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BA 9222 – FINANCIAL MANAGEMENT


UNIT I - FOUNDATION OF FINANCE PART A
1. What are the major financial functions?
i. Investment Decision / Long term Asset Mix decision
ii. Financing Decision / Capital Mix decision
iii. Dividend Decision / Profit Allocation Decision
iv. Liquidity Decision / Short term Asset Mix Decision
2. What is the role of a financial manager?
i. Raising Funds
ii. Allocation of funds
iii. Profit Planning
iv. Understanding Capital Market
3. What are the Financial Goals?
i. Profit Maximisation
ii. Maximizing Earning Per Share
iii. Shareholders Wealth Maximisation
4. What is Profit maximization?
i. Maximising the rupee income of firm
ii. Resources are efficiently utilized
iii. Appropriate measure of firm performance
iv. Serves interest to the society
5. What is maximizing Earning per Share?
i. Ignores timing and risk of the expected benefit
ii. Market value is not a function of EPS. Hence maximizing EPS will not
result in highest price for the company’s Share
iii. Maximizing EPS implies that the firm should make no dividend payment so long
as funds can be invested at positive rate of return.
What is Share Holders Wealth Maximization?
i. maximizes the net present value of a course of action to share holders
ii. Accounts for the timing and risk of the expected benefits
iii. Benefits are measured in terms of cash flows
iv. Fundamental objective – maximize the market value of the firm’s shares.
7. What is risk return Trade off?
i. Risk and return are proportionate to each other. Greater the risk greater is the return.
8. What is the role of a controller and a treasurer?
i. Two officers may be appointed as treasurer and a controller by the CEO.
ii. The treasurer’s function is to raise and manage company funds while the
controller oversees whether funds are correctly applied.
9. What is meant by Time Value Adjustment?
Two common methods of adjusting cash flows for the time value of money:
i. Compounding – The process of calculating future values of the cash flows
ii. Discounting – The process of calculating present values of the cash flows.

10. What is Annuity?


Annuity is a fixed payment (or receipt) each year for a specified number of years.

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11. What is Net present Value?


Net Present Value of a financial Decision is the difference between the present value of
cash inflows and the present value of cash outflows.
12. What are the different concepts of values?
ii. Book Value Replacement Value
iii. Liquidation Value
iv. Going Concern Value
v. Market Value
ii. What are the Features of a Bond? Face ValueInterest Rates are Fixed or
Floating
iii. It has Maturity
iv. It has Redemption Value
v. It has Market Value
14. Define Yield To Maturity.(YTM)
It is the measure of a bond’s rate of return that considers both the interest income and
any capital gain or loss. YTM is the bond’s internal rate of return.
A perpetual bond’s YTM = ∑ INTt + Bn
(I + Kd)t (1 + Kd)
15. What is current yield?
i. Current yield is the annual interest dividend by the bond’s current value
ii. Current yield does not account for the capital gain or loss

16. What are the features of an ordinary Share?


i. A company may issue two types of shares they are ordinary shares and the
preference shares.
ii. Shares have claims, dividend, redemption and conversion
17. What is the value of a preference share?
The value of the preference share would be the sum of the present values of dividends
and the redemption value.
18. What is the value of an ordinary / equity share?
The value of an ordinary / equity share includes
i. The rate of dividend on equity share also the payment of equity dividend
ii. The earnings and the dividend on equity shares are expected to grow ,
unlike the interest rate on bonds or dividends on preference shares.

19. What are the different kinds of investors taking risk into consideration?
i. Risk – Averse: Investor who choose among the investments with the equal
rate of returns, the investment with the lowest standard deviation, the
investor would prefer the one with the higher return.
ii. Risk – Neutral: Investor who would not consider the risk, and would
always prefer the investments with higher returns.
iii. Risk – Seeking: Investor who likes investment with higher risk
irrespective of the rate of return.
Mostly the investors are risk averse.
20. What is a portfolio?
A portfolio is a bundle or a combination of individual assets or securities.

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The portfolio theory provides a normative approach to the investors to make decisions
to invest their wealth in assets or securities under risk. It is based on the assumption that
investors are risk averse, and the returns on the securities are normally distributed.
21. What are the types of risk?
i. Systematic Risk: It arises on the account of uncertainties and the tendency
of individual securities to move together with the changes in the market.
It is also called as market risk.
ii. Unsystematic Risk: It arises from the unique uncertainties of individual
securities. It is also called as unique risk.
22. Define CML.
The Capital Market Line is the slope that describes the best price of a given level of
risk in equilibrium.
CML CAL RETURN
RISK
23. What is CAPM?
The capital Asset pricing Model is that framework that provides the required rate of
return on an asset and indicates the relationship between return and the risk of the asset.
PART B:
1. Explain in detail the concepts of value and return.
2. What is meant by time value of money? Explain in detail.
3. Explain in detail the valuation of bonds and the Shares.
4. Describe the time value of money.
5. What is the discounting factor in investment decision?
6. What are the various components of portfolio?
7. Describe the contents of a portfolio and explain its features.
8. How are the shares valuated?
9. How are the various bonds valuated?
10. What are the various types of shares kept in practice?
11. What is meant by Govt bond?
12. What is preference shares? What are the previlage the pref. share holders have over
equity share holders?
13. What are the rights and the previlage of an equity share holder?
14. What is meant by deferred share?
15. What are the various types of preference shares available?
16. How is the dividend declared for equity and the preference share holders?
17. What are the points to be considered before valuating a share?
18. How does an investor predict the future price of a share in a company?
19. Does the economy of a country influence the price of shares? How?

UNIT II - INVESTMENT DECISIONS:


PART A
1. What is capital Budgeting?
Capital Budgeting is the investment decision to be taken by the companies before
investing.
2. What are the various financial Decision in a firm?
i. Investment Decision
ii. Financing Decision

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iii. Dividend Decision


iv. Funds requirement Decision

3. What are the techniques of capital Budgeting?


i. Discounted Cash Flow Method:
a. Net Present Value
b. Internal Rate of Return
c. Profitability Index
ii. Non- Discounted Cash Flow Method:
a. Pay Back Period
b. Discounted Pay back Period
c. Accounting Rate of Return

4. What is the process of capital Budgeting?


i. Identification of potential investment opportunities
ii. Assembling of proposal opportunities
iii. Decision Making
iv. Preparation of capital budgets
v. Implementation
vi. Performance Review

5. What are the factors affecting capital investment decision?


i. The amount of investment
ii. Minimum rate of return
iii. Return expected from the investment
iv. Ranking the investment proposal
v. Risk & uncertainty

6. What are the types of investment decision?


i. Expansion of existing Business
ii. Expansion of new Business
iii. Replacement & Modernisation

7. What is cost of capital?


A project’s Cost of capital is the minimum required rate of return on funds committed to
the project, which depends on the riskiness of its cash flow.
The firm’s Cost of capital will be the overall, or average, required rate of return on the
aggregate of the investment projects.
8. What are the classifications of cost of capital?
i. Explicit Cost & Implicit Cost
ii. Future & Historical Cost
iii. Specific & Combined Cost
iv. Average Cost
v. Marginal Cost

9. Define Opportunity cost of capital.

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The opportunity cost is the rate of return foregone on the next best alternative
investment opportunity of the comparable risk.

Equity Share
Preference Share

Corporate Bonds
Government Bonds

Risk free security

PART B:
1. What are the methods of investment evaluation?
“Financial Management” – MY Khan & PK Jain – Pg 5.21
2. Explain the DCF methods of capital budgeting.
“Financial Management” – MY Khan & PK Jain – Pg 5.27-5.28
3. Explain the NPV method of capital Budgeting in detail.
“Financial Management” – MY Khan & PK Jain – Pg 5.28
4. Compare & Contrast the NPV method & the ARR method of investment decision.
“Financial Management” – MY Khan & PK Jain – Pg 5.28
5. Explain what the weighted average cost of capital is.
“Financial Management” – MY Khan & PK Jain – Pg 11.22
6. What is capital budgeting? What are the features of capital budgeting?
7. Explain the various ways of calculating investment decision.
8. What are the factors influencing capital budgeting?
9. What are the functions of financial manager?
10. What are the traditional methods of investment decisions?
11. What are the modern methods of investment decision?
12. What is the difference between ARR & IRR method?
13. What is the difference between Payback period and the ARR method?
14. Write the merits and the demerits of ARR method.
15. Write the merits and the demerits of IRR method.
16. What are the advantages and the disadvantages of profitability index?
17. Explain in detail the features, merits and the demerits of the DCF method.

UNIT III - FINANCING AND DIVIDEND DECISION:


PART A
1. Define Capital Structure.
It is used to represent the relationship between the equity and the debt part of the
capital in a firm.
2. What is financial leverage?
The use of fixed charges sources of funds such as debt and preference capital along with
the owners equity capital structure is described as financial leverage or gearing or
trading on equity.
3. What are the measures of Financial leverage?
i. Debt ratio
ii. Debt-Equity ratio

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iii. Interest Coverage


iv. The debt and the Debt equity can also be called as capital gearing ratio
v. Coverage ratio

4. What is degree of Operating leverage?


The degree of operating leverage is defined as the percentage change in the earnings
before the interest and the taxes relative to a given percentage change in sales.
DOL = % Change in EBIT
% Change in Sales
5. What is Degree of financial leverage?
The degree of operating leverage is defined as the percentage change in the earnings
before the interest and the taxes relative to a given percentage change in EPS
DFL = % Change in EBIT
% Change in EPS

6. What is Degree of Combined Leverage?


The degrees of operating and the financial leverage is combined to see the effect of total
leverage on EPS with the given change in sales.
DCL = % Change in EBIT X % Change in EPS
% Change in Sales % Change in EBIT
= % Change in EPS
% Change in Sales
7. What is dividend?
The dividend is the part of profit made by the firm to be distributed among the
shareholders
8. What is retained earnings?
The retained earnings in that part of the profit which the company retains with itself for
future investment.
9. What are the three distinct forms of dividend stabilities?
i. Constant dividend per share / Dividend rate
ii. Constant payout
iii. Constant dividend per share plus extra dividend.

10. What are the issues of dividend Policy?


i. Earning to be distributed – High Vs Low payout
ii. Objective – Maximise Shareholders Return
iii. Effects – Taxes, Investment and financing Decision

11. What is the significance of stability of dividend?


i. Resolutions of investors’ uncertainty
ii. Investors’ desire for current income
iii. Institutional Investors’ requirement

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iv. Raising additional Finances

12. What are the forms of dividend?


i. Bonus Shares
ii. Cash Dividend
iii. Property Dividend
iv. Bond Dividend
v. Stock Dividend

PART B:
1. What are the various theories of capital Structure?
NOI approach:
“Financial Management” – MY Khan & PK Jain – Pg 11.7
NI approach:
“Financial Management” – MY Khan & PK Jain – Pg 11.4
Traditional Approach:
“Financial Management” – MY Khan & PK Jain – Pg 11.19
MM approach:
“Financial Management” – MY Khan & PK Jain – Pg 11.11
2. Explain the optimum capital Structure.
“Financial Management” – MY Khan & PK Jain – Pg 11.8
3. What Explain the dividend policy in detail
“Financial Management” – MY Khan & PK Jain – Pg 13.1
4. Explain the Walter’s Model of Dividend Theories.
“Financial Management” – MY Khan & PK Jain – Pg 13.12
5. Explain the Gordon’s Model of dividend Theories.
“Financial Management” – MY Khan & PK Jain – Pg 13.12
6. What is MM Hypothesis – Discuss in brief
“Financial Management” – MY Khan & PK Jain – Pg 13.4
7. What are the practical considerations of dividend decisions?
“Financial Management” – MY Khan & PK Jain – Pg 14.1 – 14.10
8. Explain the stability of dividends in detail
“Financial Management” – MY Khan & PK Jain – Pg 14.2
9. What is the significance of stability of dividend?
“Financial Management” – MY Khan & PK Jain – Pg 14.2
10. What are the various forms of dividend?
“Financial Management” – MY Khan & PK Jain – Pg 14.1
11. What are the factors affecting the dividend policies of a firm?
“Financial Management” – MY Khan & PK Jain – Pg 14.1
12. What is operating leverage?
“Financial Management” – MY Khan & PK Jain – Pg 10.3
13. What is financial leverage?
“Financial Management” – MY Khan & PK Jain – Pg 10.7
14. What is combined leverage?
“Financial Management” – MY Khan & PK Jain – Pg 10.21
15. Explain in detail the various dividend practices in Indian scenario.
16. What are the various approaches under dividend theories? Explain with an illustration.
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17. What is irrelevant theory? Explain in detail.


18. How does the irrelevant theory contradict the relevant theories of dividend?
19. Explain the Gordon model of dividend theories.
20. Explain in detail the Walters model of dividend theories.
21. “A bird in the hand is worth two in the bush” – which method of dividend theories does
this statement go with? Justify.
22. Write down the traditional approaches of capital structure.
23. Explain in detail the various types of cost of capital.
24. Explain the cost of equity in detail.
25. Write down the various types of cost of capital.
26. Explain in detail the advantages and the disadvantages of NI and the NOI approach.
27. What is overall cost of capital? How is it evaluated?
28. What is the modern method available in capital structure theories? Explain.

UNIT IV - WORKING CAPITAL MANAGEMENT:


PART A
1. What are the concepts of working capital?
GWC: Gross working capital refers to the total investment in current assets
NWC: It is the difference between the current asset and the current liabilities
2. What are the determinants of working capital?
i. Nature of business
ii. Market and demand
iii. Technology and manufacturing policy
iv. Credit policy
v. Suppliers credit
vi. Operating efficiency
vii. Inflation

3. What is the nature of credit Policy?


i. Invesment in receivables
a. Volume of credit sales
b. Collection period
ii. Credit Policy
b. Credit Standards
2. Credit Terms
3. Collection efforts
4. What is the optimum credit policy?
i. Estimation of incremental profit
ii. Estimation of incremental investment in receivables
iii. Estimation of incremental rate of return
iv. Comparison of incremental rate of return with the required rate of return
v. Optimum credit policy = IRR = RRR

5. What are the collection policies and procedures?


i. Regularity of collection
ii. Clarity of collection procedures
iii. Responsibility for collection and follow-up

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iv. Case by case approach


v. Cash discount for prompt payment

6. What is the need for inventories?


i. Transaction motives
ii. Precautionary motives
iii. Speculative motives

7. What are the four facets of cash management?


i. Cash planning
ii. Managing the cash flows
iii. Optimum cash level
iv. Investing surplus cash

8. What are the motives for holding cash?


i. Transaction Motive
ii. Precautionary Motive
iii. Speculative motive

9. What is meant by trade credit?


i. Customers get from suppliers goods during the normal course of business
ii. Trade credit can also take the form of bills receivables
iii. It refers to the conditions of due date and cash discount

10. What are the various bank finances for working capital?
i. Overdraft
ii. Cash credit
iii. Purchase or discounting of bills
iv. Letter of credit

11. What is receivables management?


The objective of receivables is to promote sales & profits until that point is reached on
the investment in further funding of receivables is less than the cost of funds raised to
finance that additional credit.
12. What are the factors affecting the size of receivables?
i. The levels of sales
ii. The credit policies
iii. The term of trade
iv. The credit period
are the factors affecting the size of receivables.
13. What are the uses of receivables?
i. Achieving growth in sales
ii. Increasing Profits
iii. Meeting Competition

14. What is leasing?

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It is the contract between the lessor and the lessee for the assets for which the lessee
pays the lease rentals for a certain agreed period called lease period.
15. What is break even lease rental?
It is that rent which the lessor makes neither the profit nor loss. It is usually negotiable.
The lease rents are always higher than the break even lease rentals, for making profit.

PART B:
1. What is Commercial Paper?
“Financial Management” – MY Khan & PK Jain – Pg 17.11
2. What is factoring? What are the various types of Factoring?
“Financial Management” – MY Khan & PK Jain – Pg 17.12
3. What are the various sources of working capital financing?
“Financial Management” – MY Khan & PK Jain – Pg 17.1
4. What ar e the types of leasing?
“Financial Management” – MY Khan & PK Jain – Pg 9.2
5. What is Sale & lease back?
“Financial Management” – MY Khan & PK Jain – Pg 9.4
6. What is cash management?
“Financial Management” – MY Khan & PK Jain – Pg 18.1
7. Describe Budget in detail.
“Financial Management” – MY Khan & PK Jain – Pg 18.9
8. What are the various sources of financing?
9. Explain the term Trade Credit.
10. What are the business credits given in working capital financing?
11. What are the various types of WC financing? Explain with an example.
12. What are the various committees that WC financing has conducted?
13. What is meant by commercial paper? Explain in detail.
14. What is meant by factoring? What are the various types of factoring?
15. Who is called a factor? Explain his role.
16. Explain the various elements of cash management in detail.
17. What is inadequacy of cash? Explain.
18. What are the advantages and the disadvantages of factoring?
19. Explain briefly the functions of a factor.
20. What are the features of commercial papers?
21. What are the various factors to be concerned in receivables management?
22. What are the steps in the process of loan syndication and the after math process of
collecting the loans?
23. What are the credit standards to be verified before sanctioning the loan to a customer?
24. What is the job of the collection department in receivables management?
25. What are the types of loans available to the customers?
26. Explain the receivables management in the scenario of India’s financial position.
27. Would the planning department of finance play a vital role in fore casting the status of
the customer’s trust worthiness?

UNIT V - LONG TERM SOURCES OF FINANCE:


PART A
1. Define capital market efficiency.
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Capital market efficiency is defined as the ability of securities to reflect and incorporate
all relevant information in their prices. Three forms of capital market efficiency may be
distinguished:
i. Weak form of efficiency
ii. Semi strong form of efficiency
iii. Strong form of efficiency

2. What are the various long term sources of financing?


Various long term sources of finance are:
i. Ordinary Shares / Equity Shares
ii. Preference Shares
iii. Debentures
iv. Term Loans

3. What are the various asset based financing sources?


Asset based financing sources are:
1. Lease financing
2. Hire purchase
3. Project financing

4. Distinguish Between Lease financing and the Hire Purchase.

S.no Lease Hire Purchase


1 Lessee is not entitled to Hirer is entitled to claim
claim depreciation tax depreciation tax shield
shield
2 Lessee can charge the Hirer can charge only
entire lease payment as the
expenses for tax interest portion
computation
3 Lessee does not become Once the hirer has paid
the owner of the asset. all the instalments, he
Therefore he has no becomes the owner of the
claim over the asset asset and can claim the
salvage value salvage value.
5. What are the features of venture Capital?
 Equity participation
 Long term investment
 Participation in Management
 Venture Capitalist combines the qualities of a banker, stock market
investors and the entrepreneur.

6. Define Disinvestment Mechanism


They are:
i. Buy backs
ii. Initial Public offering
iii. Secondary Stock Market

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7. What are the various stages of venture Capital?


 Early Stage Financing
 Expansion Stage Financing
 Acquisition / Buyout Financing

8. What are the various ways of arranging Project Financing?


 Own Operate transfer Structure
 Own operate Structure
 Lease transfer Structure
PART B:
1. What are the various types of leasing?
2. What are the advantages of lease financing?
3. Explain the off the balance sheet concept of leasing & how does it add on advantage
to the leasing option?
4. Differentiate between the leasing & the hire purchase.
5. What are the demerits of leasing?
6. Explain in detail, the disadvantages of leasing.
7. What is venture capital? Explain in detail.
8. What are the various steps in venture capital financing?
9. Write down few Companies having turn around stories after venture capital financing.
10. What are the features of venture capital.
11. Write down the nurturing steps of venture capital.
12. What are the different components of project appraisal?
13. Loan Arrangement – Explain in brief.
14. What are the key factors to be kept in mind before the appraisal of projects? Explain in
detail.
15. What is the need for a feasible study in project appraisal?
16. What is the role of public deposits?
17. How can a firm go for public deposits?
18. What are the procedures for public deposits?
19. What are the necessities of inter corporate investment?

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