S.No.

791 19PBA08

(For the candidates admitted from 2019–2020 onwards)

M.B.A. DEGREE EXAMINATION

Second Semester

FINANCIAL MANAGEMENT

Time : Three hours Maximum : 75 marks

PART A — (15 × 1 = 15 marks)

Answer ALL questions.

1. The assets held by a business which can be

converted in the form of cash, without disturbing
the normal operations of a business.
(a) Tangible assets (b) Intangible assets
(c) Fixed assets (d) Current assets

2. The following is (are) the external source(s) of cash

(a) Long terms loans
(b) Short term borrowings
(c) Issue of new shares
(d) All of the above
3. The long-run objective of financial management is
to
(a) Maximise EPS
(b) Maximise the value of the firm’s common
stock
(c) Maximise return on investment
(d) Maximise market share

4. The following is (are) the type(s) of capital

budgeting decision(s)
(a) Diversification (b) Replacements
(c) Expansion (d) All of the above

5. Which of the following is not one of the methods of

Capital budgeting?
(a) IRR
(b) EPS
(c) ARR
(d) NPV

6. Initial outlay means

(a) Depreciation incurred
(b) Tax paid
(c) Investment
(d) Profit before tax

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7. The return which the company pays on borrowed
funds is termed as
(a) Dividend (b) Interest
(c) Bonus (d) All of the above

8. Who proposed irrelevancy theory?

(a) James E. Walter
(b) Myron J. Gordon
(c) Modigliani and Miller
(d) Solomon and Ezra

9. A company earns Rs.9 per share having

capitalization rate of 12% and has a return on
investment at 18%. According to Walter’s Model
what should be the price per share at 40%
dividend payout ratio?
(a) 100
(b) 98.25
(c) 97.50
(d) 96

10. Working capital management deal with

(a) Capital
(b) Fixed assets
(c) Dividend
(d) Current Assets
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11. Which of the following activities implies operating
cycle?
(a) Conversion of cash into inventory
(b) Conversion of inventory into receivables
(c) None of these
(d) Both of these

12. The EPS of a company is Rs.10; Rate of return is

15% and the capitalization rate of its risk class is
12.5%. What is the Market price at 0% payout
ratio under Walter’s model?
(a) 96
(b) 86
(c) 76
(d) 92

13. R and D budget and Capital expenditure budget

are examples of
(a) Short-term budget
(b) Current budget
(c) Long-term budget
(d) None of the above

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14. A budgeting process which demands each manager
to justify his entire budget in detail from
beginning is
(a) Functional budget
(b) Master budget
(c) Zero base budgeting
(d) None of the above

15. Reserves and Surplus are which form of financing?

(a) Security Financing
(b) Internal Financing
(c) Loans Financing
(d) International Financing

PART B — (2 × 5 = 10 marks)

Answer any TWO questions out of FIVE.

16. Explain the objectives of Financial Management.

17. A capital budgeting project proposal requires an

initial outly of Rs.240,000 and is expected to
generate the annual cash inflows of Rs.78,000;
Rs.69,000; Rs.48,000; Rs.36,000 and Rs.30,000
respectively for a period of five years. Find out the
payback period of this investment proposal.

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18. 500,000 debentures of Rs.500 each are being
issued at 10% discount. Coupon rate is 14%.
Floatation costs are likely to be 3% of the face
value. Redemption will be after nine years at a
premium of 5%. Tax rate is 35%. Determine the
cost of debt.

19. Discuss the types of working capital.

20. The following information has been made

available from the accounting records of payment
of Precision Tools Ltd. for the last six months of
2019 (and of only sales for January 2020)

(a) The units to be sold in different months are:

July : 2,200

August : 2,200

September : 3,400

October : 3,800

November : 5,000

December : 4,600

January 2020 : 4,000

(b) There will be no work-in-progress at the end

of any month.

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 (c) Finished units equal to half the sales for the
next month will be in stock at the end of
every month (including June 2019)

(d) Budgeted Production and production costs

for the year ending Dec. 2019 are as thus:

Production units : 44,000

Direct materials per unit : Rs.10.00

Direct Wages per unit : Rs.4.00

Total Factory Overheads apportioned to

product : Rs.88,000

You are required to calculate Production

budget.

PART C — (5 × 10 = 50 marks)

Answer ALL questions

21. (a) Elucidate the role of financial manager.

Or
(b) What are the sources of finance? Explain.

22. (a) A company issues 12% irredeemable

preference shares of Rs.100 each. The
floating cost for such issue is 5% of the issue
price. Estimate the cost of preference capital,
if they are issued at (i) par, (ii) 10% discount
and (iii) 10% premium.
Or
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 (b) A company uses certainty equivalent
approach to evaluate risky projects. It has
collected the following details for a project
which is under consideration.
Year Cash flow Certainty equivalents
0 2,90,000 1
1 1,72,000 0.8
2 1,54,000 0.7
3 1,45,000 0.6
4 1,36,000 0.4
5 96,000 0.3

Cost of capital for the firm is 9%. Should the

project be accepted?

23. (a) The EPS of a company are Rs.12. It had an

internal rate of return of 16% and the
capitalization rate of its class is 20%. If
Walter’s model is used

(i) What should be the optimum payout

ratio of the firm?

(ii) How shall the price be affected if a

different payout ratio of 40% was
employed?

Or
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 (b) ABC Ltd. is expecting an annual EBIT of
Rs.2,00,000. The company has Rs.2,00,000 in
10% debentures. The equity capitalisation
rate (Ke) is 12%. You are required to
ascertain the total value of the firm and
overall cost of capital. What happens if the
company borrows Rs.2,00,000 at 10% to
repay equity capital?

24. (a) Explain the factors influencing Working

capital.

Or
(b) You are given the following operating results
(in rupees) of M/s. Karthika Ltd.
Raw material 25,000
Work-in-progress 16,000
Finished Goods 24,000
Purchases 1,00,000
Cost of goods sold 1,50,000
Sales 1,75,000
Debtors 40,000
Creditors 20,000

Compute the duration of the operating cycle,

assuming 360 days in a year.

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25. (a) ABC Ltd. With existing share capital of
Rs.10,00,000 wishes to raise finance
for an investment of Rs.10,00,000. The firm
has three capital structure options for
raising additional funds of Rs.10,00,000.

Plan A : Equity capital

Plan B : 10% Preference share capital

Plan C : 8% Debentures

The expected EBIT after this investment is

Rs.4,80,000 and the firm is subject to
corporate tax rate of 50%. Examine and show
the impact of sources of financing on EPS.
Or
(b) Prepare a flexible budget for production at
80% and 100% activity on the basis of the
following information:
Production at 50% capacity 10,000 units
Raw materials Rs.100 per unit
Direct labour Rs.50 per unit.
Expenses Rs.20 per unit Factory expenses
Rs.1,00,000 (60% fixed)
Administration expenses 60,000 (50%
variable)

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