Code: 21E00201 Max.

Marks: 60

MBA II Semester Regular Examinations October/November 2022

FINANCIAL MANAGEMENT
(Common to B&FS, HC&HM, MBA (GM & BM), Fintech and Finance)
(For students admitted in 2021 only))

Scheme of Evaluation
Section – A
Q1) (a) Explain the concept of finance and financial management in contemporary scenario
(b) Explain the significance of time value money in business decision 5 Marks
Answer a) Concepts of finance & Financial Management in contemporary scenario
Finance is defined as the management of money and includes activities such as
investing, borrowing, lending, budgeting, saving, and forecasting. There are three main 2 Marks
types of finance: (1) personal, (2) corporate, and (3) public/government.
Finance and financial management encompass numerous business and governmental
activities. In the most basic sense, the term finance can be used to describe the activities
of a firm attempting to raise capital through the sale of stocks, bonds, or other promissory
notes.
In simple terms, financial management is the business function that deals with investing
the available financial resources in a way that greater business success and return-on- 3Marks
investment (ROI) is achieved. Financial management professionals plan, organize and
control all transactions in a business
Answer b) Significance of time value money in business decision.
Meaning of time value of money
The time value of money (TVM) is the concept that a sum of money is worth more now
than the same sum will be at a future date due to its earnings potential in the interim. The
time value of money is a core principle of finance. A sum of money in the hand has
greater value than the same sum to be paid in the future.
significance of time value money in business decision 2 Marks

3 Marks

OR
Q2) (a) Discuss the scope and significance of financial management.
(b) Explain the merits and demerits of profit and wealth maximization approach.
Answer a) Definition of financial management 1 Marks
According to Solomon Ezra, “Financial management is concerned with the efficient use
of an important economic resource, namely capital funds.
1. Scope of financial management
 Estimating the Requirement of Funds. 2 Marks
 Determining the Capital Structure.
 Choice of Sources of Finance.
 Investment of Funds.
 Management of Cash.
 Disposal of Surplus. 2 Marks
Significance of financial management
 Required Everywhere
 Efficient Utilization More Important
 The increase in size and influence of the business enterprises Wide distribution of
corporate ownership and Separation of ownership and management
5 Marks
(b)Explain the merits and demerits of profit and wealth maximization approach

Q3) A) A project cost Rs.25000 is expected to generate cash inflows are given as below, 5 marks
calculate NPV of the project:
Year 1 2 3 4 5
Cash 10000 8000 9000 6000 7000
inflows
Pv factors 0.893 0.797 0.712 0.636 0.567
@ 12%
(b) Describe the traditional and DCF methods..
Answer a) calculate NPV of the project:
Years Cash outflows Cash inflows Pv factors @ Present
12% values
1 25000 10000 0.893 8930
2 - 8000 0.797 6376
3 - 9000 0.712 6408
4 - 6000 0.636 3816
5 - 7000 0.567 3969
Present values cash flows – 29499
Present values out flows - 25000
Net Present values - 4999
 b) Describe the traditional and DCF methods. 5 Marks

OR
Q4) (a) Explain the capital budgeting methods.
(b) Discuss the concept of NPV and IRR and its characteristics.
Answer a) Capital Budgeting Methods: 5 Marks

b) Discuss the concept of NPV and IRR and its characteristics 5 Marks
What Are NPV and IRR? Net present value (NPV) is the difference between the
present value of cash inflows and the present value of cash outflows over a period of
time. By contrast, the internal rate of return (IRR) is a calculation used to estimate the
profitability of potential investments
Both IRR and NPV are useful to determine what projects to accept and what profitability
a company can expect. The internal rate of return estimates the outcome of a project by
analyzing cash flow and reporting an expected percent return.
Characteristics NPV and IRR
IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to
zero in a discounted cash flow analysis. IRR calculations rely on the same formula as
 NPV does. Keep in mind that IRR is not the actual dollar value of the project. It is the
annual return that makes the NPV equal to zero.
 Both NPV and IRR are primarily used in capital budgeting, the process by which
companies determine whether a new investment or expansion opportunity is
worthwhile. Given an investment opportunity, a firm needs
 To decide whether undertaking the investment will generate net economic
profits or losses for the company.
 To do this, the firm estimates the future cash flows of the project and discounts
them into present value amounts using a discount rate that represents the
project's cost of capital and its risk. Next, all of the investment's future positive
cash flows are reduced into one present value number. Subtracting this number
from the initial cash outlay required for the investment provides the net present
value (NPV) of the investment.
 Net present value (NPV) is a financial metric that seeks to capture the total value
of an investment opportunity. The idea behind NPV is to project all of the future
cash inflows and outflows associated with an investment, discount all those
future cash flows to the present day, and then add them together.
 IRR is a discount rate that makes the net present value (NPV) of all cash flows
equal to zero in a discounted cash flow analysis. IRR calculations rely on the
same formula as NPV does. Keep in mind that IRR is not the actual dollar value of
the project. It is the annual return that makes the NPV equal to zero.
Q5) (a) Explain the financing decision and its sources.
(b) Illustrate the capital structure and its theories.
Answer financing decision and its sources 2 1/2
What are Financing Decisions: Marks
Financing decisions refer to the decisions that companies need to take regarding
what proportion of equity and debt capital to have in their capital structure. This
plays a very important role vis-a-vis financing its assets, investment-related decisions,
and shareholder value creation.
Basic Financial Decisions
Basic Financial Decisions that financial managers need to take:
 Investment Decision
 Financing Decision and
 Dividend Decision
Sources of finance: 2 1/2
Sources of finance may be classified under various categories according to the following Marks
important heads
 Based on the Period
 Long-term sources
 Short-term source
 Based on Ownership
 Based on Sources of Generation
 Based in Mode of Finance Security finance may be include
b) capital structure and its theories 2 Marks
The objective of a firm should be directed towards the maximization of the value of the
firm, the capital structure, or the leverage decision should be examined from the point of
view of its impact on the value of firm, there are broadly three approaches or theories to
study the capital structure they are as below: brief out
1. Net Income Approach. each
2. Net Operating Income Approach point
3. Modigliani and Miller Approach. 3 Marks
 OR
Q6) (a) Explain the components of weighted average cost.
(b) Describe the measurement of cost of capital.
Answer a) Components of weighted average cost. 5 Marks
Notice there are two components of the WACC formula above: A cost of debt (rdebt) and
a cost of equity (requity), both multiplied by the proportion of the company's debt and
equity capital, respectively

Describe the measurement of cost of capital. 5 Marks

Measurements of cost of capital
It refers to the cost of each specific sources of finance like:
• Cost of equity
• Cost of debt
• Cost of preference share
• Cost of retained earnings Cost of Equity Cost of equity capital is the rate at which
investors discount the expected dividends of the firm to determine its share value.
Conceptually the cost of equity capital (Ke) defined as the “Minimum rate of return that a
firm must earn on the equity financed portion of an investment project in order to leave
unchanged the market price of the shares”.
Cost of equity can be calculated from the following approach:
• Dividend price (D/P) approach
• Dividend price plus growth (D/P + g) approach
• Earning price (E/P) approach
• Realized yield approach
• Dividend Price Approach
• Dividend Price Plus Growth Approach
• Earning Price Approach
• Realized Yield Approach
• Cost of Debt
• Debt Issued at Premium or Discount
• Cost of Perpetual Debt and Redeemable Debt
 Q7) (a) Discuss the working capital management and its types.
(b) Explain the factors determining working capital.
Answer
a) a) Working capital management and its types. 5Marks
Meaning of Working capital management
Every business needs funds for two purposes for its establishment and to carry Out
its day-to-day operations. Long-term funds are required to create production Faculties
through purchase of fixed assets such as plant and machinery, land, building, furniture
etc. Investments in these assets represent that part of firm’s capital which is blocked on
a permanent or fixed basis and is called fixed capital. Funds are also needed for short-
term purposes for the purchase of raw materials, payment of wages and other day-to-
day expenses, etc. These funds are known as working capital.
Types of working capital management
 Permanent Working Capital.
 Regular Working Capital.
 Reserve Margin Working Capital.
 Variable Working Capital.
 Seasonal Variable Working Capital.
 Special Variable Working Capital.
 Gross Working Capital.
 Net Working Capital.
b) B) Explain the factors determining working capital. 5 Marks
“Working capital is the life-blood and controlling nerve centre of a business”. No Business can
be successfully run without an adequate amount of working capital. To avoid the shortage of
working capital at once, an estimate of working capital requirements should be made in
advance so that arrangements can be made to procure
Adequate working capital.
factors of Estimating Working Capital Requirements
The following method are usually followed in forecasting working capital requirements of a firm
1. Percentage of Sales Method 2. Regression Analysis Method 3. Cash Forecasting
Method 4. Operating Cycle Method 5. Projected Balance Sheet Method
OR
Q8) a) Explain the working capital cycle and its importance.
b) Describe the management of current assets.
Answer a) working capital cycle and its importance 5 Marks
Working Capital Cycle (WCC) is the time it takes to convert net current assets
and current liabilities (e.g. purchased stock) 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.
Working capital cycle

Importance of working capital

Working capital affects many aspects of your business, from paying your employees and
vendors to keeping the lights on and planning for sustainable long-term growth. In
short, working capital is the money available to meet your current, short-term
obligations.
 b) Describe the management of current assets 5 marks
Asset/liability management is the process of managing the use of assets and cash flows to
reduce the firm's risk of loss from not paying a liability on time. Well-managed assets
and liabilities increase business profits.

Q9) (a Discuss the corporate restructuring process.

(b) Explain the principle of good corporate governance and its needs.
Answer a) Corporate restructuring process 5 Marks
Company Reorganization often includes a change in the organizational or financial
structure of a business. This is normally done through a merger, rebranding, acquisition,
recapitalization, or change in leadership. This part of the reorganization process is
referred to as restructuring.

b) Explain the principle of good corporate governance and its needs. 5 Marks
While there can be as many principles as a company believes make sense, some of the
more well-known include the following.
Fairness
The board of directors must treat shareholders, employees, vendors, and communities
fairly and with equal consideration.
 Transparency
The board should provide timely, accurate, and clear information about such things as
financial performance, conflicts of interest, and risks to shareholders and other
stakeholders.
Risk Management
The board and management must determine risks of all kinds and how best to control
them. They must act on those recommendations to manage them. They must inform all
relevant parties about the existence and status of risks.
Responsibility
The board is responsible for the oversight of corporate matters and management
activities. It must be aware of and support the successful, ongoing performance of the
company. Part of its responsibility is to recruit and hire a CEO. It must act in the best
interests of a company and its investors.
Accountability
The board must explain the purpose of a company's activities and the results of its
conduct. It and company leadership are accountable for the assessment of a company's
capacity, potential, and performance. It must communicate issues of importance to
shareholders.
OR
Q10) a) Explain the goals of finance manager in the corporate business.
(b) Explain the decision making skill regarding corporate restructures.

Answer a) Goals of finance manager in the corporate business.

The main goal of the financial manager is to maximize the value of the firm to its 5 Marks
owners. The value of a publicly owned corporation is measured by the share price of its
stock. A private company's value is the price at which it could be sold

b) Explain the decision making skill regarding corporate restructures 5 Marks

Corporate restructuring is the process of reorganizing a company's management,
finances, and operations to improve the efficiency and effectiveness of the
company. Changes in this area can help a company increase productivity, improve
the quality of products and services, and reduce costs.
 Industrial Policy of 1991, introduces liberalization, privatization and
globalization in the Indian economy. This led to relaxation of licensing,
inflow of foreign investments, foreign technology, boost to private section,
Govt. disinvestments etc.
 Due to these changes, traditional businesses became dynamic, Govt.
protection to private sector reduced, entry of multinationals in Indian markets
etc. Hence, there was considerable rise in number of suppliers and cut-throat
 competition.
 In view of such cut-throat competition, there is a need to align business
activities with a focus on maximizing shareholders’ wealth. This gives rise to
various strategic decisions.
 Competition is an important driver for change, and hence corporate
restructuring becomes vital. Competition drives technological development,
cost cutting and value addition. Innovations and inventions happen out of
necessity to meet challenges of competition.
 Globalization leads to increased competition. Such competition can be related
to product and service cost and price, target market, technological adaptation,
quick response, quick production by companies, etc. Such competition drives
people to change and adapt and face global challenges.
 Thus, to be globally competitive and survive in the business with surplus, an
enterprise needs to restructure with inventions and innovations.

SECTION – B
Q11) Case Study/Problem

Answer Problem: A company has following capital structures: 10 Marks

9% Debentures 10,00,000
7% Preferences shares 4,00,000
Equity share (48000 shares) 16,00,000
Retained earnings 10,00,000
Market price of equity share is Rs.80, Dividend of Rs.8 per share is prepared.
The company has marginal tax rate of 50% and shareholders individual tax rate 25%.
Calculate the weighted average cost of capital.
The cost of debentures which are not redeemed by the issuer of the debenture is known as irredeemable 2 Marks
debentures. Cost of debentures not redeemable during the life time of the company is calculated as
below:
Kd= 1/ NP(1-t)
Where,
Kd = Cost of debt after tax
I = Annual interest payment
NP = Net proceeds of debentures or current market price
t = Tax rate Net proceeds means issue price less issue expenses.
If issue price is not given then students can assume it to be equal to current market price. If issue
expenses are not given simply assume it equal to zero
Each
a) Cost of Equity capital point is
ke = D / MP *100 1 Marks
= 8 / 80 *100
= 0.1 * 100
= 10%
b) Cost of Preference Share Capital
Kp = D / NP *100 = 7 / 100 * 100 = 7%
c) Cost of Debentures (After Tax )
 Kda = I / NP * (1 – t)
= 9 * (1 – 0.5) = 4.5%
d) Cost of Retained Earnings
Kr = ke (1 – tp) (1 – b)
= 10 (1 – 0.25) (1 – 0) = 7.5%
Computation of Weighted Average Cost of Capital On The Basis Of Book Value Weights
Book After tax cost 2Marks
Weights WACC (Ko)
Source of capital Value of capital
(₹) (a) (b) (c) = (a) × (b)
9% Debentures 10,00,000 0.25 4.5 1.125
7% Preferences shares 4,00,000 0.10 7 0.700
Equity share (48000 shares) 16,00,000 0.40 10 4.000
Retained earnings 10,00,000 0.25 7.5 1.875
40,00,000 7.700
Weighted Average Cost of Capital On The Basis Of Book Value Weights = 7.7% or 0.077

Computation of Weighted Average Cost of Capital On The Basis Of Market Value Weights
2 Marks
Book After tax cost
Weights WACC (Ko)
Source of capital Value of capital
(₹) (a) (b) (c) = (a) × (b)
9% Debentures 10,00,000 0.19 4.5 0.855
7% Preferences shares 4,00,000 0.08 7 0.560
Equity share (48000 shares) 38,40,000 0.73 10 7.300
52,40,000 8.715
Weighted Average Cost of Capital On The Basis Of Market Value Weights = 8.715% or 0.08715

Scheme of Evaluation Prepared by

Dr.Kamma Ramanjaneyulu
MBA PhD.,
Associate Professor & Vice Principal
Department of Management
Dr.K.V.Subba Reddy Institute of Management (JH)
Cell: 9494733850
Gmail id: ramulatha.mba@gmail.com