Bcom 5th sem Core- 12
🧾 FUNDAMENTALS OF FINANCIAL MANAGEMENT (2024)
Full Marks: 80 | Time: 3 Hours
PART – I (Fill in the blanks)
(1 mark each)
(a) Profit maximization objective ignores time value of money.
(b) The value of an entity is measured in terms of the market value of its shares.
(c) When the cash flows occur at the end of each period, the annuity is called ordinary
annuity.
(d) Financial risk is associated with the capital structure of the company.
(e) There is always a direct relationship between risk and return.
(f) The effective cost of debenture is less as compared to shares.
(g) Right issue does not cause dilution of ownership.
(h) Equity shares are known as ownership capital.
(i) Cost of capital is the minimum rate of return expected by investors.
(j) Capital budgeting is also known as investment decision.
(k) Dividend is the distribution of profits of a company among its shareholders.
(l) The rate of return on investment decreases with shortage of working capital.
PART – II (Answer any 8 – 2 marks each)
1. Wealth Maximization:
It refers to maximizing the net present value of a company’s future cash flows to
increase shareholders’ wealth.
2. Finance Function:
It involves raising, managing, and utilizing funds efficiently to achieve business
objectives.
3. Concept of Time Value of Money:
A rupee today is worth more than a rupee in future due to its earning capacity and
inflation.
4. Discounting:
Process of determining the present value of future cash inflows using a discount rate.
5. Preference Share:
A type of share which has fixed dividend and preference over equity in profit distribution
and repayment.
6. Ploughing Back of Profits:
Retaining part of profits for reinvestment instead of distributing it as dividend.
7. Capital Budgeting:
Evaluation and selection of long-term investment projects.
8. Payout Ratio of Dividend:
The proportion of earnings paid as dividends —
1. Aggressive Working Capital:
When a firm maintains lower current assets compared to sales, leading to higher risk and
profitability.
2. Scrip Dividend:
Dividend paid in the form of shares instead of cash.
PART – III (Answer any 8 – 3 marks each)
1. Scopes of Financial Management:
Investment decisions
Financing decisions
Dividend decisions
Working capital management
Financial control and planning
2. Risk–Return Trade-Off:
Higher returns come with higher risks. Investors must balance expected returns with
acceptable risk levels.
3. Techniques of Time Value of Money:
Compounding
Discounting
Present value and future value calculations
Annuity valuation
4. Retained Earnings:
Portion of net profit kept for future expansion instead of dividend distribution. It is an
internal source of finance.
5. Convertible Debentures:
Debt instruments that can be converted into equity shares after a specific period.
6. Marginal Cost of Capital:
Additional cost of obtaining one more unit of capital. It helps in evaluating new financing
options.
7. NPV vs IRR:
NPV: Difference between PV of inflows & outflows.
IRR: Discount rate that makes NPV = 0.
NPV assumes reinvestment at cost of capital; IRR assumes reinvestment at IRR.
8. Sources of Bonus Issue:
Capital redemption reserve
Securities premium
General reserve
Profit & loss account
9. Dangers of Excess Working Capital:
Idle funds, low profitability
Misuse of resources
Poor credit management
10. Sources of Finance:
Short-term: Trade credit, bank loans
Long-term: Equity, debentures, retained earnings
PART – IV (Answer all – 7 marks each)
Q4. Examine the functions of Chief Financial Officer (CFO) in a large-scale corporate
establishment.
Functions of CFO:
1. Financial Planning: Forecasting capital needs and preparing financial budgets.
2. Capital Structure Decision: Selecting suitable mix of debt and equity.
3. Investment Decisions: Evaluating and approving long-term projects.
4. Dividend Decisions: Framing dividend policies and payout ratios.
5. Financial Reporting: Ensuring accuracy in statements and compliance with accounting
standards.
6. Working Capital Management: Monitoring liquidity, cash, receivables, and inventory.
7. Risk Management: Identifying and mitigating financial and operational risks.
8. Coordination with Departments: Ensuring alignment of finance with corporate goals.
OR (Short Notes – 250 words total)
(a) Annuity:
A series of equal payments made at regular intervals. Types:
Ordinary Annuity: Payments at end of each period.
Annuity Due: Payments at beginning of each period.
Used in loan amortization and pension valuation.
(b) Compounding and Discounting:
Compounding: Determining future value of current amount.
Discounting: Finding present value of future cash flows.
Q5. Short-term and Long-term Sources of Finance
Short-term Sources:
Trade credit
Bank overdraft
Bills discounting
Short-term loans
Long-term Sources:
Equity shares
Preference shares
Debentures
Retained earnings
Equity as a Source of Long-term Finance:
Permanent capital; no repayment obligation.
Provides ownership rights.
High risk but no fixed cost.
Strengthens capital base.
OR – Weighted Average Cost of Capital (WACC)
Source of Finance Amount (₹) Cost (%) Weighted Cost
Debt 75,000 9 6,750
Equity Share 1,12,500 18 20,250
Capital
Preference Share 2,50,000 11 27,500
Capital
Total Capital = ₹4,37,500
Total Weighted Cost = ₹54,500
Q6. Principles and Process of Capital Budgeting
Principles:
1. Evaluate cash flows, not accounting profits.
2. Consider time value of money.
3. Compare risk and return.
4. Rank projects on profitability.
Process:
1. Identification of Projects
2. Screening and Evaluation (NPV, IRR, Payback)
3. Selection and Approval
4. Implementation
5. Performance Review
OR – Dividend & Factors Influencing Policy
Dividend: Portion of profit distributed to shareholders.
Factors Influencing Policy:
1. Earnings stability
2. Liquidity position
3. Shareholder preference
4. Legal restrictions
5. Growth opportunities
6. Taxation policy
7. Control considerations
Q7. Working Capital – Definition, Need, Determinants
Definition:
Difference between current assets and current liabilities.
Need:
To ensure smooth operations, meet short-term obligations, and maintain liquidity.
Determinants:
1. Nature of business
2. Production cycle
3. Credit policy
4. Market demand
5. Seasonal factors
OR (Short Notes)
(a) Working Capital Cycle:
The time between purchase of raw materials and realization of cash from sales.
Steps: Cash → Inventory → Debtors → Cash.
(b) Types of Working Capital:
Permanent Working Capital: Minimum level always maintained.
Temporary Working Capital: Extra capital for seasonal or special needs.