QUESTION BANK
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. Define finance function.
2. State the traditional concept of finance function.
3. State the modern concept of finance function.
4. Define financial management.
5. Distinguish between finance function and accounting function of a business.
6. What is the goal of profit maximisation?
7. What is the goal of wealth maximisation?
8. What is time value of money?
9. What is compounding technique?
10. What is discounting technique?
11. What is annuity?
12. Define effective rate of interest.
13. What is sinking fund?
14. What is deferred payment?
15. What is present value of an annuity due?
16. What is systematic risk?
17. What is unsystematic risk?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. Write a note on approaches to finance function.
2. Name the areas of finance function.
3. Wealth maximization is superior criteria than profit maximization”. Do you
agree?
4. Why is maximizing wealth a better goal than maximizing profit?
5. Write a note on the concept of time value of money.
C. Short essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. What is finance function. Explain its importance in overall process of
management.
2. Define financial management. What are its main functions?
3. Describe the objectives of the financial management.
4. What are the responsibilities of a financial management?
5. What are the major types of financial management decisions that business firms
take?
6. Contrast profit maximisation and wealth maximization as criteria for financial
management decisions in practice.
7. “Profit maximization approach is not operationally feasible”. Discuss.
8. Why is inappropriate to seek profit maximization as the goal of financial
decision-making? How do you justify the present value maximization as an apt
substitute for it?
9. Discuss the scope of financial management.
10. Outline the organization of financial management for effective financial control.
11. What are the functions of a finance manager?
12. Discuss the role of a finance manager in a modern business enterprise.
13. What is meant by ‘present value of a future amount’?
14. Individuals do have a time preference for money’ – State the reasons for such
preference.
15. What is the relevance of time value of money in financial decision making?
16. Cash flow is occurring at different points of time are not comparable’. Explain
the reason and how can they be made comparable?
17. Incorporation of time value of money helps in taking better decisions.
18. What are the practical applications of the concept of TVM?
19. ‘A bird in hand is more preferable than two birds in the bush’ Explain.
Problems
1. A deposited Rs. 10,000 at the rate of 10% compounded on quarterly basis for 2
years. What would be the amount at the time of maturity.
(Rs. 12184)
2. An investor deposits a sum of Rs. 1,00,000 in a bank account on which interest
is credited @ 10% p.a How much amount can be withdrawn annually for a
period of 15 years?
(Rs. 13,148 for 15b years)
Problems
1. From the following information regarding production of Meera Ltd. Forecast their
working capital requirement:
Project annual sales Rs. 65 lakhs, the company earns a net profit at 25% on cost
of sales; credit period to customers is 10 weeks, credit period allowed by suppliers is 4
weeks, average stock period is 8 weeks, 10% is to be added for contingencies.
2. A Ltd. Expects its cost of goods sold for 2014-2015 to be Rs. 600 lakh. The
expected operating cycle is 90 days. It wants to keep a minimum cash balance of Rs. 1
lakh. What is the expected working capital requirement? Assume a year consists of
360 days.
3. Sales revenue for the year 2015 is 25% higher than the amount of Rs. 65,000
million achieved in 2014. The cost of sale is Rs. 7,740 million at 65,000 million sales.
The operating cycle period of the company is 65 days and number of operating cycle
for the year is 9. The company maintains a minimum cash balance of Rs. 400 million.
Calculate the total working capital requirement.
(Rs. 1.260 million)
[Hint: (7,740 / 9) + 400]
4. Anand Ltd. Is engaged in large scale retail business. From the following
information, you are required to forecast their working capital requirements:
Projected annual sales Rs. 130 lakhs
Percentage of Net Profit on Cost of Ssales 25%
Average credit period allowed to debtors 8 weeks
Average credit period allowed by creditors 4 weeks
Average stock carrying (in terms of sales requirement 8 weeks
Add: 10% to computed figures to allow for contingencies
(Rs. 26.40 lakhs)
Problems
1. From the following information regarding production of Meera Ltd. Forecast their
working capital requirement:
Project annual sales Rs. 65 lakhs, the company earns a net profit at 25% on cost
of sales; credit period to customers is 10 weeks, credit period allowed by suppliers is 4
weeks, average stock period is 8 weeks, 10% is to be added for contingencies.
2. A Ltd. Expects its cost of goods sold for 2014-2015 to be Rs. 600 lakh. The
expected operating cycle is 90 days. It wants to keep a minimum cash balance of Rs. 1
lakh. What is the expected working capital requirement? Assume a year consists of
360 days.
3. Sales revenue for the year 2015 is 25% higher than the amount of Rs. 65,000
million achieved in 2014. The cost of sale is Rs. 7,740 million at 65,000 million sales.
The operating cycle period of the company is 65 days and number of operating cycle
for the year is 9. The company maintains a minimum cash balance of Rs. 400 million.
Calculate the total working capital requirement.
(Rs. 1.260 million)
[Hint: (7,740 / 9) + 400]
4. Anand Ltd. Is engaged in large scale retail business. From the following
information, you are required to forecast their working capital requirements:
Projected annual sales Rs. 130 lakhs
Percentage of Net Profit on Cost of Ssales 25%
Average credit period allowed to debtors 8 weeks
Average credit period allowed by creditors 4 weeks
Average stock carrying (in terms of sales requirement 8 weeks
Add: 10% to computed figures to allow for contingencies
(Rs. 26.40 lakhs)
MODULE II
COST OF CAPITAL
Services Rs. After Tax Weights Weighted
Cost Cost
Equity share capital 40,00,000 30% .40 .120
8% Preference share capital 10,00,000 6% 10 .006
8% Debentures 30,00,000 4% .30 .012
10% Debuntures 20,00,000 .20 .010
Weighted Average cost of ccapital (Ko) .148
Or 14.80%
Cost of equity shares is Ke = + .10 = .20 + .10 = .30 or 30%
QUESTION BANK
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. What are cumulative preference shares?
2. What are cumulative convertible preference shares?
3. What are retained earnings?
4. Define debentures?
5. What are convertible debentures?
6. What are term loan?
7. Define cost of capital.
8. What is weighted average cost of capital?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. Distinguish between implicit cost of capital and explicit cost of capital.
2. Explain how cost of debt is determined.
3. Explain how cost preference capital is calculated.
4. Explain how cost of retained earning is computed.
5. Explain why the cost preference share is less than the cost of equity.
6. Explain why the cost of retained earnings is less than the cost of new equity.
7. State the assumption on which cost of capital is computed.
C. Short Essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. What is cost capital? State the importance of cost of capital.
2. Write a note on capital asset pricing model. What are its merits and demerits?
3. Explain critically the different approaches to the calculation of cost of equity
capital. As retained earnings cost free?
4. What are the assumptions on which Gordon model for the cost of equity is
based?
5. What is weighted average cost of capital? How is it computed?
6. What are merits of using market value weights over book value weights in the
computation of weighted average cost capital?
7. What are the factors determining cost of capital?
Problems
1. 20 year 12.5% debentures of a firm are sold at a a rate Rs. 75. The face value of
each debenture is Rs. 100 and the rate of tax is 50%. You are required to
compute the cost of debt capital.
(8.57%)
2. A company has issued debentures having coupon rate 14%, floatation cost 10%
and face value 100. The company is in the tax bracket of 35%. The debentures
would be redeemed after 5 years at a premium of 10%. Find the cost of debt.
(12.33%)
3. A company has issued debentures having coupon rate 14%, floatation cost 15%
and face vale Rs. 100. The company is in the tax bracket of 35%. The debentures
would be redeemable after 5 years at a discount of 5%. Find the cost of debt.
((12.33%)
4. A company issues 5,000 12% debentures of Rs. 100 each at a discount of 5%.
The commission payable to underwriters and brokers is Rs. 25,000. The
debentures are redeemable after 5 years Compute the after-tax cost of debt
assuming a tax rate of 50%.
(8.42%)
5. (i) A company issues 1,000 10% preference shares of Rs. 100 each at a discount
of 5%. Coats of raising capital are Rs. 2,000. Compute the cost of preference
capital.
(ii) Assume that the firm pays tax at 50%. Compute the after-tax cost of capital
of a preferred share sold at Rs. 100 with a 9% dividend and a redemption price
of Rs. 110, if the company redeems
((i) 10.75%; (ii) 10.47%)
6. A company is considering raising of funds of about Rs. 100 lakhs by one of two
alternative method viz, 14% institutional term loan and 13% non-convertible
debentures. The term loan option would attract no major incidental cost. The
debentures would have to be issued at a discount of 2.5% and would involve cost
of issue of Rs. 1 lakh. Advise the company as to the better option based on the
effective cost of capital in each case. Assume a tax rate of 50%.
(7% and 6.74%)
7. Calculate the cost of capital in the following cases:
(i) X Ltd. Issues 12% debentures of face value Rs. 100 each and realizes Rs. 95
per debenture. The debentures are redeemable after 10 years at a premium of
10%.
D. Long Essay Type. (15 marks each) (Answer not to exceed 3 pages)
1. What is cost capital? Explain how you would determine the cost of the equity
capital.
2. Examine critically the different approaches to the calculation of cost equity
capital.
3. What is the weighted average cost of capital? Examine the rationale behind the
use of weighted average cost of capital.
MODULE III
FINANCING DECISION
QUESTIONS FOR PRACTICE
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. Define capital structure.
2. Define capitalisation.
3. Define financial structure.
4. What is optimum capital structure?
5. What is trading on equity?
6. What is capital gearing?
7. What is leverage?
8. What is financial leverage?
9. What is degree of financial leverage?
10. What is operating leverage?
11. What is degree of operating leverage?
12. What is combined leverage?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. State the importance of capital gearing.
2. Distinguish between capital structure and capitalisation.
3. Differentiate between financial structure and capital structure.
4. What is the difference between favourable and unfavourable financial leverage?
5. What is the importance of operating leverage?
6. What is the relation between fixed cost and operating leverage?
7. Distinguish between operating leverage and financial leverage.
C. Short essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. What is capital structure? What are the factors determining capital structure?
2. What is optimal capital structure? What are the essentials or requisites of capital
structure?
3. Explain the importance of optimal capital structure decision.
4. What is financial leverage? What are its characteristics?
5. What is the relationship between debt financing and financial leverage?
6. “Financial leverage is a two-edged sword” – Elucidate.
7. What are the advantages and disadvantages of financial leverage?
8. What are the advantage and disadvantages of financial leverage?
9. How operating leverage is helpful in capital budgeting decisions?
D. Long Essay Type. (15 marks each) (Answer not to exceed 3 pages)
1. What do you mean by capital structure? What are the major determinations of
capital structure?
2. What is meant by financial leverage? How does it magnify the earnings available
for equity shareholders?
3. “Financial leverage acts as a lever to magnify the influence of fluctuations of
operating income on EPS” Comment on this statement with suitable examples.
4. Distinguish between operating leverage and financial leverage. Explain the
effects of financial leverage on EPS and financial risk.
5. Write a comprehensive note on the importance of leverages.
6. What is operating leverage? How does it help in magnifying revenue of a firm?
QUESTION BANK
Working Capital Management
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. Define working capital.
2. Define working capital management.
3. What is gross working capital?
4. What is net working capital?
5. Distinguish between gross working capital and net working capital..
6. What is operating cycle?
7. What is regular working capital?
8. What is hardcore working capital?
9. What is working capital gap?
10. What do you mean by core current assets?
11. Define cash cycle.
12. Define cash management.
13. What is a lock box system?
14. What is concentration banking?
15. Define float.
16. What are receivables?
17. Define receivables management.
18. What is credit policy?
19. What is optimal credit policy?
20. What are credit standards?
21. What is ageing schedule of debtors?
22. Distinguish between credit period and cash discount period.
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. Differentiate between gross working capital and net working capital?
2. What is the need for working capital?
3. Name the motives for holding cash.
4. State the importance of working capital management.
5. What is ABC analysis? How is it useful as tool of inventory management?
6. What is a selective control of inventory? Why is it needed?
7. Explain the nature of cash.
8. What are the motives behind holding cash?
9. What are the objectives of cash management?
10. What is the importance of cash management?
11. Discuss the scope of cash management.
12. What are the functions of cash management?
13. Explain the objectives of credit policy of a firm.
C. Short Essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. Explain the difference types of working capital.
2. What are the determinants of working capital?
3. How is excess working capital dangerous?
4. Discuss the different concepts of working capital.
5. Discuss the importance of working capital.
6. What are the principles of working capital management?
7. “Working capital must be adequate but at the same time not excessive’.
Comment.
8. What is operating cycle concept of working capital?
9. “Length of operating cycle is the major determinant of working capital needs of
a business firm”-Explain.
10. What are the various methods of estimating working capital requirement?
11. Give an account of various sources of working capital.
12. Define inventory management. What are the objects of inventory management?
13. Discuss the nature and scope of inventory management.
14. What is the need for holding inventory? Why inventory management is
important?
15. What are the costs and benefits associated with inventory? Explain.
16. What is ordering cost? How is it different from carrying cost and explain the
relationship between the two?
17. Define EOQ. What are its assumptions and limitations?
18. What is EOQ? What are the various costs which affect EOQ?
19. What are the considerations governing maximum and minimum levels of
inventory?
20. Define safety stock. How is it determined? What is the role of safety stock in
inventory management?
21. What do you mean by stock-out and carrying costs of inventory.
22. “The management of inventory must meet two opposing needs.” What are these?
How is a balance brought in these opposing needs?
23. What are the factors determining cash level (cash needs) of a firm?
24. Explain the various techniques of cash management.
25. What is lock box system? What are its merits and demerits?
26. What is concentration banking? What are its merits and demerits?
27. What are the techniques of accelerating cash inflows?
28. What are the techniques of managing cash outflows?
29. Define receivables management. What are its objectives?
30. What is credit policy? What are the elements of a credit policy?
31. What are credit terms? Explain the role of credit terms in a credit policy.
32. What are the techniques of control of receivables? Explain the ageing schedule.
33. What are the determinations of the size of investment in receivables?
34. Explain the procedure of determining the credit policy.
35. What are collection policies? How can they be evaluated?
36. “Average age of receivables is an important yardstick of testing the efficiency of
receivables management”- Explain.
37. What are the techniques of collection of account receivables?
38. What are the costs and benefits associated with a change in credit policy?
Problems
1. From the following information regarding production of Meera Ltd. Forecast their
working capital requirement:
Project annual sales Rs. 65 lakhs, the company earns a net profit at 25% on cost
of sales; credit period to customers is 10 weeks, credit period allowed by suppliers is 4
weeks, average stock period is 8 weeks, 10% is to be added for contingencies.
2. A Ltd. Expects its cost of goods sold for 2014-2015 to be Rs. 600 lakh. The
expected operating cycle is 90 days. It wants to keep a minimum cash balance of Rs. 1
lakh. What is the expected working capital requirement? Assume a year consists of
360 days.
3. Sales revenue for the year 2015 is 25% higher than the amount of Rs. 65,000
million achieved in 2014. The cost of sale is Rs. 7,740 million at 65,000 million sales.
The operating cycle period of the company is 65 days and number of operating cycle
for the year is 9. The company maintains a minimum cash balance of Rs. 400 million.
Calculate the total working capital requirement.
(Rs. 1.260 million)
[Hint: (7,740 / 9) + 400]
4. Anand Ltd. Is engaged in large scale retail business. From the following
information, you are required to forecast their working capital requirements:
Projected annual sales Rs. 130 lakhs
Percentage of Net Profit on Cost of Ssales 25%
Average credit period allowed to debtors 8 weeks
Average credit period allowed by creditors 4 weeks
Average stock carrying (in terms of sales requirement 8 weeks
Add: 10% to computed figures to allow for contingencies
(Rs. 26.40 lakhs)
MODULE IV
INVESTMENT AND DIVIDENT DECISIONS
QUESTIONS FOR PRACTICE
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. What is dividend?
2. What are the different forms of dividend?
3. What is interim dividend?
4. Define script dividend.
5. Define dividend policy.
6. What is stable dividend policy?
7. Name the two concepts of dividend.
8. What is dividend payout ratio?
9. What is bond dividend?
10. What is stock dividend?
11. What is residual dividend policy?
12. What is meant by theory of relevance?
13. What is retention ratio?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. What are the different types of dividend policies?
2. Write a note on relevance concept of dividend.
3. Write a note on irrelevance concept of dividend.
4. What are the advantages of following a conservative dividend policy?
5. What are the advantages of following a liberal dividend policy?
C. Short essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. Mention the different forms of dividend?
2. Discuss the importance of dividend policy.
3. What are the determinants of dividend policy?
4. What are the advantages and disadvantages of stable dividend policy?
5. Discuss the relationship between dividend policy and the value of the firm.
6. What is stable dividend policy? Why should a firm follow such a policy?
7. “Liberal dividend policy followed by a company is not always in the interest of
its shareholders”. Explain.
8. Write a note on optimal dividend policy.
9. “There is a reciprocal relationship between ploughing back of profit and
dividend”. Elucidate.
10. What are the practical aspects of dividend.
11. What are the mechanics of declaring and paying dividend.
D. Long Essay Type. (15 marks each) (Answer not to exceed 3 pages)
1. Define dividend policy. What are the various factors determining dividend
policy?
2. What do you mean by stable dividend policy? What is its significance?
What is the danger of stable dividend policy.
3. What do you mean by stable dividend policy? Why should it be followed? What
are the consequences of changing a stable dividend policy?
4. “Liberal dividend policy followed by a company is not always in the interest of
its shareholders”. – Explain.
MODULE IV
INVESTMENT AND DIVIDENT DECISIONS
QUESTION BANK
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. What is project appraisal?
2. What do you understand by capital budgeting?
3. State the features of capital budgeting.
4. What do you mean by mutually exclusive project?\
5. What is terminal cash flow?
6. Name the important capital budgeting techniques.
7. Name the unadjusted time methods of capital budgeting.
8. Name the time adjusted discounted cash flow techniques of capital budgeting.
9. What is payback period?
10. How is payback period calculated in case of even / uneven cash flows?
11. What is post-payback period profitability?
12. What is ARR? Give formula.
13. What is discounted payback period?
14. What is net present value?
15. Define profitability index?
16. Define two measures of PI.
17. What is IRR?
18. Why IRR is called so?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. Explain briefly the different types of cash flows
2. How is IRR method superior to payback method?
3. What is the superiority of PI over NPV?
4. What is payback period? How is it computed?
5. How is project evaluated according to payback method?
6. Explain the computation of ARR.
7. What is the rationale of the NPV method?
8. Compare NPV method with the IRR method.
C. Short essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. Discuss the importance of capital budgeting.
2. How do you classify capital expenditure decisions?
3. Explain the capital budgeting process (steps or procedures).
4. State the merits and demerits of payback method.
5. Critically evaluate payback criterion.
6. “Payback period method of project evaluation is a test of liquidity and not
profitability”. – Explain.
7. Evaluate the ARR criterion.
8. What profitability index? How is it superior to NPV technique?
9. What is IRR? How is it computed?
10. What are the merits and demerits of IRR technique?
11. State the merits and demerits of IRR technique.
12. Which (NPV of IRR) is then best method? Explain.
13. How will you provide for risk and uncertinity in investment decisions?
14. Explain briefly various conventional methods for risk analysis in investment
decisions.
15. What are the statistics methods which are used to handle risk in investment
decisions
16. Write a note on capital rationing.
Problems
1. A project costs Rs. 16,000. The estimated annual cash inflows during its 3 year
life are Rs. 8.000, Rs. 7,000 and Rs. 6,000 respectively. Find out pay-back
period.
(2 ½ years)
2. A project of Rs. 20,00,000 yield annually a profit of Rs. 3,00,000 after
depreciation @ 12 1/2 % and is subject to income tax @50%. Calculate payback
period.
(5 years)
3. Each of the following projects requires a cash outlay of Rs. 10,000. You are
required to suggest which project should be accepted if the standard pay-back
period is 5 years.
Year Cash inflows
Project X Project Y Project Z
Rs. Rs. Rs.
1. 2,500 4,000 1,000
2. 2,500 3,000 2,000
3. 2,500 2,000 3,000
4. 2,500 1,000 4,000
5. 2,500 ___ ___
QUESTION BANK
A. Short Answer Type (1 mark each) (Answer in a word or a sentence)
1. What is common stock?
2. What are sweat equity shares?
3. What are cumulative preference shares?
4. What are cumulative convertible preference shares?
5. What are retained earnings?
6. What are ploughing back of profits?
7. Define debentures?
8. What are convertible debentures?
9. What are term loan?
10. Define convertible securities.
11. Define warrants.
13. What are GDRs?
14. What are ADRs?
15. Define ECBs
16. What are FCCBs?
B. Paragraph type (2 marks each) (Answer in a short paragraph consisting of
about 50 word.
1. Distinguish between equity shares and preference shares.
2. What are the advantages of retained earnings?
3. What are the limitations of using retained earnings?
4. Define bond. What are the main features of beond?
5. What are the different types of bonds?
C. Short essay Type. (4 marks each) (Answer in a paragraph consisting of
about 100 words or 4 or 5 points with explanation)
1. What are the merits and demerits of equity shares (common stock)?
2. What are the different types of preference shares?
3. What are the merits and demerits of preference shares?
4. Distinguish between share and debentures.
5. What are the different types of debentures?
6. What are the advantages and disadvantages of debentures?
7. What are the advantages and disadvantages of term loam?
8. What are the functions of IFCI?
9. What are the functions of ICICI?
10. What are the functions of IDBI?
11. What are the objectives of UTI?
12. What are the functions of SFCs?
13. What are the functions of ADB?
14. What are the functions of World Bank?
15. What are the functions of IMF?
16. Compare IMF with World Bank.
17. Discuss the role of commercial banks in term lending.
18. What are the features of ADRs?
19. What are the advantages of ADRs and GDRs?
20. Compare ADRs with GDR.
D. Long Essay Type. (15 marks each) (Answer not to exceed 3 pages)
1. Discuss the merits and demerits of using retained earnings.
2. Comapare and contrast GDRs and ADR. What are their advantages?
3. Discuss briefly the various sources of international finance.
4. Discuss the functions of any 3 All India Financial Institutions.
5. Discuss the functions of any 3 International Financial Institutions.
6. Discuss the important international sources of finance with merits and demerits
of each.
