Financial Management

Q.1. Answer any five. (2 marks)

1. _____ refers to the that part of capital which is available and used to carrying out the
regular business operations.
i) Working capital ii) Fixed capital
iii) Required capital iv) Current capital
2. What is Business finance?
3. What is Internal Rate of Return?
4. Net operating cycle = (Inventory conversion period + _____) – (_____).
5. List the factors affecting capital structure of the firm.
6. List the characteristics of capital budgeting decisions.
7. The modern approach to financial management view___.
i) The total funds requirement of the firm.
ii) The assets to be acquired
iii) The pattern of financing the assets
iv) All of the above
8. The figures shown in financial statements are converted to percentages so as to establish
each element to the total figure of the statement in _____.
i) Comparative financial statements
ii) Trend analysis
iii) Common size statement
iv) Fund flow statement
9. What are the major functions of Finance Manager?
10. What are Activity (Efficiency) ratios?
11. Explain the concept of Working Capital.
12. What is Specific cost of capital?
13. What is Discounted Pay-Back Period?
14. What is Combined Leverage?
15. The main point of financial management in a firm is:
 i) the number and types of products or services provided by the firm.
ii) the minimization of the amount of taxes paid by the firm.
iii) the creation of value for shareholders.
iv) the profits earned by the firm
16. The term ‘capital structure’ refers to______
i) long term debt, preferred stock, and common stock equity.
ii) current assets and current liabilities.
iii) total assets minus liabilities.
iv) share holder’s equity.
17. ______is represented by the total current assets.
i) Gross working capital
ii) Net working capital
iii) Fixed working capital
iv) variable working capital
18. What is Business Finance?
19. Enlist financial statement of listed company.
20. What is the formula for calculating interest coverage ratio?
21. Define the term cost of capital.
22. What do you mean by leverage?

Q.2. Answer any two. (5 marks)

1. Explain relevance of Time value of Money in capital budgeting decision.
2. “Financial management is nothing but managerial decision making on asset mix, capital
mix and profit allocation”. Explain.
3. What is working capital? Explain in brief objectives of working capital.
4. Write notes on Concept of Trading on Equity.
5. Write notes on Trend Analysis.
6. Write notes on WACC (Weighted Average Cost of Capital).
7. Write notes on IRR (Internal Rate of Return).
8. Explain in brief modern approaches of financial management.
9. Explain in detail the trend analysis.
10. Critically examine the various steps involved in capital budgeting process

Q.3. Answer any one. (10 marks)

1.
a) The capital structure of a company consists of equity shares of Rs. 50 lakhs; 10%
preference shares of Rs.10 lakhs and 12% debentures of Rs. 30 lakhs. The cost of
equity capital for the company is 14.7% and income tax rate for this company is 30%.
You are required to calculate the WACC.
b) Annual sales of a company is Rs. 60,00,000. Variable cost is 60% of sales and fixed
cost other than interest is Rs. 5,00,000 P.A. Company has 11% debentures of Rs.
30,00,000. You are required to calculate the operating and financial leverage of the
company.

2. RT Ltd., presents you its budgeted profit & loss account for the year ended 31st March
2024 as under and request you to estimate working capital requirement by total cost
approach.

Additional Information
i) The production and sales take place evenly throughout the year.
ii) Raw material carried in stock for one month and finished goods for half month.
iii) The production cycle takes one month.
iv) There is a custom in market both for purchase of raw material and sales of finished
goods to give two months credit.
v) Time lag in payment of wages is 1 month.
vi) 25% of sales for cash and balance on credit.
vii) Cash on hand and at bank Rs. 62,500.
3. Given below are the selected ratios for two companies A and B in the same industry along
with industry average.

Can we say on the basis of the above ratios and information, that company ‘B’ is better than
company ‘A’ because its ratios are better in six out of eight areas?

4. A company is considering different methods to finance its investment proposal. It is

estimated that initially Rs. 50,00,000 will be needed. Two different alternatives are available
to raise the funds.
i) To raise Rs. 20,00,000 by sale of equity shares of Rs. 100 each and balance at 18% term
loan.
ii) To raise entire amount by sale of equity shares of Rs. 100 each. The existing capital
structure of the company consist of
1) 50,000 equity shares of Rs. 100 each
2) 17% term loan of Rs. 20,00,000.
The expected EBIT is Rs. 15,00,000. Advise the company on the basis of EPS in each
alternative. Assume income tax rate is 50%.
5. XYZ Ltd. is considering purchase of a machine in replacement of an old one. Two
machines viz. ‘CMW’ and ‘KLR’ are offered at price of Rs. 22,50, 000 and Rs. 30,00,000
respectively further, particulars regarding these models are given below:

Present value factor at 12% P.a. are as follows:

Evaluate the two proposals according to payback period and net present value method .
Which machine would you recommend and why?

6. Following are the Income statement and Balance sheet of ABC Ltd. For the year 2022 and
2023. Prepare comparative Income statement and comparative Balance sheet.
7. XYZ ltd has an avg. selling price of Rs.10 per unit. Its variable cost is Rs.7.
Fixed Cost amount to Rs. 1,70,000. All the financing is through Equity Funds and pays 35 %
tax.
ABC ltd is identical to XYZ ltd except the pattern of Financing. Later finances its assets by
50 % Equity & 50% debt. Interest on debt is Rs.20,000.
Determine the degree of operating, Financial & Combined leverage at Rs.7,00,000 sales for
both the firms and interpret the results.

8. A Company is considering implementation of a project. It has two alternatives viz Project -

A & Project - B, both the projects are mutually exclusive the relevant details are as follows:
Rate of capitalization is 9%
Initial Investment Rs. 15,00,000
Calculate
a) N.P.V.
b) Profitability Index (PI)
Comment and advice the company.

9. Using the information given below Complete the balance Sheet of M/s. Everblooming
Lotus Ltd.
Gross Profit (20 % of Sales) Rs.60,000
Shareholders Equity Rs,50,000
Credit Sales to Total Sales 0.80
Total Assets turnover 3 Times
Inventory turnover to Cost of Sales 8 times
Average Collection Period (360 day Year) 18 days
Current Ratio 1.6
Long term debt to Equity 0.40
Balance Sheet of M/s. Everblooming Lotus Ltd. As on _________

10. Assuming the corporate tax of 35 % calculate after tax cost of capital in following
situations
a) Perpetual 15 % debentures of Rs. 1000 sold at a premium of 10% with no floatation
costs.
b) 10 year 14% debentures of Rs. 2000 redeemable at par at 5 % floatation costs.
c) 10 year 14 % preference shares of Rs.100 redeemable at premium of 5 % with 5 %
floatation costs and dividend tax is 10%
d) An equity share selling at Rs.50 and paying dividend of Rs. 6 per share.
11. Estimate NWC (net Working Capital) for a company on the basis of given data. Add 10%
to your computed figure for contingencies.
Estimated cost per unit of Production (Rs.)
Raw material 80
Direct labor 30
Overheads (Including Rs.5 Depreciation) 65
Total 175
Additional Information:
a) Selling Price Rs. 200
b) Level of Activity 1,04,000 units of production per annum
c) Raw material in Stock Average 4 weeks
d) WIP (Full unit of raw material required in the beginning other conversion costs
50%)-2 weeks
e) Finished goods in Stock 4 weeks
f) Credit allowed by suppliers 4 weeks
g) Credit allowed to debtors 8 weeks
h) Lag in payment of wages 1.5 weeks
i) Desired Cash balance in Bank Rs.25,000
Assume production is carried evenly throughout the year.

12. From the following projections of M/s Power & Power ltd for the next year you are
required to work out the Working capital (WC) required by the company
Annual Sales Rs. 14,40,000
Cost of Production including Depreciation of Rs.1,20,000 Rs. 12,00,000
Raw material Purchases Rs. 7,05,000
Monthly expenses Rs. 30,000
Anticipated Opening Stock of Raw material Rs. 1,40,000
Anticipated Closing Stock of Raw material Rs. 1,25,000
Inventory Norms:
Raw material 2 months
Work-In-Progress 15 Days
Finished Goods 1 month
The Firm enjoys 15 days of credit on its purchases and allows 1 month’s credit to it’s
customers.
Company has received an advance of Rs. 15,000 on sales orders.
Assume that production is carried on evenly throughout year. Minimum cash balance desired
to be maintained Rs.10,000.

13. xyz Ltd. has provided the following information.

Determine the WACC using

i) Book value of weights.
ii) Market value of weights

14. From the following information of xyz Ltd.

Calculate:
i) Net operating cycle period.
ii) Number of operating cycles in given period.
The company gets 30 days credits from its suppliers. All sales made by the firm are on credit
only. You can take one year equal to 360 days.

15. Following are the details of AVD corporation Ltd.

Additional information
Gross profit : Rs. 6,00,000
Opening stock : Rs. 2,00,000
Sales : Rs. 15,00,000
Comment on the financial position of the company on the basis of
i) Working capital Turnover Ratio.
ii) Current ratio
iii) Liquid ratio
iv) Debtors Turnover ratio
v) Creditors Velocity
16. Analyse the operating, financial and combined leverage under financial plan A and
Financial plan B, when the fixed costs are Rs. 1,00,000 and Rs.50,000 in two different
situations.
The information regarding capital structure and other data are as under:

17. ABC Ltd. is planning to invest in new project. The investment budget of the company is
Rs. 40,00,000. The company has following alternatives

Evaluate which project the company should select on the basis of pay Back period, Net
present value and profitability Index.
18. A proforma cost sheet of xyz Ltd. Provides the following information.

Additional information available

i) Level of Activity Rs. 50000 units
ii) Raw material are expected to remain in stock for average period of a month.
iii) Work in progress for average half a month.
iv) Credit allowed by suppliers is one month.
v) Credit allowed to customers one month.
vi) Lag in payment of wages is half a month.
vii) Lag in payment of overheads is a month.
viii) Half of sales are on cash basis.
ix) cash balance expected is Rs. 1,50,000.
x) Finished goods remain in stock for one month.
The production and sales are consistent. Forecast the working capital requirement for the said
level of activity as per cash cost method.