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UNIT 1: FOUNDATIONS OF FINANCE

PART - A
1st half
1. Define Financial Management. (U)
2. What are the objectives of financial management? (U)
3. Objectives of Financial manager is to maximize the wealth of the owners of the organization.
Comment (U)
4. What are the functions of financial management? (U)
5. What are the modern views on Financial management (U)
6. What is Time value of money? (U)
7.

What are the functions of Finance?

8. Explain the role of financial manager? (U)


9. What are the objectives of conventional and modern approaches in financial management?
10. What is included in the scope of financial management?
11. What is rule of 72? (U)
12. Define future value of money?(U)
13. What are the modern view(s) on financial management?
14. What is meant by the time value of money?
15. State any four functions of a finance manager in an organization
16. Define an Annuity
17. Explain the goal of financial management?
2nd Half
1. What is risk?

(U)

2. What is Interest Tax shield? (U)


3. Who is a portfolio manager? What are the functions of a portfolio manager?
4. What are the general responsibilities of a portfolio manager?
5. Explain the relationship between risk and the rate of return?
6. What is portfolio return? (U)
7. How will you find the return on portfolio?
8. On what does Portfolio Risk Depend?
9. What do you mean by efficient portfolio?
10. What are the two types of risks? (U)
11. What do you mean by risk-free asset and a risky asset? (U)
12. What do you mean by Multiple Risky Assets and A Risk-Free Asset?

(U)

13. What is risk free rate? (U)


PART B (SIXTEEN MARKS QUESTIONS)
1st half
1. Explain the meaning of financial management. What are its objectives? Explain its functions. (U)
2. Profit maximization is the basic goal of a finance manger. Do you agree? Discuss. (U)
3. In what way do you think the role of a finance manager has undergone a change in the recent
past?(U)
4. How are the concepts of liquidity and profitability different? Which of these two should the finance
5.
6.
7.
8.

manager strive for?


Explain the functions of a controller and treasurer.(U)
Explain the relationship between financial management and other areas of management.(U)
What are the major differences between accounting and finance?
What are the major types of financial management decisions that the business firm make? Describe

briefly each one of them.(U)


9. What is financial system? Explain its different constituents.
10. Explain the meaning and importance of valuation concept. How does valuation concept help in decision
making?
11. Explain the concepts of compounding and present value. How are the two concepts different?(U)
12. Explain the process for calculating multiple compounding of interest. Give illustration also.
13. The financial analyst should take into account time value of money to take objective decision. Explain
the statement with suitable illustrations.
14. Why is consideration of time important in financial decision making? How can time be adjusted?
(U)
15. A patent has been purchased for Rs. 17, 50,000 has a remaining life of 13 years and Rs. 2, 50,000
salvage value. It is estimated that the patent will generate operating revenues Rs. 3, 50,000 per year
throughout its life. Operating costs will be Rs. 80,000 per year from year 2 to 13. Using an interest
rate of 12% p.a. find the present value of this investment. (U)
2nd Half
1.
2.
3.
4.

Explain the debenture valuation models you would adopt for valuation of:
Redeemable debentures
Perpetual debentures
Explain the two approaches which are adopted for valuation of equity shares with appropriate

examples.(U)
5. What do you understand by growth in dividends? Explain with an example.
6. What is bond? What are its features and its types?
7. Differentiate between risk and uncertainty with appropriate examples.
8. Explain the various approaches for measurement of risk
9. Write short notes on methods of risk management
10. What is risk? What are its types?(U)
11. Business risk vs. financial risk outline the main cause of each.
12. What is an ordinary share? How does it differ from preference share and debenture? Explain its most
important features.

13. What are the advantages and disadvantages of ordinary shares to the company? What are the merits and
demerits of the shareholders?
UNIT -2: INVESTMENT DECISIONS
PART - A
1st half
1. What is capital budgeting? (U)
2. What are the features of capital budget? (U)
3. Explain the merits and demerits of time adjusted methods of evaluating investment proposals. (U)
4. A project costs Rs. 5,00,000/- and yields annually a profit of Rs. 80,000/- after depreciation at 12% per
annum but before tax of 50%. Calculate the payback period.
5. What is trading on equity? (U)
6. Define Payback period
7. Define Accounting Rate of Return (ARR)
8. Define Net Present Value (NPV)
9. What are the internal Sources of Finance? (U)
10. What are the external Sources of Finance?
11. Define Capital Budgeting
12. What are features of capital Budgeting decision?
13. What are the need and significance of capital budgeting decisions?
14. What are the types of investment Proposals? (U)
15. Explain the need and significance of capital budgeting.
16. Explain Capital Budgeting Process?
17. List the phases of capital budgeting process (U)
18. What is payback period method? List the two important limitations of this method?
(U)
2nd Half
1. What is Internal Rate of Return? (U)
2. Define Internal rate of return (IRR)
3. Define Profitability Index (PI).
4. Distinguish between NPV and IRR
5. What is capital rationing?
6. What is Cost of capital? (U)
7. What is Debt capital
8. What is Equity capital
9. What is Preference capital
10. What is Weighted Average Cost of capital
11. What is Marginal Cost of capital
12. What do you mean by a mutually exclusive decision? (U)
13. What are the elements to be considered while selecting the process and criteria for valuation of specific
project?

14. What do you mean by Cost of capital? (U)


15. Explain the Significance of Cost of Capital
16. What do you mean by Opportunity Cost of Capital?
17. What is Weighted Average Cost of Capital and Specific Costs of Capital?
18. How will you classify the Cost of Capital for Projects? (U)
19. What is profitability index? (U)
20. Brief with a simple illustration, the profitability index method of capital budgeting.
21. The initial cash outlay of the project is Rs. 1,00,000 and it can generate cash inflow of Rs. 40,000/and Rs. 30,000 and Rs. 50,000/- and Rs. 20,000/- in year 1 through 4. Assume a 105 of rate of
discount. Calculate the profitability index of this project. (U)
22. An equipment A has a cost of Rs. 75,000/- and net cash flow of Rs. 20,000/- per year for 6 years.
No salvage value. Calculate the IRR of this project. (U)
23. Suppose a dividend per share of firm is expected to be Re 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.
24. Current market price of a companys share is Rs. 90/-. Expected dividend per share next year is
Rs. 4.5. If the dividends are expected to grow at a constant rate of 8%. Calculate the
shareholders required rate of return. (U)
PART B (SIXTEEN MARKS QUESTIONS)
1st half
1. Explain the factors which should taken into account while making a capital investment decision.
2. If the economic life of project is long relative to its pay back period, the reciprocal of
payback period gives a reasonable estimate of a projects rate of profit. Analyze the Statement
and give the situations where this argument holds well.(U)
3. What is capital budgeting decision? Why is it significant for a firm?
4. Explain distinctive features of capital budgeting decisions.
5. Evaluate pay back period method of capital budgeting.(U)
6. There are two projects P and Q. The cost of the project is Rs. 30,000 in each case. The cash
inflows are as under(U)

Year

Cash inflows

1
Projects

Project P

Project Q

Rs.

Rs.

10,000

2,000

Initial Investment

Annual cash flow

10,000 Rs.
Rs.
A
60,000
12,000
B
88,000
22,500
3
10,000
C
2,150
1,500
D
20,500
4,500
E
4,25,000
2,25,000
You may use the following table for your calculation:

Life in years

4,000
15
22
24,000 3
10
20

Period in years
3
10
Present value of an annuity of Re.1 per 2.5918 6.3213

15
7.768

year payable for n years at 10 per cent

20
22
8.6466 8.8919

From the following information, Rank the projects according to their desirability under
(i)

payback period

(ii)

Accounting rate of returns and

(iii)

Net present value Index method assuming the cost of capital is 10%
7. The following data is available in respect of two mutually exclusive projects to be considered
by the management for investment. (U)
Particulars

Cash inflows before depreciation

years

Project X(Rs.)

Project Y(Rs.)

1
60,000
90,000
2
75,000
1,50,000
3
1,20,000
1,75,000
4
1,80,000
1,25,000
5
2,50,000
50,000
Project X cost Rs. 2, 75,000 and Project Y cost Rs. 3, 00,000. An investment of this type is expected to earn
a discounted rate of return of at least 12%. You are required to determine the more desirable project by
(i)

NPV

(ii)

PI method and (iii) pay back Period methods.

2nd Half
1. What is capital rationing? Explain the steps for selecting the projects under such situation.
2. Discuss the methods used for evaluating and ranking investment proposals. Make a comparative study
of the internal rate of return approach with the present value approach in choosing a capital expenditure
project.
3. Explain the IRR method of a project evaluation.
4. Investment alternative yielding the highest discount rate of return is most applicable. Will this
always be true? Explain.(U)
5. Do you agree with the following statements? (give brief critical views in your own words)(U)
i.
Capital budgeting is the discounted cash flow analysis used to make decisions on capital

6.
7.
8.
9.

outlays for fixed assets only.


ii.
IRR is a superior technique than a NPV methodology.
Differentiate between:
i.
Tactical and strategic investment decisions
ii.
Mutually exclusive proposal and Independent proposals.
What is profitability Index? This is a superior ranking criteria- profitability index or the NPV.(U)
How would you deal sunk costs and allocated overheads in analyzing investment decisions.
Compare the NPV method and IRR method. What are the steps involved in the calculation of IRR in the

case of uneven cash inflows?


10. What is the relevance of cost of capital in corporate investment and financing decisions?
11. Write short notes on: Financial risk and Marginal cost of capital.
12. Explain the concept of cost of capital as a device for establishing a cut off point of capital investment
proposals.
13. What is meant by cost of capital for a firm and what relevance does it have in decision making?
How is it calculated with different types of sources of capital funds? What is the cost of capital
most appropriately measured on an after tax basis?(U)
14. What is meant by cost of capital? What are the components of cost of capital?
15. What is cost of retained earnings? How is the cost of new equity issue determined?
16. What are the factors determining cost of capital?
17. What is M&M approach to the problem of cost of capital structure? Under what assumptions do their
conclusions hold good?
18. State the different approaches of cost of capital.
19. What are the merits of using market value weights in computing weighted average cost of capital?
20. New issue of capital is costlier than the retained earnings. How and what makes these two differ
21. Cost of retained earnings is same as cost of equity. Comment.
22. ABC Limited is proposing to invest in a project requiring a capital outlay of Rs. 50,000. Cost for
annual income after depreciation but before tax is as follows: (U)
Year
1
2
3
4
5
Rs.
20,000
20,000
16,000
16,000
8,000
Depreciation may be taken at 20% original cost and taxation at 50% of net income. You are required
to evaluate the project according to each of the following methods:
(i)

Pay back method

(ii)

Rate of return on original investment method

(iii)

Rate of return on average investment method

(iv)

Discount cash flow method taking cost of capital at 10%

(v)

Excess present value index.

23. P Enterprise is interested in assessing the cash flows associated with the replacement of an old
machine by anew machine. The old machine bought a few yeas ago has a book value of Rs.90, 000
and it can be sold for Rs.90, 000. It has a remaining life of 5 years after which its salvage value
will be zero. It is being depreciated annually at the rate of 20% (Written down Value method)
The new machine cost Rs. 4, 00,000. It is expected to fetch Rs. 2, 50,000 after 5 years when it will
no longer be required. It will be depreciated annually at the rate of 33 1/3% (W.D.V.M). The new
machine is expected to bring a saving of Rs. 1, 00,000 per year in manufacturing cost. The tax rate
applicable to the firm 50%. Assess the feasibility of investing in the new machine based on
incremental post tax cash flows of the replacement decision. (U)
24. A project has the following pattern of cash flows (U)
Year
Cash flow (Rs.)
(i)

0
- 40,00,000

1
15,00,000

2
8,00,000

3
7,50,000

4
- 8,00,000

5
35,23,000

Calculate IRR of the project (ii) with i= 8% calculate NPV of the project.

25. Loss of contribution on the other products Rs. 2 lakhs.


Credit sales are collected after a year with a bad debt loss of 2%. The capital equipment costs Rs. 30
lakhs and is depreciated at 33 1/3% per annum, written down value method. Working capital
investment of Rs. 20 lakhs is required.
A long term debt carrying 14% interest rate will increase by Rs. 20 lakhs and a short term bank
borrowing carrying 18% rate will increase by Rs.10 lakhs. The corporate tax rate is 50%.
Compute the cash flows for four years. (U)
UNIT -3: FINANCING AND DIVIDEND DECISION
PART - A
1st half
1.
2.
3.
4.

What do you mean by Capital structure?


What do you mean by optimal capital structure?
Give any two bases upon which capital structure is determined (U)
How change in sales influence EPS? Discuss with reference to combined effect operating and
financial leverages. (U)

5.
6.
7.
8.
9.

What are the various capital structure theories?


What do you mean by financial leverage?(U)
What do you mean by Operating leverage?
What are the assumptions under Net Income or Durand approach?
What do you mean by financial Structure?(U)

10. Explain capital structure theories?


11. Explain arbitrage process under MM approach.(U)
12. Briefly explain the factors influencing the planning of capital structure.
2nd Half
1. What is dividend?
2. What are the Issues in Dividend Policy?
3. What are the various Dividend policies?(U)
4. What are the various dividend theories?(U)
5. What do you mean by Residual approach?(U)
6. .Explain Theory of Relevance.
7. What are the assumptions under Walters Model ?(U)
8. What are the assumptions under MM theory ?(U)
9. How does Payout Ratio vary for different firms?(U)
10. What are the Criticisms under Walter model?
11. Write the formula of Walter share valuation model. State the variables.
12. Who presented dividend irrelevance theorem. State any three criticisms of this theorem. (U)
13. What are the assumptions under Gordon's Model ? (U)
14. Explain The Bird in the Hand view.
15. Explain Modigliani and Miller under dividend theory?(U)
16. What are the factors to be considered in paying dividends ?
17. What is Stability of Dividends?
18. What is the Significance of Stability of Dividends?
19. What are the essentials of Walters model? Explain its shortcomings?
20. What is dividend? Explain Dividend policies.
21. What is financial distress? How does it affect value of the firm?
22. Explain different theories of dividend.
23. What is share split? (U)
24. Compare a bonus issue and Share Spilt on four aspects (U)

PART B (SIXTEEN MARKS QUESTIONS)


1st half
1. Define leverage. Explain its type. Discuss its significance.
2. Operating leverage is determined by firms cost structure and financial leverage by the mix of debt
equity funds used to finance the firm explain.

3. Explain the concept of financial leverage. How does it magnify the revenue available for equity share
holders?
4. What is composite leverage? How it is computed? (U)
5. How does trading on equity related to financial leverage.(U)
6. Explain the impact of various combination of operating and financial leverage? Which combination
considered being a suitable solution to the company?
7. Explain the concept of working capital leverage.
8. What is meant by capital structure? Explain its significance.
9. What are the differences between financial structure and capital structure?
10. Briefly explain the factors determine the capital structure of a firm.
11. Describe various theories of capital structure.
12. Discuss the net income and net operating income approaches to capital structure.
13. Explain the traditional approach to capital structure.(U)
14. Define optimum capital structure explain its essential features.
15. A firm has sales of Rs. 75, 00,000 variable cost of Rs. 42, 00,000 and fixed cost of Rs. 6, 00,000. It
has a debt of Rs. 45, 00,000 at 9% and equity of Rs. 55, 00,000. Calculate operating, financial and
combined leverage of the firm. Also calculate the new EBIT, if the sale drops to Rs. 50, 00,000.
(U)
16. The following is the capital structure of M/S Kurukshetra Earning Works Ltd.:

Sources of Finance
Amount
Equity share capital (45,000 shares of rupees 4,50,000

Projections
45%

10 each fully paid up)


Retained earnings
Preference share capital
Debenture (at the rate of 9%)
Total

15%
10%
30%
100

1,50,000
1,00,000
3,00,00
10,00,000

The firms after tax component costs of the various sources of funds are as follows:

Equity share capital 14%

Retained earnings 14%

Preference share capital 10%

Debt 4.5%

Calculate the weighted cost of capital


(i)

by assigning the book values as weight and

(ii)

Market values as weights. Assume the market price of equity share is Rs. 20 per share.

17. From the following capital structure of a company, calculate the over all cost of capital, using (1)
Book value weights (2) Market value weights. (U)
Sources

Book value

Market value

Equity shares (Rs. 10/ share)


Retain earnings
Preference share capital
Debentures

45,000
15,000
10,000
30,000

90,000
--------10,000
30,000

The after tax cost of different sources of finance is as follows:


Equity 14%
Preference share capital 10%
Retained Earnings -13%

Debentures 5%

18. V corporations presently has one million outstanding equity shares (Rs.10 par) selling at Rs.15 per
share. It needs Rs. 100 lakhs of additional funds which can be raised into two ways:
(1) Issue of 8 lakhs equity shares at Rs.12.50 per share
(2) Issue of debt capital carrying 15% interest.
The expected earnings before interest and taxes after the new funds are raised will be Rs.70 lakhs per
year with the standard deviation of Rs.30 lakhs. Tax rate 60% what is the probability that the debt
alternative is better than the equity alternative with respect to earnings per share. (U)
19. Assuming that a firm pays tax at a 50% tax, compute the after cost of capital in the following
case:
i. A 8.5% preference share sold at par
ii. A perpetual bond sold at par, coupon rate of interest being 7%
iii. A ten year 8%, Rs. 1,000 par bond sold at Rs. 950 less 4% underwriting
commission.
iv. A preference share sold at Rs. 100 with a 9% dividend and a redemption price of Rs.
110 if the company redeems it in 5 years.
v. An ordinary share selling at a current market price of Rs. 120, and paying a current
dividend of Rs.9 per share, which is expected to grow at a rate of 8%

(U)

20. The shares of chemical company are selling at Rs. 20per share. The firm had paid dividend at Rs.2
per share last year. The estimated growth of the company is approximately 5% per year.
Determine the cost of equity capital of the company. Also determine the estimated price of equity
shares if the anticipated growth rate of the firm (1) rises to 8% (2) falls to 3% (U)
21. Sagar Industries is planning to introduce a new product with projected life of 8 years. The project,
to be set up in a backward region, qualifies for one time (as its starting) tax free subsidy from the
government of Rs. 20 lakhs. Initial equipment cost will be Rs. 140 lakhs and additional equipment
costing Rs. 10 lakhs will be needed at the beginning of the third year. At the end of 8 years, the
original equipment will have no resale value, but the supplementary equipment can be sold for Rs.
1 lakh. A working capital of Rs. 15 lakhs will be needed. The sales volume over the eight years
period have been forecasted as follows:

Year
Units
1
80,000
2
1,20,000
3-5
3,00,000
6-8
2,00,000
A sale of price Rs. 100 per unit is expected and variable expenses will amount to 40% of sales revenue.
Fixed cash operating costs will amount to Rs. 16 lakhs per year. In addition, an extensive advertising
campaign will be implemented, requiring annual outlays as follows
Year
1
2
3-5
6-8
The company is subject to 50% tax rate and

Rs.(in lakhs)
30
15
10
04
considers 12% to be an appropriate after tax cost of

capital for this project. The company follows the straight line method of depreciation.
Should the project be accepted? Assume that the company has enough income from existing products. (U)
22. P Enterprise is interested in assessing the cash flows associated with the replacement of an old
machine by anew machine. The old machine bought a few yeas ago has a book value of Rs.90, 000
and it can be sold for Rs.90, 000. It has a remaining life of 5 years after which its salvage value
will be zero. It is being depreciated annually at the rate of 20% (Written down Value method)
The new machine cost Rs. 4, 00,000. It is expected to fetch Rs. 2, 50,000 after 5 years when it will
no longer be required. It will be depreciated annually at the rate of 33 1/3% (W.D.V.M). The new
machine is expected to bring a saving of Rs. 1, 00,000 per year in manufacturing cost. The tax rate
applicable to the firm 50%. Assess the feasibility of investing in the new machine based on
incremental post tax cash flows of the replacement decision. (U)

2nd Half
1. Explain the EBIT EPS approach with suitable example.
2. What are the factors determine the dividend policy of a company? How is stable dividend
policy advantageous to the investors as well as company? (U)
3. What are bonus shares? Do they differ from stock dividend? State the advantages of issuing bonus
4.
5.
6.
7.
8.
9.

shares?
What are the recent guidelines by the SEBI regarding bonus shares?
Write a lucid note on current dividend practices in India.
Explain the forms of dividend policy.
Discuss the various approaches of dividend policy.
Explain the concept of Buy back shares. (U)
(i) what are the various factors influencing Dividend policy? Explain.

ii. Firms X and Y are identical except that firm X is not levered while firm Yis levered. The
following data relate to them.

Particulars
Assets
Debt capital
Equity share capital (50,000
shares of Rs. 10 each)
Rate of return on assets

Firm X
5,00,000
0
5,00,000

Firm Y
5,00,000
2, 50,000(9% Int.)
2,50,000( 25,000 shares

20%

of Rs.10 each)
20%

Calculate EPS for both Firms, assuming a tax- rate of 50%. Will it be advantageous to Firm Y to raise the
level of debt capital to 75%? (U)
10. Determine the market value of equity shares of the company from the following information as
per Walters Model. (U)
Particulars

Amount

Rs.
Earnings of the company
5,00,000
Dividend paid
3,00,000
Number of shares outstanding
1,00,000
Price earning ratio
8
Rate of return on Investment
15%
Cost of capital
13.2%
11. The Evergreen Company has the choice in raising an additional sum of Rs. 50 lakhs either by
the sale of 10% debentures or by issue of additional equity shares Rs. 50 per share. The capital
structure of the company consists of 10 lakhs ordinary shares and not debt. At what level of
EBIT after the new capital is acquired, would EPS be the same whether new funds are raised
either by issuing ordinary shares or by issuing debentures? Also determine the level of EBIT at
which uncommitted EPS (UEPS) would be the same, if sinking fund obligation amount to Rs. 5
lakhs per year. Assume a 50% tax rate. Discuss the relevance of this calculation and also verify
your results. (U)
12. ABC has a total investment of Rs. 5, 00,000 in assets and 50,000 outstanding ordinary shares at
Rs. 10 per share (Par value). It earns a rate of 15% on its investment and has a policy of
retaining 50% of the earnings. If the appropriate discount rate of the firm is 10% determine
the price of its share using Gordons model. What shall happen to the price of the share if the
company has a pay out of 80 or 20%. (U)
13. i. What is Share split? Explain in detail with suitable example. (U)

ii. Calculate the operating leverage for each of the four firms A, B, C, and D from the following
data.

Particulars

Firms
A

Rs.
Rs.
Rs.
Rs.
Sale price / unit
20
32
50
70
Variable cost / unit
6
16
20
50
Fixed operating cost
80,000 40,000
2,00,000
Nil
14. i. Explain the factors which influence the dividend policy of a firm. (U)
ii. ABC Ltd. Provides following details.
Particulars
Profit
Less: Interest on debentures
Earnings before taxes
Less: taxes @ 35%
Earnings after taxes
No. of equity shares @Rs. 10 each
Earnings per share
Market price of share (Rs.)
P/ E ratio

Rs.
3,00,000
60,000
2,40,000
84,000
1,56,000
40,000
3.9
39
10

The company has undistributed reserves, Rs. 6, 00,000. It needs Rs. 2, 00,000 for expansion
which will earn the same rate as funds already employed. The debt equity ratio higher than
35% will push the P/ E ratio down to 8 and raise the interest rate on additional amount to be
borrowed to 14%. Calculate the price of equity share (1) If the additional funds are raised as
debt; (2) If the amount is raised by equity shares at current market price.
UNIT 4: WORKING CAPITAL MANAGEMENT
PART - A
1st half
1. What is working capital? What are its concepts?
2. What are the kinds of working capital?
3. What are the Factors that determine the need for working capital?
4.
5.
6.
7.

Give the importance of working capital in an organization?


What do you understand by the term float? (U)
What do you mean by Operating cycle?
How will you determine the length of operating cycle?

8. What are the Issues relating to Working Capital Management? (U)


9. What are the ways of Estimating Working capital requirement?
10. What do you mean by Gross operating cycle, Net operating cycle and Cash conversion cycle?
11. What is factoring?(U)
12. Distinguish between with recourse and without recourse factoring
13. What do you mean by forfeiting? (U)
14. State the difference between factoring and bill discounting?
15. Distinguish between factoring and forfeiting?
16. What is fluctuating working capital? (U)
17. Draw the operating cycle of working capital for a manufacturing company?(U)
2nd Half
1. What are the Components of inventory /stock?
2. What is the Need for Inventories?
3. What are the objectives of Inventory Management?
4. What are Inventory Management Techniques? (U)
5. How can Inventory Investment Analysis be made?
6. What is Inventory Management Process?
7. Explain ABC Analysis (U)
8. What is Cash Management? (U)
9. What are the Four Facets of Cash Management?
10. What are the Motives for Holding Cash?
11. What is Cash Planning? (U)
12. What are the functions of Short-term Cash Forecasts? (U)
13. Write any two virtues and limitations of the Receipt and Disbursements

Method?

14. What are the benefits and limitations of The Adjusted Net Income Method?
15. What are the uses of Long-term Cash Forecasting? (U)
16. What are the methods of Managing Cash Collections and Disbursements?
17. What is Lock-box system?(U)
18. What are the components of credit policy?
19. What is Heuristic approach?
20. What do you mean by ageing schedule?
21. Z &co requires 2000 units of an item per year. The purchase price per unit is RS.30.The carrying
cost of inventory is 25%and the fixed cost per order is Rs.1000.Determine the economic ordering
quantity? (U)
22. What is Indifference Point? (U)
23. State any 4 features of commercial paper in India (U)
24. What is commercial paper? (U)
25. What is debt service coverage ratio? State the formula and name the variables (U)

PART B (SIXTEEN MARKS QUESTIONS)


1st half
1.
2.
3.
4.

What is meant by working capital? Explain the concept of working capital.(U)


What are the various types of working capital?
Briefly explain the importance of working capital for a manufacturing organization.
What is meant by operating cycle of working capital? Explain the various stages of operating

cycle.(U)
5. What are the advantages of inadequate working capital?
6. Explain the factors which determine the working capital needs of the organization.
7. Explain the different methods of forecasting working capital requirements of a concern?(U)
8. What is meant by receivables management? How it is useful to business concern.(U)
9. What are the factors influencing the size of the receivables?
10. Receivables forecasting is important for the proper management of receivables forecasting.
11. Discuss the various aspects / dimensions of receivable management.
12. What is meant by factoring? Briefly explain the factoring.
13. Describe the functions of factoring services.(U)
14. Explain the benefits of factoring services in India.
15. What is meant by working capital finance?
16. Discuss the various sources for the financing of working capital.
17. Assuming a year of 50 weeks of 5 days each, calculate the working capital requirements, using the
following data, sales 1,50,000 units at Rs. 10/ piece on credit. Customers are allowed 60 days
credit. Production cost includes Rs. 5 / piece for raw material, Rs. 2/ piece for labour and
Rs.2.5/piece for other expenses. Production cycle time 20 days. Credit allowed by suppliers 50
days. Cash requirement is one quarter of the remaining current assets. Stock levels raw materials,
40 days of supply and finished goods 20 days. Ignore work in progress.(U)
18. A company has sales of Rs. 10, 00,000. Average collection period is 50 days, bad debt losses 6% of
sales and collection expenses Rs. 10,000. The cost of funds is 15% p.a. The company has two
alternative collection programmes. (U)
I
II
Average collection period reduced to
40 days
30 days
Bad debt losses reduced to
4% of sales
3% of sales
Collection expenses
Rs. 20,000
Rs.30,000
Evaluate which programme is viable.
19. A proforma cost sheet of a company provides the following particulars(U)

Element of cost
Raw material
Direct labour
Over heads
Total cost
Profits
Selling price

Amount per unitRs.


80
30
60
170
30
200

The following further particulars are available:

Raw materials are in stock on average one month.

Materials are in process, on average, half a month.

Finished goods are in stock on average one month.

Credit allowed by suppliers is one month.

Credit allowed to debtors is two months.

Lag in payment of wages is 1 weeks.

Lag in payment of overhead expenses is one month.

One fourth of the output is sold against cash.

Cash on hand and at bank is expected to be Rs. 25,000.

You are required to prepare a statement showing the working capital needed to finance a level of activity
of 104000 units of production. You may assume that production is carried on evenly throughout the year,
wages and overheads accrue similarly and a time period of 4 weeks is equivalent to a month.
20. Calculate the amount of working capital requirement for Jolly & co. Limited from the following
Information. (U)
particulars
(Rs. Per unit)
Raw material 160
Direct labour 60
Overheads
120
Total cost
340
Profit
60
Selling price
400
Raw materials are held in stock on average for one month. Materials are in process on average for half
month. Finished goods are in stock on an average for one month.
Credit allowed by suppliers in one month and credit allowed to debtors is two months. Time lag in
payment of wages is 1 weeks. Time lag in payment of overhead expenses is one month. One fourth of the
finished goods are sold against cash. Cash in hand and cash at bank is expected to be Rs. 50,000; and
expected level of production amounts to 1, 04,000 units.
You may assume that production is carried on evenly throughout the year, wages and overheads accrue
similarly and a time period of four weeks is equivalent to a month.
21. Assuming a year of 50 weeks of 5 days each, calculate the working capital requirements, using the
following data, sales 1,50,000 units at Rs. 10/ piece on credit. Customers are allowed 60 days
credit. Production cost includes Rs. 5 / piece for raw material, Rs. 2/ piece for labour and
Rs.2.5/piece for other expenses. Production cycle time 20 days. Credit allowed by suppliers 50

days. Cash requirement is one quarter of the remaining current assets. Stock levels raw materials,
40 days of supply and finished goods 20 days. Ignore work in progress.(U)
22. NMK brothers desire to purchase a business and has consulted you and one point on which you
are asked to advise them is the average amount of working capital which will be required in the
first year. You are given the following estimates and are instructed to add 10 per cent to your
computed figures to allow contingencies.(U)
Particulars

Amount for the year

Average amount locked up in stocks

Stock of finished goods

5000

Stock of stores and materials

8000

Average credit given

In land sales 6 weeks

3,12,000

Export sales 1.5 weeks

78,000

Lag in payment of wages and others

Wages 1.5 weeks

Stores, materials 1.05 months

Rent, loyalties 6 months

Clerical staff 0.5 months

Manager 0.5 month

Miscellaneous Expenses 1.5 months

2,60,000
48,000
10,000
62,400
4,800
48,000

Payment in advance

Sundry advances (paid in quarterly in advance)

Undrawn profits on the average throughout the


year

8,000
11,000

Set up your calculations for the average amount of working capital required.
2nd Half
1.
2.
3.
4.
5.

What are the factors should be considered while forming a credit policy of the company?
Explain the meaning and objectives of cash management.(U)
Explain the basic problems involved in cash management. How will you overcome them?
What factors will you keep in mind while investing surplus cash?
Explain the techniques that you would adopt for controlling inflows of cash.

6. The need for maintaining cash balance arises from the non synchronization of the inflows and
outflows of cash. Elucidate the statement. Also point out the role of short costs in determining the cash
needs.
7. Write short note about concentration banking and lock box system to speed up recovery from debtors.
8. What is inventory management? Briefly explain the objectives of inventory management?
9. What is inventory? What are its types?(U)
10. What is meant by ABC analysis? What are its advantages?(U)
11. Discuss the various tools of inventory management.
12. What is meant by EOQ? What are the various costs which affect economic order quantity?
13. The management of inventory must meet two opposing needs? What are these? how is balance brought
in these opposing needs?
14. What is meant by commercial paper? Explain the conditions for issuing commercial paper.
15. What is meant by trade credit? Explain the importance of trade credit and accruals as source of working
capital. What is the cost of these sources?
16. Explain the rationale of the Tandon committees recommendation.
17. Describe the important features of Tandon committees recommendation.
18. Define commercial paper. Explain the pros and corn.(U)
19. What are the implications of the recommendations of chore committee?
20. A companys capital structure consists of the following: (U)
Particulars

Amount

Equity shares of Rs. 100 each


Retained Earnings
9% preference shares
7% Debentures
Total

Rs.
20 lakh
10 lakh
12 lakh
8 lakh
50 lakh

The company earns 12% on its capital. The income tax rate is 50%.
The company requires a sum of Rs. 25 lakhs to finance its expansion programme for which following
alternatives are available to it:
(i)

Issue of 20,000 equity shares at a premium of Rs. 25 per share

(ii)

Issue of 10% preference shares

(iii)

Issue of 8% debentures.

It is estimated that P/E ratios in the cases of equity, preference and debentures financing would be
21.4, 17 and 15.7 respectively.
Which of the three financing alternatives would you recommend and why?
UNIT -5: LONG TERM SOURCES OF FINANCE
PART - A
1st half
1. What is money market?

2.
3.
4.
5.
6.
7.

What do you mean by OTCEI market?


What are the functions of stock exchange?
Explain the difference between primary market and secondary market.
Distinguish between OTCEI and conventional stock exchange
Explain book-building. (U)
Name the objective of conventional and modern approaches in financial management. Distinguish

them on two aspects (U)


8. What do you mean by green shoe option?(U)
9. What do you mean by rights issue?
10. What do you mean by underwriting?
11. What do you mean by bought out deals? (U)
12. What do you mean by bonus shares? (U)
13. Explain the difference between equity shares and preference shares.
14. What are the different modes of making public issue?
15. What do you mean by E-IOP? (U)
16. How is a broker different from an underwriter?
17. State in brief any four rights of equity share holders(U)
18. Name at least four Intermediaries associated with a companys issue of share capital
2nd Half
1. Distinguish between shares and debentures.(U)
2. Distinguish between preference shares and debentures (U)
3. What do you mean by leasing? (U)
4. What are the different types of lease? (U)
5. What do you mean by swap leasing?
6. What do you mean by operating lease?
7. What do you mean by leverage leasing?
8. Explain financial lease?
9. What do you mean by hire purchase?
10. How is leasing different from Hire purchase?
11. What do you mean by Repossession in HP?(U)
12. What do you mean by import leasing?
13. List out the legal aspects involved in leasing?
14. Explain the difference between Hire purchase and Installment? (U)
15. Write a note on the tax benefits involved in Hire purchase transactions?
16. What do you mean by venture capital?
17. State any 3 accounting treatment of lease transaction? (U)
18. What is the net advantage of the lease? How it is calculated? (U)
19. Distinguish between Term loan and Bought out deal? (U)
PART B (SIXTEEN MARKS QUESTIONS)
1st half
1. Explain the concept of capital market efficiency. What are the different forms of capital market efficiency?
(U)
2. What is the difference between primary market and the secondary market? Briefly describe the some
significant developments in the stock markets in India.
3. Briefly discuss the procedures for trading and settlement on the stock markets in India.

4. What developments have taken place in capital markets in India? What are their implications for financial
managers?(U)
5. Explain the role of merchant banking in capital markets. What is the status of merchant banking in India?
6. What are index funds and hedged funds? Explain their merits and de merits.
2nd Half
1. What is debenture? Explain the features of debentures.(U)
2. What are the pros and cons of debenture s from the company investors point of views?
3. What are term loans? What are its features?(U)
4. What is leasing? What are its types?
5. What are the steps involved in leasing?(U)
6. Differentiate between financial lease and operating lease.
7. Explain the roles played by different players in the lease market in India.
8. Why companies go for leasing rather than purchasing equipment?(U)
9. Describe the various legal provisions that govern the leasing business in India.
10. Distinguish between lease and term loan.
11. What are the salient features of a hire purchase agreement?
12. What are the differences between a lease and the hire purchase?
13. Briefly, trace the evolution of hire purchase in India.(U)
14. State the essential requisites of a valid hire purchase agreement.
15. What are the implied conditions and warranties of hire purchase?(U)
16. Describe the rights and duties of their hirer and hire vendor.(U)
17. Describe the tax treatment of hire purchase.
18. What are the various stages of evolution of venture capital business in India?(U)
19. Explain the mechanism of venture capital with examples.(U)
20. What are the various types of venture capitalist?(U)
21. Describe the types of venture capital firms.
22. Describe the different types of venture capital investors.(U)
23. What is meant by private equity? State its advantages and drawback of private placements.
24. .i. Discuss the features of any two long term sources of finance, in detail. (U)
ii. Elaborate the various activities involved in new issue management.
25. .i. Explain the features of hire purchase with suitable examples. (U)
iii.
Bring out the essential aspects of project financing, venture capital.
26. Define the term option. What are its features?
27. Explain the types of options
28. What are the assumptions of black schole option pricing model?