BBA (Semester-IIIrd) Mid Term Examination-2015

306-Financial Management
Time: 1Hrs [Max. Marks: 15]
Note: All Questions are compulsory and figure to the right indicating their maximum marks.

[Section A: Objective Type]

Q.1: Choose the correct answer from the following:

(i): If operating leverage of a firm is 6, then 1
(a) With every 1% increase in sales its contribution will increase by 1%
(b) With every 6% increase in sales its contribution will increase by 1%
(c) With every 1% increase in sales its contribution will increase by 6%
(d) With every 6% increase in sales its contribution will increase by 6%

(ii): "Shareholder wealth" in a firm is represented by:

(a) the number of people employed in the firm.
(b) the book value of the firm's assets less the book value of its liabilities
(c) the amount of salary paid to its employees.
(d) the market price per share of the firm's common stock.

(iii): When __________ is greater than zero the project should be accepted.
(a) IRR (b) PI (c) NPV (d) ARR

(iv): In The traditional approach towards the valuation of a company assumes:

(a) that the overall capitalization rate holds constant with changes in financial leverage.
(b) that there is an optimum capital structure.
(c) that total risk is not altered by changes in the capital structure.
(d) that markets are perfect.

(v): The cost of equity capital is all of the following EXCEPT:

(a) the minimum rate that a firm should earn on the equity-financed part of an investment.
(b) a return on the equity-financed portion of an investment that, at worst, leaves the market price of
the stock unchanged.
(c) by far the most difficult component cost to estimate.
(d) generally lower than the before-tax cost of debt

[Section B]
Q.2: What do you mean by NPV? Explain it merits and demerits 2
OR
Explain the Net Income approach (relevance theory) of capital structure.

Q.3: Consider the following information for Kaunark Enterprise:

Rs. In Lakh
EBIT 1120
PBT 320
Fixed Cost 700
Calculate percentage change in earnings per share if sales increased by 5%. 2
OR
A bank has offered to you an annuity of Rs.1800 for 10 years if you invest Rs. 12000 today. What rate of
return would you earn?

[Section C]
Q.4 What do you mean by financial management? What is its objectives? 5
OR
The capital structure of Shobha Ltd. is as under: Rs.
2000, 6% Rs.100 debenture (first issue) 2, 00,000
1000, 7% Rs.100 debenture (second issue) 1, 60,000
2000, 8% Preference Shares of Rs.100 each 2, 00,000
4000, Equity Shares of Rs.100 each 4, 00,000
Retained Earnings 1, 00,000
The earnings per share (EPS) of the company in the past many years have been Rs.15. The shares of the
company are sold in the market at book value. The Company tax rate is 50% and shareholders tax liability is
25%. Find out the after tax weighted average cost of capital. 5