Financial management

Theoretical questions

1. “Working capital management deals with decisions regarding the appropriate mix and level of
current assets and current liabilities” Elucidate the statement. (April 2010)
2. Describe briefly the major types of financial management decisions that business firms make.
(April 2010)
3. Describe briefly the ingredients and objectives of portfolio management. (April 2010)
4. How would you analyze the financial position of a company from the point of view of (i)
Investor, (ii) a creditor, (iii) a financial executive of a company (April 2010)
5. Differentiate between cost centre, profit centre ad investment centre. Explain how performance is
measured in each? (April 2010)
6. Explain the term “Foreign Exchange Rate Risk”. Name the tools available to cover Exchange
Rate Risk. (August 2010)
7. Explain the “wealth maximization” and “wealth maximization” objective of financial
management. (August 2010)
8. Explain that you are about to move from a finance position in a public limited company to work
in government financial management. Explain what major differences you are likely to
experience between the financial management in a public limited company and in the
government. (August 2010)
9. What are the various types of ratio? (August 2010)
10. “Where the Firm’s have no Operating Fixed Cost. There have no Operating Leverage.” Explain.
(December 2010)
11. What are the assumptions of CAPM? Are these assumptions realistic? (December 2010)
12. Why standard deviation though considered perfect as a theoretical tool to analyse risk and return
on investment, may not hold good always in practical term. (December 2010)
13. What synergies exist in (i) Horizontal merger, (ii) Vertical merger, (iii) Conglomerate mergers.
(April 2011)
14. Explain the concepts of horizontal, vertical and conglomerate mergers with example. What are
the important reasons for mergers and takeovers? (August 2012)
15. “No body would want to buy a firm with a large loss carry forward, since this is an indication of
an unprofitable business” Examine the statement. (April 2011)
16. Discuss the usefulness and limitations of CAPM for capital budgeting decisions. (April 2011)
17. Discuss the relationship between working capital management and business solvency. (April
2011)
18. Explanation what you understand by the option theory? State the characteristics by put and call
option. (April 2011)
19. Explain what you understand by option strategy termed a “Straddle”. Why might an investor use
a straddle? (April 2011)
20. Discuss at least 4 important factors that determine the quantum of working capital required for
any business with examples. (August 2011)
21. Explain the following statement, “the risk free real rate of interest is a function of time preference
of consumption and the long-term productivity of investment.” (August 2011)
22. What is “4T” approach of risk management? Discuss the four approaches. (April 2012)
23. Why must the market portfolio be a consideration of all securities, each in proportion to market
value outstanding? (April 2012)
24. What is the crossover rate in project evaluation? (August 2012)
25. Under what circumstances will the IRR and NPV rules lead to the same accept-reject decisions?
(August 2012)
26. What is the difference between a Eurobond and a foreign bond? (August 2012)
27. Explain “There is a trade-off between risk and return” (December 2012)
28. Explain “Investment is well-grounded and carefully planned speculation” (December 2012)
29. Explain “Financial risk is a function of financial leverage” (December 2012)
30. Explain “The single index model results in a substantial reduction in inputs required for portfolio
analysis” (December 2012)
31. Explain “CAPM postulates the nature of the relationship between the expected return and the
systematic risk of a security” (December 2012)
32. Explain Gordon’s share valuation model with suitable illustration. What are the advantages of this
model? (April 2013)
33. Write short note on (April 2013)
a. Coupon rate
b. Yield to call
c. Zero coupon bond
d. Default risk of a bond
34. “Credit default swap (CDS) is the trigger of current worldwide financial crisis” explain
(December 2013)
35. At a recent board meeting of Paramount Ltd, a shareholder director suggested that the company’s
remuneration committee should consider scrapping the company’s current share option scheme,
since executive directors could be rewarded by the scheme even when they did not perform well.
A second shareholder director disagreed, saying the problem was that even when executive
directors acted in ways which decreased the agency problem, they might not be rewarded by the
share option scheme if the stock market were in decline.
Required: explain the nature of the agency problem and discuss the use of share option schemes
as a way of reducing the agency problem in a stock market listed company such as Paramount
Ltd. (April 2014)
36. Discuss how the shareholders of a company can assess the extent to which they face the following
risks, explaining in each case the nature of the risk being assessed: (April 2014)
a. Business risk
b. Financial risk
c. Systematic risk
37. What is forward contract? How does forward contract differs from Future Contract? (August
2014)
38. Describe the key considerations of setting an annual dividend rate. (August 2014)
39. Define lease financing. Distinguish between Lease financing and Hire purchase. (August 2014)
40. Explain the sale and lease back arrangement with suitable example. (August 2014)
41. “Portfolio evaluation provides a feedback mechanism for improving the entire portfolio
management process” explain. (August 2014)
42. What is Capital Asset Pricing Model? ‘CAPM can be used to evaluate the pricing of Securities’-
discuss. (August 2014)
43. “Retained earnings are not cost free” – explain the statement. (April 2015)
44. Explain the impact of tax benefit and financial distress costs on the value of a levered firm. (April
2015)
45. “Financial Management involves in managing financial resources of an organization by four
functions to maximize the value of the firm.” Do you agree with the statement? If so, answer the
following questions based on the statement: (April 2015)
a. What do you mean by financial resources of an organization
b. What are the possible sources of financial resources for the organization
c. How is the proportion of alternative financing sources determined to generate the total
capital? When the firm will be called levered firm, or unlevered firm?
d. What are the four functions of financial management
e. What do you mean by value maximization of the firm? How does it differ from profit
maximization?
f. How can you measure the value of a firm?
g. How do the four functions of financial management affect the value of a firm?
46. Explain the difference between nominal interest rate and effective interest rate. Can these two
rates be same? Justify your position. (April 2015)
47. How do inflation rate, interest rate and exchange rate affect the financial management decisions
of a multinational corporation operated in Bangladesh? (April 2015)
48. “The process of measuring risks associated with the return of bondholders and the return of
shareholders are different” – Do you agree with the statement? Justify your position. (August
2015)
49. Suppose you are the CFO of a company operating in Greece at now, can you maximize the value
of your company by taking extra debt to finance a new project? Justify your position. (August
2015)
50. What are the key ratios for Financial Statement analysis, Budgeting and Profit Planning?
(December 2015)
51. Explain the significance and limitations of the ratio analysis? (December 2015)
52. “A rise in accounts receivable of inferior quality or the tightening of credit by suppliers can all
impair the firm’s ability to generate cash flows from operations.” Do you agree with this
statement? Explain. (June 2016)
53. What are the characteristics of operating lease and financial lease? Distinguish between operating
lease and financial lease. (June 2016)
54. Describe the pecking order theory of capital structure. Does it make sense for a company to
follow the pecking order theory? (June 2016)
55. Assume that you are serving on the board of directors of a medium sized company and that you
are responsible for establishing the compensation policies of senior management. You believe
that the company’s CEO is very talented, buy your concern is that he is always looking for a
better job and may want to boost the company’s short-run performance (perhaps at the expenses
of long-run profitability) to make himself more marketable to other companies. What effect
would these concerns have on the compensation policy you put in place? (December 2016)
56. A risky security cannot have an expected return that is less than the risk free rate because no risk-
averse investor would be willing to hold this asset in equilibrium. Is the statement true or false?
Explain your position. (December 2016)
57. In contrast to the CAPM, the APT does not indicate which factors are expected to determine the
risk premium of an asset. How can you determine which factors should be included? For
example, one risk factor suggested in the company size. Why might this be an important risk
factor in an APT model? (December 2016)
58. Consider a levered firm’s projects that have similar risks to the firm as a whole? Is the discount
rate for the projects higher or lower than the rate computed using the security market line? Why?
(December 2016)
59. How does the existence of financial distress costs and agency costs affect Modigliani and Miller’s
(MM) theory of capital structure in a world where corporations pay taxes? (December 2016)
60. From the standpoint of the borrower, is long term or short term credit riskier? Explain. Would it
ever make sense to borrow on a short term basis if short term rates were above long-term rates?
(December 2016)
61. How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the
difference between the coupon rate and the required return on a bond. (December 2016)
62. McCanna Corp., a U.S. firm, has a French subsidiary that produces paper and exports to various
European countries. All of the countries where it sells its paper use the euro as their currency,
which is the same as the currency used in France. Is McCanna Corp. exposed to exchange rate
risk? (December 2016)
63. What effect does each of the following option parameters have on the value of a call option and a
put option? (December 2016)
a. Current stock price
b. Exercise price
c. Term to maturity
d. Risk free rate
e. Variability of the stock price