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SEMESTER – II FINANCIAL MANAGEMENT Course Code: MBAAA2T94 Unit I Part – A (5 x 6 = 30 marks) Answer all questions. All questions carry equal marks 1. a). Describe the relationship between risk and return (or) b). Explain the concept of Time value of money with an illustration. 2. a). What are the tasks of Financial Management? b). What is Capital Market? 3. a). Define Financial Management. Explain its functions. b). What are the features of present Indian Money Market? (or) (or)
4. a). Discuss briefly the scope of Financial Management (or) b). Explain the superiority of wealth maximization as the goal of Financial Management. 5. a), Describe the three broad areas of financial decision making b). Distinguish between Money Market and Capital Market. 6. a). What is meant by risk return trade-off? b). What are the sources of long term finance? 7. a). Explain the components of Indian Financial System. b). What are the functions of modern finance manager? (or) (or) (or)
8. a). What are the objectives of Financial Management? (or) b). What are the risks associated with finance decision? Explain them with examples. 9. a). What are the characteristics of Indian Capital Market? b). Discuss the role of SEBI. 10. a). Briefly explain the goals of Financial Management. b). Explain the legal aspects of Indian Financial Management. (or) (or)
4. 5. 3. 6.Part – B (3x 10 = 30 marks) Answer any three questions. How do you calculate the accounting rate of return? (or) b). Discuss Systematic and unsystematic risks. Discuss the types of investment decisions. a). Explain the importance of investment decisions. Explain the steps involved in the evaluation of IRR method. Explain Capital Rationing b). b). 2. All questions carry equal marks 1. (or) (or) (or) 4. a). What are the phases of Capital Budgeting Process? (or) 2 . What are the functions of money markets and capital markets? Critically review their Functioning. (or) b). a). 8. b). UNIT – II Part – A (5 x 6 = 30 marks) Answer all questions. Enumerate the recent trends of Indian Capital Market and bring out the role of SEBI in regulating it. Explain the features of capital market development in India. Discuss the significant of Capital Budgeting. 7. What are the limitations of rate of return? (or) b). Discuss the risk –return relationship and its significance to an organization. Explain the steps involved in the evaluation of an investment. a). Under what circumstances of the net present value and internal rate of return methods differ? 6. Explain the merits of pay back period method. b). In what ways is the wealth maximization objective superior to the profit maximization objective? Explain. Identify the sources of long term finance for large scale seasonal industry. 2. What is Capital Budgeting? 3. Explain in detail the various finance functions in a Modern Organization. Discuss the recent trends in Indian Capital Market. Why the NPV method is the true measure of an investment’s profitability. 7. How do they involve risk-return trade off? 5. a). 9. Explain the merits and demerits of the time adjusted method. a). All questions carry equal marks 1. a). Explain the major types of financial decisions that a firm makes. 10.
000 25.000 during the next 4 years. All questions carry equal marks 1. 10. Explain the risk analysis in capital budgeting with an example. 3. Rs.00. Compare and contrast different capital budgeting techniques.000 20. How do you calculate the accounting rate of return? What are its limitations? 2.000 20. Year Machine A Rs. (or) 9. profitability index or the net present value? UNIT II Part B (3x 10 = 30 marks) Answer any three questions. a).00. 50. 10.8.000 and generate cash in flows of Rs.000. Earnings after taxation are expected to be as follows.000. Cash out flow 10.000 10. 5.000 Machine B Rs. What is discounting? What is Compounding? Distinguish between the two. 4. (or) b).000 1 2 3 4 5 Evaluate the two alternatives according to (i).000 3 . What is the projects pay back? (or) b).000. 7. Two machines A and B. a) A project requires a cash outlay of Rs. are available and each one requiring an initial investment of Rs. Explain the factors affecting Capital Investment Decisions. What is profitability index? Which is a superior ranking criterion.000 and Rs.000 30. NPV Method (Cost of Capital @10%) (ii). Compare and contrast NPV and IRR methods of project appraisal with suitable example.000 20. b). 15. IRR Method 4. a). 3.000 Project B Rs. 8. Which project will be selected under NPV method? Cost of Capital is 10% Project A Rs. 20.000 15. Rs.000 15. A company is considering purchase of a machine.
000 B Rs.000 6. Which project will be selected under NPV method? Cost of Capital is 10% Project A Rs. Cash out flow Cash inflows 1 year 2 year 3 year 4 year 5 year 2.00.000 Project B Rs.000 2.00.50.00.000 1.000 7.00.000 2.000 2.00.000 5.000 5.00.000 3.00.00.00.00.000 C Rs.00.000 1. 3. 3.00.00.000 7.000 2.00.000 4.50. 15.Cash inflows 1 year 2 year 3 year 5.50.00.000 6.50.00.00.00.000 2.000 4 .00.000 15.000 7.000 6.000 7.000 1.000 4. Which project will be selected under pay back method? Project A Rs.50.00.00.000 1.50.00.000 4.000 6.000 2.50.000 2. Cash out flow Cash inflows 1 year 2 year 3 year 1.00.
10. The cash flows associated with three projects P. (or) b). a). Explain why a low level of operational leverage and high level of financial leverage is good for the organization (or) b). 8. Explain the concept of WACC. 4. 9. Enumerate the steps in calculating weighted average cost of capital. b). a). Explain Financial Leverage. 3. Q and R are given below: Year P (2000 ) 1400 600 400 Q (2000) 500 1100 900 R (2000) 500 500 1600 1 2 3 Calculate the net present value of each project at discount rates of 15 percent and 25 percent. What is EPS analysis? b). a). 5. (or) (or) (or) 5 . a). Explain Operating Leverage. Explain EBIT-EPS analysis. Discuss ‘Cost of Capital’ and its importance. Explain the factors that determine the cost of capital. What are the advantages of the risk-adjusted discount rate? What is the major problems in using this approach to handle risk in capital budgeting? UNIT – III Part –A 1. Explain the risk analysis in capital budgeting with an example. b). 2. a). Discuss the approaches suggested for determining the cost of retained earnings.7. State and explain various capital budgeting techniques and their advantages and limitations.
The current market price of a company’s share is Rs. If the dividends are expected to grow at a constant rate of 8 percent. a).5. 16% debentures of Rs. Define the term weighted average cost of capital and explain how the cost of individual components of it is computed. 1. The company is in 35% tax bracket.00. 10. 90 and the expected dividend per share next year is RS. Explain the advantages and disadvantages of financial leverage.000. Distinguish between the weighted average cost of capital and the marginal cost of capital. 10.000. 50. 3. Is equity capital free of cost? 7.6.Rs.000 b). A Company issues Rs. 10. a).00. a).000 6 . 3.000 Rs. if the debentures are issued at (i) Par (ii) 10% discount (iii) 10% premium. Explain the concept marginal cost of capital. Calculate EPS. A texile company has EBIT of Rs. a).60. 4. What is cost of capital? Discuss its uses in financial decision making. a). 4. How will you calculate cost of preference share? b). How leverage concepts are used in financial management? 8. which one should be used in capital budgeting and valuation of the firm? Why? 2. Operating Profit 7% debentures Tax rate No of equity shares Rs. Explain the various approaches for WACC and their merits b).100 each. what is the share holder’s required rate of return? Part – B 1. You are requires to calculate the cost of debt after tax. b). The capital structure is as follows: 10% debentures 12% preference shares . 1.000 -Rs. (or) b). What is Leverage? Compare operating and financial leverage.000 40% Rs.00.00. (or) (or) (or) 9. 1.
X on his equity investment.) 20.575 in years 1. 4. 600 and fixed costs are Rs. if the quantity manufactured and sold rises to 600 units? 6. an investor. Determine the Degree of Financial Leverage 5. What will be the DOL. Examine the relevance of cost of capital for long term investment and financing decisions.00.00. 7. 1000.00.000 4. is as follows: Source Debenture Preference share Equity share Amount (Rs. variable cost per unit is Rs.000 The company is in the 35% tax bracket a).00.Equity shares (Rs. what is Pradhan’s degree of operating leverage at its current level of operations.10 at the end of 3 years. What is the required rate of return of Mr. 11.50.00..000 2. 1. If the selling price per unit is Rs. Combined Leverage Firm A Rs. What are the problems in its determination? 9.00.000 3.000 6.00.00.000 Specific Cost (%) 7% (before tax) 8% 10% 7 .50.000 Firm B Rs.00.000 3.000 6. 16. Mr. Financial Leverage c).000 8.00. The capital structure of Keerthi Enterprises Ltd. 243. Calculate a).00. Rs.025 and Rs. He expects to sell the shares at a price of Rs. 11. Pradhan Enterprises is currently selling 400 units per year.2 and 3 respectively. He expects the company to pay dividends of Rs.00.000 2. 100 each) -Rs. X. Determine the growth rate of dividend (ii).0000.000 7. Determine EPS b). (i). Sales Fixed cost Interest Variable cost 15. 10. purchases an equity share of a growing company for 210. Operating Leverage b).
Explain the nature of the factors which influence the dividend of a firm. 4.000 2. a). a). What is dividend? Explain its importance on share prices. 2.00. What is meant by optimum capital structure? (or) b).000 1.000 3. What is ‘Informational Content’ of dividend payments? Explain. What are the different types of dividend policy? b). a). Briefly explain the concept of Net Income Approach. Explain Net operating income approach. b). Explain its significance.00. 5. 8.500 equity shares (fully paid) 3000 nos of 8% debentures 2000 nos of 6% preference shares Retained earnings 4. 3. a). Explain the major considerations in capital structure planning. a).”The M-M approach is based on unrealistic assumptions”. Briefly explain different types of dividends declared by the companies. (or) b).00. (or) (or) (or) 4. 10. b). a). Explain the effect of capital structure on the value of the firm when both corporate and personal income taxes are considered? (or) 8 . b). (or) (or) 9. Bring out the principal propositions of M-M approach. Define Capital Structure. a). b). a). 7. Calculate weighted average cost of capital from the following information: Rs. What are the assumptions used in CAPM. a).000 Unit IV Part A 1.00.Explain the traditional approach to capital structure theory. b). Evaluate the reality of the assumptions made by M-M.Calculate the weighted average cost of capital. Explain the factors that are relevant for determining the dividend payout ratio (or). What are the basic assumptions of Gordon’s model of dividend and valuations of firm? Does dividend policy affect the value of the firm under this model? 6.
Describe the traditional view on the optimum capital structure. 6. What do you understand by capital structure of a corporation? Discuss the qualities which a sound capital structure should possess. a). (or) b). Explain the importance and objectives of inventory management. What are the advantages of decentralized collection over a centralized collection? 4. 10. Discuss briefly the various theories of Dividend Policy of a corporate body. Explain in detail the various determinants of working capital requirements of a manufacturing firm. The MM approach is effective or not – Discuss. 7. Explain the different models of the dividend valuations. Compare and contrast this view with the NOI approach and the NI approach. What is an optimum capital structure? Discuss the important approaches to different theories of capital structure. 2. What are the factors affecting working capital? b).. (or) b). a). Explain the NI and NOI approach in detail. Assuming the existence of the corporate income taxes. a). Explain the techniques that can be used to accelerate the firm’s collection. Explain the three principal motives for holding cash. What is meant by financial flexibility? Is a flexible capital structure costly? Unit V Part – A 1. How is it computed? (or) 9 .How valuations of share is done using CAPM (or) b). What is dividend policy? Discuss the factors that affect dividend policy of a firm. What are the important factors affecting capital structure decision of a firm? Part –B 1. b). (or) 3. Define EOQ. 2. describe MM’s position on the issue of an optimum structure. 3. 8. a). How do the considerations of control and size affect the capital structure decision of a firm? 10. 9. Explain the salient features of various committees’ recommendations of working capital financing. 5. a). 4.b).
Explain the concept of working capital. (or) 6. What is an optimum credit policy? Discuss.5. a). What is the role of credit terms and credit standards in the credit policy of a firm? 10. a). 8. Are gross and net concepts of working capital exclusive? Discuss. Explain the objectives of credit policy.What is the concept of working capital cycle? Why it is important? Give an example to illustrate. a). a). How would you monitor receivables? Explain the pros and cons of various methods. 9.000 Raw materials stock Work in process Financial goods 3 months 1 month 2 months 30 240 / Unit 10 . Explain the methods do you suggest for estimating working capital needs? Illustrate. (or) b) What are ordering and carrying costs? What is their role in inventory control? Part –B 1. a). What are the objectives of the collection policy? How should it be established? 7. (or) b). How can safety stock be computed? b). Explain the risk-return trade-off of current assets financing. Prepare a working capital forecast Raw materials Labour Expenses Rs. 120 / Unit Rs. a). 60 / Unit Rs. (or) b). How is the re-ording point determined? Illustrate with an example. (or) b). How would you determine the optimum level of current assets? Illustrate you answer? (or) b). Define safety stock. 30 / Unit 210 Profit Selling price Annual production 1000 units Cash in hand 10.
52. You are required to prepare a statement showing the working capital needed to finance a level of activity of 70000 units of output.000. 11 . 1000. 3. Cheran Corporation requires 2000 units of a cretin item per year. the carrying cost of inventory is 25% of inventory value and fixed cost per order is Rs. You may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly.5 130.5 19.5 39.Customer credit Supplier credit Outstanding wages Outstanding expenses 1 month 2 months 1 month 15 days 2. 1. 30.0 Average raw material in stock Average materials in process Credit allowed by suppliers Credit allowed to customers Time log in payment of wages Overheads One month Half a month One month Two months One and a half weeks One month One-fourth of sales are on cash basis. A proforma cost sheet of a company provides the following data: Cost per unit Raw Materials Direct labour Overheads Total Cost (per unit) Profit Selling price Rs.20. Determine EOQ. The purchase price per unit is Rs.0 19. Cash balance is expected to be Rs.0 110.
Explain the importance of inventory management and also explain the objectives of it. Technology c). Production Policy d).. Explain. the interest on which amounts to Rs.70. A Manufacturing company has an expected usage of 50.000 sales for both the firms and interpret the results. 10 per unit. How is working capital affected by (a) Sales b)..000.50 for one year. has an average selling price of Rs. EBIT PBT Fixed cost Calculate: a). Determine the degree of operating. XYZ Ltd. 6.120 320 700 12 . Degree of Combined Leverage Rs. 7. What is factoring? What functions does it perform? And also explain the various types of factoring. Its variable unit cost are Rs. a).000 units of certain product during the next year.000. 7 and fixed cost amount to Rs.20 and the carrying cost per unit is Re. The cost of processing an order is Rs. 8. How does factoring differ from bill discounting and short term financing? 10. The reordering point (Assume 250 days years) 5. except in respect of the pattern of financing. the EOQ b). 0. Explain the factors that determine the working capital needs of a firm. It finances all its assets by equity funds. The latter finances its assets 50% by equity and 50% by debt. You are required to calculate. Degree of Operating leverage b). It pays 50% tax on its income. Inflation. ABC Ltd.. PART –C (1x15=15 marks) Compulsory: 1. 7. Degree of Financial Leverage c). 20.4. 2. Lead time on an order on an order is five days and the company will keep a reserve supply of two days’ usage. Do you recommend that a firm should finance its current assets entirely with short term financing? Explain your answer. Consider the following information for a company. In lakhs 1. 9. financial and combined leverages at Rs.00. 1. is identical to XYZ Ltd.
0 Indicate which machine would be profitable using the following methods of ranking investment proposals.668 b).50.5 2. 4.0 3. cash inflows after tax are expected as follows Year Machine A (Rs in lakhs) 1 2 3 4 5 1. In comparing the profitability of the machines. The company can also raise additional loan at 10% for Rs.00.000 to finance its expansion. 3. 105 and the company declares a dividend of Rs. Calculate the degree of operating leverage. The dividend growth rate is 5%.5 1. 9 per share for the next year. Payback method b).d). Risky Situation and b).5 1.70 Fixed cost :Rs. Ideal Situation 5. 100 each) 5. A Company is contemplating to purchase a machine. 5. Calculate the WACC. a).00. Equity Capital (5000 shares of Rs. 1.000 Interest charges :Rs.50.000 units of Rs.5 1. Profitability index method and d). Dhanvantary company has the following capital structure Rs. a discounting rate of 10% is to be used and machine is to be written off in five years by straight line method of depreciation with nil residual value. Net present value method c).5 2. Average rate of return method. 0.000 The equity shares of the company have current market price at Rs.0 2.000 12% debentures 3. 5 lakhs. Percentage change in EPS if sales increased by 5% 3. Which combinations of operating and financial leverages constitute: a).000 9% preference shares 1.00. 2 per unit Variable cost per unit :Rs.0 Machine B (Rs in lakhs) 0. Two machines A and B are available each costing Rs. 13 . degree of financial leverage and combined leverage from the following data: Sales 1.00.0 2. The tax rate is 50%.
Rs.45 days .00. Financial Leverage A B 75. P Out put (in units) Fixed cost (in Rs.000 7. 75 per unit -------------------------.Rs.) Variable cost / unit in Rs.000 Q 75. Degree of financial leverage and the Degree of combined leverage for the three firms and interpret the results.6.000 . 25.1 month .000 3.Rs. Prepare a working capital forecast from the following data: Raw material Direct Labour Direct expenses Total cost Selling price Annual Sales Cash in hand Customers Credit Suppliers credit Stock of Raw Materials Stock of Finished goods Stock of WIP Rs.000 30. Operating Leverage b).00.000 1 25.00. 15 per unit Rs.000 30.000 7. Calculate a).000 20.15 days - 8. Interest Expenses 3.00.000 5.0000 0.5 40. 10.000 units .000 75.000 7.000 R 5.000 10. From the following data calculate the Degree of operating leverage. 90 per unit .1 month . 10 per unit -------------------------Rs.000 Sales Fixed cost Interest Variable cost 1.000 50.50.15 days .10 Nil 14 . 50 per unit Rs.
3 2. which project is the best? Sree Saraswathi Thyagaraja College (Autonomous).50 9. Assuming the projects are independent.000 -10. Pradhan Enterprises is currently selling 400 units per year. Pollachi PG DEPARTMENT OF MANAGEMENT SCIENCE First MBA *Second Semester*Cycle Test .000 +7.Unit selling price Rs. variable cost per unit is Rs. ARR 3.000 what is Pradhan’s degree of operating leverage at its current level of operations? What will be the DOL. Cash flows (Rs) Projects A B C D C0 -10. NPV b).000 -10. 1.000 C1 + 10. 1RR 4.000 C2 +7500 +4000 +3000 C3 +12000 +3000 a).II*March 2010 Subject: Financial Management * 2 hours * 50 marks Section – A 4 x 5 = 20 15 . if the quantity manufactured and sold rises to 600 units? 10. which one should be accepted? If the projects are mutually exclusive.A Company is considering the following investment projects.000 +10. Payback 2.000.000 -10. If the selling price per unit is Rs.500 +2.00. 600 and fixed cost are Rs. Rank the project according to each of the following methods: 1.5 0. 1.
a) What is Capital Budgeting Decision? Give Examples b) Write the importance of Investment Decisions 2. b) What are the uses of Cost of Capital? Section – B Answer any TWO questions.000. Rs 4. Assume that a project requires a cash outlay of Rs 20.000 during the next 4 years.000 and provide annual cash inflow of Rs 10. and generates cash inflows of Rs 8. 5. and Rs 3. Calculate the Internal Rate of Return.Answer all questions. All questions carry equal marks. 7. Assume that an investment would cost Rs 40. Write a detailed note on the concepts of cost of capital. What are the steps involved in capital budgeting decision? 6. 16 .860 for 6 years. 1. What is the project’s payback? 8. 2 x 10 = 20 (or) (or) (or) (or) Section – C 1 x 10= 10 9. a) Write short notes on ARR with formula b) Write short notes on Profitability Index. Rs 7. a) What are the types of Investment Decisions? b) Write the significance of cost of capital.000.000. Write a detailed note on discounted cash flow techniques. 3.000. a) Write short notes on Cost of Debt Capital. 4.
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