Financial Management Question Bank (2 Mks.

Module I: Introduction to Financial Management

1) What is Finance?List major 2 areas of Finance
2) State any 4 emerging roles of Finance managers?
3) State the objectives of Financial Management?
4) What is Time Value of money?
5) State & explain the 2 techniques of time value of money
6) State difference between annuity & perpetuity?
7) If the Interest rate is 12%, what are the doubling periods as per the rule of 72?
8) If you invest Rs.10,000 today at a compound interest of 10%, what will be its future value
after 5 years?
9) Miss.Nandini wishes to find out the PV of investments which yield Rs.500 in perpetuity,
discounted at 5%.Find the PV of perpetuity
10) What is Risk? What are the types of Risk?
11) What is Return? Write the formula for return
12) What is annuity?
13) What is doubling period?
14) Mr.Dhawan deposits Rs.1000/- in a bank today which pays 10% interest compounded
annually.How much will the deposit grow to after 8 years and 12 years?(Using Chart)
15) Mr.X has been given an opportunity to receive Rs.1,060 one year from now.He knows that
he can earn 6 percent on his investments. The question is what amount will he be prepared to
invest for this opportunity?
16) Define Range as per Sensitivity Analysis
17) What is the present value of a 5 year annuity of Rs.2000 at 10%

Module II: Basics of Capital Budgeting

1) What is Capital Budgeting Decision?
2) State the Importance of Capital Budgeting Decision?
3) What are the types of Capital Budgeting decision or Investment Decision?
4) What is contingent Investment Decision?
5) What is Mutually Exclusive Investment Decision?
6) What is Independent Investment Decision?
7) List any 4 Discounting Cash flow techniques
8) List 2 Discounting & 2 Non-Discounting Cash flow techniques
9) What is NPV?State formula for NPV
10) To evaluate mutually exclusive projects which technique do u suggest?
11) What is IRR?State formula for IRR
12) State the formula for Benefit Cost Ratio & Net Benefit Cost Ratio
13) What is payback period?Give formula for Payback period
14) Project cost is Rs.30,000 and the cash inflows are Rs.10,000,the life of the project is 5 years.
Calculate the pay-back period
15) A project requires an outlay of Rs.50,000 and yields annual cash inflow of Rs.12,500 for 7
years. Calculate the Payback period
16) What is ARR?State the formula for ARR

Module III: Cost Of Capital

1) What is cost of capital?
2) List the types of cost of capital based on nature & usage
3) What is Explicit & Implicit Cost?
4) What is Average & Marginal Cost?
5) What is Historical & Future Cost?
6) What is Specific & Combined Cost?
7) Give 4 reasons as to why cost of capital is important.
8) State the 4 approaches to calculate cost of equity
9) State formula for Dividend Price Approach & Dividend Price plus growth approach
10) State the formula for Earning Price Approach
11) State the formula for cost of debt issued at par & at discount
12) State the formula for cost of perpetual & redeemable debt
13) State the two types of preference shares & list one major difference between the two
14) State the formula for cost of redeemable preference shares
15) State the formula for cost of retained earnings
16) A firm’s Ke (return available to shareholders) is 10%, the average tax rate of shareholders is
30% and it is expected that 2% is brokerage cost that shareholders will have to pay while
investing their dividends in alternative securities. What is the cost of retained earnings?
17) The current market price of the shares of A Ltd. is Rs. 95.The floatation costs are Rs. 5 per
share. The company pays a dividend of Rs.4.50 per share and is expected to grow at a rate of
7%. You are required to calculate the cost of equity share capital.
18) What is specific cost?
19) What is cost of debt? State the formula to calculate Kd.
20) What is redeemable debt?
21) What is irredeemable debt?
22) What is cost of preference capital? State the formula to calculate Kp.
23) What are redeemable preference shares?
24) What are irredeemable preference shares?
25) What is weighted average cost of capital?
26) How is Weighted Average Cost of Capital calculated?
27) How is cost of equity calculated?
28) How is WACC different from Specific costs?
29) What are Retained Earnings?
30) What is cost of equity?
31) What is dividend price plus growth rate approach?
32) What is earning price ratio approach?

Module IV: Capital Structure & Dividend Policy

1) What is capital structure?
2) List any four long term sources of finance.
3) Mention any 4 assumptions of Capital Structure
4) What is Optimal Capital Structure?
5) State the objectives of Capital Structure
6) List any 4 factors determining capital structure
7) Mention the approaches to Capital Structure Theories
8) What is Net Income Approach in Capital Structure?
9) List assumptions of Net Income Approach in Capital Structure
10) What is Net Operating Income Approach in Capital Structure?
11) List assumptions of Net Operating Income Approach in Capital Structure
12) What is Modigliani & Miller Approach in Capital Structure?
13) List assumptions of Modigliani & Miller Approach in Capital Structure
14) What is Traditional Approach in Capital Structure?
15) Why debt financing is advantageous to Corporates?
16) What is dividend?
17) List the types of dividend
18) What is Cash Dividend?
19) What is Stock Dividend?
20) What is Bond Dividend?
21) What is Property Dividend?
22) What is theory of Irrelevance of Dividend?
23) What is theory of relevance of Dividend?
24) List any 4 factors influencing dividend payout ratio.
25) What is Rights Issue?
26) Who has to pay tax in case of Dividend Issue:Investor Or Company issuing Dividend?
27) What is EBIT-EPS Analysis?

Module V: Leverages
1) What is Leverage?
2) State the 3 types of Leverages
3) What is Operating Leverage?
4) What is Financial Leverage?
5) What is Combined Leverage?
6) State any 4 differences between Operating Leverage & Financial Leverage
 Financial Management Question Bank (5 Mks.)
Module I:Introduction to Financial Management
1) Mr.Anand deposits each year Rs.1000, Rs.1500, Rs.2000, Rs.2500 & Rs.3000 in his savings
bank account for 5 years respectively. The interest rate is 5%. Find the future value of his
deposits at the end of the 5th year.
2) Miss.Lalita deposits Rs.5000 at the end of every year for 10 years in her savings account
paying 12% interest compounded annually. She wants to determine how much some of
money she will have at the end of the 10th year.
3) Mr.Kabir has cash inflows of Rs.500, Rs.1000, Rs.1500, Rs.2000 & Rs.2,500 at end of each
year for 5 years respectively. The interest rate he is expecting is 10%.Find the present value
or discounted value of his inflows.
4) ABC Ltd has borrowed Rs.50,000 to be repaid in equal installments at the end of each
of the next 5 years. The interest rate is 20%. Prepare a Loan amortization schedule.
5) The lease rentals for a 5-year contract are Rs.300/Rs.1000 payable annually in arrears.
Assuming no salvage value, compute the rate of interest implied by the contract and
develop a lease amortization schedule
6) Mr.Vijay deposits each year Rs.10000, Rs.15000, Rs.20000, Rs.25000 ,Rs.30000,Rs.35000
& Rs.40000 in his savings bank account for 7 years respectively. The interest rate is 7%.
Find the future value of his deposits at the end of the 7th year.
7) Miss.Sunita deposits Rs.50000 at the end of every year for 15 years in her savings account
paying 10% interest compounded annually. She wants to determine how much some of
money she will have at the end of the 15th year.
8) Mr.Karan has cash inflows of Rs.5000, Rs.10000, Rs.15000, Rs.20000 & Rs.25000 at end of
each year for 5 years respectively. The interest rate he is expecting is 10%.Find the present
value or discounted value of his inflows.
9) Texas Ltd has borrowed Rs.5,00,000 to be repaid in equal installments at the end of
each of the next 7 years. The interest rate is 20%. Prepare a Loan amortization
schedule.
10) Bang Company Ltd has borrowed Rs.1,00,000 to be repaid in equal installments at the
end of each of the next 5 years. The interest rate is 15%. Prepare a Loan amortization
schedule.

Module II: Basics of Capital Budgeting

1) From the following information, calculate the net present value of the two project and
suggest which of the two projects should be accepted at a discount rate of 10% .Calculate
NPV
 Project X Project Y
Initial Investment Rs.20,000 Rs.30,000
Estimated Life 5 years 5 years
Scrap Value Rs.1,000 Rs.2,000

The profits before depreciation and after taxation (cash flows) are as follows:
in Rs Year 1 Year 2 Year 3 Year 4 Year 5
Project X 5000 10000 10000 3000 2000
Project Y 10000 10000 5000 3000 2000

2) Assume that a Project X costs Rs.2500 now and is expected to generate year-end cash
inflows of Rs.900,Rs.800,Rs.700,,Rs.600 and Rs.500 in years 1 to 5.The opportunity cost of
capital may be assumed to be at 10 percent. Calculate NPV.

3) A project costs Rs.16,000/- and is expected to generate cash inflows of Rs.4000/- each for 5
years. Calculate the Internal Rate of Return

4) A project costs Rs.20,00,000 and yields annual profit of Rs.3,00,000 after depreciation @
12(1/2) % but before tax at 50%.Calculate the pay-back period

5) Certain projects require an initial cash outflow of Rs. 25,000. The cash inflows for 6 years
are Rs.5000,Rs.8000,Rs.10000,Rs.12000,Rs.7,000 and Rs.3,000. Calculate the pay-back
period

6) The following are the cash inflows and outflows of a certain project. The salvage value at
the end of 5 years is Rs. 50,000. Taking the cutoff rate as 10%. calculate NPV

Years Outflows(Rs) Inflow(Rs)

0 1,75,000 -
1 50,000 35,000
2 45,000
3 65,000
4 85,000
5 50,000
7) No Project is acceptable unless the yield is 10%. The salvage value at the end of the 5th year
is Rs.40,000. Cash inflows of a certain project along with cash outflows are given in table
below. Calculate NPV
Years Outflows(Rs) Inflow(Rs)
0 1,50,000 -
1 30,000 20,000
2 30,000
3 60,000
4 80,000
5 30,000

8) A company is considering investment in a project that costs Rs.2,00,000. The project has an
expected life of 5 years and zero salvage value. The company uses straight line method of
depreciation. The company’s tax rate is 40%. The estimated earnings before depreciation and
before tax from the project is given in table below. Calculate the NPV at 10%.

Years EBDT
1 70,000
2 80,000
3 1,20,000
4 90,000
5 60,000

9) A project requires a cash outlay of Rs.20,000 and generates cash inflows of

Rs.8000,Rs.7000, Rs.4000, & Rs.3000 during the next 4 years. Calculate the payback period

10) A company has to select one of the following 2 projects. Using IRR method suggest which is
preferable
Project A Project B
Cost 22,000 20,000
Cash Inflows
Year 1 12,000 2,000
Year 2 4,000 2,000
Year 3 2,000 4,000
Year 4 10,000 20,000
Module III:Cost of Capital

1) A company issues 10,000 equity shares of Rs.200 each at a premium of 10%.The company
has been paying 15% dividend to equity share holders for the past 5 years and expects to
maintain the same in the future also. Compute the cost of equity capital. Will it make any
difference if the market price of equity share is Rs.275?
2) (a) A company plans to issue 10000 new shares of Rs. 100 each at a par. The floatation costs
are expected to be 4% of the share price. The company pays a dividend of Rs. 12 per share
initially and growth in dividends is expected to be 5%.Compute the cost of new issue of
equity shares.
(b) If the current market price of an equity share is Rs. 120. Calculate the cost of existing
equity share capital
3) A firm is considering an expenditure of Rs. 75 lakhs for expanding its operations. The
relevant information is as follows :
Number of existing equity shares =10 lakhs
Market value of existing share =Rs.100
Net earnings =Rs.100 lakhs
Compute the cost of existing equity share capital and of new equity capital assuming that
new shares will be issued at a price of Rs. 92 per share and the costs of new issue will be
Rs.2 per share
4) ABC Ltd. issues Rs. 10,00,000, 8% debentures at par. The tax rate applicable to the company
is 50%. Compute the cost of debt capital.
5) BIG Ltd. issues Rs. 1,00,000, 8% debentures at a premium of 10%. The tax rate applicable to
the company is 60%. Compute the cost of debt capital.
6) Arc Ltd. issues Rs. 1,00,000, 8% debentures at a discount of 5%. The tax rate is 60%,
compute the cost of debt capital.
7) Baggy Ltd. issues Rs. 10,00,000, 9% debentures at a premium of 10%. The costs of
floatation are 2%. The tax rate applicable is 50%. Compute the cost of debt-capital.
8) A firm has the following capital structure and after-tax costs for the different sources of
funds used. Compute WACC
Source of Funds Amount Rs. Proportion % After-Tax Cost
Debt 12000 20 4
Preference Shares 15000 25 8
Equity Shares 18000 30 12
Retained Earnings 15000 25 11
Total 60000 100

9) A firm has the following capital structure and after-tax costs for the different sources of
funds used. Compute WACC
 Source of Funds Amount Rs. Proportion % After-Tax Cost
Debt 50000 25 5
Preference Shares 100000 30 10
Equity Shares 150000 25 13
Retained Earnings 200000 20 6
Total 500000 100

10) A company has on its books the following amounts and specific costs of each type of capital.
Determine the weighted average cost of capital using:
(a) Book value weights, and
(b) Market value weights.
How are they different?
Book
Type of Capital Value Market Value Specific Cost
Debt 400000 380000 5
Preference Shares 100000 110000 8
Equity Shares 600000 900000 15
Retained Earnings 200000 300000 13
Total 1300000 1690000

Module IV: Capital Structure & Dividend Policy

1) Explain the factors determining Capital Structure of a Firm
2) Explain in brief the Approaches to Capital Structure Theories
3) What is Dividend?Explain the types of Dividends
4) Explain the factors influencing dividend payout ratio.
5) Discuss which is better:Dividend Policy with Stable Dividend Payout Ratio or Stable
Dividend steadily changing dividends
6) Discuss the rationale for Dividend Stability
7) A firm has a capital structure exclusively comprising of ordinary shares amounting to
Rs.10,00,000(Rs.100 each). The firm now wishes to raise additional Rs. 10,00,000 for
expansion.The firm has four alternative financial plans:
(a) It can raise the entire amount in the form of equity capital.
(b) It can raise 50 per cent as equity capital and 50 per cent as 5% debentures.
(c) It can raise the entire amount as 6% debentures.
(d) It can raise 50 per cent as equity capital and 50 per cent as 5% preference capital.
Further assume that the existing EBIT are Rs.1,20,000, the tax rate is 35 per cent,
outstanding ordinary shares 10,000 and the market price per share is Rs. 100 under all the
four alternatives. Which financing plan should the firm select?
8) A firm has a capital structure exclusively comprising of ordinary shares amounting to
Rs.20,00,000(Rs.100 each). The firm now wishes to raise additional Rs. 25,00,000 for
expansion.The firm has four alternative financial plans:
(a) It can raise the entire amount in the form of equity capital.
(b) It can raise 60 per cent as equity capital and 40 per cent as 6% debentures.
(c) It can raise the entire amount as 7% debentures.
(d) It can raise 40 per cent as equity capital and 60 per cent as 6% preference capital.
Further assume that the existing EBIT are Rs.2,50,000, the tax rate is 40 per cent, outstanding
ordinary shares 20,000 and the market price per share is Rs. 100 under all the four
alternatives. Which financing plan should the firm select?
9) Falcon Limited has existing capital of 1 million equity shares of Rs.10 each.The tax rate is
50%.It plans to raise additional capital of Rs.10 million for financing an expansion project. It
is evaluating two alternatives (i) issue of equity shares-1 million equity shares at Rs.10 per
share (ii)issue of debentures carrying 14 percent interest. What will be the EPS under the two
alternative financing plans for two levels of EBIT,say Rs.4 million & Rs.2 million. Suggest
which is better
10) Cocon Limited has existing capital of 2 million equity shares of Rs.10 each.The tax rate is
40%.It plans to raise additional capital of Rs.20 million for financing an expansion project. It
is evaluating two alternatives (i) issue of equity shares-2 million equity shares at Rs.10 per
share (ii)issue of debentures carrying 14 percent interest. What will be the EPS under the two
alternative financing plans for two levels of EBIT,say Rs.5 million & Rs.3 million. Suggest
which is better

Module V: Leverages
1) What is Leverage?Explain the classification of Leverage with Formula
2) From the following selected operating data, determine the degree of operating leverage.
Variable expenses as a percentage of sales are 50% for company A and 25% for company B.
Which company has the greater amount of business risk? Why?

In Rs. Company A Company B

Sales 25,00,000 30,00,000
Fixed Costs 7,50,000 15,00,000

3) A Company has the following capital structure

Amount in Rs.
Equity Capital Share 1,00,000
10% Preference Share Capital 1,00,000
8% Debentures 1,25,000
 The present EBIT is Rs. 50,000. Calculate the financial leverage assuring that the company is
in 50% tax bracket

4) XYZ Ltd. decides to use two financial plans and they need Rs. 50,000 for total investment.
The earnings before interest and tax are assumed at Rs. 5,000, and 12,500. The tax rate is
50%. Calculate the EPS

Particulars Plan A Plan B

Debenture (Interest @ 10%) 40,000 10,000
Equity Share (Rs.10 each) 10,000 40,000
Total Investments needed 50,000 50,000
No.of.Equity Shares 1,000 4,000

5) From the following selected operating data, determine the degree of operating leverage.
Variable expenses as a percentage of sales are 40% for company A and 35% for company B.
Which company has the greater amount of business risk? Why?

In Rs. Company A Company B

Sales 45,00,000 50,00,000
Fixed Costs 10,50,000 15,00,000

6) A Company has the following capital structure

Amount in Rs.
Equity Capital Share 10,00,000
10% Preference Share Capital 10,00,000
8% Debentures 10,25,000

The present EBIT is Rs. 2,50,000. Calculate the financial leverage assuring that the company
is in 50% tax bracket

7) Kumar Company has sales of Rs. 25,00,000. Variable cost of Rs. 15,00,000 and fixed cost of Rs.
5,00,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage.

8) From the following information find out operating, financial and combined leverages

Amount in Rs.
Sales 1,00,000
Variable Cost 60,000
Fixed Cost 20,000
Interest 10,000