Aug 2024 ESE FM questions
[Link] the importance of considering a company ‘s future growth prospects when valuing its shares.
[Link] the potential consequences of poor financial management for a business. How can effective
financial management contribute to a company ‘s success?
3.A company is considering issuing a large amount of debt to finance expansion. Explain the potential
benefits and drawbacks of this financing strategy on their capital structure
[Link] company is considering two investment projects with similar expected returns. However, one
project requires a significantly higher initial amount. Explain how capital rationing might influence the
company’s decision-making process in this scenario.
[Link] explain the concept of working capital financing and its importance for business.
6.A company has a high debt-equity ratio. Explain how this financial leverage might influence their
dividend policy and why they might choose a lower payout ratio compared to a company with a lower
debt burden.
[Link] how Walter’s model explains the relationship between dividend policy and a firm ‘s market
value. Use the model to illustrate how high and low dividend payout ratios can affect the value of a
firm.
[Link] how the credit rating of an issuer can impact the valuation of its debentures. What might
happen to the debenture's market value if the issuer ‘s credit rating is downgraded?
[Link] you are a financial consultant. Design a framework for a comprehensive financial
management system for a company. Identify the key tools and techniques you would recommend for
each stage of the financial management process (e.g. Planning, budgeting, monitoring ). Explain the
importance of each tool.
The financial manager of a company has formulated various financial plans to finance Rs. 30,00,000
required to implement various capital budgeting projects.
i. Either equity capital of Rs. 30,00,000 or Rs. 15,00,000 10% debentures and Rs. 15,00,000 equity.
ii. Either Equity capital of Rs. 30,00,000 or 13% preference shares of Rs. 10,00,000 and Rs. 20,00,000
equity.
[Link] are required to determine the indifference point for each financial plan, assuming 35%
corporate tax rate and the face value of equity shares as Rs.100.
Sunshine Bakery is a well-established bakery chain considering opening new locations. They need to
determine the project s viability and choose the best financing strategy.
[Link] are a consultant for a company that sells a wide variety of products with varying costs and sales
volumes. Design a framework for combining ABC analysis and EOQ analysis for their inventory
management strategy. Explain how you would classify items using ABC analysis and then determine
optimal order quantities for each category using EOQ.
12.A company is considering a new credit policy with more lenient credit terms to attract new
customers.
[Link] how this change might ffect the size of their accounts receivable and the potential impact on
cash flow.
[Link] a dividend policy for a fintech corporation based on the hypothetical financial details
and strategic goals . justify your recommendation by comparing the different dividend options and
considering the company s growth prospects and financial stability
[Link] are a financial analyst for two companies in the same industry , company A has a high internal
rate of return (r) and low debt levels , while company B has a lower r and higher debt . Analyze how
walter s model would suggest different optimal dividend payment policies for these two companies .
Explain your reasoning.
[Link] are required to determine the Weighted Average Cost of Capital of ABC ltd.
Using i) Book Value Weight ii) Market value weights . The following information is available for your
perusal
The present book value capital structure of the company is
Debenture (Rs. 100 per debenture) 8,00,000
Preference shares (Rs. 100 per share ) 20,00,000
Equity share capital Rs. 10,00,000 (Rs. 10 each)
Anticipated external financing opportunities are
i) Rs 100 per debenture redeemable at par : 20 year maturity , 8 % coupon rate , 4 % floatation cost ,
Sales price Rs. 100
ii) Rs. 100 of preference shares redeemable at par : 15 year maturity , 10% dividend rate , 5% floatation
costs , and Sales Price Rs.100
iii) Equity shares : Rs 2 per share floatation costs , Sales price Rs.22, (Assume that the market price of
share is Rs. 22)
Dividend expected on the equity share at the end of the year is Rs. 2 per share, the anticipated growth
rate in dividend is 5 % and the company has the practice of paying all it ‘s earning in the form of
dividends . The corporate tax rate is 50%.
2023 fm questions
.What are financial goals?
What are perpetual bonds? How the value of perpetual bond is determined?
Calculate operating leverage for Maruti Itd from the following information:
No. of units produced Rs50,000, selling price per unit Rs50, Variable cost per unit Rs.20, Fixed cost
per unit at current level of sales Rs.15. What will be the new operating leverage, if the variable cost is
Rs.30 per unit?
Distinguish book value weights vs market value weights.
State the objectives of inventory management.
Mention the sources of working capital.
The following data relate to J Itd. EPS Rs.4. Retention ratio (b) 25%; capitalization rate (k) 15%. Rate
of return 20%. Determine the market price per share under the Gordons model.
What are the basic financial decisions? How do they involve risk-return trade-offs?
"There is nothing like an optimum capital structure for a firm". Critically examine this statement.
A company needs Rs.6, 00,000 for the construction of a new firm. The following three financial plans
are feasible.
1. The company may issue 60,000 equity shares of Rs. 100 each 2. The company may issue 30,000
equity shares of Rs. 10 each and 3,000 debentures of Rs.100 each bearing 8% coupon rate of interest.
3. The company may issue 30,000 equity shares of Rs10 each and 3,000 preference shares of Rs.100
each bearing8% rate of dividend.
4. The profit before interest and taxes is expected to be Rs.1, 50,000. The corporate tax rate is 50%.
5. Calculate the EPS under three plans. Which plan you
recommend and why?
Why debt is regarded as the cheapest source of finance for a profit-making firm? - Discuss.
Bharath Ltd. has Rs.2, 00,000 to invest. The following proposals are under consideration. The cost of
capital of the company is estimated to be 15%.
Project Initial Outlay Cash inflows Life (years)
A 1,00,000 25,000 10
B 70,000 20,000 8
C 30,000 6,000 20
D 50,000 15,000 10
Rank the project on the basis of:
1. Net present value method 2. Profitability index method 2. P.V. of Annuity of Re. I received
discounted at 15% is given
below
3. 8 years-4.487, 10 years 5.019, 20 years 6.259
From the following information extracted from the books of
manufacturing company, Compute the operating cycle in days and the amount of working capital
required:
[Link] covered 365 days
2. Average period of credit allowed by suppliers 16 days
[Link] total of debtors outstanding 480 [Link] material consumption 4,400
[Link] production cost 10,000
6. Total cost of sales 10,500.
[Link] for the year 16,000
[Link] of average stock maintained
Raw material 320
WIP 350
Finished goods 260
Days of Inventory (DOI):
Modern enterprises require 90,000 units of a certain item annually. It costs Rs.3 per unit. The cost per
purchase order is Rs.300 and the inventory carrying cost is 20% per year.
1. What is the Economic order quantity, if there is no quantity discount?
2. What should the firm do if the supplier offers discounts as follows, viz
Order Quantity Discount (%)
4500-5999 2
6000 and above 3
Examine the features of Walter's model and Gordon's model.
From the following particulars of capital structure of a company, you are required to calculate the
overall cost of capital:
800 8% debentures of Rs1000 each issued at par Rs 800000
2000 9% preference shares of Rs100 each at par Rs.200000
1000 equity shares of Rs 100 at par Rs 100000
New debenture can be sold at par at 10% interest rate. Preference shares will have a 12% dividend rate
and can be sold at par. Equity shares can be sold, to net Rs.90 per share. The shareholders required rate
of return is 8% which is expected to grow at 4%. Retained earnings for the year are estimated to be
Rs.1, 00,000. The company is planning to expand its business accordingly and the company tax rate is
50%. Determine the cost of each source of capital.
Arrear fm questions
Discuss the relationship of financial management to economics and accounting .
Why finance is very important for the organization state with suitable examples.
What is capital gearing and trading on equity?
Distinguish between NPV and IRR of method in capital budgeting.
Mention the sources of working capital .
Write short notes on ABC ,VED and EOQ analysis
Explain how MM hypothesis of dividend policy evolved.
Explain why the variance of a well-diversified portfolio is largely determined by the covariance terms.
MC ltd is planning an expansion programme which will require Rs. 30 cr and can be funde4d through
one of three following options :
1. Issue further equity share of Rs.100 each at par.
2. Raise Loans at 15% interest
3. Issue Preference shares at 12 %
Present paid up capital is Rs. 60 cr and average annual EBIT Rs. 12 cr . assume IT rate at 50 % . After
the expansion , EBITis expected to be Rs. 15 cr per annum. Calculate the EPS under the three
financing options indicating the alternative giving the highest return to the equity shareholders.
Calculate the degree of operating leverage , Financial leverage and combined leverage for the
following firms and interpret the results.
P Q R
Output (units) 3,00,000 75,000 5,00,000
Fixed Cost(Rs) 3,50,000 7,00,000 75,000
Unit Variable Cost 1.00 7.50 0.10
Interest expenses 25,000 40,000 nil
Selling Price 3 25 0.50
How is Weighted Average Cost of Capital calculated ? What weights should be used in its
calculations?
Equipment A has a cost of Rs. 75,000 and net cash flow of Rs.20,000 per year. A substitute equipment
B would cost of Rs. 50,000 and generate net cash flow of Rs. 14,000per year for 6 years. The required
rate of return of both equipment is11 %. Calculate the IRR and NPV for the equipment. Which
equipment should be accepted and why ?
Analyze the methods of measurements of working capital.
From the following particular compute
1. Number of operating cycle periods and number of operating cycle in a year.
2. The amount of Working Capital required in a year.
3. The period covered 360 days
4. The average period allowed by suppliers 30 days
5. The average period allowed debtors 45 days
6. Raw materials consumed during the year Rs. 6,00,000
7. average stock of raw materials Rs. 50,000
8. Work in progress inventory Rs. 5,00,000
9. Average work-in-progress inventory Rs. 30,000
10. Finished Goods inventory Rs. 8,00,000
11. Average finished goods stock holds Rs. 40,000
12. Total Cost of sales Rs. 8,40,000
Operating Cycle (in days)=Raw Materials Holding Period+Work-in-Progress Holding Period+Finished
Goods Holding Period+Debtors Collection Period
What is the MM dividend irrelevance hypothesis? Critically evaluate its assumptions.
A choice has to be made between two comparing projects which require an initial investment of Rs.
5,00,000 and are expected to generate net cash flows as under :
Particulars Project A Project B
Initial cash outlay 5,00,000 5,00,000
Cash inflows
1st year 3,00,000 50,000
2 nd year 2,00,000 1,50,000
3rd year 1,00,000 2,00,000
4th year 50,000 3,00,000
5th year 50,000 3,50,000
[Link] Present Value Method (Assume k= 10%)
2. Payback period
[Link] Cost Ratio
4. Accounting Rate of Return