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QP CODE: 22100108
B.COM DEGREE (CBCS) REGULAR / REAPPEARANCE EXAMINATIONS, JANUARY-2022
Fifth Semester
CORE COURSE – C05CRT16- FINANCIAL MANAGEMENT
For Regular Candidates: 2017 Admission Onwards
For Private Candidates: 2019 Admission Only

PART A
ANSWER ANY TEN questions.
Each question carries 2 marks

1) What do you mean by profit maximization?

Profit maximization is one of the important objective of an organisation. A firm should
take financial decisions in such a way to maximize its profits.
The main objective of financial management is to safeguard the economic interests
of the person who are directly or indirectly connected with the companies such as
shareholders, creditors, employees and the general public. For an organisation
profitability is considered as a barometer for measuring efficiency and economic
prosperity of the Enterprise.

2) What do you mean by venture capital?

It is a form of equity financing designed especially for funding high risk and higher
reward projects. Venture capitalist new type of financial intermediary which emerged
in 1950 in USA and spread to other parts of the world. It is a process whereby funds
are pulled in for a period around 10 years and investing it in venture capital
undertakings for a period of three to five years with an expectation of higher return. It
focuses on new companies or start-ups and it is given for implementing new ideas.
3) What is cost of capital?
Cost of capital is the minimum rate of return that must be earned on investment in
order to meet the rate of return required by the investors.
4) Xyz Limited issues 50000, 10 % debentures of 100 each at a discount of 5 %. The
debentures are redeemable at a premium of 5 % after 10 years. The tax rate
applicable to the company is 50 %.
Kd = I (1-t) + (RV- Np) 1/N ÷RV+ NP/2×100
= 500000(1-0.5) +5250000-4750000/10÷5250000+4750000/2 × 100
=6
OR
𝐼+(𝑅𝑉−𝑁𝑃)1/𝑁
Kd= (𝑅𝑉+𝑁𝑃)∗1/2 (1-t)
5,00,000+(52,50,000−47,50,000)∗1/10
Kd = (1-0.5)

5,50,000
Kd= (0.5)
50,00,000

0.11×05

0.055×100

=5.5%
(Marks can be awarded for both answers)
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5) Tisco Limited issued 150000,20% preference shares of 75 each, calculate the cost
of preference capital in shares are issued at a discount of 9% and the cost of issue is
Rs 5 per share.

Kp = D/NP
D= 2250000, NP= 9487500
= 2250000/9487500×100
= 23.71

6) What do you mean by management of fixed capital?

Management of fixed capital means the management of fixed assets for the business
and financing long-term projects. Fixed capital represents long-term investment. It is
required for purchasing fixed assets such as land and buildings, plant and machinery,
motor vehicles, furniture, etc.

7) How will you compute initial capital outlay?

To calculate the initial investment outlay, take the cost of new equipment for the
project plus operating expenses such as supplies. Subtract the value of any old
equipment sell off, then add any capital gains tax or loss on the sale.

8) Define Working Capital Management.

Working capital management refers to all aspects of administration of both current
assets and current liabilities.

9) From the following information you are required to calculate expected working capital
requirement using operating cycle method.
Operating cycle 15 days
Cost of goods sold 1200000
Minimum desired level of cash to be maintained 18750
Assume 360 days in a year
Working capital required= cost of goods sold× operating cycle÷365+ expected cash
balance
= 1200000×15/360+18750
= 68750

10) What do you mean by cash dividend?

Cash dividend declared and paid at the end of the financial year and usually the
dividend is paid in cash for declaring cash dividend from should have adequate cash
resources at its disposal.

11) The return on investment of B Limited is 20% and its retention ratio is 60% find out
the growth rate. ?
Growth Rate (g)= b×r
b = retention ratio
r =rate of return
r = 0.60×.20
=.12 or 12%
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12) What do you mean by subdivision of shares? Give example.

Sub-division of shares is a process by which a company limited by shares changes
the structure of its share capital by increasing the number of shares it has in issue
and decreasing the nominal value of each share.
Example: 'Illustration PLC' undertakes a 10-for-1 subdivision. Each shareholder will
then receive 9 additional 'Illustration PLC' shares in exchange for every 1 share held.

PART B
Answer any six questions.
Each question carries 5 marks

13) Explain the scope of financial management.

Financial Management is concerned with the efficient use of economic resources
namely capital funds

*Estimating financial requirements

* deciding the capital structure
* selecting a source of finance
* selecting a pattern of investment
* proper cash management
* implementing financial control
* proper use of surplus fund

14) kr=(ke) (1-t) (1-b)

ke=D/NP*100
D=20*25%=5
NP=Face value - issue expense - underwriting commission
= 20 - 0.8 - 0.5
= 18.70
Ke=5/18.70*100
=27%
Kr=27% (1-0) (1-0.025)
=27% (0.975)
=26.32%
15) Undercapitalization is better than overcapitalization. is it why?
Capitalisation refers to the total of all long term funds employed in a business.

Undercapitalization- when the actual capitalisation is lower than the proper

capitalisation as wanted by its earning capacity it is a state of Under capitalisation.
Over capitalisation is a situation where company has more capital than its needs.

Basis Overcapitalization Undercapitalization

Meaning Overcapitalization is a Undercapitalization is a

financial condition of a financial condition of a
company in which its total company in which the
debt and equity value of its capital is
outstanding significantly significantly lower than
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exceeds the value of its the quantum of its assets,

assets. specifically fixed assets.

Indicators Overcapitalization Undercapitalization

indicates a situation of indicates a situation of
over-funding i.e.: the under-funding i.e.: the
company has raised company does not have
excessive funds as enough funds/cash flow to
compared to its current meet the current needs of
requirements. its business operations.

Causes Overcapitalization can be Undercapitalization can

caused by several be caused by several
reasons including over- reasons including–
estimation of funding incorrect estimation of
requirements at the time initial funding
of raising capital, low requirements, inability to
return generation by the raise sufficient funds in
business etc. the form of capital and
long-term debt, funding
through expensive short-
term debt etc.

Negative impact The primary negative The primary negative

impact of impact of
overcapitalization is that undercapitalization is loss
the company incurs heavy of growth due to lack of
financing cost obligations funds to support
which it may not be able expansion. Inability pay
to fulfill. In severe cases creditors by an
of overcapitalization this undercapitalized company
can result in continuous can eventually lead a
reduction of earnings company to bankruptcy in
leading to lost investor severe cases.
confidence and downward
spiral of share prices

Advantages The key benefit of The key benefit of

overcapitalization is that undercapitalization is that
the company has the company can earn
sufficient funds to higher rate of return on its
undertake expansions of capital.
its operations. This can be
a boost to the growth rate
of the company.

16) In case of project under consideration the debt-equity ratio is 2:1 There are two
alternatives available.
1. Raising entire amount by the issue of equity shares
2. Raising 40 lakhs by way of debt and 20 lakhs by way of issue of equity
shares, thus maintaining debt equity ratio 2:1
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In first case, interest will be zero and in the second case it will be 4 lakhs.
( 40*10%=4lakhs)
Point of Indifference=
(X-I1) (1-t)-PD/S1 = (X-I2) (1-t)- PD/S2
(X-0) (1-0.5)-0/60=(X-4)(1-0.5)-0/20
X(0.5)/60=(X-4)(0.5)/20
0.5X/60=(X-4)(0.5)/20
0.5X/60=0.5X-2/20
20(0.5X)=60(0.5X-2)
10X=30X-120
10X-30X=-120
-20X=-120
X=-120/-20
=6 lakhs
17) Bajaj Limited issues 10,000, 12% debentures of 50 is at a discount of 25%.the cost
of flotation is 5% the rate of tax is applicable to the company is 45% compute cost
of debt capital?
Kd = I (1- t) /NP × 100
I (Interest) = 60000, t = 45 %,
NP= (10000*50) – discount Rs.175000 – 18750 (flotation cost 375000*5%)
=356250
Kd = (1-0.45) 60000/356250 ×100
= 9.26
18) Write short notes on the following1) capital budgeting2) cut off point3) payback
period4) risk and uncertainty 5) NPV and IRR

(1) Capital budgeting_ capital budgeting involves current investment in which benefit
are expected to be received beyond one year in future. Capital budgeting is the
process of making investment decision in capital expenditure as the expenditure
incurred for acquiring on improving fixed assets for the benefits of which are
expected to be received over number of years in future.

(2) Cut off point_ management use the criteria for deciding which project proposals
should be rejected or which should be accepted. It is mostly based on yield of a
project. It may also be the maximum period during which the cash inflows from a
project will enable investments to be recouped. The criteria of minimum payback
period or maximum rate of return is called cut off point.

(3) Payback period_ payback period refers to the number of years required to recoup
the original investment in a project.

(4) Risk and uncertainty- risk is present when future events occur with measurable
probability. Uncertainty is present when the likelihood of future events is indefinite or
incalculable. Both elements are an essential part of a business and we cannot avoid
it but we can take steps to minimise this.

(5) NPV and IRR _ net present value is excess of present value of a project cash
inflows over a project cash outflows. Internal rate of return is used when discount rate
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is not known but the cash outflows and cash inflows are known it is defined as the
interest rate that equates the present value of expected future cash inflows to the
cost of investment outlay.

19) What are the sources used for financing temporary requirements of working capital?
Working capital over and above the fixed and working capital is known as temporary
working capital and it varies with the volume of Business and it is used to meet the
seasonal demands of busy periods.
Temporary working capital can be divided into two: Seasonal working capital and the
Special working capital.
Seasonal working capital
It is the working capital which is needed to meet the seasonal needs of a firm
Special working capital
It is extra working capital required to meet extraordinary needs are emergencies such
as strikes fire unexpected competition launching of a new product.
The sources used for financing temporary requirement of working capital are:
1). Trade Credit
2) Outstanding Expenses
3) Inter Corporate Deposits
4) Commercial Papers
5) Banks
6) Advances received form customers
7) Various short term provisions
20)
From the following data prepare working capital forecast
Budgeted sales (Rs.20 per unit) ₹520000
Analysis of one ₹ sales ₹
Raw Material 0.30
Labour 0.40
Overheads 0.10
Profit 0.10
Sales 1.00
It is estimated that
1. Raw materials are kept in stock for three weeks and finished goods for two weeks
2. Factory processing will take 3 weeks
3. Supplies will give 5weeks credit and customers will require 8 weeks credit
It may be assumed that wages and overhead sequoia evenly throughout the year.

Statement Showing Working Capital Forecast

1.current assets

i)Stock of Raw materials 26000×0.30×3/52 450 450

ii)Working progress:

a)Materials 26000×0.30×3/52×100% 450

b)Direct labour 26000×0.40×50/100×3/52 300

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c)Overhead 26000×0.10×50/100×3/52 75 825

iii) Finished Goods:

a) Material 26000×0.3×2/52 300
b) Labour 26000×0.40×2/52 400

c) Overhead 26,000×0.10×2/52 100 800

iv) Debtors:

a)Materials 26000×0.30×8/52 1200

b) Labour 26000×0.40×8/52 1600

c)Overhead 26000×0.10×8/52 400 3200

Current Assets Total 5275

2.Current liabilities

i)Creditors 26000×0.30×5/52 750

Current Liabilities Total 750

Working capital
4525
requirement (1-2)

Note: As the degree of completion of work in progress is not given, it is assumed to be

100% in case of material and 50% for direct labour and overheads. (Liberal valuation
recommended)

21) What do you mean by bonus shares explain the effects of issue of Bonus shares.
Bonus shares are the shares issued to the existing shareholders at free of cost. The
company issue its own shares to existing shareholders as a distribution of profits. In case of
bonus issue companies issue bonus shares out of profits and reserves are converted into
share capital.
Circumstances where bonus issue of shares are made,
*When a company wants to capitalise its huge accumulated profits and Reserves.
*When a company is not able to declare higher rate of dividend in spite of sufficient profits
due to the restrictions imposed by the government
*When there is large difference between nominal value and market value of shares of the
company
Effects of issue of Bonus shares
*Bonus shares increases the issued share capital of the company, the company is perceived
as being bigger than it really is, making it more attractive to investors. In addition, increasing
the number of outstanding shares decreases the stock price, making the stock more
affordable for retail investors.
Shareholders will get additional shares at a free of cost and investors can easily sell the
shares and get immediate cash and it is considered to be a permanent source of income.
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Part C
Answer any two questions.
Each question carries 15 marks

22) A company has to make a choice between three possible Investments. project A, B,
and C the immediate capital outlay on each being 11000 Each will continue for 8 years
and it has been decided that a discount rate of 10% is acceptable for all three. The cash
flows for the three projects are as follows.

Year 1 2 3 4 5

A 1000 2000 3000 4000 5000

B 3000 2000 3000 2000 5000

C 1000 3000 3000 2000 4000

PV factor at 10% 0.909 0.826 0.683 0.751 0.621

Solution;
In the question for the third year PV factor is given to the 4th year and 4th year PV factor is
given to the third year so it is assumed that PV factor of 10 % discount right for third year is
0.75 1 and for the fourth year is 0.6 83.
(Full marks should be given if the student worked out the problem considering the PV
factor given in the question also.)
A
Year Cash inflows PV factor of Re. 1 at PV of cash
!0% discount rate inflows

1 1000 0.909 909

2 2000 0.826 1652

3 3000 0.751 2253

4 4000 0.683 2732

5 5000 0.621 3105

Total 10651

Cost 11000

NPV (349)

B
Year Cash inflows PV factor of Re. 1 at PV of cash
!0% discount rate inflows

1 3000 0.909 2727

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2 2000 0.826 1652

3 3000 0.751 2253

4 2000 0.683 1366

5 5000 0.621 3105

Total 11103

Cost 11000

NPV 103

C
Year Cash inflows PV factor of Re. 1 at PV of cash
!0% discount rate inflows

1 1000 0.909 909

2 3000 0.826 2478

3 3000 0.751 2253

4 2000 0.683 1366

5 4000 0.621 2484

Total 9490

Cost 11000

NPV (1510)

By evaluating the three alternatives B has the highest NPV. So B will be selected.

23) ATM Ltd has a sale of 500000

the variable costs are 45% the sales while the fixed operating cost amounts to 100000 and
the amount on interest on long term debt is 60000 calculate the combined leverage and find
out the impact if sales decreased by 10%.

Sales 500000

Variable Cost 225000

Contribution 275000

Fixed Cost 100000

EBIT 175000

Interest 60000

EBT 115000
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Operating Leverage = Contribution / EBIT

275000/175000
= 1.57

Financial Leverage= EBIT/ EBT

175000/115000
= 1.52
Combined leverage = 1.57× 1.52= 2.38

Sales decreased by 10%

Sales 450000

Variable cost 202500

Contribution 247500

Fixed cost 100000

EBIT 147500

Interest 60000

EBT 87500

Operating Leverage = 247500/147500= 1.68

Financial Leverage = 147500/87500= 1.69
Combined Leverage= 1.68×1.69= 2.83

24) Cost of equity (ke) = EPS/MP*100

EPS=Net Earnings/No. of equity shares
=15000/10000=1.5
Ke =1.5/15*100=10%
Kd = I/P (1-t)*100
=7500/75000(1-0.25)*100
= (0.1)(0.75)*10=7.5%
Kr = ke(1-t)(1-b)
=10%(1-0.25)
=7.5%
Calculation of weight
Equity=100000/195000*100=52%
Debt=75000/195000*100=38%
Retained Earnings=20000/195000*100=10%
(Reserve is assumed as retained earnings)
Calculation of WACC
Sl.No. Source Cost (X) Proportion (W) Weighted cost (WX)
1 Equity 10 52 520
2 Debt 7.5 38 285
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3 Retained Earnings 7.5 10 75

Total 100 880

WACC= ΣXW/ ΣW
= 880/100=8.8%
25. Discuss various methods of estimating working capital requirements.

Working capital is the sum of current assets.

Methods for estimating the working capital requirements:

1) Percentage of sales method

2) Regression analysis method

3) Cash forecasting method

4) Operating cycle method

5) Adjusted profit and loss account

******
QPC 22100128
FINANCIAL MANAGEMENT

(For private Candidates only)

MULTIPLE CHOICE QUESTIONS

Q. No. Answer Q. No. Answer

1 B 11 D
2 D 12 B
3 D 13 C
4 C 14 C
5 D 15 D
6 C 16 B
7 C 17 C
8 C 18 B
9 B 19 B
10 C 20 C