FACULTY OF ARTS AND SCIENCE, AV CAMPUS, CHENNAI

VINAYAKA MISSION’S RESEARCH FOUNDATION

DEPARTMENT OF BUSINESS ADMINISTRATION

BOARD: MANAGEMENT STUDIES

PROGRAM: BBA (BATCH 2017 – 2020)

REGULATION: 2017

SEMESTER: IV

Course Code:

Course Title: FINANCIAL MANAGEMENT

[Students who are admitted MBA for the academic year 2016 – 2017]

QUESTION BANK

UNIT – 1

PART – A (2 MARKS)

1. What is ‘Financial Management’?

2. Enumerate the two objectives of financial management.
3. Mention any four scope of financial management.
4. State any four significance of financial management.
5. List any four important function of Finance.
6. Write any two important relationships between risk and return.
7. What is ‘Working Capital Management’
8. What is time value of money?
9. What are the agency costs?
10. State the major difference between accounts and finance.
11. State Two relationship between finance and economics.
12. What is Present Value concept?
13. Differentiate risk from uncertainty. [any two]
14. State any four approaches for measurement of return.
15. Enumerate any four components required for rate of return.

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 PART – B ( 5 MARKS)

1. State any four the importance of financial management.

2. Briefly explain the term ‘Profit Maximization’
3. Roles of a Financial Manager
4. Brief the structure of Financial Management
5. Functions of Financial management.
6. Briefly explain the term ‘Wealth Maximization’
7. Meaning of financial management and its objectives.
8. Mr. X deposits Rs. 100 in a financial institution for a period of 3 years. It pays 10 per
cent interest [compounded] annually. Find out the amount payable by the institution at
the end of the maturity period.
9. If a person deposit Rs. 1000 today in a bank which pays 10 per cent interest
compounded annually, how much will the deposit grow to after 8 years and 12 years?
10. Find the present value of Rs. 1000 receivable in the 6th year end, if the rate of discount
is 10 per cent.

PART – C (10 MARKS)

1. Explain the meaning of financial management. What are its objectives? Explain its
functions.
2. “Profit Maximization is the basic goal of a finance manager”. Do you agree? Discuss.
3. “Investment, financing and dividend decision are all interrelated”. Comment.
4. Explain the relationship between Financial Management and other areas of Management
with relevant examples.
5. Discuss in brief the scope of Financial Management. What are the various methods and
tools of financial management? Explain.

UNIT – II: CAPITAL BUDGETING

PART A (2 MARK)

1. What is “Capital Budgeting”.

2. Define ‘Cut-off Rate’ – Explain with an example.
3. How do you rank projects?

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4. What is Pay-back period?
5. State three types of capital budgeting decisions.
6. State Accept or Reject Criterion under Payback period.
7. Brief the strategic investment decision.
8. A project costs Rs. 10,00,000 and yields an annual cash inflow of Rs. 2,00,000 for 10
years. Calculate its payback period.
9. State Net Present Value method.
10. Describe Internal Rate of Return.
11. What is Average Rate of Return?
12. Define Leverage
13. What is Financial Leverage?
14. What is Operating Leverage?
15. What is Combined Leverage?

PART – B (5 MARKS)

1. Differentiate between NPV and IRR. – Minimum 2 differences.

2. What are the various methods of evaluating a project investment proposal
3. Explain the importance of Capital Budgeting
4. List out the importance of Leverages.
5. State three types of capital budgeting decisions.
6. State Accept or Reject Criterion under Payback period.
7. Determine the payback period for a project which requires a cash outlay of Rs. 10,000
and generates cash inflows of Rs. 2,000, Rs. 4,000 and Rs. 3,000 and Rs. 2,000 in the
first, second, third and fourth year respectively.
8. ABC Ltd is proposing to take up a project which will need an investment of Rs.
40,000. The net income before depreciation and tax is estimated the first five years as
follows: Rs. 10,000, Rs.12,000, Rs. 14,000, Rs.16,000 and Rs. 20,000. Depreciation
is to be charged according to the straight line method. Tax rate is 50%. Calculate the
Accounting Rate of Return.
9. Explain Profitability Index method and it’s accept and rejection rule.

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 10. A project requires an initial outlay of Rs. 32,400. Its estimated economic
life is 3 years. The cash streams generated by it are expected to be as
follows :
11.

Years Estimated ACF

(Rs.)
1 16,000
2 14,000
3 12,000

Computed its IRR. If the cost of capital to the firm is 12%, advise the
management whether the project should be accepted or rejected.

PART – C (10 MARKS)

1. Critically examine the various methods of evaluating capital budgeting proposals. Discuss
their advantages and disadvantages.
2. Explain the Present Value Method. How does it evaluate profitability of various capital
projects? Discuss its advantages and limitations.
3. Explain in detail the various types of Leverages?
4. Explain in detail the various methods of evaluating a project investment proposal

5. Calculate i) operating leverage ii) financial leverage and iii) Combined leverage under
situations I and II and financial plans A and B.
Installed Capacity (units) 4,000
Actual Production and sales (Units) 75% of the Capacity
Selling price per unit (Rs.) Rs. 30 per unit
Variable cost per unit (Rs.) Rs. 15 per unit
Fixed Costs (Rs.) Situation I 15,000
Situation II 20,000

Financial Plan
Capital Structure
1 2
Equity Rs. 10,000 Rs 15,000
Debt (0.20 interest) 5,000 2,500

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 UNIT – III – CAPITAL STRUCTURE
PART – A (2 MARK)
1. Define capital structure.
2. What is optimum capital structure?
3. What are the various approaches of capital structure?
4. State any two importance of Capital structure planning.
5. Give any two differences between Capital Structure and Financial Structure.
6. What is NI Approach?
7. State the assumptions of the Net Income Approach.
8. State the assumptions of the Net Operating Income Approach.
9. State any three assumptions of MM approach.
10. What is optimum capital structure?
11. What is Arbitrage Process?
12. State any four factors that determining capital structure of a company.
13. Define Net Operating Income Approach.
14. Explain MM approach of Capital Structure.
15. Describe the various theories of capital structure.

PART B (5 MARKS)

1. Explain Net Operating Income Approach (NOI) to Capital Structure with suitable
illustration.
2. Explain the Modigliani and Miller Approach (MM) of Capital Structure with suitable
example.
3. Brief the concept optimum capital structure.
4. List and explain assumptions of MM approach.
5. List and explain assumptions of NI approach.
6. List and explain assumptions of NOI approach.

7. Explain Net Income Approach (NI) to Capital Structure with suitable illustration.
8. Explain Traditional Approach to Capital Structure with suitable illustration.
9. A firm is assumed to have Rs. 8 lakhs of debt of 8 per cent, as expected EBIT of
Rs. 19 lakhs and an overall capitalisation rate of 10 per cent. Calculate the Total
value of the firm

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10. A firm increases in debt from Rs. 8 lakhs to 16 lakhs and uses the cost of debt and
equity are held constant at 8 percent and 10 per cent, respectivey. Find the impact of
change in capital structure on value of the firm.

PART C (10 MARKS)

1. Explain in detail the various Capital structure theories.
2. Briefly explain the various Capital structure patterns?
3. Discuss the factors influencing the capital structure of a company.
4. The expected value of annual net operating income for two firms is Rs.4,000
before taxes, the corporate tax rate is 50 per cent. The after tax capitalisation rate
is 10 per cent for both firms and that firm A has no debt whereas firm B has Rs.
16,000 in 5 per cent bonds. According to the M-M find the total values of the two
firms.
5. Following financial data are avaiable about A.B.C. Ltd.
Expected net operating income Rs. 6,00,000
Debt Rs. 16,00,000 @ 12%
Equity Capitalisation Rate 15%
Equity Share Capital Rs. 24,00,000
What will be the effect of the following actions on the valuation and Ko ?
If the Company raises further debt of Rs. 8,00,000 at 12% and the net
operating income is expected to increase by Rs. 1,20,000 and with increase in
leverage, the equity capitalisation rate increase to 18%.

UNIT – IV - COST OF CAPITAL

PART -A (2 MARK)

1. Define the term ‘Cost of Capital’.

2. What is meant by opportunity cost?
3. “Debt is cheapest source of funds” comment.
4. State two Difference the explicit cost and implicit cost.
5. Describe the term ‘Cost of Preference Shares’
6. Describe the term ‘Cost of Equity Shares’
7. Define the term ‘Cost of Debt ‘
8. Mention any two importance of Weighted average cost of capital
9. “Equity cost is free” Do you agree?

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10. Define weighted average cost of capital?
11. Define the term ‘cost of retained earrings’.
12. What is an indifference point in the EBIT-EPS analysis?
13. A company issues 10% irredeemable debentures of Rs. 1,00,000. The company is in the
55% tax bracket. Calculate cost of debt (before as well as after tax) and if the debentures
are issued at par.
14. A ltd issues Rs. 50,000, 8% debentures at par. The tax rate applicable to the company is
50%. Compute the cost of debt capital.
15. A company’s debentures of the face value of R. 100 bear an 8% coupon rate. Debentures
of this type currently yield 10%. What is the market price of debentures of the company?

PART – B (5 MARKS)

1. Explain the components of cost of capital with an example.

2. Briefly explain Cost of Preference Shares with an example
3. Briefly explain Cost of Debt and provide an example.
4. Explain weighted average cost of capital with an example
5. Briefly explain cost of retained earrings with an example.
6. Briefly explain Cost of Equity Shares with an example
7. Raja & Co issue 9% preference shares of Rs. 100 each at a premium of Rs. 5 per
share. The issue expense per share comes to Rs. 3. Calculate the cost of preference
shares.
8. A company issues 1,000, 7% preference shares of Rs. 100 each at a premium of 10%
redeemable after 5 years at par. Compute the cost of preference capital.
9. A company has 10% redeemable preference shares of Rs. 1,00,000 redeemable at the
end of the 10th year from the year of their issue. The underwriting costs came to 2%.
Calculate the effective cost of preference share capital.
10. A company issues 10,000, 10% preference shares of Rs. 100 each redeemable after 10
years at a premium of 5%. The cost of issue is Rs. 2 per share. Calculate the cost of
preference capital.

Part – C (10 MARKS)

1. Describe the components of cost of capital. Discuss in detail how the cost of various
components of capital is calculated?
2. Explain weighted average cost of capital. How it is computed? Illustrate with an example.
3. A weighted average cost of capital based on existing capital structure.

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 a. The new weighted average cost of capital if the company raises an additional
Rs. 20, 00,000 debt by issuing 10% debentures. This would result in
increasing the expected dividend to Rs. 3 and leave the growth rate unchanged
but the price of share will fall to Rs. 15 per share.
b. The cost of capital is in (a) above, growth rate increases to 10%.

4. Excel industries limited has assets of Rs. 1,60,000 which have been financed with Rs.
52,000 of debt and Rs. 90,000 of equity and a general reserve of Rs. 18,000. The firms
total profits after interest and taxes for the ended 31st March 2014, were Rs. 13,000. It
pays 8% interest on borrowed funds and is in the 50% tax bracket. It has 900 equity
shares of Rs. 100 each selling at a market price of Rs. 120 per share. What is the weighted
average cost of capital?

5. Determine the EPS of a textile company which has EBIT of Rs. 1, 60, 000. Its capital
structure consists of the following securities.
10% Debentures … Rs. 5, 00, 000
12% Preference Shares … Rs. 1, 00, 000
Equity Shares of Rs. 100 each… Rs. 4, 00, 000
The company is in the 55% tax bracket. Determine:
i) the firms EPS
ii) the percentage changes in EPS associated with 30% increase and 30%
decrease in EBIT.
iii) The degree of financial leverage.

UNIT –V – WORKING CAPTIAL MANAGEMENT

PART - A (2 MARK)

1. Define working capital. Describe the concepts of working capital.

2. What is operating cycle of working capital?
3. What are the different types of working capital?
4. Define Permanent working capital and Temporary working capital.
5. State any two differences between Temporary and Permanent Working Capital.
6. State any four factors that influencing working capital management of an organisation.
7. Differentiate between Operating Cycle and Business Cycle.
8. What is Cash Management? State the suitable technique for Cash Management.
9. What are the principal motives for holding cash?

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10. What is receivable management? State the importance of receivable management.
11. What is ‘Factoring’?
12. What are the components of receivable management?
13. What is ‘Lock-Box’ System?
14. What is meant by inventory management?
15. State the importance of inventory management.

Part B (5 Marks)
1. List the objectives of Inventory Management.
2. Brief the various techniques of Inventory Management.
3. What are the motives for holding inventory – explain?
4. Explain the factors affecting the working capital requirements of a business.
5. Enumerate the importance of Working Capital Management
6. Brief Speculative motive of holding inventory.
7. What are the basic strategies of efficient cash management?
8. Explain the significance of speedy receivables collection.
9. Calculate Economic Order Quantity from the following:
Consumption during the year 600 units
Ordering cost Rs.12
Carrying cost 20%
Price per unit Rs.20
10. Calculate Economic Order Quantity:
Annual consumption 900 kgs.
Cost of placing and receiving one order Rs.10
Annual carrying and storage cost Rs.20 per unit.
Part - C (10 Marks)

1. Explain the term “Working Capital”. Explain the factors affecting the working capital
requirements of a business.
2. ‘Working Capital management deals with decisions regarding the appropriate mix of
current assets and current liabilities’. Elucidate the statement.
3. What do you mean by Cash Management? Discuss the motives for holding cash and
objectives of Cash Management.
4. Explain Inventory Management. Discuss in brief benefits and costs of holding inventory.

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5. What do you mean by receivables management – explain? What are the motives and cost
of maintaining receivables? Also explain the objectives of Receivable Management.

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 FACULTY OF ARTS AND SCIENCE
VINAYAKA MISSION’S RESEARCH FOUNDATION
DEPARTMENT OF BUSINESS ADMINISTRATION
MODEL QUESTION PAPER

Subject Name: FINANCIAL MANAGEMENT Duration: 3 Hrs

Subject Code: Max.Marks:70
Part – A(Answer all the questions) 10 X 2 = 20

1. What is ‘Financial Management’.

2. Enumerate the two objectives of financial management.
3. What is Financial Leverage?
4. What is Pay-back period.
5. Give any two differences between Capital Structure and Financial Structure.
6. State any three assumptions of MM approach.
7. Define the term ‘Cost of Capital’.
8. Define retained earnings
9. Define working capital.
10. Define Permanent working capital and Temporary working capital.

Part – B 4 X 5 = 20

1. A) Briefly explain the term ‘Profit Maximization’ (OR)

B) Roles of a Financial Manager
2. A) Importance of Capital Budgeting (OR)
B) State the assumptions of NI approach.
3. A) State the assumptions of NOI approach. (OR)
B) Briefly explain Cost of Debt and provide an example.
4. A) Briefly explain Cost of Preference Shares with an example (OR)
B) What are the motives for holding inventory – explain?

Part – C(Answer any 3 questions) 3 X 10 = 30

11. “Profit Maximization is the basic goal of a finance manager”. Do you agree? Discuss.
12. Explain in detail the various types of Leverages?
13. Explain in detail the various Capital structure theories.
14. Explain weighted average cost of capital. How it is computed? Illustrate with an
example.
15. Explain the term “Working Capital”. Explain the factors affecting the working capital
requirements of a business.

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