VALLIAMMAI ENGINEERING COLLEGE DEPARTMENT OF MANAGEMENT STUDIES BA7202-FINANCIAL MANAGEMENT - QUESTION BANK

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1 Year and Semester FIRST YEAR II SEMESTER (EVEN) Subject Code and Name BA7202 FINANCIAL MANAGEMENT Faculty Name 1) Mrs.A.UMA DEVI ASST PROF (OG) 2) Mr.J.ANAND ASST PROF (OG) Q.No UNIT I PART A BT Level 1 Define financial management BTL 1 2 A Rs.10,000 per value bond bearing a coupon rate of 12% will mature after 5 years. BTL 2 Compare the value of bond, if the discount rate is 15%? 3 Identify the two aspects of financial management 4 Classify the various concepts in Time value of money 5 Discuss the objectives and goal of financial management BTL 5 6 Interpret the functions of financial manager. BTL 6 7 Define Future Value of Money. BTL 1 8 Compare modern view of financial management with its traditional view. BTL 2 9 How is the term finance more comprehensive than money management? 10 Return on market portfolio has a standard deviation of 20% and covariance between the returns on the market portfolio and that of security A is 800. What is the expected return? 11 How would you have a fresh look at the finance function in business? BTL 5 12 Interpret modem view(s) on financial management BTL 6 13 Define Compound value concept. BTL 1 14 Can you explain Rule 72 & Rule 69. BTL2 15 How is bond different from equity? 16 Classify the efficient portfolio 17 Define and explain financial assets. BTL 1 18 Classify the yield to maturity? BTL 2 19 Define Yield to call. BTL 1 20 What is effective rate of interest? BTL 1

2 Q.No UNIT I PART B BT Level 1 How will you measure time preference for money. Give reasons for time preference. BTL 1 2 Discuss future value of an annuity explain with examples? BTL 2 3 How would you show your understanding on the estimation of time value of a put option? and explain briefly the Black Scholes option model 4 Can you list the types of risk & classify Non diversifiable risk & Security market line.how does it differ from capital market line? 5 What is the concept and significance of risk and return of a portfolio?what is the importance of BTL 5 correlation between assets returns in a portfolio? 6 Evaluate The goal of profit maximization does not provide an operationally useful criterion BTL 6 Explain 7 Define the concept of risk return trade off with diagram. BTL 1 8 With illustration general principles of valuation of shares? Elucidate. BTL 2 9 A) Explain the functions of finance manager of a firm. B) Can you explain the features & scope of financial management? 10 Define the various decisions in financial management. Wealth maximization is the sole objective of financial management Explain BTL 1 UNIT I PART C 1. Best ltd has a Rs par value bond carrying a coupon rate of 12% and maturing after 7 yrs. The market value of this bond is Rs.750. What is the YTM of this bond? What will be the YTM if the market price is 1050? 2. There are 3 securities X,Y, and Z. The returns are given as follows: Select the securities based on risk and return. Calculate average returns, variance and standard deviation. Security X Y Z A Company is currently paying a dividend of Rs.2 per share. The dividend is expected to grow at a 15% annual rate for three years then at 10% for next three years, after it is expected to grow at a 5% rate forever. (a) What is the present value of the share if the capitalization rate is 9%? (b) If the share is held for three years, what shall be its present value? 4. Illustrate with the example linkage between share price and earnings. What is the importance of P/E ratio. What are its limitations?

3 Q.No UNIT II PART A BT Level 1 Define pay back period method. BTL 1 2 Compare operating risk and financial risk? BTL 2 3 Identify the merits & limitations of pay back period method? 4 What are the components of capital Budgeting? 5 Discuss the phases of capital budgeting process. BTL 5 6 Interpret with simple illustration, the profitability index method of capital BTL 6 budgeting. What does the profitability index signify? 7 Define cost of retained earnings? BTL 1 8 Distinguish the two ways of defining benefit cost ratio. BTL 2 9 A) Identify the cost of a specific source of finance is calculated? Brief with an example. B) Suppose the dividend per share of firm is expected to be Re.1 per share next BTL4 year and is expected to grow at 6% per year perpetually. Determine the cost of equity capital, assuming the market price per share is Rs What are the merits of NPV method? BTL 1 11 Define floatation costs in computing the cost of capital? BTL 1 12 Interpret the adjusted NPV with NPV. BTL 2 13 How would you use risk free rate of return? 14 Determine the payback period from the following cash flows Year CFAT How the principles of capital rationing. Which evaluation technique is best under BTL 5 such circumstances? 16 Classify the various costs in computing the cost of capital? BTL 6 17 Define IRR. BTL 1 18 Compare operating risk and financial risk? BTL 2 19 A) Can you apply the payback reciprocal method in decision making? B) What are the circumstances NPV & IRR differ? BTL4 20 What are the features of ARR method? BTL 1

4 Q.No UNIT II PART B BT Level 1 Define Capital budgeting. Discuss in detail the need and importance of it. BTL 1 2 What are the major Financial Decisions? What are the different methods of valuing equity shares? BTL 2 3 A) How would you distinguish various DCF capital budgeting techniques? B) A company is considering two mutually exclusive projects Both require an initial cash outlay of Rs. 10,000 each and BTL 1 have a life of 5 years. The company s required rate of return 10% and pays tax at 50 %. The project will be depreciated on a straight line basis. The before tax cash flows expected to be generated by the project are as follows. Before tax cash flows Year Project A 4,000 4,000 4,000 4,000 4,000 Project B 5,000 5,000 2,000 5,000 5,000 Calculate for each project: (i) PBP (ii) NPV (iii) PI. Which project should be accepted and why? 4 A) How would you show your understanding on factors influencing capital budgeting decisions? B) How would you rank capital budgeting proposals? BTL3 BTL4 5 A) What are the steps involved in computing cost of capital? B) How would you explain the factors influencing Overall cost of capital of the firm? BTL5 BTL6 6 Define & explain the process of Capital budgeting. BTL1 7 Can you explain about specific sources of capital? BTL2 8 A) Discuss the conditions that should be satisfied for using a firm s overall cost of capital for evaluating new investments. B) GURU ltd has paid up equity capital equity shares of Rs 10 each. The current market price of shares is Rs 24. During the current year, the company has declared a dividend of RS 6 Per shares. The company has also previously issued 14% Preference shares of Rs 100 each aggregating Rs at 5% discount and 13% debentures of Rs 100 each for Rs The corporate tax rate is 40% the growth rate in dividends on equity shares is expected at 5%. Calculate the overall cost of capital of the company. 9 A) How is cost of equity capital determined under CAPM.Explain? B) How would you explain the concept of capital rationing? 10 A) What are the problems in determining cost of capital? B) Can you assess the role of inflation in capital budgeting? BTL1 BTL3 &4 BTL3 BTL4 BTL 5 BTL6

5 UNIT II PART C 1. Capital expenditure decisions are by far the most important decisions in the field of management. Illustrate. 2. What is Profitability Index? Which is a superior ranking criterion, profitability index or NPV? 3. Debt is the cheapest source of funds. Explain 4. A firm finances all its investment by 40% debt & 60% equity. The estimated required rate of return on equity is 20% after tax and that of the debt is 8% after tax. Firm is considering an investment proposal costing Rs.40000with an expected return that will last forever. What amount must the proposal yield per year so that the market price does not change?

6 Q.No UNIT III PART A BT Level 1 Define stock split BTL 1 2 Compare bonus issue and share split on four aspects. BTL 2 3 Identify the different forms of Dividend policies. 4 What is Financial Leverage? 5 Discuss any four factors which are relevant for determining the pay out ratio. BTL 5 6 Can you interpret the existence of Operating leverage in a firm s Capital Structure? BTL 6 7 Define any two bases upon which capital structure is determined. BTL 1 8 What is meant by debt equity ratio and interest coverage ratio? BTL 2 9 List some of the causes for indifference point? 10 What is MM hypothesis? 11 Discuss the different forms of capital structure BTL 5 12 Interpret arbitrage pricing in capital structure theory. BTL 6 13 Define dividend pay out ratio? Brief with a simple illustration. BTL 1 14 Compare the different forms of dividend BTL2 15 How would you show your understanding about trading on equity? 16 How would you categorize the term leverage? 17 Define reverse split. BTL 1 18 Classify NI & NOI approaches. BTL 2 19 Define Walter s & Gordon model of Dividend. BTL 1 20 Define composite leverage. BTL 1 Q.No UNIT III PART B BT Level 1 How would you explain the impact of financial leverage on earnings per share? BTL 1 2 What is Modigliani Miller approach on cost of capital? BTL 2 3 What are the various factors you consider in influencing Divided Policy? Explain the different types of Dividend Policy? 4 Examine the legal and procedural aspects of dividend according to Company s Act. 5 What are the practical considerations in formulating the dividend policy? Write short notes on forms of dividends. 6 Interpret the role of finance manager keeping in mind the degree of financial leverage in evaluating financing plans? When does leverage become favorable? BTL 5 BTL 6

7 7 Define the essentials BA7202-FINANCIAL of Walters Dividend MANAGEMENT model? Explain its - shortcomings. QUESTION BANK BTL 1 8 Can you explain the considerations involved in evolving a balanced capital structure of a corporation. 9 A) How to measure the degree of operating, financial leverage? Illustrate with an example. B) Can you make a distinction between a policy of stable dividend payout ratio and a policy of stable dividends or steadily changing dividends? What are the reasons for a firm to choose a specific dividend policy? BTL 2 10 List the determinants while considering capital structure of a company? BTL 1 UNIT III Part C 1. The following projections have been given in respect of company X and Y. Particulars Company X Company Y Volume of output and sales units units Variable cost per unit Rs 4 Rs 3 Fixed cost Rs Rs Interest burden on debt Rs Rs Selling price per unit Rs 10 Rs 8 On the basis of above information calculate (A) OL (B) FL (C) combined leverage (D) operating BEP ( E) financial BEP. 2. i) Xltd is expecting an annual EBIT of Rs 1 Lakh. The company has Rs 4 lakh in 10% debentures. The cost of equity capital or capitalization rate is 12.5%. you are required to calculate the total value of firm. Also state the overall Ko? ii) In considering the most desirable capital structure for a company, the following estimates of the cost of equity ( after tax) and cost of debt has been made at various of debt equity mix.

8 Debt as percentage of total capital employed Cost of debt (%) Cost of equity (%) You are required to determine the optimal debt equity mix for the company by calculating composite cost of capital. iii) The EBIT of a firm is Rs 10000, the firm as got 5% bond of Rs40000, and 10% preference shares of Rs equity shares of Rs 10. The tax rate is 35%. Calculate financial leverage and EPS. 3. Does the financial leverage always increase the earnings per share illustrate your answers 4. Explain the assumptions and implications of NI and NOI approach illustrate your answers with hypothetical examples

9 Q.No UNIT IV PART A BT Level 1 Define Commercial paper? State its features. BTL 1 2 Explain the purpose of using working capital. BTL 2 3 How would you use various methods available for forecasting working capital requirements? 4 Can you list the advantages of inventory control? 5 What are the factors determining working capital? BTL 5 6 Explain the term Float. BTL 6 7 How would you explain Factoring? BTL 1 8 What is operating cycle? BTL 2 9 How would you apply the steps in receivables forecasting? 10 Can you specify the cost associated with factoring? 11 What are the factors influencing current assets with the help of short as well as BTL 5 long term funds? 12 What is your opinion about cash cycle? BTL 6 13 How would you explain credit evaluation? BTL 1 14 Explain inventory management. BTL2 15 How would you draw an operating cycle of working capital for a manufacturing company? 16 What is the process of factoring? 17 Define Cash Management. BTL 1 18 What is meant by ABC analysis? BTL 2 19 Define Lock box system of cash. BTL 1 20 What is the nature of cash? BTL 1

10 Q.No UNIT IV PART B BT Level 1 How would you explain receivable control techniques? BTL 1 2 Can you explain the factors affecting working capital? What are the various BTL 2 principles of it? 3 How would you use float in cash management? Explain the different kinds of float in cash management. 4 What is the concept of working capital cycle? Discuss the various sources of working capital in detail. 5 What are the objectives of inventory management? Explain. BTL 5 6 How could you determine various inventory control techniques? BTL 6 7 How would you describe the basic objectives of cash management and basic BTL 1 problems in cash management? 8 How would you explain techniques that can be used to accelerate a firm s BTL 2 collection? 9 A) What cash management models proposed by Baumol and Miller Orr? B) Can you list its merits & demerits of Baumol & Miller model? 10 Can you a give brief note on factoring, its process & types? BTL 1 UNIT IV Part C 1. The credit policy of a firm is criticized because the bad debt losses have increased Discuss. 2. From the following information of VSGR Company Ltd., estimate working capital needed to finance a level of activity of 1,10,000 units of production after adding a 10 per cent safety contingency. Raw materials Direct Labour Overheads (excluding depreciation) Total cost Profit Selling price Additional information: Rs.78 Rs.29 Rs.58 Rs.165 Rs.24 Rs.189 (i) Average raw materials in stock : one month (ii) Average materials in process (50% completion stage):1/2month (iii) Average finished goods in stock: one month

11 (iv) Credit allowed BA7202-FINANCIAL by suppliers: one month MANAGEMENT - QUESTION BANK (v) Credit allowed to customers : Two months (vi) Time lag in payment of wages : one and half weeks (vii) Overhead expenses : one month One fourth of the sales are on cash basis. Cash balance is expected to be Rs. 2, 15,000. You may assume that production is carried on evenly throughout the year and wages and overhead expenses accrue similarly. 3. Calculate the working capital allow 10% contingencies Cost per unit Raw Material Cost Rs.100 Labour cost Rs 20 Overheads Rs.20 Total Cost Rs. 140 Profit Rs. 60 Selling price Rs.200 Additional information: No. of units sold =25000 units Average Raw material stock 2months Average work in process 1 month Finished goods 2month One fourth of the sales is based on cash. Debtors 1 month Lag in wages 1/2 month Lag in payment to Creditors 1 month Lag in payment in overhead expenses 1/2 month Cash balance Rs.1, 00, What is the importance of working capital for a manufacturing firm?what shall be the repercussions if a firm as a) paucity of working capital b) excess working capital.

12 Q.No UNIT V PART A BT Level 1 Define the term debenture. BTL 1 2 How would you Compare debenture and preference share capital? BTL 2 3 What facts would you identify in leveraged lease transactions? 4 What are the various features of term loan? 5 How will you estimate risk in venture capital firms? BTL 5 6 Can you assess the importance of private equity? BTL 6 7 Define Lease. BTL 1 8 Compare Hire Purchase and lease. BTL 2 9 How do you examine the intermediaries associated with a company s issue of capital? 10 What inference can you make from pre emptive right of equity shares? 11 What facts can you compile for the lease financing? BTL 5 12 How would you interpret Restrictive covenants? State two features of it. BTL 6 13 Define the internal financing of a firm. BTL 1 14 What can you say about authorized share capital and paid up share capital of a BTL2 firm? 15 What approach would you use to classify BOOT in project financing? Quote a practical example. 16 Can you list the process involved in venture capital? 17 Define Hire purchase. BTL 1 18 What is the concept of book building? BTL 2 19 What is term loan? BTL 1 20 What are the key functions of venture capital? BTL 1

13 Q.No UNIT V PART B BT Level 1 List the features of various long term sources of finance. BTL 1 2 Can you explain lease financing? How does it differ from a hire purchase? What are BTL 2 the cash flows consequences of a lease? Illustrate. 3 What ways would you use for understanding the organization, functions and problems of Indian stock market? 4 Discuss in detail the rights and position of equity shareholders. 5 Can you elucidate about the Venture Capital financing and explain its features & BTL 5 steps in detail. 6 How would you determine between share holders and debenture holders. BTL 6 7 What do you mean venture capital & discuss briefly SEBI regulations given to BTL 1 venture capital finance? 8 Explain the steps and parties involved in an IPO process in India. BTL 2 9 A) Discuss briefly the style of investment nurturing by the venture capital funds. What are the objectives of after care? Also explain the important techniques to achieve these. B) How would you classify the structure of Indian capital market? 10 List the features of shares traded in stock exchanges & define primary & secondary capital market. BTL 1 UNIT V Part C 1. Elucidate the role of FII in Indian Stock Market. Elaborate with a case study. 2. Venture Capital Fund is a Non Banking Financial Company s business Discuss. 3. Describe the SEBI regulations in IPO processing. 4. Do you agree that there is a significant growth in FDI equity inflows after the launch of Make In India. Critically examine the fact.