Unit-1

Part-A
1. Define Financial Management.

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise. Financial management
is one of the most important aspects of a business.
2. What is meant by financial planning?

Financial Planning is the process of estimating the capital required and determining it’s
competition. It is the process of framing financial policies in relation to procurement,
investment and administration of funds of an enterprise.

3. Identify the two aspects of financial management.

Procurement of Funds: The firm acquires funds from an array of sources, such as
Debentures and Bonds, Owner’s funds, i.e. equity shares and preference shares, commercial
banks, venture capital, angel financing, hire purchases and leasing.

Utilization of Funds: Another important aspect of the financial management is the

deployment of funds in an effective manner, i.e. the funds are to be invested in such a way
that it yields good returns for the business without posing a threat to its overall solvency.
4. What are the goals of financial management?

Goals of Financial Management · 1. Profit Maximization · 2. Wealth Maximization. 3.

Profitability Maximization · 4. EPS Maximization · 5. Liquidity Maximization.
5. Interpret any four functions of finance manager in an organisation.

1. Estimating the Amount of Capital Required:

This is the foremost function of the financial manager. Business firms require capital for:

(i) purchase of fixed assets,

(ii) meeting working capital requirements, and

(iii) modernisation and expansion of business.

The financial manager makes estimates of funds required for both short-term and long-term.
 2. Determining Capital Structure:

Once the requirement of capital funds has been determined, a decision regarding the kind and
proportion of various sources of funds has to be taken. For this, financial manager has to
determine the proper mix of equity and debt and short-term and long-term debt ratio. This is
done to achieve minimum cost of capital and maximise shareholders wealth.

3. Choice of Sources of Funds:

Before the actual procurement of funds, the finance manager has to decide the sources from
which the funds are to be raised. The management can raise finance from various sources like
equity shareholders, preference shareholders, debenture- holders, banks and other financial
institutions, public deposits, etc.

4. Procurement of Funds:

The financial manager takes steps to procure the funds required for the business. It might
require negotiation with creditors and financial institutions, issue of prospectus, etc. The
procurement of funds is dependent not only upon cost of raising funds but also on other
factors like general market conditions, choice of investors, government policy, etc.

5. Utilisation of Funds:

The funds procured by the financial manager are to be prudently invested in various assets so
as to maximise the return on investment: While taking investment decisions, management
should be guided by three important principles, viz., safety, profitability, and liquidity.
6. Explain Financing decision.

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.
7. State the features of a preference share.

Preferential dividend option for shareholders.

Preference shareholders do not have the right to vote.

Shareholders have a right to claim the assets in case of a wind up of the company.

Fixed dividend payout for shareholders, irrespective of profit earned.

8. Compare modern view of financial management with its traditional view.

9. Comment on the emerging role of the finance manager in India.

They have to do some tasks that are specific to their organization or industry.

They manage company credit.

Appreciate the financial performance concerning return investments.

They maximize the wealth for company shareholders.

To handle financial negotiations with banks and financial institutions.

10. What is time value of money?

The value of a certain amount of money today is more valuable than its value tomorrow. The
difference between the value of money at present and the value at a future date is referred to
as time value of money.

11. Differentiate Systematic Risk and Unsystematic Risk.

12. What is Risk Premium?

The risk premium is the amount that an investor would like to earn for the risk involved with
a particular investment. Higher the risk, higher will be the risk premium, leading to higher
expectation of return
13. How is bond different from equity?

14. What is effective rate of interest?

The effective rate of return is the rate of return generated by an investment when all factors
impacting receipts are considered. This approach generates the most comprehensive view of
the return on an investment. These factors include the price at which the instrument was
purchased, the stated interest rate to be paid by the issuer of the instrument, and any
compounding used in the calculation of interest paid.
15. List out the methods of valuation of equity share.

1. Discounted Cash-flow Technique

2. Balance Sheet Valuation

3. Dividend Capitalisation Model

4. Price Earning Ratio

5. Intrinsic Value Approach

6. Other Comparative Valuation Ratio.

i) Price-Book. (P/B) Ratio

ii) Price-Sales (P/S) Ratio

16. Can you explain Rule 72 and Rule 69?

The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of
years required to double the invested money at a given annual rate of return. Alternatively, it
can compute the annual rate of compounded return from an investment given how many years
it will take to double the investment.

The Rule of 69 is used to estimate the amount of time it will take for an investment to double,
assuming continuously compounded interest. The calculation is to divide 69 by the rate of
return for an investment and then add 0.35 to the result.
17. How is the term finance more comprehensive than money management?

The main focus of finance involves money management, i.e., to manage the money/assets that
an organization has in the best possible manner. Comprehensive financial planning considers
the entirety of the financial life. The assets, liabilities, taxes, income, business – these aspects
of the financial life are never isolated from each other. Money management financial
professionals manage investment and make investment decision for pools of funds.

18. Mr.Thanish deposits Rs3,00,000 for three years at 10% interest. What is the
compounded value his deposit?
19. Kavin makes an initial deposit of Rs 3,00,000 in Thana Laxmi Bank Ltd. Interest is
compounded at 10% p.a for 6 years. Compute the amount of maturity
20. Return on market portfolio has a standard deviation of 20% and covariance between
the returns on the market portfolio and that of security A is 800. What is the expected
return
 Unit-2
Part-A
1. Define ‘pay back period’ method.

The term payback period refers to the amount of time it takes to recover the cost of an
investment. Simply put, it is the length of time an investment reaches a breakeven point. The
shorter payback an investment has, the more attractive it becomes. Determining the payback
period is useful for anyone and can be done by dividing the initial investment by the average
cash flows.
2. Identify any two important advantages of payback period method.

3. What is capital budgeting?

Capital Budgeting refers to the planning process which is used for decision making of the
long term investment. It helps in deciding whether the projects are fruitful for the business
and will provide the required returns in the future years. Investments in heavy machinery or
big constructions are examples of capital budgeting.
4. Define cost of capital.

According to Solomon Ezra, “Cost of Capital is the minimum required rate of earning or the
cut-off rate of capital expenditures”.

According to Hampton, John J, “The rate of return the firm requires from investment in
order to increase the value of the firm in the market place”.

Cost of capital is the minimum rate of return or profit a company must earn before generating
 value. It's calculated by a business's accounting department to determine financial risk and
whether an investment is justified.

5. What are the features of a capital budget?

 It involve exchange of current funds for the benefit to be achieved in future.

 The funds are invested in non flexible and long term activities.
 They involve generally huge funds.
 They are irreversible decisions.

6. How would you measure the time value of money in capital budgeting?

The specific time value of money calculation used in Capital Budgeting is called net present
value (NPV). NPV is the sum of the present value (PV) of each projected cash flow,
including the investment, discounted at the weighted average cost of the capital being
invested (WACC).

In general, you calculate the time value of money by assessing a discount factor of future
value factor to a set of cash flows. The factor is determined by the number of periods the cash
flow will impacted as well as the expected rate of interest for the period.
7. Write the importance of cost of capital.

 It is useful in investment decisions.

 It is useful in designing capital structure.
 It is helpful in evaluation of financial efficiency of top management.
 It is helpful in comparative analysis of various sources of finance.

8. What are the merits of NPV method?

9. What are the features of ARR method?

 It is simple and easy to calculate.

 It takes into account all the savings over the entire period of investment.
 It is based on accounting profit rather than cash inflow.
 It considers value of project to its economic life.

10. What is internal rate of return?

Internal rate of return (IRR) is the discount rate at which a project’s returns become equal to
its initial investment. In other words, it attains a break-even point where the total cash inflows
completely meet the total cash outflow. The internal rate of return is commonly used to
compare and select the best project.
11. Compare NPV & IRR.

12. Define the term cost of debt capital.

The cost of debt is the effective interest rate that a company pays on its debts, such as bonds
and loans. The cost of debt refers to the before tax cost of debt, which is the company’s cost
of debt before taking taxes into account, or the after tax cost of debt. The key difference in the
 cost of debt before and after taxes lies in the fact that interest expense are tax deductible.

13. Classify the various costs in computing the cost of capital.

14. What is meant by Weighted average cost of capital?

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.
WACC is the average rate that a company expects to pay to finance its assets.
15. Define floatation costs in computing the cost of capital.

Flotation cost is the cost incurred by the company when they issue new stocks in the market
as the process involves various stages and participants. It includes audit fees, legal fees,
accounting fees, investment bank’s share out of the issuance, and the fees for listing the stock
exchange stocks that need to be paid to the exchange.
16. Suppose the dividend per share of firm is expected to beRe.1 per share next year and is
expected to grow at 6% per year perpetually. Determine the cost of equity capital,
assuming the market price per share is Rs.25.

17. How do you classify financial assets?

Types of Financial Assets:

Cash and Cash Equivalents

Accounts Receivable / Notes Receivables

 Fixed Deposits

Equity Shares

Debentures/ Bonds

Preference Shares

Mutual Funds

Interests in subsidiaries, associates and joint ventures

Insurance contracts

Rights and Obligations under leases

Share-Based Payments

Derivatives

Employee benefit plans

18. Define cost of retained earnings.

The cost of retained earnings is the cost to a corporation of funds that it has generated
internally. If the funds were not retained internally, they would be paid out to investors in the
form of dividends.
19. What is benefit cost ratio?

The benefit-cost ratio (BCR) is an indicator showing the relationship between the relative
costs and benefits of a proposed project, expressed in monetary or qualitative terms. If a
project has a BCR greater than 1.0, the project is expected to deliver a positive net present
value to a firm and its investors.
20. What is Capital Rationing?

Capital rationing is the process through which companies decide how to allocate their capital
among different projects, given that their resources are not limitless. The main goal is to
maximize the return on their investment.
 Unit-5
Part-A
1. What is the role of Indian capital market?

2. Can you list any four intermediaries ‘associates with a company’ issue of capital?

Stock Broker

Depository or Depository Participant

Bank

Clearing Corporation.
3. Define the internal financing of a firm.

Internal financing is the process of a firm using its profits or assets as a source of capital to
fund a new project or investment. Internal financing is generally thought to be less expensive
for the firm than external financing because the firm does not have to incur transaction costs
to obtain it, nor does it have to pay the taxes associated with paying dividends.
4. Define the term debenture.

A debenture is essentially a long-term loan that a corporate or government raises from the
public for capital requirements. For example, a government raising funds to construct roads
for the public. Debenture holders are the creditors.
5. How would you Compare debenture and preference share capital?

Basis of difference Debenture Preference Share Capital

Types It is a type of loan.
Rate of Return It has a fixed rate of return
which is known as interest.
Secured It may or may not be secured
against the assets.
Voting Rights It does not have voting rights.
6. What is preferential issues of securities?
It is a type of capital.
It has a fixed rate of return which
is known as dividend.
It is not secured but has a
preference for repayment.
It does have voting rights.

A preferential issue is an issuance of shares or convertible securities to a chosen group of

investors by a listed or unlisted company that is not an issue related to rights or the public.
Based on people’s interest, preferential shares are allotted to people or companies at prices
which are determined prior to allotment. Any company can opt for preferential allotment of
securities, be it private or public companies, listed or unlisted companies, under Section 8 of
the Companies Act, 2013.
7. What is New Issue market?

The primary market is a market for new issues. It is also called the new issues market. It is a
market for fresh capital. Funds are mobilised in the primary market through prospectus, rights
issues, and private placement.
8. What is Secondary Market?

The secondary market is where investors buy and sell securities. Trades take place on the
secondary market between other investors and traders rather than from the companies that
issue the securities. People typically associate the secondary market with the stock market.
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are examples of such
platforms.
9. Can you make a distinction between term loans and bought out deal?

Loans Bought Out Deal

A loan is a transfer of money by one party A bought out deal is a process in which a
to another with an agreement to pay it back. company offers securities or shares to the
public, through a sponsor.
 It involves the lender and the borrower. This method involves three parties: the
company’s promoters, the sponsors and the
co-sponsors.
The lender is usually a corporation, financial The sponsor can be a bank, any financial
institution or government. institution or even an individual.
Loans keep control of the company. It helps the company in saving time as well
as the costs involved in a public issue.
10 What is book building and listing?
.
Book building is the process by which an underwriter attempts to determine the price at
which an initial public offering (IPO) will be offered. An underwriter, normally an investment
bank, builds a book by inviting institutional investors (such as fund managers and others) to
submit bids for the number of shares and the price(s) they would be willing to pay for them.

Listing means the formal admission of securities of a company to the trading platform of the
Exchange. It is a significant occasion for a company in the journey of its growth and
development. It enables a company to raise capital while strengthening its structure and
reputation.
11 Define Hire purchase.
.
Hire purchase is a buying option where the buyer pays for goods in regular installments. But,
first, the buyer has to pay a down payment. The buyer does not get the title of ownership until
complete payment is made. This includes the principal and the interest.
12 What can you say about Venture Capital?
.
Venture capital (VC) refers to a type of long-term finance extended to startups with high-
growth potential to help them succeed exponentially. The investors are called venture
capitalists who bear the excessive financial risk and provide guidance to startups to attain
their objectives. In exchange, the investors get ownership in the business and multiple returns
for when the company makes it big.
13 Define leasing.
.
When an asset is acquired with financing provided by a lessor, the transaction is called
leasing. When the lessee enters into a leasing arrangement, it pays a fixed periodic fee to the
lessor. This fee is essentially comprised of the return of capital to the lessor, plus an interest
component. The lessor may also charge the lessee for other fees incurred to acquire and hold
the underlying asset, such as personal property taxes.
14 Compare Hire Purchase and lease.
.
15 What are the benefits of project financing?
.
 eliminate or reduce the lender’s recourse to the sponsors
 permit an off-balance sheet treatment of the debt financing
 maximize the leverage of a project
 obtain a better tax treatment for the benefit of the project, the sponsors or both
 reduce political risks affecting a project

16 What are the different types of debentures?

.
17 What are the merits of lease financing?
.
Lease rents paid by the lessee are not non-taxable income.

Leasing helps in easy finance without totally diluting the ownership of the asset.

This also helps the lessee to acquire the asset with a much lower price.

Less documentation is required.

18 What are the functions of primary market?
.
Functions of Primary Market. 1. New issue offer. 2. Underwriting services. 3. Distribution of
new issue.
19 What are the key functions of venture capital?
.

20 Name at least four intermediaries associated with a company issue of share capital.
.
Intermediaries that facilitate initial public offering are share transfer agents, registrar,
merchant bankers, underwriters, credit rating agencies, and custodians.