Name : Aniket Vashishtha

Paper Code: MUB 403

SECTION A (MCQ)

Q1. Attempt all the parts:

a) Objective of financial management is: Wealth Maximisation

b) Time value of money explains that: A unit of money obtained today is worth more
than a unit of money obtained in future
c) Finance function involves: Procurement & effective use of funds
d) External sources of finance do not include: Retained earnings
e) Capital Decisions are: irreversible.
f) Which of the following is not used in capital budgeting? Net Asset Value method
g) From the below-mentioned items which are financial assets: Stocks
h) Accounting Rate of return is based on: Average expected profit
i) What is the primary goal of financial management: to maximize the owner’s wealth
j) Working capital can be calculated.: Current assets – Current liabilities

SECTION B (SHORT ANSWER)

Q2. Attempt any four of the following.

a) Explains the importance of financial management.

Financial management provides pathways to attain goals and objectives in an organisation.

The main duty of a financial manager is to measure organisational efficiency through proper
allocation, acquisition and management.

The importance of financial management is explained below −

 It provides guidance in financial planning.

 It assists in acquiring funds from different sources.
  It helps in investing an appropriate amount of funds.
 It increases organisational efficiency.
 It reduces delay production.
 It cut down financial costs.
 It reduces cost of fund.
 It ensures proper use of fund.
 It helps business firm to take financial decisions.
 It prepares guideline for earning maximum profits with minimum cost.
 It increases shareholders’ wealth.
 It can control the financial aspects of the business.
 It provides information through financial reporting.
 It makes the employees aware of saving funds.

b) Calculate “Liquidity Ratio” from the following information:

Current Liabilities= Rs. 50,000, Current asset= Rs 80,000, Inventories=Rs 20,000,
Advance tax=Rs 5,000, Prepaid expenses= Rs5,000.

Solution: Liquidity Ratio =Liquid Assets/Current Liabilities

Liquidity Assets = Current assets - (Inventories + Prepaid expenses + Advance tax)
= Rs. 80,000 - (Rs. 20,000 + Rs. 5,000 + Rs. 5,000)
= Rs. 50,000
Liquidity Ratio =Rs.50,000/Rs.50,000=1:1

c) Calculate the payback period from the following information:

Cash outlay Rs 100,000 and Cash inflow Rs 30,000

Solution: Payback (in years) = Total cash outlay/Cash inflow

= 1,00,000/ 30,000

=3.33 years
 d) What is dividend? Explain the types of dividends.

It is a distribution of part of the company’s earnings to its equity shareholders. The

company’s board of directors decides the amount that the shareholders will receive. The
company can also state it in the form of a percentage.

Different Forms / Types of Dividends

There are various forms of dividends in which a company pays its shareholders:

Cash Dividend

It is the most common form. The shareholders receive cash for each share. The board of
directors announces the dividend payment on the date of declaration. The company assigns
the dividends to those shareholders who were holding the status of the shareholder of that
company on the date of records. The record date and ex-dividend date are two very
important concepts. The dividends are issued on the date of payment. But for distributing
cash dividends, the company needs to have positive retained earnings and enough cash for
such distributions.

Bonus Share

Bonus share is also called the stock dividend. A company may have low operating cash but
still want to keep the investors happy, issues such dividends.

Share Repurchase

Share repurchase occurs when a company buys back its own shares from the market and
reduces the number of shares outstanding. This is considered an alternative to the dividend
payment as cash is returned to the investors in another way.

Property Dividend

The company makes the payment in the form of assets under the property dividend. The
asset could be any of this equipment, inventory, vehicle, or any other asset. The asset’s
value has to be restated at the fair value while issuing this.
Scrip Dividend

It is a promissory note to pay the shareholders later. This type is used when the company
does not have sufficient funds for such issuance.

Liquidating Dividend

When the company returns the original capital contributed by the equity shareholders as a
dividend, it is termed a liquidating dividend. It is often seen as a sign of closing down the
company.

e) Explain the working capital management policy.

Working capital management is a business strategy designed to ensure that a company

operates efficiently by monitoring and using its current assets and liabilities to their
most effective use.

The efficiency of working capital management can be quantified using ratio analysis.

The primary purpose of working capital management is to enable the company to

maintain sufficient cash flow to meet its short-term operating costs and short-term debt
obligations. A company's working capital is made up of its current assets minus its
current liabilities.

 Working capital management requires monitoring a company's assets and liabilities

to maintain sufficient cash flow to meet its short-term operating costs and short-
term debt obligations.
 Working capital management involves tracking various ratios, including the working
capital ratio, the collection ratio, and the inventory ratio.
 Working capital management can improve a company's cash flow management and
earnings quality by using its resources efficiently.
 SECTION C (LONG ANSWER)

Q3. Attempt any three of the following.

a) A company has to choose one of the following two actually exclusive machines.
Calculate Net Present Value and Profitability Index.

Cash Inflows

Year Machine X Machine Y

0 40000 40000
1 6000 7000
2 6500 8200
3 7800 4500
4 4500 3500
5 3000 2200

b) What is capital Budgeting? Explain its needs and importance.

The capital Budgeting process is one of the most important processes in the financing,
accounting, and investment having its importance for the purpose of planning and
evaluating the investment projects of the organization by taking into consideration all the
future cash inflows and the future cash outflows expected from that particular project
thereby evaluating the profitability and growth of the project and helping the management
of the organization in proper decision making for the long run.

Explanation

Capital Budgeting project is important for the evaluation of any particular project of the
organization. The growth and prosperity of the business is affected by the capital budgeting
decisions of the organization in the long run. Also, the capital budgeting process creates the
measurability and accountability of the project by using various techniques like calculation
of net present value, considering the internal rate of return, payback period, profitability
index, and accounting rate of return. Generally, the value of future net cash flows is
determined by taking the discounted rate of return in the calculation.
Importance of Capital Budgeting

The Following are the points describing the importance of Capital Budgeting:

 .Calculation of future cash flows: Capital Budgeting process takes into account the
expected future cash inflows and the expected future cash outflows of the project by
taking into account the discounted rate of return and following the various
techniques like calculation of net present value, considering the internal rate of
return, payback period, profitability index, and accounting rate of return Thus, the
organization get the idea about present investment’s future total value and the net
profitability by using the process of capital budgeting.
 Helps in the long term goals of the organization: Capital Budgeting process helps
the organization for the long term decision making as well as in making the long term
goals as it provides the idea of future costs and growth taking into account the
expected future cash flows. The making of long term goals is the most important and
sensitive area for any organization and any wrong decision taken in this area can
adversely affect the long term profitability of the organization.
 Control of Expenditure: The capital budgeting process gives the idea of the expected
future cash inflows as well as expected future cash outflows. It takes into account
the investment cost for the project considering the other related expenditures like
Research & Development costs, running costs of the project, etc. So, with this
information, the organization can monitor the total costs and have control of its
future costs. The proper management and control of the total costs is a very
important factor for the growth and efficiency perspective of the company.
 Helps in Permanent Decision Making: Generally, the Capital related decisions are
the permanent decisions taken by the organization as it involves the large amount of
investments and funds. Such decisions cannot be reversed back in the future once
they are taken. Hence, the process of capital budgeting helps in effective decision
making for such permanent decisions of the organization.
 Wealth Maximization: The interest and the investment decisions of the
shareholders in the company depend on its long term investment decisions. If the
investments in the capital or other long term investments are done by the company
 in the proper and planned manner, the confidence of the shareholders gets boost up
and thus they become more interested in investing in the company thus resulting in
the company’s wealth maximization.
 Flow of information within the departments: The entire process of capital
budgeting involves numerous steps and ideas and a number of decisions are taken
by the different levels of the company. This allows the flow and exchange of
information within the various departments and thus increases the connectivity
between them.
 Protection to the large funds involved: As discussed above, there involves a large
amount of funds by the company in the acquisition of the capital assets. Thus with
the process of capital budgeting, that large financial investment or a large amount of
funds invested by the company gets protected to a certain extent against any
uncertainty in future.
 Protection against future risks: There are various risks that are associated with
capital acquisitions by the company as they all are related to some future events and
uncertainty. Thus, the capital budgeting process helps the organization in the
advance assessment of those risks involved, and the management of the company
plans for the protection of such risks well in advance to minimize its impact.
 New Opportunities in the market: With the introduction of the new project in the
market, there arises many job opportunities for the new employees as well as the
existing ones. This gives rise to the economic growth of the country along with
boosting up the morale of personals.
 Understanding the Complications of the projects: With the help of the Capital
budgeting process, the management of the company can have the idea of different
types of complications or Complexities that can be faced or arise during the
development of the project. Hence, the management can have ready and advance
strategies for dealing with such future complexities arising from the project.

c) Explain the various methods of capital budgeting techniques.

Techniques/Methods of Capital Budgeting

In addition to the many capital budgeting methods available, the following list outlines a few
by which companies can decide which projects to explore:

#1 Payback Period Method

It refers to the time taken by a proposed project to generate enough income to cover the
initial investment. The project with the quickest payback is chosen by the company.

Formula:

Initial Cash
Payback Period
Investment 
=
Annual Cash Flow

Example of Payback Period Method:

#2 Net Present Value Method (NPV)

Evaluating capital investment projects is what the NPV method helps the companies with.
There may be inconsistencies in the cash flows created over time. The cost of capital is used
to discount it. An evaluation is done based on the investment made. Whether a project is
accepted or rejected depends on the value of inflows over current outflows.

This method considers the time value of money and attributes it to the company's objective,
which is to maximize profits for its owners. The capital cost factors in the cash flow during
the entire lifespan of the product and the risks associated with such a cash flow. Then, the
capital cost is calculated with the help of an estimate.

Formula:
 Net Present Value (NPV)
=

t = time of cash flow

i = discount rate

Rt  = net cash flow

#3 Internal Rate of Return (IRR)

IRR refers to the method where the NPV is zero. In such as condition, the cash inflow rate
equals the cash outflow rate. Although it considers the time value of money, it is one of the
complicated methods.

It follows the rule that if the IRR is more than the average cost of the capital, then the
company accepts the project, or else it rejects the project. If the company faces a situation
with multiple projects, then the project offering the highest IRR is selected by them.

#4 Profitability Index

This method provides the ratio of the present value of future cash inflows to the initial
investment. A Profitability Index that presents a value lower than 1.0 is indicative of lower
cash inflows than the initial cost of investment. Aligned with this, a profitability index great
than 1.0 presents better cash inflows and therefore, the project will be accepted.

d) What is ratio analysis? Explain its types.

ratio analysis is a process to scrutinise and compare financial data of a company using its
financial statements. This method actively uses the data from financial statements to
calculate the financial health and performance of a company. Therefore, this process
eliminates the need of analysing and comparing line items from each financial statement. 
 
This prevailing method primarily helps the management of a company as well as its
investors to gather information on its growth percentage. Besides, this method also clarifies
the operational drawbacks of an organisation. As a result, the management can take
suggestions from the ratio analysis to take the right course of financial action. Thereby, a
company benefits largely from this widely prominent method. 

Companies use a wide array of ratio analysis types to understand the financial condition and
position within a sector. As a result, they can gather effective information on the level of
cash flow circulating within the organisation. Therefore, these types of ratio analysis helps
an investor know about an institution’s solvency, profitability, and asset liquidity. 
 
Moreover, the fundamental types of ratio analysis include the following – 

 Activity Ratio Analysis – Activity ratio analysis implies the assessment of a

company’s efficiency and scale of operations. This method helps accountants
understand the pace at which companies convert their inventories into sales.
Besides, this method also helps them to understand how the cash from sales helps
them to manage their fixed capital and working capital. Activity ratio analysis also
includes inventory turnover ratio, working capital turnover ratio, and payables
turnover ratio among others. 
 Profitability Ratio Analysis – This category of ratio analysis helps a business measure
its profits. As a result, accountants can use the profitability ratio analysis to
determine the company’s ability to bag profits. Besides, this works as a marker for
the industry to understand which companies have exhibited the most profits.
Therefore, it duly conveys the financial health of an organisation. This kind of
analysis takes into account the net profit margin, gross profit margin, and return on
capital employed. 
 Liquidity Ratio Analysis – This method duly analyses an organisation’s liquidity of its
assets. Therefore, individuals can gather an idea about the rate at which the
company can convert its assets into cash. This procedure is mainly used to determine
a company’s ability to fulfil its financial obligations without experiencing any
disruption. 
  Solvency Ratio Analysis – Solvency ratio analysis takes into account the long-term
financial sustainability of a business. Therefore, it is used to analyse the ability of an
organisation for paying off its long-term financial obligations. These obligations thus
include loans taken from financial institutions to fund its capital requirement, and
the bonds it has issued in the secondary market. 

These are the main types of ratio analysis that companies use to understand their financial
position, performance, and health. Now it’s time to move on to the advantages and
disadvantages of the ratio analysis process.

e) The Balance Sheet of Punjab Auto Limited as on 31-12-2022 was as follows:

Particular Rs. Particular Rs.

Equity Share Capital 40,000 Plant and Machinery 24,000
Capital reserves 8,000 Land and Building 40,000
8% Loan on mortgage 32,000 Furniture and Fixtures 16,000
Creditors 16,000 Stock 12,000
Bank overdraft 4,000 Debtors 12,000
Taxation: Investment (short term) 4,000
Current 4,000
Future 4,000
Profit & Loss A/C 12,000 Cash in hand 12,000
1,20,000 1,20,000

From the above compute: (A) Current Ratio, (B) Quick Ratio, (C) Debt-Equity Ratio, and (D)
Proprietary Ratio.

Solution:

Current Ratio = Current assets

 Current liabilities
Current Assets = Stock + debtors + Investments (short term) + Cash In hand
Current Liabilities = Creditors + bank overdraft + Provision for Taxation
(current & Future)
CA = 12000 + 12000 + 4000 + 12000

= 40,000
CL = 16000 + 4000 + 4000 + 4000

= 28,000
= 40,000
28,000
= 1.43:1

Quick Ratio:

Quick Assets
Quick Liabilities

Quick Assets = Current Assets - Stock

Quick Liabilities = Current Liabilities – (BOD + PFT future)
QA = 40,000 – 12,000 = 28,000
QL = 28,000 – (4,000 + 4,000) = 20,000
= 28,000
20,000
= 1.40 : 1

Debt-Equity Ratio:

Long Term Debt (Liabilities)

Shareholders fund
LTL = Debentures + long term loans
SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference Sh. Cap. – Fictitious
Assets
LTL = 32,000
SHF = 40,000 + 8,000 + 12,000

= 60,000
= 32,000
60,000
= 0.53 : 1

Proprietary Ratio:
Shareholders’ Funds
Total Assets

SHF = Eq. Sh. Cap. + Reserves & Surplus + Preference Sh. Cap. – Fictitious Assets
Total Assets = Total Assets – Fictitious Assets
SHF = 40,000 + 8,000 + 12,000 = 60,000

Total asset = 1,20,000

= 60,000
1,20,000
= 0.5 : 1