Question Bank

Financial Management
BCB402
Module -1
1. What is Financial Management? Discuss its importance.
2. Explain the three major decisions as functions of finance.
3. Briefly explain the three key activities of the financial manager.
4. Distinguish between Profit maximization and Wealth maximization objectives of a
firm.
5. “Financial goal of a firm should be to maximise value of wealth.” Explain.
6. Express the two important issues, economic value added and focus on stakeholders
related to the value/share price-maximization.
7. Explain the two approaches, Profit/EPS Maximization Decision Criterion and Wealth
Maximization Decision Criterion. Describe the basic reasons why profit/EPS
maximization fails to be consistent with wealth maximization as the financial
objective of a business firm.
8. “Financial management is nothing but managerial decision making in asset mix,
capital mix and profit allocation.” Explain.
9. Describe Finance, Financial Services and Financial Managers.
10. Explain the responsibilities of a Financial Manager.
Module-2
1. Why does money have time value?
2. An investor deposits Rs. 10000 in a bank account for 5 years at 8% interest. Calculate
the amount which he will have in his account if interest is compounded i) annually ii)
semi-annually iii) quarterly and iv) continuously.
3. If you invest ₹ 5,000 today at a compound interest of 9 percent, what will be its future
value after 75 years?
4. Calculate the present value of Rs. 50000 receivable after 8 years if the rate of discount
is i)10 percent ii)12 percent iii)15 percent
5. Mr. Sanjay plans to send his son for higher studies abroad after 10 years. He expects
the cost of these studies to be ₹ 1,000,000. Calculate how much he should save
annually to have a sum of ₹ 1000,000 at the end of 10 years, if the interest rate is 12
percent.
6. A borrower offers 16 percent nominal rate of interest with quarterly compounding.
What is the effective rate of interest?
7. What is an annuity? What is the difference between an ordinary annuity and an
annuity due?
8. If the interest rate is 12 percent, calculate the doubling periods as per the rule of 72
and the rule of 69 respectively.
9. A finance company advertises that it will pay a lump sum of ₹ 44,650 at the end of
five years to investors who deposit annually ₹ 6,000 for 5 years. What is the interest
rate implicit in this offer?
 10. As a winner of a competition, you can choose one of the following prizes: i) Rs.
500,000 now ii) Rs. 1,000,000 at the end of 6 years iii) Rs. 60,000 a year forever iv)
Rs. 100,000 per year for 10 years. If the interest rate is 10 percent, determine which
prize has the highest value.
11. What is the present value of ₹ 1,000,000 receivable 60 years from now, if the
discount rate is 10 percent?
12. You want to take a world tour which costs Rs. 1,000,000, the cost is expected to
remain unchanged in nominal terms. You are willing to save annually Rs. 80,000 to
fulfill your desire. Calculate how long you will have to wait if your savings earn a
return of 14 percent per annum.
13. Mahima deposits Rs. 200,000 in a bank account which pays 10 percent interest.
Calculate how much she can withdraw annually for a period of 15 years.
14. A 12 – payment annuity of ₹ 10,000 will begin 8 years hence. (The first payment
occurs at the end of 8 years). What is the present value of this annuity if the discount
rate is 14 percent?
15. Shriya promises to give you Rs. 5,000 after 10 years in exchange for Rs. 1,000 today.
Calculate the interest rate implicit in this offer.
Module-3
1. Explain the nature of capital budgeting decisions. Express the importance of such
decisions for a business enterprise.
2. What is profitability index. Is it better criterion than net present value.
3. A company is considering which of two mutually exclusive project it should
undertake. The company anticipates a cost of capital of 10% and net after tax cash
flows of the project are as follows:
Year 0 1 2 3 4 5
Project X (Rs ‘000) 210 40 80 90 75 25
Project Y (Rs ‘000) 210 222 10 10 6 6
Calculate the NPV and PI of each project. Infer with reasons which project you would
recommend.

4. Evaluate the accounting rate of return method of assessing capital budgeting

6. Explain the following techniques of capital budgeting with their respective merits and
demerits: i) Payback method ii) Net present value iii) Accounting rate of return iv)
Internal rate of return
7. A company is considering an investment proposal to install new milling controls at a
cost of Rs.50000. The facility has a life expectancy of 5 years and no salvage value.
The tax rate is 35 per cent. Assume the firm uses straight line depreciation and the
same is allowed for tax purposes. The estimated cash flows before depreciation and
tax (CFBT) from the investment proposal are as follows:
Year CFBT
1 Rs. 10000
2 Rs. 10692
3 Rs. 12769
4 Rs. 13642
5 Rs. 20385
Calculate the following: i) Average rate of return ii) Internal rate of return iii) Net present
value at 10 percent discount rate.

8. A project costing Rs. 560000 is expected to purchase annual net profits of Rs. 80000
over a period of 15 years. Estimate the IRR. Also find the payback period and obtain
the IRR from it.
9. Tata Co. is considering replacement of existing machine which is obsolete and unable
to meet rapidly rising demand for its product. The company is faced with two
alternatives: i) To buy machine M1 which is similar to the existing machine or ii) To
go for machine M2 which is more expensive and has much greater capacity. The
cashflows at the present level of operations under the two alternatives are as follows:
Cashflows (in lakh of rupees) at the end of year:
Year 0 1 2 3 4 5
Machine M1 (-)25 - 5 20 14 14
Machine M2 (-)40 10 14 16 17 15
The company’s cost of capital is 10%. The Finance manager tries to evaluate machines by
calculating the following: i) Net present value ii) Profitability index iii) Payback period. At
the end of his calculations, however the finance manager is unable to make up his mind as to
which machine to recommend. You are required to make these calculations and in the light of
thereof to advise finance manager about the proposed investment.
10. The expected cash flows of a project are as follows: Year Cash flow 0 − 100,000 1
20,000 2 30,000 3 40,000 4 50,000 5 30,000 The cost of capital is 12 percent.
Calculate the following: (a) net present value, (b) benefit-cost ratio, (c) internal rate of
return, (d) modified internal rate of return, (e) payback period, and (f) discounted
payback period.
11. Your company is considering two mutually exclusive projects, A and B. Project A
involves an outlay of ₹ 100 million which will generate an expected cash inflow of ₹
25 million per year for 6 years. Project B calls for an outlay of ₹ 50 million which
will produce an expected cash inflow of ₹ 13 million per year for 6 years. The
company’s cost of capital is 12 percent. Calculate the NPV and IRR of each project.
What is the NPV and IRR of the differential project (project A over B)?
12. Sulabh International is evaluating a project whose expected cash flows are as follows:
Year Cash flow (₹)
0 −1000,000
1 100,000
2 200,000
3 300,000
4 600,000
5 300,000
What is the NPV of the project, if the discount rate is 14 percent for the entire period?
What is the NPV of the project if the discount rate is 12 percent for year 1 and rises
every year by 1 percent?
Module-4
1. What are the three steps involved in calculating a firm’s WACC?
2. Discuss the following bases for determining the proportions (or weights) in the WACC
calculation: book values, target capital structure, and market values.
3. Abascus Limited issued 15 year, 14 percent bonds five years ago The bond which has a
face value of Rs. 100 is currently selling for Rs. 108. Calculate the pre-tax and the after-tax
cost of debt. (Assume a 35 percent tax rate)
4. Discuss the application of CAPM to the calculation of cost of equity.
5. Omega Enterprises issued 10 year, 9 percent preference shares four years ago. The
preference share which has a face value of Rs. 100 is currently selling for Rs. 92. Calculate
the cost of preference shares.
6. Explain the factors affecting the weighted average cost of capital.
7. Discuss on the common misconceptions surrounding cost of capital in practice and
measures to dispel them.
8. Suman Corporation manufactures speciality chemicals. Its debt-equity ratio is 0.8. Its
WACC is 15 percent and its tax rate is 30 percent. If Suman’s cost of equity is 20 percent,
calculate its pre-tax cost of debt. If Suman can issue debt at an interest rate of 13 percent,
calculate its cost of equity.
9. Rao Corporation has a target capital structure of 60 percent equity and 40 percent debt. Its
cost of equity is 18 percent and its pre-tax cost of debt is 13 percent. If the relevant tax rate is
35 percent, calculate Rao Corporation’s WACC?
10. Explain the procedure for determining the weighted marginal cost of capital.
11. The capital structure of Adamus Ltd. in book value terms is as follows: Equity capital (20
million shares, ₹ 10 par) ₹ 200 million Preference capital, 12 percent (500,000 shares, ₹ 100
par) ₹ 50 million Retained earnings ₹ 350 million Debentures 14 percent (1,200,000
debentures, ₹ 100 par) ₹ 120 million Term loans, 13 percent ₹ 80 million ₹ 800 million The
next expected dividend per share is ₹ 2.00. The dividend per share is expected to grow at the
rate of 12 percent. The market price per share is ₹ 50.00. Preference stock, redeemable after
10 years, is currently selling for ₹ 85.00 per share. Debentures, redeemable after 5 years, are
selling for ₹ 90.00 per debenture. The tax rate for the company is 30 percent. Calculate the
average cost of capital
12. Amit Electronics is evaluating an expansion project that is expected to cost ₹ 20 million
and generate an annual after-tax cash flow of ₹ 4 million for the next 10 years. The tax rate
for the company is 35 percent. Amit Electronics has a target debt-equity ratio of 1:1. Its cost
of equity is 16.9 percent whereas its pre-tax cost of debt is 14 percent. The floatation cost of
equity is 12 percent whereas the floatation cost of debt is 2 percent. What is the NPV of the
expansion project?

Module-5
1. How do various instruments of long-term financing compare?
2. Discuss the important features of term loans in India.
3. Discuss the advantages and disadvantages of equity capital.
4. Describe working capital management.
5. Explain the concepts of working capital.
6. Explain the determinants of working capital.
7. Discuss on the factors considered by suppliers for granting trade credit.
8. Explain the various sources of finance which support current assets.
9. Discuss the salient features of debentures.
10. Discuss the advantages and disadvantages of preference capital.
11. Explain the need for working capital.
12. Distinguish between permanent working capital and fluctuating working capital.
13. Explain the factors examined by a bank while processing an application for working
capital advance.
14. Discuss on accruals.
15. Explain the nature of working capital
16. Explain the need for working capital.