method?
Level 4 Analysing
11
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Define floatation costs in computing the cost of capital?Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
Level 6 Creating
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13How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
Determine the payback period from the following cash flows
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Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
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15Suppose 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.
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Level 3 Applying16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
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Distinguish the two ways of defining benefit cost ratio.Level 1 Remembering
18
Compare NPV & IRR.
Level 2 Understanding
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19What are the features of ARR method?
Level 1 Remembering
20
Define cost of retained earnings.
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Level 1 RememberingPART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
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Level 1 Rememberingii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
2
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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)
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3i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
Level 3 Applying
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ii)A company is considering two mutually exclusive projects bothrequire 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
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are as follows.Before tax cash flows
Year 1 2 3 4 5
Project
A
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4,000 4,000 4000 4000 4000Project
B
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
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should be accepted and why?(6)
4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
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(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
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Rs.20000 per year, for six years. A substitute machine Ywould 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?
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11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
th
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year(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
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Level 5 Evaluating(6)
6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
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(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
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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%.
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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.
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(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
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(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
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shares is expected at 5%. Show the overall cost of capital of thecompany.
9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
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Level 3 Applyingii)How would you show your understanding of the concept capital
rationing?
(6)
10
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Discuss the steps involved in calculating overall cost of capital andalso outline the conditions that should be satisfied for using a firm?s
overall cost of capital for evaluating new investments.
Level 4 Analysing
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11i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
(7)
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Level 1Remembering
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
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market price per shareisRs.30.(6)
12
i)What are the steps involved in computing cost of capital? (7)
Level 2 Understanding
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ii)How would you explain the factors influencing overall costof capital of the firm?
(6)
13
How would you explain about Specific cost and overall cost of
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capital?Level 4 Analysing
14
The following information has been taken from the balance sheet
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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
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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?
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Level 1 RememberingPART - C
S.NO QUESTIONS
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1Capital 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.
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4A 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?
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UNIT ? III ? FINANCING AND DIVIDEND DECISION
SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree of
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Operating & Financial leverage ? Combined leverage. Capital structure ? Theories ? Net IncomeApproach, 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.
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PART- AS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1Define stock split and reverse split.
Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
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Level 2 Understanding3
Identify the different forms of Dividend.
Level 3 Applying
4
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What is Financial Leverage? State its significance.Level 4 Analysing
5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
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6Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
7
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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
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9How do you calculate operating leverage?
Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
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Level 4 Analysing11
Discuss the different forms of capital structure
Level 5 Evaluating
12
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Interpret arbitrage pricing in capital structure theory.Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
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14Compare the different forms of dividend policy.
Level 2 Understanding
15
How would you show your understanding about trading on equity?
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Level 3 Applying16
How would you categorize the term leverage?
Level 4 Analysing
17
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Define Operating Leverage.Level 1 Remembering
18
Classify NI & NOI approaches.
Level 2 Understanding
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19Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
Define composite leverage.
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Level 1 RememberingPART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
i) How would you explain the impact of financial leverage on
earnings per share
(7)
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Level 1 Rememberingii) 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
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capital?(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
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No. of Units produced : 50,000Selling 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?
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(6)3
Explain the different types of Dividend and also its policy.
Level 3 Applying
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4What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
Level 4 Analysing
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5i)What are the practical considerations in formulating the dividend
policy?
(7)
Level 5 Evaluating
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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)
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Level 6 Creatingii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
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ii)Define the essentials of Walters Dividend model? Explainits shortcomings.
(7)
8
i)Can you explain how to measure the degree of operating and
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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?
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(5)9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
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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)
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Level 3 Applyingii) What is Walter model?
(3)
10
i)List the various factors which influence the capital structure of a
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firm of your choice.(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
given data:
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Sales 50,000 units at Rs.12 per unit. Variablecost at Rs.8 per unit.
Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
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11i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
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(6)The capitalization rate is 15% and the return on investment is
18%. Under Walter?s Model, Determine
a) The optimum Pay-out
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b) The market price of the share at this payoutc) 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
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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
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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?
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Level 2 Understanding13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
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Level 4 Analysing
14
Calculate financial and operating leverage under situations when
fixed costs are i) Rs.50000 ii) Rs.10000 and financial
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plans 1 and 2 respectively, from the following informationpertaining 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
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Capital Structure Financial Plan 1 Financial Plan 2Equity 30000 10000
10% Debenture 10000 30000
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
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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
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Interest burden on debt Rs.120000 Rs.50000Selling 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.
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2You 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
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5,000 10% debentures of Rs.100 each issued at par Rs.5,00,00012% 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
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the dividend per share is expected to grow at 10%. The preference shares are redeemable after7 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
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Assume there are two firms, L and U, which are identical in all respects except that firm L has10 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
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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
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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.
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1,00,000 and use the proceeds to retire the equity shares. The ki
and k
e
would remain
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unaffected as per the assumptions of the NI approach. In the new situation, find the value ofthe firm. (5 marks)
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UNIT ? IV ?WORKING CAPITAL MANAGEMENTSYLLABUS: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
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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Define ?Commercial paper?.Level 1 Remembering
2
Explain the different types of working capital.
Level 2 Understanding
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3How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
4
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Can you explain the consequences of deposit float?Level 4 Analysing
5
State the meaning of Working Capital Management.
Level 5 Evaluating
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6Explain the term Trade credit.
Level 6 Creating
7
How would you explain Factoring?
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Level 1 Remembering8
What is operating cycle?
Level 2 Understanding
9
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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
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11What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
12
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What is your opinion about NWC?Level 6 Creating
13
How would you explain credit evaluation?
Level 1 Remembering
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14Explain aging schedule.
Level 2 Understanding
15
How would you draw an operating cycle of working capital for
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a manufacturing company?Level 3 Applying
16
Can you give a brief note on Treasury Bills?
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Level 4 Analysing17
Define Cash Management.
Level 1 Remembering
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18What do you mean by operating efficiency?
Level 2 Understanding
19
What is Cash planning?
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Level 1 Remembering20
List out the motives for holding cash.
Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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How would you explain receivable control techniques?Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
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Level 2 Understandingii) What are the various principles of working capital? (5)
3
i) What services are provided by a factor?
(6)
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Level 3 Applyingii) What are the costs and benefits of factoring?
(7)
4
i)What is the concept of working capital cycle? (6)
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Level 4 Analysingii) Discuss the various opportunities available to thecompanies to
park their surplus funds for a short term.
(7)
5
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What is the role of Credit terms and Credit standards in the creditpolicy of a firm?
Level 5 Evaluating
6
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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?
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(8)Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
(5)
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8Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
Level 2 Understanding
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9i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
Iii) What facts would you select to show the cash management
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models proposed by Baumol and Miller Orr with their merits anddemerits?
(9)
10
i)Can you a give brief note on factoring, its process?
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(8)Level 4 Analysing
ii) How would you explain factoring types?
(5)
11
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PC ltd sells its product on a gross profit of 20% on sales. Thefollowing 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
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? 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
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advance 2,00,000The 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
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precautionary measure assuming a 10% margin. Find out theworking capital requirement of PC Ltd.
Level 1
Remembering
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12From the following data prepare a statement showingrequirement
for
(a) Estimated output for the year 130000 units ( 52weeks)
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(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
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(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
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Level 2 Understanding
FirstRanker.com - FirstRanker's Choice
(An
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?DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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II SEMESTER
1915203 ? FINANCIAL MANAGEMENT
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Regulation ? 2019Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
? .
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DEPARTMENT OF MANAGEMENT STUDIESQUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
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UNIT ? I ?FOUNDATIONS OF FINANCESYLLABUS: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.
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PART- AS.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
Level 1 Remembering
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2Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
Identify the two aspects of financial management.
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Level 3 Applying4
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%?
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Level 4 Analysing5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
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Interpret any four functions of finance manager in anorganisation.
Level 6 Creating
7
Explain Financing decision.
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Level 1 Remembering8
Compare modern view of financial management with its traditional
view.
Level 2 Understanding
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9How is the term finance more comprehensive than money
management?
Level 3 Applying
10
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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
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How would you have a fresh look at the finance function in?
Level 5 Evaluating
12
Interpret modern view on financial management.
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Level 6 Creating13
Define Risk analytics.
Level 1 Remembering
14
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Can you explain Rule 72 and Rule 69?Level 2 Understanding
15
How is bond different from equity?
Level 3 Applying
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16What inference can you make from real and financial assets?
Level 4 Analysing
17
What is Risk Premium?
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Level 1 Remembering18
What is the main idea of Financial Risk?
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Level 2 Understanding19
Define yield to call.
Level 1 Remembering
20
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What is effective rate of interest?Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i) State and explain the functions of finance. Why is wealthmaximization 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
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rate of 14 percent and maturing after 5 years in Rs.1050. What isthe Yield To Maturity (YTM) on this bond? What is the approximate
YTM?
(6)
2
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Discuss the features of shares and bonds?Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
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assets and of a portfolio?(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
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4Can 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
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5i) How would you evaluate the general principles of valuation of
shares?
(7)
Level 5 Evaluating
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ii) Can you assess the concept and significance of risk and return ofa portfolio and single asset?
(6)
6
Evaluate ?The goal of profit maximization does not provide an
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operationally useful criterion? ? ExplainLevel 6 Creating
7
i) Define the concept of risk return trade off with diagram.
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(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)
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8What is return? Write the various types of total return.
Whether unrealised capital gain or loss is included in the
calculations of returns?
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Level 2 Understanding9
i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
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ii) Can you explain the features & scope of the modern approachesto financial management?
(6)
10
i) What inference can you make from the three major decisions in
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financial management?(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
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(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
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Rs.1, 100 assuming interest is paid annually?Level 1
Remembering
12
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i) How would you explain the various concepts of value? Statethe formula for bond valuation.
(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
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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
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of 10%. What will be the value of the share if the annual growth is8%?
Level 4 Analysing
14
ABC company currently paying a dividend of Rs.2 per share. The
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dividend is expected to grow at a 15% annual rate for the threeyears, 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%?
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(ii) If the share is held for 3 years, what shall be itspresent value?
Year 1 2 3 4 5 6
PVF
@
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9%0.917 0.842 0.772 0.708 0.650 0.596
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
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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
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0.1 0 3The investor has decided to invest 1/3
rd
of investment in X and 2/3
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rdin 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
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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
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3A 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?
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UNIT ? II ? INVESTMENT DECISIONSSYLLABUS: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.
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PART- AS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1Define ?pay back period? method.
Level 1 Remembering
2
Compare operating risk and financial risk?
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Level 2 Understanding3
Identify any two important advantages of payback period
method.
Level 3 Applying
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4What are the needs of capital Budgeting?
Level 4 Analysing
5
Discuss the significance of IRR.
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Level 5 Evaluating6
Interpret the significance of capital budgeting.
Level 6 Creating
7
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How would you measure the time value of money in capital budgeting?Level 1 Remembering
8
Explain the concept IRR.
Level 2 Understanding
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9What is meant by Weighted average cost of capital?
Level 3 Applying
10
What are the merits of NPV method?
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Level 4 Analysing11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
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Interpret the adjusted NPV with NPV.Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
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14Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
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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.
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Determine the cost of equity capital, assuming themarket price per share is Rs.25.
Level 3 Applying
16
Classify the various costs in computing the cost of capital?
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Level 4 Analysing17
Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
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Compare NPV & IRR.Level 2 Understanding
19
What are the features of ARR method?
Level 1 Remembering
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20Define cost of retained earnings.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
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practical examples.(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
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(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
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decisions in the field of management ? Justify.(9)
3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
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(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
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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
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ProjectA
4,000 4,000 4000 4000 4000
Project
B
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5,000 5,000 2000 5000 5000Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
4
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i)How would you show your understanding on factors influencingcapital budgeting decisions?
(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
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5Machine 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
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both machines is 11%. Calculate the IRR and NPV for themachines. Which machine should be accepted and why?
11% 12% 13% 14% 15% 16% 17% 18%
PVF
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6th
year
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
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(7)
Level 5 Evaluating
(6)
6
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i)Explain capital budgeting and discuss in detail the need andImportanceof it.
(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
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7i)Analyse the important techniques used for decision making under
risk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
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ii)A project costs Rs.20, 00, 000 and yields annually a profit ofRs.3, 00,000 after depreciation at 12.5% but before tax at 50%.
Discover payback period.
(6)
8
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i)Explain the conditions that should be satisfied for using a firmsoverall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
ii)GURU Ltd has paid up equity capital 60000 equity shares of
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Rs.10 each the current market price of shares is Rs.24. Duringthe 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
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and 13% debentures of Rs.100 each for Rs.5,00,000. Thecorporate 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
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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?
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(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.
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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
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good?(7)
Level 1
Remembering
ii) Suppose the dividend per share of firm is expected to be Rs.1.50
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per share next year and is expected to grow at 6.5% per yearperpetually. Determine the cost of equity capital, assuming the
market price per shareisRs.30.
(6)
12
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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)
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13How would you explain about Specific cost and overall cost of
capital?
Level 4 Analysing
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14The 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
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15%termloan :Rs.18,00,000Total 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
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difference will it make if the current price of Rs.100 share isRs.200?
Level 1 Remembering
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PART - CS.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
Illustrate.
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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
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proposal costing Rs.40000with an expected return that will last forever. What amount must theproposal yield per year so that the market price does not change?
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UNIT ? III ? FINANCING AND DIVIDEND DECISIONSYLLABUS: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
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and MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
Define stock split and reverse split.
Level 1 Remembering
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2Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
Identify the different forms of Dividend.
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Level 3 Applying4
What is Financial Leverage? State its significance.
Level 4 Analysing
5
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Discuss the meaning of Dividend policy.Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
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Level 6 Creating7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
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What is meant by debt equity ratio and interest coverage ratio?Level 2 Understanding
9
How do you calculate operating leverage?
Level 3 Applying
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10How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
Discuss the different forms of capital structure
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Level 5 Evaluating12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
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Define dividend payout ratio? Brief with a simple illustration.Level 1 Remembering
14
Compare the different forms of dividend policy.
Level 2 Understanding
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15How would you show your understanding about trading on equity?
Level 3 Applying
16
How would you categorize the term leverage?
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Level 4 Analysing17
Define Operating Leverage.
Level 1 Remembering
18
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Classify NI & NOI approaches.Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
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20Define composite leverage.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i) How would you explain the impact of financial leverage on
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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.
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2i) What is the main idea of Modigliani Miller approach on cost of
capital?
(7)
Level 2 Understanding
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ii) Show the operating leverage for Maruti Ltd., from thefollowing information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
Variable cost per unit: Rs.20
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Fixed cost per unit at current level of sales is Rs.15. What will bethe new operating leverage, if the variable cost is Rs.30perunit?
(6)
3
Explain the different types of Dividend and also its policy.
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Level 3 Applying
4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
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Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
policy?
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(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
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to Company?s Act.(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
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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)
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8i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
Level 2 Understanding
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ii)How would you summarize the factors to be considered indetermining capital structure ofacompany?
(5)
9
i)Assume that there are 3 firms A, B, C.
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PARTICULARS A B CK 12% 12% 12%
R 18% 12% 8%
Eps(Rs) 10 10 10
Prove that changing dividend will affect the value of the firm
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according to Walter model. Use payout ratio 0%, 50%, 100%.(10)
Level 3 Applying
ii) What is Walter model?
(3)
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10i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
Level 4 Analysing
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ii)Find out operating, financial and combined leverages from thegiven 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).
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(6)
11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
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Rememberingii)Chetan Ltd. Earns Rs.50 pershare.
(6)
The capitalization rate is 15% and the return on investment is
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18%. Under Walter?s Model, Determinea) 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%
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12A 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?
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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?
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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
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cost of capital. What are the factors affecting weighted averagecost of capital?
Level 4 Analysing
14
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Calculate financial and operating leverage under situations whenfixed 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
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Total assets turnover based on sales 2Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
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Level 1 Remembering
PART - C
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S.NO QUESTIONS1
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
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Variable Cost per Unit Rs.4 Rs.3Fixed Cost Rs.240000 Rs.250000
Interest burden on debt Rs.120000 Rs.50000
Selling price per unit Rs.10 Rs.8
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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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1,000 12% preference shares of Rs.100 each issued at par Rs.1,00,00010,000 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
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Retained Earnings Rs.1,50,000The 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
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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
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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)
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(ii) A company?s expected annual net operating income (EBIT) is Rs. 50,000. Thecompany 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.
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(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
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ewould remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
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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
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capital finance: Trade credit, Bank finance and Commercial paper.PART- A
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
Define ?Commercial paper?.
Level 1 Remembering
2
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Explain the different types of working capital.Level 2 Understanding
3
How would you use various methods available for forecasting
working capital requirements?
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Level 3 Applying4
Can you explain the consequences of deposit float?
Level 4 Analysing
5
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State the meaning of Working Capital Management.Level 5 Evaluating
6
Explain the term Trade credit.
Level 6 Creating
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7How would you explain Factoring?
Level 1 Remembering
8
What is operating cycle?
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Level 2 Understanding9
How would you apply the steps in receivables forecasting?
Level 3 Applying
10
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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?
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Level 5 Evaluating12
What is your opinion about NWC?
Level 6 Creating
13
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How would you explain credit evaluation?Level 1 Remembering
14
Explain aging schedule.
Level 2 Understanding
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15How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
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16Can you give a brief note on Treasury Bills?
Level 4 Analysing
17
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Define Cash Management.Level 1 Remembering
18
What do you mean by operating efficiency?
Level 2 Understanding
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19What is Cash planning?
Level 1 Remembering
20
List out the motives for holding cash.
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Level 1 RememberingPART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
How would you explain receivable control techniques?
Level 1 Remembering
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2i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
3
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i) What services are provided by a factor?(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
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4i)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.
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(7)5
What is the role of Credit terms and Credit standards in the credit
policy of a firm?
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Level 5 Evaluating6
Examine the various issues in estimation of working capital?
Level 6 Creating
7
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i) How would you describe the principles, needs and determinantsof working capital to a manufacturing firm?
(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
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management?(5)
8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
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Level 2 Understanding
9
i) Explain the three principal motives for holding cash.
(4)
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Level 3 ApplyingIii) What facts would you select to show the cash management
models proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
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10i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
ii) How would you explain factoring types?
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(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.
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? 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
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? 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 &
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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.
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Level 1Remembering
12
From the following data prepare a statement showingrequirement
for
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(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
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(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.
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Raw Material 5 UNITLabour 3 UNIT
Level 2 Understanding
Overheads 2 UNIT
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Profit 5 UNITFind out the working capital requirement?
13
i)What are the methods of preparing short term cash forecast?
(7)
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Level 4 Analysingii) Whatare the uses of long term cash forecasting?
(6)
14
i)What criteria are followed to select marketable securities for
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investing cash surplus?(6)
Level 1 Remembering
ii) What are the short term investments in India for investing short
term cash?
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(7)PART - C
S.NO QUESTIONS
1 Illustrate the methodology to raise working capital finance.
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2From 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.
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Raw materials Rs.78Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
Total cost Rs.165
Profit Rs.24
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Selling price Rs.189Additional information:
(i) Average raw materials in stock : onemonth
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(ii) Average materials?inprocess (50% completionstage):1/2month
(iii) Average finished goods in stock: one month
(iv)Credit allowed by suppliers: onemonth
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(v) Credit allowed to customers : Twomonths(vi) Time lag in payment of wages : one and halfweeks
(vii) Overhead expenses : onemonth
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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
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Calculate the working capital allow 10% contingenciesCost per unit
Raw Material Cost Rs.100
FirstRanker.com - FirstRanker's Choice
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(An?
DEPARTMENT OF MANAGEMENT STUDIES
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QUESTION BANKII SEMESTER
1915203 ? FINANCIAL MANAGEMENT
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Regulation ? 2019
Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
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? .DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
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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
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portfolio ? Risk Analytics.PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
Define Financial Management.
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Level 1 Remembering2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
3
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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
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rate is 15%?Level 4 Analysing
5
Discuss the objectives and goals of financial management.
Level 5 Evaluating
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6Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
7
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Explain Financing decision.Level 1 Remembering
8
Compare modern view of financial management with its traditional
view.
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Level 2 Understanding9
How is the term finance more comprehensive than money
management?
Level 3 Applying
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10Return 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
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11How would you have a fresh look at the finance function in
?
Level 5 Evaluating
12
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Interpret modern view on financial management.Level 6 Creating
13
Define Risk analytics.
Level 1 Remembering
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14Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
How is bond different from equity?
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Level 3 Applying16
What inference can you make from real and financial assets?
Level 4 Analysing
17
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What is Risk Premium?Level 1 Remembering
18
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What is the main idea of Financial Risk?Level 2 Understanding
19
Define yield to call.
Level 1 Remembering
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20What is effective rate of interest?
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
(7)
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Level 1 Remembering ii) The market price of Rs.1,000 par value bond carrying a couponrate 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)
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2Discuss the features of shares and bonds?
Level 2 Understanding
3
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i) What is risk? Discuss the methods of Calculating risk for singleassets and of a portfolio?
(6)
Level 3 Applying
ii) What approach would you use to value bonds and shares?
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(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)
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Level 4 Analysing5
i) How would you evaluate the general principles of valuation of
shares?
(7)
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Level 5 Evaluatingii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
6
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Evaluate ?The goal of profit maximization does not provide anoperationally useful criterion? ? Explain
Level 6 Creating
7
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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?
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(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?
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Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
(7)
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Level 3 Applyingii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
10
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i) What inference can you make from the three major decisions infinancial management?
(7)
Level 4 Analysing
ii) What ideas justify the scope of financial management in any
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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
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would you compute the yield to maturity at current market price ofRs.1, 100 assuming interest is paid annually?
Level 1
Remembering
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12i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
Level 2 Understanding
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ii) Can you explain the relationship between coupon rate, requiredyield and price?
(6)
13
Analyse the value of a share for which the current dividend is Rs.3
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and the annual growth rate is 5%. Assume a required rate of returnof 10%. What will be the value of the share if the annual growth is
8%?
Level 4 Analysing
14
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ABC company currently paying a dividend of Rs.2 per share. Thedividend 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
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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
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@9%
0.917 0.842 0.772 0.708 0.650 0.596
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Level 1 RememberingPART - C
S.NO QUESTIONS
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1Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
0.5 4 0
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0.4 2 30.1 0 3
The investor has decided to invest 1/3
rd
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of investment in X and 2/3rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
2
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There are 3 securities X, Y, and Z. The returns are given as follows: ? Select the securitiesbased 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
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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
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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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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
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Concept and measurement of cost of capital - Specific cost and overall cost of capital.PART- A
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
Define ?pay back period? method.
Level 1 Remembering
2
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Compare operating risk and financial risk?Level 2 Understanding
3
Identify any two important advantages of payback period
method.
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Level 3 Applying4
What are the needs of capital Budgeting?
Level 4 Analysing
5
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Discuss the significance of IRR.Level 5 Evaluating
6
Interpret the significance of capital budgeting.
Level 6 Creating
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7How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
Explain the concept IRR.
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Level 2 Understanding9
What is meant by Weighted average cost of capital?
Level 3 Applying
10
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What are the merits of NPV method?Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
Level 5 Evaluating
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12Interpret the adjusted NPV with NPV.
Level 6 Creating
13
How would you explain the meaning of Capital Rationing?
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Level 1 Remembering14
Determine the payback period from the following cash flows
Year 0 1 2 3 4 5
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CFAT 100000 20000 30000 40000 50000 60000Level 2 Understanding
15
Suppose the dividend per share of firm is expected to beRe.1 per
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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
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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
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18Compare NPV & IRR.
Level 2 Understanding
19
What are the features of ARR method?
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Level 1 Remembering20
Define cost of retained earnings.
Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i)Analyze the different techniques of Capital budgeting withpractical examples.
(7)
Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
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of their selection?(6)
2
i) Can you recall the process of capital budgeting? (4)
Level 2 Understanding
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ii)Capital expenditure decisions are by far the most importantdecisions in the field of management ? Justify.
(9)
3
i) How is accounting rate of return calculated? Explain its merits
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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
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5 years. The company?s required rate of return 10% and pays taxat 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
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Year 1 2 3 4 5Project
A
4,000 4,000 4000 4000 4000
Project
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B5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
(6)
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4i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
Level 4 Analysing
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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
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Rs.14000 per year for six years. The required rate of return ofboth 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%
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PVF6
th
year
(4.231)
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4.111 3.998 3.889 3.784 3.685 3.589 3.498(7)
Level 5 Evaluating
(6)
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6i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
Level 6 Creating
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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)
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Level 1 Rememberingii)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)
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8i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
Level 2 Understanding
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ii)GURU Ltd has paid up equity capital 60000 equity shares ofRs.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
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shares of Rs.100 each aggregating Rs.3,00,000 at 5% discountand 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.
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9i)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
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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
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overall cost of capital for evaluating new investments.Level 4 Analysing
11
i)What is Modigliani-Miller approach to the problem of cost of
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capital structure? Under what assumptions do their conclusion holdgood?
(7)
Level 1
Remembering
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ii) Suppose the dividend per share of firm is expected to be Rs.1.50per 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)
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12i)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?
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(6)13
How would you explain about Specific cost and overall cost of
capital?
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Level 4 Analysing14
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
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10%Debentures :Rs.6,00,00015%termloan :Rs.18,00,000
Total Rs.30,00,000
Determine the weighted average cost of capital of the company.
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It has been paying dividends at a constant rate of 20% p.a. Whatdifference will it make if the current price of Rs.100 share is
Rs.200?
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
Capital expenditure decisions are by far the most important decisions in the field of management.
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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
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on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investmentproposal 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?
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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.
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Dividend decision - Importance, Relevance & Irrelevance theories ? Walter?s ? Model, Gordon?s modeland MM model. ? Factors determining dividend policy ? Types of dividend policies ? forms of dividend -
Issues in Dividend Decisions.
PART- A
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
Define stock split and reverse split.
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Level 1 Remembering2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
3
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Identify the different forms of Dividend.Level 3 Applying
4
What is Financial Leverage? State its significance.
Level 4 Analysing
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5Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
Can you interpret the existence of Operating leverage in a firm?s
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Capital Structure?Level 6 Creating
7
Define any two bases upon which capital structure is determined.
Level 1 Remembering
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8What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
How do you calculate operating leverage?
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Level 3 Applying10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
11
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Discuss the different forms of capital structureLevel 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
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13Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
Compare the different forms of dividend policy.
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Level 2 Understanding15
How would you show your understanding about trading on equity?
Level 3 Applying
16
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How would you categorize the term leverage?Level 4 Analysing
17
Define Operating Leverage.
Level 1 Remembering
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18Classify NI & NOI approaches.
Level 2 Understanding
19
Define Walter?s & Gordon model of Dividend.
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Level 1 Remembering20
Define composite leverage.
Level 1 Remembering
PART- B
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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i) How would you explain the impact of financial leverage onearnings per share
(7)
Level 1 Remembering
ii) Janaki Ltd. issued 12,000 10% debentures of Rs.100 each at (6)
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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)
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Level 2 Understandingii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
Selling price per unit: Rs.50
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Variable cost per unit: Rs.20Fixed 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
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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
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example. State the criticism against Gordon?s model.Level 4 Analysing
5
i)What are the practical considerations in formulating the dividend
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policy?(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
6
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i) Examine the legal and procedural aspects of dividend accordingto Company?s Act.
(7)
Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
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7i)What are the different types of Dividend Policy? (6)
Level 1 Remembering
ii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
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(7)8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
(8)
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Level 2 Understandingii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
9
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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
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Prove that changing dividend will affect the value of the firmaccording to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
ii) What is Walter model?
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(3)10
i)List the various factors which influence the capital structure of a
firm of your choice.
(7)
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Level 4 Analysingii)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.
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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)
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Level 1Remembering
ii)Chetan Ltd. Earns Rs.50 pershare.
(6)
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The capitalization rate is 15% and the return on investment is18%. 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%.
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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
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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
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EBIT?At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
13
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Discuss the procedure for determining the weighted averagecost of capital. What are the factors affecting weighted average
cost of capital?
Level 4 Analysing
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14Calculate 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.
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Total assets Rs.30000Total assets turnover based on sales 2
Variable costs as percentage of sales 60
Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
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10% Debenture 10000 30000Level 1 Remembering
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PART - CS.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
Particulars Company X Company Y
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Volume of Output and Sales 80000 units 100000 unitsVariable 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
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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
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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
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12% term loan Rs.2,00,000Retained 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
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par after 5 years and are quoted at Rs.90 per debenture. The tax rate applicable to the companyis 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
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the firms are equal that is Rs.1,00,000.The equity-capitalisation rate (ke
)of firm L is higher(16
per cent) than that of firm U (12.5 per cent).Also prove MM hypothesis.
4
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(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
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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
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and ke
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
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UNIT ? IV ?WORKING CAPITAL MANAGEMENT
SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation of
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working capital Accounts Receivables Management and factoring - Cash management ? Models -Workingcapital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
Define ?Commercial paper?.
Level 1 Remembering
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2Explain the different types of working capital.
Level 2 Understanding
3
How would you use various methods available for forecasting
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working capital requirements?Level 3 Applying
4
Can you explain the consequences of deposit float?
Level 4 Analysing
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5State the meaning of Working Capital Management.
Level 5 Evaluating
6
Explain the term Trade credit.
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Level 6 Creating7
How would you explain Factoring?
Level 1 Remembering
8
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What is operating cycle?Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
Level 3 Applying
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10Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
What are the factors influencing current assets with the help of
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short as well as long term funds?Level 5 Evaluating
12
What is your opinion about NWC?
Level 6 Creating
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13How would you explain credit evaluation?
Level 1 Remembering
14
Explain aging schedule.
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Level 2 Understanding15
How would you draw an operating cycle of working capital for
a manufacturing company?
Level 3 Applying
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16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
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17Define Cash Management.
Level 1 Remembering
18
What do you mean by operating efficiency?
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Level 2 Understanding19
What is Cash planning?
Level 1 Remembering
20
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List out the motives for holding cash.Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
How would you explain receivable control techniques?
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Level 1 Remembering2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
ii) What are the various principles of working capital? (5)
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3i) What services are provided by a factor?
(6)
Level 3 Applying
ii) What are the costs and benefits of factoring?
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(7)4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
ii) Discuss the various opportunities available to thecompanies to
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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?
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Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
Level 6 Creating
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7i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
Level 1 Remembering
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ii) Can you list the various basic problems in the cashmanagement?
(5)
8
Will you interpret in your own words i) Trade discount,
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ii) Commercial paper iii)Lock box system iv)Credit Policy variablesLevel 2 Understanding
9
i) Explain the three principal motives for holding cash.
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(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?
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(9)10
i)Can you a give brief note on factoring, its process?
(8)
Level 4 Analysing
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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
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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
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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
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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.
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Level 1
Remembering
12
From the following data prepare a statement showingrequirement
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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
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(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
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(h) Analysis of cost per unit is as below.Raw Material 5 UNIT
Labour 3 UNIT
Level 2 Understanding
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Overheads 2 UNITProfit 5 UNIT
Find out the working capital requirement?
13
i)What are the methods of preparing short term cash forecast?
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(7)Level 4 Analysing
ii) Whatare the uses of long term cash forecasting?
(6)
14
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i)What criteria are followed to select marketable securities forinvesting cash surplus?
(6)
Level 1 Remembering
ii) What are the short term investments in India for investing short
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term cash?(7)
PART - C
S.NO QUESTIONS
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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.
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Raw materials Rs.78
Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
Total cost Rs.165
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Profit Rs.24Selling price Rs.189
Additional information:
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(i) Average raw materials in stock : onemonth(ii) Average materials?inprocess (50% completionstage):1/2month
(iii) Average finished goods in stock: one month
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(iv)Credit allowed by suppliers: onemonth(v) Credit allowed to customers : Twomonths
(vi) Time lag in payment of wages : one and halfweeks
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(vii) Overhead expenses : onemonthOne 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.
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3Calculate the working capital allow 10% contingencies
Cost per unit
Raw Material Cost Rs.100
Labour cost Rs20
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Overheads Rs.20Total Cost Rs.140
Profit Rs.60
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Selling price Rs.200
Additionalinformation:
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No. of units sold =25000 unitsAverage Raw material stock 2months
Average work in process 1 month
Finished goods 2month
One fourth of the sales is based on cash.
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Debtors 1 monthLag in wages 1/2 month
Lag in payment to Creditors 1 month
Lag in payment in overhead expenses 1/2 month
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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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FirstRanker.com - FirstRanker's Choice
(An
?
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DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
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II SEMESTER1915203 ? FINANCIAL MANAGEMENT
Regulation ? 2019
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Academic Year 2019 - 2020--- Content provided by FirstRanker.com ---
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Prepared byDr.L.Sujatha ? Asst. Professor(Sel.G)
Ms.A.UmaDevi ? Asst. Professor(OG)
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(An
? .
DEPARTMENT OF MANAGEMENT STUDIES
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QUESTION BANKSUBJECT : 1915203 ? FINANCIAL MANAGEMENT
SEM / YEAR : II SEMESTER / I YEAR
UNIT ? I ?FOUNDATIONS OF FINANCE
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SYLLABUS:Introduction to finance- Financial Management ? Nature, scope and functions ofFinance, 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
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S.NO QUESTIONS BT LEVEL COMPETENCE1
Define Financial Management.
Level 1 Remembering
2
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Differentiate Systematic Risk and Unsystematic Risk.Level 2 Understanding
3
Identify the two aspects of financial management.
Level 3 Applying
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4A 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
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5Discuss the objectives and goals of financial management.
Level 5 Evaluating
6
Interpret any four functions of finance manager in an
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organisation.Level 6 Creating
7
Explain Financing decision.
Level 1 Remembering
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8Compare modern view of financial management with its traditional
view.
Level 2 Understanding
9
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How is the term finance more comprehensive than moneymanagement?
Level 3 Applying
10
Return on market portfolio has a standard deviation of 20%
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and covariance between the returns on the market portfolio andthat 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
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?Level 5 Evaluating
12
Interpret modern view on financial management.
Level 6 Creating
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13Define Risk analytics.
Level 1 Remembering
14
Can you explain Rule 72 and Rule 69?
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Level 2 Understanding15
How is bond different from equity?
Level 3 Applying
16
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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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18
What is the main idea of Financial Risk?
Level 2 Understanding
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19Define yield to call.
Level 1 Remembering
20
What is effective rate of interest?
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Level 1 RememberingPART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i) State and explain the functions of finance. Why is wealth
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maximization considered as the prime objective of financialmanagement 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
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the Yield To Maturity (YTM) on this bond? What is the approximateYTM?
(6)
2
Discuss the features of shares and bonds?
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Level 2 Understanding
3
i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
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(6)Level 3 Applying
ii) What approach would you use to value bonds and shares?
(7)
4
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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
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i) How would you evaluate the general principles of valuation ofshares?
(7)
Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
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a portfolio and single asset?(6)
6
Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
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Level 6 Creating
7
i) Define the concept of risk return trade off with diagram.
(7)
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Level 1 Remembering ii) A company?s current price of share is Rs.60 and dividend pershare is Rs.4. If its capitalization rate is 12 per cent, what is the
dividend growth rate?
(6)
8
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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
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9i) Explain the functions of finance manager of a firm.
(7)
Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
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to financial management?(6)
10
i) What inference can you make from the three major decisions in
financial management?
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(7)Level 4 Analysing
ii) What ideas justify the scope of financial management in any
organization?
(6)
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11A 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?
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Level 1
Remembering
12
i) How would you explain the various concepts of value? State
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the formula for bond valuation.(7)
Level 2 Understanding
ii) Can you explain the relationship between coupon rate, required
yield and price?
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(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
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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
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years, then at 10%rate of the next three years, after which it isexpected 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
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present value?Year 1 2 3 4 5 6
PVF
@
9%
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0.917 0.842 0.772 0.708 0.650 0.596Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
Consider two securities X & Y. The return of the securities is given below:
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Probability Return X Return Y
0.5 4 0
0.4 2 3
0.1 0 3
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The investor has decided to invest 1/3
rd
of investment in X and 2/3
rd
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in Y. Find out (i) Portfolioreturn (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.
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Security X 30 20 22 33 15Security Y -20 10 20 10 20
Security z -20 -10 -5 10 30
3
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A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to growat 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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UNIT ? II ? INVESTMENT DECISIONS
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SYLLABUS:Capital Budgeting: Principles and techniques - Nature of capital budgeting- Identifyingrelevant 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
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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Define ?pay back period? method.Level 1 Remembering
2
Compare operating risk and financial risk?
Level 2 Understanding
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3Identify any two important advantages of payback period
method.
Level 3 Applying
4
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What are the needs of capital Budgeting?Level 4 Analysing
5
Discuss the significance of IRR.
Level 5 Evaluating
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6Interpret the significance of capital budgeting.
Level 6 Creating
7
How would you measure the time value of money in capital budgeting?
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Level 1 Remembering8
Explain the concept IRR.
Level 2 Understanding
9
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What is meant by Weighted average cost of capital?Level 3 Applying
10
What are the merits of NPV method?
Level 4 Analysing
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11Define floatation costs in computing the cost of capital?
Level 5 Evaluating
12
Interpret the adjusted NPV with NPV.
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Level 6 Creating13
How would you explain the meaning of Capital Rationing?
Level 1 Remembering
14
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Determine the payback period from the following cash flowsYear 0 1 2 3 4 5
CFAT 100000 20000 30000 40000 50000 60000
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Level 2 Understanding15
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
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market price per share is Rs.25.Level 3 Applying
16
Classify the various costs in computing the cost of capital?
Level 4 Analysing
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17Distinguish the two ways of defining benefit cost ratio.
Level 1 Remembering
18
Compare NPV & IRR.
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Level 2 Understanding19
What are the features of ARR method?
Level 1 Remembering
20
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Define cost of retained earnings.Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
i)Analyze the different techniques of Capital budgeting with
practical examples.
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(7)Level 1 Remembering
ii) How would you rank capital budgeting proposals for the purpose
of their selection?
(6)
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2i) 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.
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(9)3
i) How is accounting rate of return calculated? Explain its merits
and demerits.
(7)
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Level 3 Applyingii)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.
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The before tax cash flows expected to be generatedby the projectare as follows.
Before tax cash flows
Year 1 2 3 4 5
Project
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A4,000 4,000 4000 4000 4000
Project
B
5,000 5,000 2000 5000 5000
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Calculate for each project i) PBP ii) NPV iii) PI. Which projectshould be accepted and why?
(6)
4
i)How would you show your understanding on factors influencing
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capital budgeting decisions?(7)
Level 4 Analysing
ii)Can you assess the role of inflation in capital budgeting? (6)
5
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Machine X has a cost of Rs.75, 000 and net cash flow ofRs.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
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machines. Which machine should be accepted and why?11% 12% 13% 14% 15% 16% 17% 18%
PVF
6
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thyear
(4.231)
4.111 3.998 3.889 3.784 3.685 3.589 3.498
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(7)Level 5 Evaluating
(6)
6
i)Explain capital budgeting and discuss in detail the need and
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Importanceof it.(7)
Level 6 Creating
ii)Discuss the different kinds of capital budgeting proposals. (6)
7
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i)Analyse the important techniques used for decision making underrisk and uncertainty in capital budgeting.
(7)
Level 1 Remembering
ii)A project costs Rs.20, 00, 000 and yields annually a profit of
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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
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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
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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
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corporate tax rate is 40% the growth rate in dividends on equityshares 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?
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(7)Level 3 Applying
ii)How would you show your understanding of the concept capital
rationing?
(6)
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10Discuss 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.
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Level 4 Analysing11
i)What is Modigliani-Miller approach to the problem of cost of
capital structure? Under what assumptions do their conclusion hold
good?
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(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
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perpetually. Determine the cost of equity capital, assuming themarket price per shareisRs.30.
(6)
12
i)What are the steps involved in computing cost of capital? (7)
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Level 2 Understandingii)How would you explain the factors influencing overall cost
of capital of the firm?
(6)
13
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How would you explain about Specific cost and overall cost ofcapital?
Level 4 Analysing
14
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The following information has been taken from the balance sheetof 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
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Total Rs.30,00,000Determine 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
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Rs.200?Level 1 Remembering
PART - C
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S.NO QUESTIONS1
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?.
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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
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proposal yield per year so that the market price does not change?UNIT ? III ? FINANCING AND DIVIDEND DECISION
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SYLLABUS:Leverages - Operating and Financial leverage ? measurement of leverages ? Degree ofOperating & 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 -
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Issues in Dividend Decisions.PART- A
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
Define stock split and reverse split.
Level 1 Remembering
2
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Compare ?bonus issue? and ?share ?split? on four aspects.Level 2 Understanding
3
Identify the different forms of Dividend.
Level 3 Applying
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4What is Financial Leverage? State its significance.
Level 4 Analysing
5
Discuss the meaning of Dividend policy.
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Level 5 Evaluating6
Can you interpret the existence of Operating leverage in a firm?s
Capital Structure?
Level 6 Creating
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7Define any two bases upon which capital structure is determined.
Level 1 Remembering
8
What is meant by debt equity ratio and interest coverage ratio?
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Level 2 Understanding9
How do you calculate operating leverage?
Level 3 Applying
10
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How does interest coverage ratio affect the Capital Structure?Level 4 Analysing
11
Discuss the different forms of capital structure
Level 5 Evaluating
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12Interpret arbitrage pricing in capital structure theory.
Level 6 Creating
13
Define dividend payout ratio? Brief with a simple illustration.
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Level 1 Remembering14
Compare the different forms of dividend policy.
Level 2 Understanding
15
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How would you show your understanding about trading on equity?Level 3 Applying
16
How would you categorize the term leverage?
Level 4 Analysing
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17Define Operating Leverage.
Level 1 Remembering
18
Classify NI & NOI approaches.
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Level 2 Understanding19
Define Walter?s & Gordon model of Dividend.
Level 1 Remembering
20
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Define composite leverage.Level 1 Remembering
PART- B
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
i) How would you explain the impact of financial leverage on
earnings per share
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(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
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i) What is the main idea of Modigliani Miller approach on cost ofcapital?
(7)
Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
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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
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the new operating leverage, if the variable cost is Rs.30perunit?(6)
3
Explain the different types of Dividend and also its policy.
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Level 3 Applying4
What are the essentials of Gordon?s model? Illustrate with an
example. State the criticism against Gordon?s model.
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Level 4 Analysing5
i)What are the practical considerations in formulating the dividend
policy?
(7)
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Level 5 EvaluatingIi) Elaborate in detail the various forms of dividends. (6)
6
i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
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(7)Level 6 Creating
ii) Distinguish between operating and financial leverage. (6)
7
i)What are the different types of Dividend Policy? (6)
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Level 1 Rememberingii)Define the essentials of Walters Dividend model? Explain
its shortcomings.
(7)
8
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i)Can you explain how to measure the degree of operating andfinancial leverage? Illustrate with an example.
(8)
Level 2 Understanding
ii)How would you summarize the factors to be considered in
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determining capital structure ofacompany?(5)
9
i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
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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%.
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(10)Level 3 Applying
ii) What is Walter model?
(3)
10
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i)List the various factors which influence the capital structure of afirm of your choice.
(7)
Level 4 Analysing
ii)Find out operating, financial and combined leverages from the
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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).
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(6)11
i)Can you recall the factors affecting the dividend policy? (7)
Level 1
Remembering
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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
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a) The optimum Pay-outb) 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
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A firm has sales of Rs.75, 00,000, variable cost of Rs.42, 00,000and 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?
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iii) What are the operating, financial and combinedleverages 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?
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Level 2 Understanding
13
Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
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cost of capital?Level 4 Analysing
14
Calculate financial and operating leverage under situations when
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fixed costs are i) Rs.50000 ii) Rs.10000 and financialplans 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
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Variable costs as percentage of sales 60Capital Structure Financial Plan 1 Financial Plan 2
Equity 30000 10000
10% Debenture 10000 30000
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Level 1 RememberingPART - C
S.NO QUESTIONS
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1The 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
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Fixed Cost Rs.240000 Rs.250000Interest 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
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(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
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10,000 Equity shares of Rs.10 each issued at par Rs.1,00,0005,000 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
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The market price of an equity share is Rs.30. The next expected dividend is Rs.3 per share andthe 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%.
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3Assume 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
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)of firm L is higher(16per 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
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company has Rs. 2, 00,000, 10% debentures. The equity capitalisation rate (ke
) of the
company is 12.5 per cent. Find the value of the firm & the overall cost of capital.
(5marks)
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(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
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would remainunaffected as per the assumptions of the NI approach. In the new situation, find the value of
the firm. (5 marks)
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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.
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PART- AS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1Define ?Commercial paper?.
Level 1 Remembering
2
Explain the different types of working capital.
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Level 2 Understanding3
How would you use various methods available for forecasting
working capital requirements?
Level 3 Applying
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4Can you explain the consequences of deposit float?
Level 4 Analysing
5
State the meaning of Working Capital Management.
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Level 5 Evaluating6
Explain the term Trade credit.
Level 6 Creating
7
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How would you explain Factoring?Level 1 Remembering
8
What is operating cycle?
Level 2 Understanding
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9How would you apply the steps in receivables forecasting?
Level 3 Applying
10
Can you specify why Working Capital Management is needed?
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Level 4 Analysing11
What are the factors influencing current assets with the help of
short as well as long term funds?
Level 5 Evaluating
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12What is your opinion about NWC?
Level 6 Creating
13
How would you explain credit evaluation?
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Level 1 Remembering14
Explain aging schedule.
Level 2 Understanding
15
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How would you draw an operating cycle of working capital fora manufacturing company?
Level 3 Applying
16
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Can you give a brief note on Treasury Bills?Level 4 Analysing
17
Define Cash Management.
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Level 1 Remembering18
What do you mean by operating efficiency?
Level 2 Understanding
19
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What is Cash planning?Level 1 Remembering
20
List out the motives for holding cash.
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1How would you explain receivable control techniques?
Level 1 Remembering
2
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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?
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(6)Level 3 Applying
ii) What are the costs and benefits of factoring?
(7)
4
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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)
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5What is the role of Credit terms and Credit standards in the credit
policy of a firm?
Level 5 Evaluating
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6Examine the various issues in estimation of working capital?
Level 6 Creating
7
i) How would you describe the principles, needs and determinants
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of working capital to a manufacturing firm?(8)
Level 1 Remembering
ii) Can you list the various basic problems in the cash
management?
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(5)8
Will you interpret in your own words i) Trade discount,
ii) Commercial paper iii)Lock box system iv)Credit Policy variables
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Level 2 Understanding9
i) Explain the three principal motives for holding cash.
(4)
Level 3 Applying
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Iii) What facts would you select to show the cash managementmodels proposed by Baumol and Miller Orr with their merits and
demerits?
(9)
10
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i)Can you a give brief note on factoring, its process?(8)
Level 4 Analysing
ii) How would you explain factoring types?
(5)
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11PC 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
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? 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
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? Sales promotion expenses payable half yearly inadvance 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.
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The cash balance is maintained as Rs 10, 0000 as aprecautionary measure assuming a 10% margin. Find out the
working capital requirement of PC Ltd.
Level 1
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Remembering12
From the following data prepare a statement showingrequirement
for
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(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
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(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
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Labour 3 UNITLevel 2 Understanding
Overheads 2 UNIT
Profit 5 UNIT
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Find out the working capital requirement?13
i)What are the methods of preparing short term cash forecast?
(7)
Level 4 Analysing
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ii) Whatare the uses of long term cash forecasting?(6)
14
i)What criteria are followed to select marketable securities for
investing cash surplus?
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(6)Level 1 Remembering
ii) What are the short term investments in India for investing short
term cash?
(7)
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PART - C
S.NO QUESTIONS
1 Illustrate the methodology to raise working capital finance.
2
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From the following information of VSGR Company Ltd., estimate working capital needed tofinance a level of activity of 1,10,000 units of production after adding a 10 per cent safety
contingency.
Raw materials Rs.78
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Direct Labour Rs.29Overheads(excluding depreciation) Rs.58
Total cost Rs.165
Profit Rs.24
Selling price Rs.189
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Additional information:
(i) Average raw materials in stock : onemonth
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(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
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(vi) Time lag in payment of wages : one and halfweeks
(vii) Overhead expenses : onemonth
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One fourth of the sales are on cash basis. Cash balance is expected to be Rs. 2, 15,000. Youmay 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
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Cost per unitRaw Material Cost Rs.100
Labour cost Rs20
Overheads Rs.20
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Total Cost Rs.140Profit Rs.60
Selling price Rs.200
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Additionalinformation:
No. of units sold =25000 units
Average Raw material stock 2months
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Average work in process 1 monthFinished goods 2month
One fourth of the sales is based on cash.
Debtors 1 month
Lag in wages 1/2 month
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Lag in payment to Creditors 1 monthLag in payment in overhead expenses 1/2 month
Cash balance ?Rs.1, 00,000
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4?Maintaining optimum working capital is required?- Justify. Discuss the consequences
of inadequate or excess working capital.
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UNIT ? V ?LONG TERM SOURCES OF FINANCESYLLABUS: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
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BTLEVEL
COMPETENCE
1
Define the term debenture.
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Level 1 Remembering2
How would you Compare debenture and preference share
capital?
Level 2 Understanding
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3What are the benefits of project financing?
Level 3 Applying
4
Can you list any four intermediaries ?associates with a company?
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issue of capital.Level 4 Analysing
5
How will you estimate risk in venture capital firms?
Level 5 Evaluating
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6Can you assess preferential issues of securities?
Level 6 Creating
7
Who is a lame duck?
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Level 1 Remembering8
Compare Hire Purchase and lease.
Level 2 Understanding
9
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How do you examine the intermediaries associated with acompany?s issue of capital?
Level 3 Applying
10
What inference can you make from pre ? emptive right of equity
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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
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features of it.Level 6 Creating
13
Define the internal financing of a firm.
Level 1 Remembering
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14What can you say about Venture Capital?
Level 2 Understanding
15
What approach would you use to classify ?BOOT? in project
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financing? Quote a practical example.Level 3 Applying
16
Can you make a distinction between term loans and bought out
deal.
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Level 4 Analysing17
Define Hire purchase.
Level 1 Remembering
18
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What is book building and listing?Level 2 Understanding
19
What is private equity?
Level 1 Remembering
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20What is the role of Indian capital market?
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
i)List the features of various long term sources of finance.
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(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
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purchase? What are the cash flows consequences of a lease?Illustrate.
Level 2 Understanding
FirstRanker.com - FirstRanker's Choice
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(An
?
DEPARTMENT OF MANAGEMENT STUDIES
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QUESTION BANK
II SEMESTER
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1915203 ? FINANCIAL MANAGEMENTRegulation ? 2019
Academic Year 2019 - 2020
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Prepared by
Dr.L.Sujatha ? Asst. Professor(Sel.G)
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Ms.A.UmaDevi ? Asst. Professor(OG)--- Content provided by FirstRanker.com ---
(An? .
DEPARTMENT OF MANAGEMENT STUDIES
QUESTION BANK
SUBJECT : 1915203 ? FINANCIAL MANAGEMENT
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SEM / YEAR : II SEMESTER / I YEARUNIT ? 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
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decisions ? valuation of shares and bonds ? Concept of risk and return ? single asset and of aportfolio ? Risk Analytics.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE
1
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Define Financial Management.Level 1 Remembering
2
Differentiate Systematic Risk and Unsystematic Risk.
Level 2 Understanding
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3Identify the two aspects of financial management.
Level 3 Applying
4
A Rs.10, 000 per value bond bearing a coupon rate of 12% will
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mature after 5 years. Compute the value of bond, if the discountrate is 15%?
Level 4 Analysing
5
Discuss the objectives and goals of financial management.
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Level 5 Evaluating6
Interpret any four functions of finance manager in an
organisation.
Level 6 Creating
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7Explain Financing decision.
Level 1 Remembering
8
Compare modern view of financial management with its traditional
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view.Level 2 Understanding
9
How is the term finance more comprehensive than money
management?
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Level 3 Applying10
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?
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Level 4 Analysing11
How would you have a fresh look at the finance function in
?
Level 5 Evaluating
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12Interpret modern view on financial management.
Level 6 Creating
13
Define Risk analytics.
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Level 1 Remembering14
Can you explain Rule 72 and Rule 69?
Level 2 Understanding
15
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How is bond different from equity?Level 3 Applying
16
What inference can you make from real and financial assets?
Level 4 Analysing
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17What is Risk Premium?
Level 1 Remembering
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18What is the main idea of Financial Risk?
Level 2 Understanding
19
Define yield to call.
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Level 1 Remembering20
What is effective rate of interest?
Level 1 Remembering
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PART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
i) State and explain the functions of finance. Why is wealth
maximization considered as the prime objective of financial
management over profit maximization?
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(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?
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(6)2
Discuss the features of shares and bonds?
Level 2 Understanding
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3i) What is risk? Discuss the methods of Calculating risk for single
assets and of a portfolio?
(6)
Level 3 Applying
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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?
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(13)Level 4 Analysing
5
i) How would you evaluate the general principles of valuation of
shares?
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(7)Level 5 Evaluating
ii) Can you assess the concept and significance of risk and return of
a portfolio and single asset?
(6)
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6Evaluate ?The goal of profit maximization does not provide an
operationally useful criterion? ? Explain
Level 6 Creating
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7i) 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
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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
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calculations of returns?Level 2 Understanding
9
i) Explain the functions of finance manager of a firm.
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(7)Level 3 Applying
ii) Can you explain the features & scope of the modern approaches
to financial management?
(6)
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10i) What inference can you make from the three major decisions in
financial management?
(7)
Level 4 Analysing
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ii) What ideas justify the scope of financial management in anyorganization?
(6)
11
A bond has 3 years remaining until maturity. It has a par value of
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Rs.1, 000. The coupon interest rate on the bond is 10%. Howwould you compute the yield to maturity at current market price of
Rs.1, 100 assuming interest is paid annually?
Level 1
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Remembering12
i) How would you explain the various concepts of value? State
the formula for bond valuation.
(7)
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Level 2 Understandingii) Can you explain the relationship between coupon rate, required
yield and price?
(6)
13
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Analyse the value of a share for which the current dividend is Rs.3and 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
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14ABC 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.
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(i) What is the present value of the share if thecapitalization rate is9%?
(ii) If the share is held for 3 years, what shall be its
present value?
Year 1 2 3 4 5 6
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PVF@
9%
0.917 0.842 0.772 0.708 0.650 0.596
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Level 1 Remembering
PART - C
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S.NO QUESTIONS1
Consider two securities X & Y. The return of the securities is given below:
Probability Return X Return Y
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0.5 4 00.4 2 3
0.1 0 3
The investor has decided to invest 1/3
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rdof investment in X and 2/3
rd
in Y. Find out (i) Portfolio
return (ii) Co Variance (iii) Portfolio risk (iv) Correlation Coefficient.
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2There 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
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Security z -20 -10 -5 10 303
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
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grow at a 5% rate forever. (a) What is the present value of the share if thecapitalization 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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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,
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Net Present Value, Internal Rate of Return, Profitability Index - Comparison of DCF techniquesConcept and measurement of cost of capital - Specific cost and overall cost of capital.
PART- A
S.NO QUESTIONS
BT
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LEVELCOMPETENCE
1
Define ?pay back period? method.
Level 1 Remembering
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2Compare operating risk and financial risk?
Level 2 Understanding
3
Identify any two important advantages of payback period
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method.Level 3 Applying
4
What are the needs of capital Budgeting?
Level 4 Analysing
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5Discuss the significance of IRR.
Level 5 Evaluating
6
Interpret the significance of capital budgeting.
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Level 6 Creating7
How would you measure the time value of money in capital budgeting?
Level 1 Remembering
8
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Explain the concept IRR.Level 2 Understanding
9
What is meant by Weighted average cost of capital?
Level 3 Applying
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10What are the merits of NPV method?
Level 4 Analysing
11
Define floatation costs in computing the cost of capital?
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Level 5 Evaluating12
Interpret the adjusted NPV with NPV.
Level 6 Creating
13
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How would you explain the meaning of Capital Rationing?Level 1 Remembering
14
Determine the payback period from the following cash flows
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Year 0 1 2 3 4 5CFAT 100000 20000 30000 40000 50000 60000
Level 2 Understanding
15
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Suppose the dividend per share of firm is expected to beRe.1 pershare 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
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16Classify the various costs in computing the cost of capital?
Level 4 Analysing
17
Distinguish the two ways of defining benefit cost ratio.
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Level 1 Remembering18
Compare NPV & IRR.
Level 2 Understanding
19
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What are the features of ARR method?Level 1 Remembering
20
Define cost of retained earnings.
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i)Analyze the different techniques of Capital budgeting with
practical examples.
(7)
Level 1 Remembering
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ii) How would you rank capital budgeting proposals for the purposeof their selection?
(6)
2
i) Can you recall the process of capital budgeting? (4)
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Level 2 Understandingii)Capital expenditure decisions are by far the most important
decisions in the field of management ? Justify.
(9)
3
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i) How is accounting rate of return calculated? Explain its meritsand demerits.
(7)
Level 3 Applying
ii)A company is considering two mutually exclusive projects both
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require an initial cash outlay of Rs.10, 000 each and have a life of5 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.
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Before tax cash flowsYear 1 2 3 4 5
Project
A
4,000 4,000 4000 4000 4000
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ProjectB
5,000 5,000 2000 5000 5000
Calculate for each project i) PBP ii) NPV iii) PI. Which project
should be accepted and why?
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(6)4
i)How would you show your understanding on factors influencing
capital budgeting decisions?
(7)
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Level 4 Analysingii)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
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would cost Rs.50, 000 and generate net cash flow ofRs.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?
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11% 12% 13% 14% 15% 16% 17% 18%PVF
6
th
year
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(4.231)4.111 3.998 3.889 3.784 3.685 3.589 3.498
(7)
Level 5 Evaluating
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(6)6
i)Explain capital budgeting and discuss in detail the need and
Importanceof it.
(7)
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Level 6 Creatingii)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.
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(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.
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(6)8
i)Explain the conditions that should be satisfied for using a firms
overall cost of capital for evaluating new investments.
(6)
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Level 2 Understandingii)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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shares. The company has also previously issued 14% preferenceshares 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
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company.9
i)How is cost of equity capital determined under CAPM? Explain?
(7)
Level 3 Applying
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ii)How would you show your understanding of the concept capitalrationing?
(6)
10
Discuss the steps involved in calculating overall cost of capital and
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also outline the conditions that should be satisfied for using a firm?soverall cost of capital for evaluating new investments.
Level 4 Analysing
11
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i)What is Modigliani-Miller approach to the problem of cost ofcapital structure? Under what assumptions do their conclusion hold
good?
(7)
Level 1
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Rememberingii) 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.
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(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
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of capital of the firm?(6)
13
How would you explain about Specific cost and overall cost of
capital?
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Level 4 Analysing
14
The following information has been taken from the balance sheet
of Ram Co. as on 31-12-2016.
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Equity share Capital : Rs. 6,00,00010%Debentures :Rs.6,00,000
15%termloan :Rs.18,00,000
Total Rs.30,00,000
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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
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PART - C
S.NO QUESTIONS
1
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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
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A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of returnon 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?
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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
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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
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S.NO QUESTIONSBT
LEVEL
COMPETENCE
1
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Define stock split and reverse split.Level 1 Remembering
2
Compare ?bonus issue? and ?share ?split? on four aspects.
Level 2 Understanding
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3Identify the different forms of Dividend.
Level 3 Applying
4
What is Financial Leverage? State its significance.
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Level 4 Analysing5
Discuss the meaning of Dividend policy.
Level 5 Evaluating
6
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Can you interpret the existence of Operating leverage in a firm?sCapital Structure?
Level 6 Creating
7
Define any two bases upon which capital structure is determined.
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Level 1 Remembering8
What is meant by debt equity ratio and interest coverage ratio?
Level 2 Understanding
9
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How do you calculate operating leverage?Level 3 Applying
10
How does interest coverage ratio affect the Capital Structure?
Level 4 Analysing
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11Discuss the different forms of capital structure
Level 5 Evaluating
12
Interpret arbitrage pricing in capital structure theory.
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Level 6 Creating13
Define dividend payout ratio? Brief with a simple illustration.
Level 1 Remembering
14
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Compare the different forms of dividend policy.Level 2 Understanding
15
How would you show your understanding about trading on equity?
Level 3 Applying
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16How would you categorize the term leverage?
Level 4 Analysing
17
Define Operating Leverage.
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Level 1 Remembering18
Classify NI & NOI approaches.
Level 2 Understanding
19
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Define Walter?s & Gordon model of Dividend.Level 1 Remembering
20
Define composite leverage.
Level 1 Remembering
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PART- BS.NO QUESTIONS
BT
LEVEL
COMPETENCE
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1i) How would you explain the impact of financial leverage on
earnings per share
(7)
Level 1 Remembering
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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?
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(7)Level 2 Understanding
ii) Show the operating leverage for Maruti Ltd., from the
following information:
No. of Units produced : 50,000
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Selling price per unit: Rs.50Variable 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)
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3Explain the different types of Dividend and also its policy.
Level 3 Applying
4
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What are the essentials of Gordon?s model? Illustrate with anexample. State the criticism against Gordon?s model.
Level 4 Analysing
5
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i)What are the practical considerations in formulating the dividendpolicy?
(7)
Level 5 Evaluating
Ii) Elaborate in detail the various forms of dividends. (6)
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6i) Examine the legal and procedural aspects of dividend according
to Company?s Act.
(7)
Level 6 Creating
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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
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its shortcomings.(7)
8
i)Can you explain how to measure the degree of operating and
financial leverage? Illustrate with an example.
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(8)Level 2 Understanding
ii)How would you summarize the factors to be considered in
determining capital structure ofacompany?
(5)
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9i)Assume that there are 3 firms A, B, C.
PARTICULARS A B C
K 12% 12% 12%
R 18% 12% 8%
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Eps(Rs) 10 10 10Prove that changing dividend will affect the value of the firm
according to Walter model. Use payout ratio 0%, 50%, 100%.
(10)
Level 3 Applying
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ii) What is Walter model?(3)
10
i)List the various factors which influence the capital structure of a
firm of your choice.
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(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
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cost at Rs.8 per unit.Fixed cost Rs.90, 000 (including 10% interest on Rs.2, 50,000).
(6)
11
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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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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
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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 @
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9% and equity of Rs.55,00,000i) What is the firm?sROI?
ii) Does it have favourable financial leverage?
iii) What are the operating, financial and combined
leverages of the firm?
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iv) If the sale drops to Rs.50, 00,000, what will be the newEBIT?
At what level will the EBT of the firm be equal to zero?
Level 2 Understanding
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13Discuss the procedure for determining the weighted average
cost of capital. What are the factors affecting weighted average
cost of capital?
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Level 4 Analysing14
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
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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
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Equity 30000 1000010% Debenture 10000 30000
Level 1 Remembering
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PART - C
S.NO QUESTIONS
1
The following projections have been given in respect of company X and Y.
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Particulars Company X Company YVolume 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
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Selling price per unit Rs.10 Rs.8On the basis of above information calculate (A) OL (B) FL (C) combined leverage
(D) operating BEP (E) financial BEP.
2
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You are required to calculate the overall cost of capital, from the following capital structure of acompany.
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
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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
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7 years at par and are currently quoted at Rs.75 per share. The debentures are redeemable atpar 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
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10 per cent, Rs. 5,00,000 debentures. The earnings before interest and taxes (EBIT) of boththe 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.
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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
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) of thecompany 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
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iand k
e
would remain
unaffected as per the assumptions of the NI approach. In the new situation, find the value of
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UNIT ? IV ?WORKING CAPITAL MANAGEMENT
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SYLLABUS:Principles of working capital: Concepts, Needs, Determinants, issues and estimation ofworking capital Accounts Receivables Management and factoring - Cash management ? Models -Working
capital finance: Trade credit, Bank finance and Commercial paper.
PART- A
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
Define ?Commercial paper?.
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Level 1 Remembering2
Explain the different types of working capital.
Level 2 Understanding
3
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How would you use various methods available for forecastingworking capital requirements?
Level 3 Applying
4
Can you explain the consequences of deposit float?
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Level 4 Analysing5
State the meaning of Working Capital Management.
Level 5 Evaluating
6
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Explain the term Trade credit.Level 6 Creating
7
How would you explain Factoring?
Level 1 Remembering
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8What is operating cycle?
Level 2 Understanding
9
How would you apply the steps in receivables forecasting?
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Level 3 Applying10
Can you specify why Working Capital Management is needed?
Level 4 Analysing
11
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What are the factors influencing current assets with the help ofshort as well as long term funds?
Level 5 Evaluating
12
What is your opinion about NWC?
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Level 6 Creating13
How would you explain credit evaluation?
Level 1 Remembering
14
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Explain aging schedule.Level 2 Understanding
15
How would you draw an operating cycle of working capital for
a manufacturing company?
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Level 3 Applying16
Can you give a brief note on Treasury Bills?
Level 4 Analysing
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17
Define Cash Management.
Level 1 Remembering
18
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What do you mean by operating efficiency?Level 2 Understanding
19
What is Cash planning?
Level 1 Remembering
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20List out the motives for holding cash.
Level 1 Remembering
PART- B
S.NO QUESTIONS
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BTLEVEL
COMPETENCE
1
How would you explain receivable control techniques?
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Level 1 Remembering
2
i) Canyou explain the factors affecting working capital? (8)
Level 2 Understanding
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ii) What are the various principles of working capital? (5)3
i) What services are provided by a factor?
(6)
Level 3 Applying
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ii) What are the costs and benefits of factoring?(7)
4
i)What is the concept of working capital cycle? (6)
Level 4 Analysing
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ii) Discuss the various opportunities available to thecompanies topark their surplus funds for a short term.
(7)
5
What is the role of Credit terms and Credit standards in the credit
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policy of a firm?Level 5 Evaluating
6
Examine the various issues in estimation of working capital?
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Level 6 Creating7
i) How would you describe the principles, needs and determinants
of working capital to a manufacturing firm?
(8)
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Level 1 Rememberingii) Can you list the various basic problems in the cash
management?
(5)
8
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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
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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
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demerits?(9)
10
i)Can you a give brief note on factoring, its process?
(8)
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Level 4 Analysingii) How would you explain factoring types?
(5)
11
PC ltd sells its product on a gross profit of 20% on sales. The
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following information is extracted from its annual accounts for theyear ended 31.12.2011.
? Sales @ 3 months credit 40,00,000
? Raw material 12,00,000
? Wages paid ? avg time lag 15 days96,0000
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? Manufacturing expenses paid ? 1 montharrear12,00,000
? Admin expenses paid in 1 month arrear48,0000
? Sales promotion expenses payable half yearly in
advance 2,00,000
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The company enjoys 1 month credit from the suppliers of rawmaterial 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
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working capital requirement of PC Ltd.Level 1
Remembering
12
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From the following data prepare a statement showingrequirementfor
(a) Estimated output for the year 130000 units ( 52weeks)
(b) Stocks of R.M ? 2 weeks &materials in process for 2weeks,
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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
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(g) Selling price / units RS 15(h) Analysis of cost per unit is as below.
Raw Material 5 UNIT
Labour 3 UNIT
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Level 2 UnderstandingOverheads 2 UNIT
Profit 5 UNIT
Find out the working capital requirement?
13
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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)
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14i)What criteria are followed to select marketable securities for
investing cash surplus?
(6)
Level 1 Remembering
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ii) What are the short term investments in India for investing shortterm cash?
(7)
PART - C
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S.NO QUESTIONS1 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
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contingency.Raw materials Rs.78
Direct Labour Rs.29
Overheads(excluding depreciation) Rs.58
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Total cost Rs.165Profit Rs.24
Selling price Rs.189
Additional information:
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(i) Average raw materials in stock : onemonth
(ii) Average materials?inprocess (50% completionstage):1/2month
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(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
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(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
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expenses accrue similarly.3
Calculate the working capital allow 10% contingencies
Cost per unit
Raw Material Cost Rs.100
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Labour cost Rs20Overheads Rs.20
Total Cost Rs.140
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Profit Rs.60Selling price Rs.200
Additionalinformation:
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No. of units sold =25000 units
Average Raw material stock 2months
Average work in process 1 month
Finished goods 2month
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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
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Lag in payment in overhead expenses 1/2 monthCash balance ?Rs.1, 00,000
4
?Maintaining optimum working capital is required?- Justify. Discuss the consequences
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UNIT ? V ?LONG TERM SOURCES OF FINANCE
SYLLABUS:Indian capital and stock market, New issues market Long term finance: Shares, debentures
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and term loans, lease, Types of Lease, hire purchase, venture capital financing, Private Equity.PART- A
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
Define the term debenture.
Level 1 Remembering
2
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How would you Compare debenture and preference sharecapital?
Level 2 Understanding
3
What are the benefits of project financing?
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Level 3 Applying4
Can you list any four intermediaries ?associates with a company?
issue of capital.
Level 4 Analysing
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5How will you estimate risk in venture capital firms?
Level 5 Evaluating
6
Can you assess preferential issues of securities?
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Level 6 Creating7
Who is a lame duck?
Level 1 Remembering
8
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Compare Hire Purchase and lease.Level 2 Understanding
9
How do you examine the intermediaries associated with a
company?s issue of capital?
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Level 3 Applying10
What inference can you make from pre ? emptive right of equity
shares?
Level 4 Analysing
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11 What facts can you compile for the lease financing? Level 5 Evaluating12
How would you interpret ?Restrictive covenants? State two
features of it.
Level 6 Creating
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13Define the internal financing of a firm.
Level 1 Remembering
14
What can you say about Venture Capital?
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Level 2 Understanding15
What approach would you use to classify ?BOOT? in project
financing? Quote a practical example.
Level 3 Applying
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16Can you make a distinction between term loans and bought out
deal.
Level 4 Analysing
17
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Define Hire purchase.Level 1 Remembering
18
What is book building and listing?
Level 2 Understanding
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19What is private equity?
Level 1 Remembering
20
What is the role of Indian capital market?
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Level 1 RememberingPART- B
S.NO QUESTIONS
BT
LEVEL
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COMPETENCE1
i)List the features of various long term sources of finance.
(8)
Level 1 Remembering
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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.
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Level 2 Understanding
3
Write a detailed note on Indian Stock Market.
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Level 3 Applying4
Discuss the various procedure involved in obtaining a term loan.
Level 4 Analysing
5
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Can you elucidate about the Venture Capital financing and explainits features & steps in detail.
Level 5 Evaluating
6
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i)What facts can you compile to discuss the rights and positionofequityshareholders?
(5)
Level 6 Creating
ii) Elaborately discuss the different classification of sharestraded
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instockexchanges.(8)
7
Discuss briefly the regulations given by SEBI to Venture Capital
Finance?
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Level 1 Remembering
8
i)Can you explain debenture and attractive features of a debenture?
(9)
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Level 2 Understandingii)How would you summarize the advantages and disadvantages
ofdebtfinancing?
(4)
9
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i) Discuss in detail the process of selecting investment by venturecapitalists.
(7)
Level 3 Applying
iiii)Differentiate between Hire Purchase and leasing.
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(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.
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Level 4 Analysing
11
i)How would you explain in detail about New issues market? (8)
Level 1 Remembering
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ii)List the difference of primary & secondarymarket. (5)12
i)Can you differentiate between term loan and working capital
loan.
(8)
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Level 2 Understandingii)Explain the criteria in evaluating term loan proposalsand
working capital proposals.
(5)
13
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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)
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14Explain the types of leasing and discuss the advantages of lease
financing.
Level 1 Remembering
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PART - CS.NO QUESTIONS
1
Explore the current trends in Indian Capital market with specific reference to the secondary
market.
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2? Discuss.
3
Describe the SEBI regulations in IPO processing.
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4Do 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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