FINANCIAL MANAGEMENT
Question Bank
Short Answer Questions (5 marks)
1.
Define Financial Management?
2.
State the approaches to finance function?
3.
What are the functions of Financial manager?
4.
Define capital budgeting?
5.
What do you mean by payback period? State its
advantages of this method?
6.
What are the objectives of financial
management?
7.
What do you mean by time value of money?
State the reasons for time preference of money?
8.
If you deposit 5000 today at 6% rate of
interest, in how many years will the amount double? Work out the problem using
rule 72 and rule 69?
9.
Make a comparison between NPV and IRR method.
10.
What do you mean by business finance? Also
state its classifications.
11.
What is finance function?
12.
Write a note on Profit maximization VS Wealth
Maximization?
13.
State the advantages and disadvantages if IRR
Method?
14.
What do you mean by Discounted cash flow?
State the various methods used to calculate discounted cash flow?
15.
A project costs Rs:1 lakh and yields an
annual cash flow of Rs: 20,000 for 8 years. Calculate its payback period?
16.
“A rational human being has a time preference
for money”. What are the reasons for such a preference?
17.
A project costs Rs:5 lakhs and yields
annually a profit of Rs:80,000 after depreciation @ 12 % p.a but before tax of 50%. Calculate the payback
period?
18.
What is Capital rationing? Explain with an
example?
19.
Define capital budgeting?
20. What is business finance?
Explain its significance.
21. What is finance
function? State
the objectives of finance function
22.
“The wealth maximization objective provides an operationally appropriate decision criterion” — Analyse
the
statement.
23. What is meant by pay back method? State its advantages.
24. What is Weighted
Average Cost
of Capital?
25. Explain the
importance of cost of capital in financial management.
26. Distinguish
between operating leverage and financial leverage.
27.
The following information is available from the
Balance Sheet of a company:
Equity share capital – 20,000 shares of Rs. 10 each Rs. 2,00,000
Reserves and Surplus Rs. 1,30,000
8% Debentures Rs. 1,70,000
The rate of tax for the company is 50%.
Current level of
Equity Dividend is 12%.
Calculate the weighted average cost of capital using the
above figures
28. A Ltd.
furnished the following information:
Sales 480000, variable cost ratio 60%; fixed cost other than interest Rs. 28,00,000,
Interest on Debentures Rs.4,20,000. Tax rate is 50%. You are required to
calculate Operating Leverage, Financial Leverage and Combined Leverage.
29.
Define Financial Management?
State the aims of finance function?
30.
What are the objectives of
financial Management?
31.
Explain the different types
of financial Decisions?
32.
Write a Note on NPV method?
33.
Compare and contrast
Traditional and modern approaches of Financial management?
34.
What is meant by pay back
method? State its advantages.
35.
Cost of investment is Rs:1
lakhs, Cash inflows are 15000, 20000, 25000,30000,40000. Compute the payback
period.
36.
Write a note on
Profitability Index Method.
37.
What do you mean by payback period? State its merits
and demerits?
38.
Differentiate between capital expenditure and
revenue expenditure?
39.
Define capital budgeting? Point out any 4 importance
of CB decision?
40.
What do you mean by Financial Management? Why
financial management is indispensable to organizations?
41.
Explain the concept of time value of money? State
the reasons for time preference of money?
42.
Explain any two discounted methods of capital
budgeting?
43.
Determine the Payback period for a project which
requires a cash outlay of Rs:10000 and generates cash inflows of Rs:2000,
Rs:4000, Rs:3000, and Rs:2000. in the first second third and fourth year
respectively.
44.
Mention the criticisms against wealth maximization.
45.
What are various financial decisions. Explain?
46.
What do you mean by finance function?
47.
Define financial management.?
48.
What are the goals of Business finance?
49.
What do you mean by capital budgeting?
50.
State the advantages and disadvantages of NPV method
?
51.
What do you mean by IRR?
52.
Differentiate between Pay back period and post pay
back period method?
53.
State the importance of capital budgeting?
54.
What is capital rationing?
55.
Discuss the techniques of investment appraisal in capital budgeting.
56.
Explain different theories of capital
structure.
57.
Short Essays/Problems (10 marks)
1. Explain the Capital budgeting process?
2. What
is capital budgeting? why it is significant for a firm?
3. Explain the Scope of Financial Management?
4. What
are the steps involved in evaluating an investment proposal?
5. Write the meaning of capital budgeting? Why capital budgeting
decisions are important to a firm?
6. Write
a note on Profit maximization VS Wealth Maximization?
7. What
are the various steps in capital Budgeting Decisions?
8.
Explain the process of capital budgeting?
9.
Evaluate critically the objectives of Financial
management?
10.
Explain the scope of finance function?
11.
12. Calculate
average rate of return for projects A and B from the following
Project A
|
Project B
|
|
Investments
|
20,000
|
30,000
|
Expected Life (no salvage value)
|
4 years
|
5 years
|
Projected
Net income after Interest Depreciation and taxes
|
||
Year
|
Project A
|
Project B
|
1
|
2000
|
3000
|
2
|
1500
|
3000
|
3
|
1500
|
2000
|
4
|
1000
|
1000
|
5
|
-
|
1000
|
Total
|
6,000
|
10,000
|
If
the required rate of return is 12 %, which project should be undertaken
13. A
Ltd is considering an investment proposal. The cost of the project is Rs:1
lakhs. It has estimated working life of 5 years with zero salvage value. The profit before depreciation are expected
to be Rs:30000, Rs:30000, Rs:25000, Rs:25000 and Rs:20000 respectively. The tax
rate is 50%. It is the policy of the company to provide depreciation under WDV.
(a)
Payback period
(b)
ARR method
14. Explain
the scope of finance function?
15. X
Ltd is producing articles mostly by manual labour and is considering to replace
it by a new machine. There are two alternative models M and N of the new
Machine. Prepare a statement of Profitability showing the payback period from
the following information.
Particulars
|
Machine M
|
Machine N
|
Estimated life of machine
|
4 years
|
5 years
|
Cost of machine
|
90000
|
180000
|
Estimated savings in scrap
|
5000
|
8000
|
Estimated savings in direct wages
|
60000
|
80000
|
Additional cost of maintenance
|
8000
|
10000
|
Additional cost of supervision
|
12000
|
18000
|
16. Mr.
Suresh is appointed as the chief financial Manager of Anna Ltd. State the
various financial functions to be performed by Suresh.
17. From
the following information calculate NPV of two projects and suggest which of
the two project should be accepted assuming a discount rate of 10%
Particulars
|
Project X
|
Project Y
|
Initial Investment
|
20000
|
30000
|
Estimated life
|
5 years
|
5 years
|
Scrap value
|
1000
|
2000
|
The
profit before depreciation and after taxes (cash flows) are as follows
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
Project X
|
5000
|
10000
|
10000
|
3000
|
2000
|
Project Y
|
20000
|
10000
|
5000
|
3000
|
2000
|
Year
|
1
|
2
|
3
|
4
|
5
|
PV of Rs 1 @10 % (Discount Factor)
|
.909
|
.826
|
.751
|
.683
|
.621
|
18. Cash inflows of a certain projects along with cash outflows are
given below.
Year
|
Outflow
|
Inflow
|
PV
@10%
|
0
|
1,50,000
|
-
|
1
|
1
|
30,000
|
20,000
|
.909
|
2
|
-
|
30,000
|
.826
|
3
|
-
|
60,000
|
.751
|
4
|
-
|
80,000
|
.683
|
5
|
-
|
30,000
|
.620
|
The salvage value at the end
of the 5th year is 40,000. Assuming a discount rate of 10% calculate
NPV.
19. A
Ltd is considering an investment proposal. The cost of the project is Rs:1
lakhs. It has estimated working life of 5 years with zero salvage value. The profit before depreciation are expected
to be Rs:30000, Rs:30000, Rs:25000, Rs:25000 and Rs:20000 respectively. The tax
rate is 50%. It is the policy of the company to provide depreciation under WDV.
Evaluate
the project using;
(a)
Payback period
(b)
ARR method
20. A
company is considering an investment in a project that costs Rs:2 lakhs. The
project has an expected life of 5 years and Zero salvage value. The company
uses straight line method of depreciation. The companies tax rate is 40%. The
estimated earnings before depreciation and before tax from the project are as
follows.
Year
|
Earnings before Dep and
tax
|
PV factor @10%
|
1
|
70,000
|
.909
|
2
|
80,000
|
.826
|
3
|
1,20,000
|
.751
|
4
|
90,000
|
.683
|
5
|
60,000
|
.621
|
You
are required to calculate the NPV @10% and advice the company.
21. A
company is considering an investment in a project that costs Rs:2 lakhs. The
project has an expected life of 5 years and Zero salvage value. The company
uses straight line method of depreciation. The companies tax rate is 40%. The
estimated earnings before depreciation and before tax from the project are as
follows.
Year
|
Earnings before Dep and
tax
|
PV factor @10%
|
1
|
70,000
|
.909
|
2
|
80,000
|
.826
|
3
|
1,20,000
|
.751
|
4
|
90,000
|
.683
|
5
|
60,000
|
.621
|
22.
You are required to
calculate the NPV @10% and advice the company
23.From the following information calculate the net present value of the two projects and suggest which of the two projects should be accepted assuming a
discount rate of 10%.
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 after taxes but before depreciation
(cash flows)
are
as follows:
Year 1
|
Year2
|
Year 3
|
Year 4
|
Year 5
|
|
Project X(Rs.)
|
5000
|
10000
|
10000
|
3000
|
2000
|
Project y (Rs.)
|
20000
|
10000
|
5000
|
3000
|
2000
|
Note
: Present value interest factors at 10% interest rate are 0.909, 0.826, 0.751, 0.683and 0.621 respectively for
five years.
24.
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