Q1. (a) What is Financial Management?

Explain its function and

objectives.
Ans. Financial Management means planning, organizing, directing and controlling
the financial activities of an organization.
Functions of financial management: -
 Financial Planning and Forecasting
 Cash Management
 Estimating Capital Expenses
 Determining Capital Structure
 Procurement of Funds
 Investment of Funds
 Surplus Disposal
Objectives of financial management:-
 To ensure regular and adequate supply of funds to the concern.
 To ensure exact returns to the shareholders depending upon the criteria.
 To ensure optimum funds utilization.
 To ensure safety on investment so that funds should be invested in safe
ventures.
 To plan a sound capital structure.

(b) What do you mean by profit and wealth maximization?

Ans. Wealth Maximization consists of activities that manage the financial resources
to increase the stakeholders' value.
Profit Maximization consists of the activities that manage the financial resources
intending to increase the Company's profitability.
 (c) How will you correlate between risk and return?
Ans. A positive correlation exists between risk and return: the greater the risk, the
higher the potential for profit or loss. Using the principle, low levels of risk are
associated with low returns and high levels of risk with high returns.

Q2. (a) Explain in brief if NI and NOI approach in brief of capital structure.
Ans. NI approach is relevant to capital structure decision. It means decision of debt
equity mix does affect the WACC and value of the firm. As per NOI approach
the capital structure decision is irrelevant and the degree of financial leverage
does not affect the WACC and market value of the firm.

(b) What do you mean by WACC?

Ans. Weighted average cost of capital (WACC) represents a firm's average after-tax
cost of capital from all sources, including common stock, preferred stock,
bonds, and other forms of debt.

Q3. What are the features of good capital structure?

Ans. Features of sound capital structure are as follows:
 Maximum Return
 Less Risky
 Safety
 Flexibility
 Economy
 Capacity
 Control
Q4. How will you take decisions through leverages? Compare and
contrast between NPV and IRR. What factors do you consider for
investment decision?
Ans.
NPV IRR
The total of all the present values of IRR is described as a rate at which
cash flows (both positive and the sum of discounted cash
negative) of a project is known as Net inflows equates discounted cash
Present Value or NPV. outflows.

Expressed in Absolute terms Expressed in Percentage terms

Represents Surplus from the project Represents Break even point

It makes decision making easy. It does not help in decision

making

Cost of capital rate Internal rate of return

Variation in the cash outflow timing Variation in the cash outflow

will not affect NPV timing will show negative or
multiple IRR

Factors to consider when making investment decisions are

 Reason of investment.
 Researching the market.
 Risk levels.
 Investment Tenure.
 Taxations.
 Liquidity.
 Volatility.
Q5. What are the factors to consider for working capital requirement?
Ans. Factors to consider for working capital requirements are:-
 Nature and Size of Business
 Business Cycle
 Production Cycle
 Seasonal Fluctuations
 Operational Efficiency

Q6. Distinguish between fixed working capital and variable working

capital.
Ans.

Q7. Short note on working capital cycle.

Ans. Working Capital Cycle (WCC) is the time it takes to convert net current assets
and current liabilities into cash. A long cycle means tying up capital for a longer
time without earning a return. Short cycles allow your business to free up cash
faster and to be more agile.