ALPHA COLLEGE OF ENGINEERING

DEPARTMENT OF MANAGEMENT STUDIES

BA 4202 FINANCIAL MANAGEMENT – IMPORTANT QUESTIONS

Short Questions
1. Define Financial management. What are its aims?
2. What are the aims and objectives of finance?
3. What do you mean by Wealth maximization?
4. List out the various goals of Financial Management
5. The responsibility of finance manager is now regarded as much more than mere
procurement of funds. What do you think are the other responsibilities of a finance
executive
6. Briefly explain the relationship between risk and return
7. What is the concept of time value of money?
8. Mention the various long term and short term sources of finance
9. Explain the concept of present value
10. What do you mean by capital budgeting
11. What is meant by explicit cost and real cost of capital?
12. What are the techniques used to measure time value of money in Capital budgeting?

13. At IRR, NPV is Zero. Do you agree with this statement? Give reasons.

14. Define cost of capital. Explain its significance in financial decision making
15. Define Explicit Cost
16. What do you mean by Specific Cost of Capital?
17. What do you mean by Net Operating Income approach?
18. Define weighted average cost of capital.
19. Define cost of equity. What are the various methods of calculating equity capital
20. What do you mean by cost of retained earnings?
21. Define cost of preference shares.
22. Explain the concepts of Gross working capital and Net working capital
23. What do you mean by working capital? What are the various types of working capital?
24. What is the importance of working capital for a manufacturing firm?
25. Briefly explain the concepts of permanent and temporary working capital
26. What is an operating cycle?
27. How do you estimate working capital needs of a firm?
28. List the various types of long term and short term sources of finance?

Long Questions
1. Comment on the emerging role of the finance manager in India.
2. Define Finance. What according to you are the major objectives of financial
management?
3. What are the basic finance functions? How do they involve risk-return trade off?
4. Define the scope of financial management. What is the role of a finance manager in a modern
enterprise?
5. Explain the concepts of Risk and return related to a single investment and that of a
portfolio
 ALPHA COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES
BA 4202 FINANCIAL MANAGEMENT – IMPORTANT QUESTIONS

6. Why is cost of debt normally less than the cost of equity? Is it always so?
7. What is capital budgeting? Explain the various techniques of
8. Capital budgeting in detail with their merits and demerits
9. What is capital budgeting? What is its significance to a firm?
10. Briefly explain the various techniques of capital budgeting with their respective merits,
demerits and decision criteria
11. Define cost of capital. Explain the difference between specific cost of capital and
weighted average cost of capital.
12. What do you mean by specific cost of capital? Explain the various methods of
calculating equity shares, Preference shares and debt.
13. What do you mean by weighted average cost of capital? How is it calculated?
14. Explain the concept of working capital. Are gross and net concepts of working capital
exclusive? Explain.
15. Explain the concepts of working capital. What are the determinants of working capital
needs of a firm?
16. Briefly explain the factors that determine the working capital needs of a firm?
17. How is working capital affected by (a) sales (b) technology (c) production policy and (c)
inflation? Explain.
18. Define working capital management. Why is it important to study the management of
working capital as a separate area in financial management?
19. Define Cost of Capital. Discuss the factors determining the Cost of Capital. How do
they influence the planning of Capital Structure?
20. What is working capital? Explain in depth the determinants of working capital of a firm.

21. What are the essentials of Gordon’s model? Illustrate with an example. State the criticism
against Gordon’s model
22. What is an indifference point in the EBIT-EBT analysis? How would you compute it?
23. Distinguish between operating and financial leverages
24. Explain the concept of working capital. Are gross and net concepts of working capital exclusive?
Explain.
25. 2. Explain the concepts of working capital. What are the determinants of working capital needs
of a firm?
26. 3. Briefly explain the factors that determine the working capital needs of a firm?
27. 4. How is working capital affected by (a) sales (b) technology (c) production policy and (c)
inflation? Explain.
28. 5. Define working capital management. Why is it important to study the management of
working capital as a separate area in financial management?

Exercises
1. A company issues 10% irredeemable debentures of Rs.1,00,000. The company is in 55% tax
bracket. Calculate the cost of debt (before & after tax) if the debentures are issued - I) At par; ii)
10% discount and iii) 10% premium.
 ALPHA COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES
BA 4202 FINANCIAL MANAGEMENT – IMPORTANT QUESTIONS

2. A firm issues debentures of Rs.1,00,000 and realises RS.98,000 after allowing 2% commission
to brokers. The debentures carry an interest rate of 10%. They are due for maturity at the end of
the 10th year. You are required to calculate the effective cost of debt before tax.

3. A company raises preference capital of Rs.1,00,000 by issuing 10% preference shares of Rs.10
each. Calculate the cost of preference shares when they are issued at - a) 10% premium b) 10%
discount.

4. A company issues Rs.10,00,000 10% redeemable debentures at a discount of 5%. The cost of
flotation amounts to Rs.30,000. The debentures are redeemable after 5 years. Calculate before
and after tax cost of debt assuming a tax rate of 50%.

5. A company offers for public subscription equity shares of Rs.10 each at a premium of 10%.
The company is paying 5% of the issue price as under writing commission. The rate of dividend
expected by equity share holders is 20%. You are required to calculate cost of equity capital.
Will your cost of capital be different if it is to be calculated at the market value of equity shares
which is Rs.15 ?

6. There are 2 projects - X & Y. Each project requires an investment of Rs.20,000. You are
required to rank these projects according to the pay back period method from the following
information. Net profit before depreciation and after tax for both the projects is as follows.
Years Project XProject Y
1 1,000 2,000
2 2,000 4,000
3 4,000 6,000
4 5,000 8,000
5 8,000 -

8. A project requires an investment of Rs.5,00,000 and has a scrap value of Rs.20,000 after 5
years. It is expected to yield profits after depreciation and taxes during the 5 years, which
amounts to Rs.40,000, 60,000, 70,000, 50,000 and 20,000. Calculate the accounting rate of
return on the investment.

9. Using the information given below, compute NPV.

Initial outlay = Rs.80,000
Estimated life = 5 years
Years Profit after tax

1 6,000
2 14,000
3 24,000
4 16,000
5 -
Depreciation has been calculated under straight line method. The cost of capital may be taken
at 20% pa and the present value of one rupee at 20% pa is as under
 ALPHA COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES
BA 4202 FINANCIAL MANAGEMENT – IMPORTANT QUESTIONS

Years : 1, 2, 3, 4, 5
PV factor : .83, .69, .58, .48, .40.

10. Project X costs Rs.2500 now and is expected to generate year-end cash inflows of Rs.900,
Rs.800, Rs700, Rs.600 and Rs.500 in years 1 through 5. The opportunity cost of capital may be
assumed to be 10%. Advise whether the project should be accepted or not.

11. A company has on its books the following amounts and specific
costs of each type of capital.

Type of Capital Book Value (Rs) Market Value (Rs) Specific COC (%)
Debt 4,00,000 3,80,000 5
Preference 1,00,000 1,10,000 8
Equity 6,00,000 - 15
Retained Earnings 2,00,000 12,00,000 13

Determine the Weighted Average Cost of Capital using (i) Book value Weights and (ii) Market
Value weights. How are they different? Can you think of a situation where the weighted
average cost of Capital would be the same using either of weights?

12. The following information is available in respect of a firm;

Capitalization rate (Ke) = 10%; EPS = Rs.50. Assume rate of return as – (i) 12% (ii) 8% , (iii)
10%. Show the effect of dividend policy on market price of shares applying Walter’s formula
when payout ratio is – (1) 0%; (2) 20%); (3) 40%); (4) 80% and (5) 100%.

13. A. Raja Ltd. is thinking of investing in a project costing Rs. 20 lakhs. The life of the project
is five years and the estimated salvage value of the project is zero. Straight line method of
depreciation is followed. The tax rate is 50%. The expected cash flows before tax (in lakhs) are
as follows:
Year 1 2 3 4 5
Estimated cash flow before depreciation and tax 4 6 8 8 10

You are required to determine the (i) Pay back method (ii) Average rate of return (iii) Net
present value (iv) Internal rate of return. Cost of capital is 10%

14. From the following information, prepare a cash budget for three months from June to
August:
Month Sales Purchases Wages Overhead Expenses
s
June 72,000 25,000 10,000 6,000 5,500
July 97,000 31,000 12,100 6,300 6,700
Augus 86,000 25,500 10,600 6,000 7,500
t
(i) Cash balance in hand as on 1st June Rs. 72,500
(ii) 50% of sales are cash sales
 ALPHA COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES
BA 4202 FINANCIAL MANAGEMENT – IMPORTANT QUESTIONS

(iii) A fixed assets has to be purchased for Rs. 8,000 in July

(iv) Debtors are allowed one month’s credit
(v) Creditors for materials grant one month’s credit
(vi) Sales commission at 3% on sales is paid to the salesman each month

15. From the following information, calculate the NPV (net present value) of the two projects
and suggest which of the two projects should be accepted, assuming a discount rate of 10%. The
tax rates are @ 30%
Project X Project Y

Initial investment 20,000 30,000

Estimated life 5 Yrs 5 Yrs
Scrap value 1,000 2,000

Profits before depreciation and after taxes are as follows

Years Project X Project Y PV factor @ 10%

1 5,000 20,000 .909
2 10,000 10,000 .826
3 10,000 5,000 .751
4 3,000 3,000 .683
5 2,000 2,000 .621

16. A pro forma cost sheet of a company provides the following data

Costs (per unit)

Raw Material Rs. 80
Direct Labor Rs. 30
Overheads Rs. 40
Total cost (per unit) Rs.150
Profit Rs. 30
Selling Price Rs.180

The following is the additional information available.

Average raw material in stock : one month, average materials in process : half a month. Credit
allowed by suppliers – one month. Credit allowed to debtors – two months. Time lag in
payment of wages – 2 weeks and for overhead – one month. Half of the sales are on cash basis.
Cash balance is expected to be Rs.2,00,000.

You are required to prepare a statement showing the working capital needed to finance a level of
activity of 50,000 units of output. You may assume that production is carried out on evenly
throughout the year and wages and overheads accrue similarly.
 ALPHA COLLEGE OF ENGINEERING
DEPARTMENT OF MANAGEMENT STUDIES
BA 4202 FINANCIAL MANAGEMENT – IMPORTANT QUESTIONS

16. A pro forma cost sheet of a company provides the following data

Costs (per unit)

Raw Material Rs. 90
Direct Labor Rs. 30
Overheads Rs. 50
Total cost (per unit) Rs.170
Profit Rs. 30
Selling Price Rs.200

The following is the additional information available.

Average raw material in stock : one month, average materials in process : half a month. Credit
allowed by suppliers – one month. Credit allowed to debtors – two months. Time lag in
payment of wages – 2 weeks and for overhead – one month. Half of the sales are on cash basis.
Cash balance is expected to be Rs.3,00,000.

You are required to prepare a statement showing the working capital needed to finance a level of
activity of 50,000 units of output. You may assume that production is carried out on evenly
throughout the year and wages and overheads accrue similarly.