DEPARTMENT OF MANAGEMENT SCIENCE SREE SARASWATHI THYAGARAJA COLLEGE (AUTONOMOUS), THIPPAMPATTI, POLLACHI – 642 107 MASTER OF BUSINESS ADMINISTRATIONSEMESTER – II FINANCIAL MANAGEMENT Course Code: MBAAA2T94 Unit I Part – A (5 x 6 = 30 marks) Answer all questions. All questions carry equal marks 1. a). Describe the relationship between risk and return (or) b). Explain the concept of Time value of money with an illustration. 2. a). What are the tasks of Financial Management? b). What is Capital Market? 3. a). Define Financial Management. Explain its functions. b). What are the features of present Indian Money Market? (or) (or) 4. a). Discuss briefly the scope of Financial Management (or) b). Explain the superiority of wealth maximization as the goal of Financial Management. 5. a), Describe the three broad areas of financial decision making b). Distinguish between Money Market and Capital Market. 6. a). What is meant by risk return trade-off? b). What are the sources of long term finance? 7. a). Explain the components of Indian Financial System. b). What are the functions of modern finance manager? (or) (or) (or) 8. a). What are the objectives of Financial Management? (or) b). What are the risks associated with finance decision? Explain them with examples. 9. a). What are the characteristics of Indian Capital Market? b). Discuss the role of SEBI. 10. a). Briefly explain the goals of Financial Management. b). Explain the legal aspects of Indian Financial Management. (or) (or) 1 Explain the steps involved in the evaluation of an investment. (or) (or) (or) 4. Identify the sources of long term finance for large scale seasonal industry. All questions carry equal marks 1. 6. 8. 10. Enumerate the recent trends of Indian Capital Market and bring out the role of SEBI in regulating it. 5. Explain in detail the various finance functions in a Modern Organization. UNIT – II Part – A (5 x 6 = 30 marks) Answer all questions. Explain the steps involved in the evaluation of IRR method. a). Why the NPV method is the true measure of an investment’s profitability. Explain the importance of investment decisions. a). What is Capital Budgeting? 3. Discuss the recent trends in Indian Capital Market. Discuss the types of investment decisions. Discuss the risk –return relationship and its significance to an organization. What are the limitations of rate of return? (or) b). 2. Explain the major types of financial decisions that a firm makes. 4. In what ways is the wealth maximization objective superior to the profit maximization objective? Explain. Discuss the significant of Capital Budgeting. 3. Under what circumstances of the net present value and internal rate of return methods differ? 6. b). b). Explain Capital Rationing b). a). (or) b). What are the phases of Capital Budgeting Process? (or) 2 . What are the functions of money markets and capital markets? Critically review their Functioning. b). 7. a). How do they involve risk-return trade off? 5. Discuss Systematic and unsystematic risks. Explain the merits and demerits of the time adjusted method. a). 9. All questions carry equal marks 1. 7. Explain the features of capital market development in India. Explain the merits of pay back period method.Part – B (3x 10 = 30 marks) Answer any three questions. 2. How do you calculate the accounting rate of return? (or) b). a). a). 000.000 15.000 20. a).000 during the next 4 years. Cash out flow 10.000. What is profitability index? Which is a superior ranking criterion. IRR Method 4. Explain the factors affecting Capital Investment Decisions. profitability index or the net present value? UNIT II Part B (3x 10 = 30 marks) Answer any three questions. A company is considering purchase of a machine. b). What is discounting? What is Compounding? Distinguish between the two. 15.000 20. Compare and contrast NPV and IRR methods of project appraisal with suitable example. Explain the risk analysis in capital budgeting with an example.000 30. How do you calculate the accounting rate of return? What are its limitations? 2. Which project will be selected under NPV method? Cost of Capital is 10% Project A Rs. Earnings after taxation are expected to be as follows.00.8. 8. 50.000.000 10. What is the projects pay back? (or) b). are available and each one requiring an initial investment of Rs. NPV Method (Cost of Capital @10%) (ii). 20.000 and generate cash in flows of Rs.00. Year Machine A Rs.000 1 2 3 4 5 Evaluate the two alternatives according to (i).000 3 . Compare and contrast different capital budgeting techniques.000 25. 7. (or) 9.000 and Rs.000 20. Rs.000 Project B Rs. 10. (or) b). a).000 15. All questions carry equal marks 1. Two machines A and B. 3. 4. a) A project requires a cash outlay of Rs. 5. 3. 10. Rs.000 Machine B Rs. 000 2. Cash out flow Cash inflows 1 year 2 year 3 year 1.000 1.000 7.00. Cash out flow Cash inflows 1 year 2 year 3 year 4 year 5 year 2.00.000 2. 15.00.000 4.00.00.000 4.00.000 7.00.000 B Rs. 3.50.000 1.00.000 2.000 6.00.000 2.000 6.00.00.000 5. Which project will be selected under NPV method? Cost of Capital is 10% Project A Rs.00.000 2.000 15.00.000 Project B Rs.00.00.000 1.000 7.00.00.50.50.00.000 2.000 5.00. Which project will be selected under pay back method? Project A Rs.00.50.50.000 2. 3.50.Cash inflows 1 year 2 year 3 year 5.000 C Rs.000 6.50.000 4 .00.000 7.000 4.000 6.000 3.00.000 1.00. b). a). b). a). Enumerate the steps in calculating weighted average cost of capital. What are the advantages of the risk-adjusted discount rate? What is the major problems in using this approach to handle risk in capital budgeting? UNIT – III Part –A 1. 4. Explain the risk analysis in capital budgeting with an example.7. Discuss the approaches suggested for determining the cost of retained earnings. a). 9. State and explain various capital budgeting techniques and their advantages and limitations. Explain why a low level of operational leverage and high level of financial leverage is good for the organization (or) b). a). Explain the factors that determine the cost of capital. 8. 2. (or) (or) (or) 5 . What is EPS analysis? b). The cash flows associated with three projects P. Explain Financial Leverage. Explain the concept of WACC. Q and R are given below: Year P (2000 ) 1400 600 400 Q (2000) 500 1100 900 R (2000) 500 500 1600 1 2 3 Calculate the net present value of each project at discount rates of 15 percent and 25 percent. 10. Discuss ‘Cost of Capital’ and its importance. a). 5. 3. Explain Operating Leverage. (or) b). Explain EBIT-EPS analysis. 000.Rs. a). 4. 10. How leverage concepts are used in financial management? 8.00. 3. 4. 90 and the expected dividend per share next year is RS. which one should be used in capital budgeting and valuation of the firm? Why? 2. a). 1. Define the term weighted average cost of capital and explain how the cost of individual components of it is computed. 50. Calculate EPS. A Company issues Rs. 10.000 b).000 -Rs. The company is in 35% tax bracket.00. 3. How will you calculate cost of preference share? b). what is the share holder’s required rate of return? Part – B 1. Operating Profit 7% debentures Tax rate No of equity shares Rs. b). Distinguish between the weighted average cost of capital and the marginal cost of capital. The current market price of a company’s share is Rs.60.00. if the debentures are issued at (i) Par (ii) 10% discount (iii) 10% premium. What is cost of capital? Discuss its uses in financial decision making.000 40% Rs. You are requires to calculate the cost of debt after tax. A texile company has EBIT of Rs. a). 1.00.6. Explain the advantages and disadvantages of financial leverage.100 each. 16% debentures of Rs. The capital structure is as follows: 10% debentures 12% preference shares . What is Leverage? Compare operating and financial leverage.000. (or) (or) (or) 9.000 6 . Is equity capital free of cost? 7.000 Rs. a). 1. 10. a). Explain the various approaches for WACC and their merits b). Explain the concept marginal cost of capital. If the dividends are expected to grow at a constant rate of 8 percent.5. (or) b). Determine the growth rate of dividend (ii).575 in years 1.000 4. 11. purchases an equity share of a growing company for 210.00.00.50. if the quantity manufactured and sold rises to 600 units? 6. Combined Leverage Firm A Rs.000 2. The capital structure of Keerthi Enterprises Ltd. 600 and fixed costs are Rs.000 Specific Cost (%) 7% (before tax) 8% 10% 7 .000 7.) 20.000 6. X on his equity investment.Equity shares (Rs.00.00. Financial Leverage c). What is the required rate of return of Mr.000 The company is in the 35% tax bracket a).00. What are the problems in its determination? 9. 10.000 6. 7. Operating Leverage b). 1.00.00. Rs.025 and Rs. Calculate a).00. an investor.0000. Examine the relevance of cost of capital for long term investment and financing decisions. Determine the Degree of Financial Leverage 5.00. 16.000 3.50. Pradhan Enterprises is currently selling 400 units per year..00. 11. He expects to sell the shares at a price of Rs.000 2.2 and 3 respectively.000 3. what is Pradhan’s degree of operating leverage at its current level of operations. variable cost per unit is Rs. (i). If the selling price per unit is Rs. is as follows: Source Debenture Preference share Equity share Amount (Rs. What will be the DOL. Mr. Sales Fixed cost Interest Variable cost 15. He expects the company to pay dividends of Rs. 243.000 8. Determine EPS b). 4.10 at the end of 3 years.000 Firm B Rs.00. 1000.00. X. 100 each) -Rs. What is meant by optimum capital structure? (or) b). Briefly explain the concept of Net Income Approach. Briefly explain different types of dividends declared by the companies. b). 4.000 Unit IV Part A 1. (or) b). Explain Net operating income approach.Calculate the weighted average cost of capital.500 equity shares (fully paid) 3000 nos of 8% debentures 2000 nos of 6% preference shares Retained earnings 4. What is ‘Informational Content’ of dividend payments? Explain.000 1. What are the assumptions used in CAPM. a). Explain its significance.00. What is dividend? Explain its importance on share prices. Define Capital Structure. Explain the nature of the factors which influence the dividend of a firm. Bring out the principal propositions of M-M approach.000 2. 5. (or) (or) (or) 4. a). 3. a). Explain the effect of capital structure on the value of the firm when both corporate and personal income taxes are considered? (or) 8 . b). a).00. Explain the major considerations in capital structure planning. What are the basic assumptions of Gordon’s model of dividend and valuations of firm? Does dividend policy affect the value of the firm under this model? 6.”The M-M approach is based on unrealistic assumptions”. b). (or) (or) 9.000 3. a). a). b).00.Explain the traditional approach to capital structure theory.00. What are the different types of dividend policy? b). a). 7. Evaluate the reality of the assumptions made by M-M. Calculate weighted average cost of capital from the following information: Rs. 2. b). a). 8. 10. a). Explain the factors that are relevant for determining the dividend payout ratio (or). 3. 2.b). 4. 2.. a). describe MM’s position on the issue of an optimum structure. a). Explain the importance and objectives of inventory management. What are the factors affecting working capital? b). a). (or) b). What do you understand by capital structure of a corporation? Discuss the qualities which a sound capital structure should possess. Discuss briefly the various theories of Dividend Policy of a corporate body. What is dividend policy? Discuss the factors that affect dividend policy of a firm. Assuming the existence of the corporate income taxes. Explain the salient features of various committees’ recommendations of working capital financing. Explain the NI and NOI approach in detail. The MM approach is effective or not – Discuss. 8. 5. Explain the techniques that can be used to accelerate the firm’s collection. Explain the three principal motives for holding cash. What is meant by financial flexibility? Is a flexible capital structure costly? Unit V Part – A 1. Define EOQ. 10. b). How do the considerations of control and size affect the capital structure decision of a firm? 10. Explain the different models of the dividend valuations. Describe the traditional view on the optimum capital structure. 7.How valuations of share is done using CAPM (or) b). (or) b). a). Explain in detail the various determinants of working capital requirements of a manufacturing firm. What are the advantages of decentralized collection over a centralized collection? 4. 9. Compare and contrast this view with the NOI approach and the NI approach. 6. What is an optimum capital structure? Discuss the important approaches to different theories of capital structure. (or) 3. How is it computed? (or) 9 . What are the important factors affecting capital structure decision of a firm? Part –B 1. a). 60 / Unit Rs. a). 8. 120 / Unit Rs. How is the re-ording point determined? Illustrate with an example. (or) b).000 Raw materials stock Work in process Financial goods 3 months 1 month 2 months 30 240 / Unit 10 . a).5. a). Explain the objectives of credit policy. How can safety stock be computed? b). a). Explain the concept of working capital. Explain the methods do you suggest for estimating working capital needs? Illustrate.What is the concept of working capital cycle? Why it is important? Give an example to illustrate. a). What are the objectives of the collection policy? How should it be established? 7. Explain the risk-return trade-off of current assets financing. (or) b). (or) 6. a). 30 / Unit 210 Profit Selling price Annual production 1000 units Cash in hand 10. Prepare a working capital forecast Raw materials Labour Expenses Rs. (or) b) What are ordering and carrying costs? What is their role in inventory control? Part –B 1. How would you determine the optimum level of current assets? Illustrate you answer? (or) b). Are gross and net concepts of working capital exclusive? Discuss. (or) b). How would you monitor receivables? Explain the pros and cons of various methods. 9. What is an optimum credit policy? Discuss. Define safety stock. What is the role of credit terms and credit standards in the credit policy of a firm? 10. the carrying cost of inventory is 25% of inventory value and fixed cost per order is Rs.000.0 Average raw material in stock Average materials in process Credit allowed by suppliers Credit allowed to customers Time log in payment of wages Overheads One month Half a month One month Two months One and a half weeks One month One-fourth of sales are on cash basis.5 130. 11 .5 39. Cheran Corporation requires 2000 units of a cretin item per year.20. 30. Determine EOQ.0 19.Customer credit Supplier credit Outstanding wages Outstanding expenses 1 month 2 months 1 month 15 days 2.0 110.5 19. Cash balance is expected to be Rs. You are required to prepare a statement showing the working capital needed to finance a level of activity of 70000 units of output. 1. 3. You may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly. The purchase price per unit is Rs. 52. 1000. A proforma cost sheet of a company provides the following data: Cost per unit Raw Materials Direct labour Overheads Total Cost (per unit) Profit Selling price Rs. How does factoring differ from bill discounting and short term financing? 10. In lakhs 1. Explain the factors that determine the working capital needs of a firm. the interest on which amounts to Rs. ABC Ltd. Degree of Operating leverage b). The reordering point (Assume 250 days years) 5. has an average selling price of Rs. XYZ Ltd. 9. 0. Technology c). The latter finances its assets 50% by equity and 50% by debt. Degree of Combined Leverage Rs. A Manufacturing company has an expected usage of 50. Determine the degree of operating.000 units of certain product during the next year.120 320 700 12 . How is working capital affected by (a) Sales b). The cost of processing an order is Rs. is identical to XYZ Ltd..000. Explain the importance of inventory management and also explain the objectives of it. 7. Lead time on an order on an order is five days and the company will keep a reserve supply of two days’ usage.000 sales for both the firms and interpret the results.. financial and combined leverages at Rs. 10 per unit.000. Degree of Financial Leverage c). Production Policy d). 7 and fixed cost amount to Rs. except in respect of the pattern of financing. a). You are required to calculate. Its variable unit cost are Rs. Consider the following information for a company. Do you recommend that a firm should finance its current assets entirely with short term financing? Explain your answer. 2. What is factoring? What functions does it perform? And also explain the various types of factoring. 7.50 for one year. Inflation.70.4. Explain.00. PART –C (1x15=15 marks) Compulsory: 1. 1. the EOQ b). 20.20 and the carrying cost per unit is Re. EBIT PBT Fixed cost Calculate: a). 6.. It finances all its assets by equity funds. 8. It pays 50% tax on its income. 70 Fixed cost :Rs. degree of financial leverage and combined leverage from the following data: Sales 1.0 2.000 Interest charges :Rs.000 to finance its expansion.0 3. Percentage change in EPS if sales increased by 5% 3. 5. Dhanvantary company has the following capital structure Rs.0 2.0 Indicate which machine would be profitable using the following methods of ranking investment proposals. Payback method b). In comparing the profitability of the machines.000 units of Rs. 2 per unit Variable cost per unit :Rs. The dividend growth rate is 5%.5 2.5 1. 4. A Company is contemplating to purchase a machine. Calculate the degree of operating leverage.000 12% debentures 3. Which combinations of operating and financial leverages constitute: a). 0.00.000 The equity shares of the company have current market price at Rs. The company can also raise additional loan at 10% for Rs. 3.00. Two machines A and B are available each costing Rs. Calculate the WACC.5 1.d). Net present value method c).50.668 b). 105 and the company declares a dividend of Rs. Profitability index method and d). a discounting rate of 10% is to be used and machine is to be written off in five years by straight line method of depreciation with nil residual value. a). Ideal Situation 5. Average rate of return method. 9 per share for the next year. Risky Situation and b). The tax rate is 50%.50. Equity Capital (5000 shares of Rs.0 Machine B (Rs in lakhs) 0.5 2. 1.00. 13 . 5 lakhs. 100 each) 5.000 9% preference shares 1.5 1. cash inflows after tax are expected as follows Year Machine A (Rs in lakhs) 1 2 3 4 5 1.00. 000 .000 R 5. 90 per unit .0000 0.000 30.000 7.10 Nil 14 .45 days .00.000 Q 75.Rs. 50 per unit Rs. 75 per unit -------------------------.000 50.000 75. Prepare a working capital forecast from the following data: Raw material Direct Labour Direct expenses Total cost Selling price Annual Sales Cash in hand Customers Credit Suppliers credit Stock of Raw Materials Stock of Finished goods Stock of WIP Rs. Financial Leverage A B 75.000 30.000 7.) Variable cost / unit in Rs.50.00. Operating Leverage b). From the following data calculate the Degree of operating leverage.1 month .00.000 20.5 40. P Out put (in units) Fixed cost (in Rs. Interest Expenses 3.000 10.000 3. 25.000 7. 10 per unit -------------------------Rs. Calculate a).15 days - 8.00.000 1 25.Rs.15 days . 15 per unit Rs.Rs.000 5. Degree of financial leverage and the Degree of combined leverage for the three firms and interpret the results. 10.6.000 Sales Fixed cost Interest Variable cost 1.000 units .1 month . 000.500 +2.000 C1 + 10. 1RR 4. 3 2. 600 and fixed cost are Rs. If the selling price per unit is Rs. ARR 3. NPV b).000 +10.A Company is considering the following investment projects.000 what is Pradhan’s degree of operating leverage at its current level of operations? What will be the DOL. Payback 2.00. Cash flows (Rs) Projects A B C D C0 -10. 1.II*March 2010 Subject: Financial Management * 2 hours * 50 marks Section – A 4 x 5 = 20 15 .000 -10. Pollachi PG DEPARTMENT OF MANAGEMENT SCIENCE First MBA *Second Semester*Cycle Test . which project is the best? Sree Saraswathi Thyagaraja College (Autonomous).000 +7.50 9. Pradhan Enterprises is currently selling 400 units per year.000 -10.5 0. 1. if the quantity manufactured and sold rises to 600 units? 10.000 C2 +7500 +4000 +3000 C3 +12000 +3000 a). which one should be accepted? If the projects are mutually exclusive.000 -10.Unit selling price Rs. Rank the project according to each of the following methods: 1. Assuming the projects are independent. variable cost per unit is Rs. 7. Calculate the Internal Rate of Return. b) What are the uses of Cost of Capital? Section – B Answer any TWO questions. 3. Assume that an investment would cost Rs 40. All questions carry equal marks.000.000 during the next 4 years. Rs 7. Assume that a project requires a cash outlay of Rs 20.000 and provide annual cash inflow of Rs 10. 2 x 10 = 20 (or) (or) (or) (or) Section – C 1 x 10= 10 9. What are the steps involved in capital budgeting decision? 6.000. a) Write short notes on ARR with formula b) Write short notes on Profitability Index. a) What is Capital Budgeting Decision? Give Examples b) Write the importance of Investment Decisions 2. 4. 16 . and generates cash inflows of Rs 8.Answer all questions. 1.860 for 6 years. What is the project’s payback? 8. and Rs 3. 5.000. a) What are the types of Investment Decisions? b) Write the significance of cost of capital. Write a detailed note on the concepts of cost of capital. a) Write short notes on Cost of Debt Capital. Rs 4.000. Write a detailed note on discounted cash flow techniques.