HT TP: //qpa Pe R.W But .Ac .In: 2010-11 Financial Management

Name : ……………………………………………………………
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Roll No. : ………………………………………………………..
Invigilator’s Signature : ………………………………………..
CS/MBA (NEW)/SEM-3(PT)/MB-207/2010-11
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2010-11
FINANCIAL MANAGEMENT
Time Allotted : 3 Hours Full Marks : 70
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The figures in the margin indicate full marks.
Candidates are required to give their answers in their own words
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as far as practicable.
GROUP – A
( Multiple Choice Type Questions )
1. Choose the correct alternatives for any ten of the following :
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10 × 1 = 10
i) When coupon interest rate is less than required yield, it

is called
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a) premium bond b) discount bond
c) par value bond d) none of these.

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ii) Which of the following statements is correct in relation

to the theory of cost of capital ?
a) Business risk is assumed to be constant

a c.
b) Financial risk is assumed to be constant
c) Both (a) and (b)

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d) None of these.
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iii) Working capital is affected by

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a) production policy of the firm
b) credit policy of the firm
c) production cycle of the firm
d) all of these.
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iv) Operating cycle increases with the
a) increase in time lag between sale of goods and the
receipt of cash
b) decrease in time lag between sale of goods and the
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receipt of cash
c) introduction of efficient production system
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d) providing more incentive for paying within smaller
credit period.
v) Current yield of 10 years, 12% coupon bond with a par
value of Rs. 1000 and selling for Rs. 950 is
a) 13·62%
b) 12·63%
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c) 12%
d) 13%
e) none of these.
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vi) For a normal business organization

a) Kd > Ke b) Kd < Ke
c) Kd = Ke d) None of these.
vii) A project is financially viable if its
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! a) IRR > K o ! b) IRR < K o

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c) NPV < 0 d) PI <1.
viii) Commercial paper is essentially
! !
a c.
a) another term for a junk bond

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b) a short-term unsecured corporate IOU
c) an intermediate-term corporate bond
d) a certificate that may be exchanged for a share of
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common stock at a specified future date.
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ix) An increase in the firm’s receivable turnover ratio

means that
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a) it is collecting credit sales more quickly than before
b) cash sales have decreased
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c) it has initiated more liberal credit terms
d) inventories have increased.
x) A profitability index of 0·85 for a project means that
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a) the present value of benefits is 85% greater than
the project’s costs
b) the project’s NPV is greater than zero
pap
c) the project returns 85 paise in present value for

each current rupee invested
d) the payback period is less than one year.
xi) A firm’s degree of operating leverage (DOL) depends

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primarily upon its

a) sales variability
b) level of fixed operating cost
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c) closeness to its operating break-even point
d) debt-to-equity ratio.
xii) A critical assumption of the net operating income (NOI)
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approach to valuation is
a) that debt and equity levels remain unchanged
b) that dividends increase at a constant rate
a c.
c) that K 0 remains constant regardless of changes in

leverage
d) that interest expense and taxes are included in the
! calculation.
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xiii) Which of the following is an argument for the relevance

of dividends ?
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a) Informational content
b) Reduction of uncertainty
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c) Some investors’ preference for current income
d) All of these.
GROUP – B
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( Short Answer Type Questions )
Answer any three of the following. 3 × 5 = 15
pap
2. In what respect is the objective of wealth maximization
superior to profit maximization ?
3. “PBP method is a test of liquidity and not profitability.”
Discuss.
4. Mr. Banerjee deposits each year Rs. 5,000 , Rs. 10,000,

er.
Rs. 15,000, Rs. 20,000 & Rs. 25,000 in his savings bank
account for 5 years at the interest rate of 6%. He wants to
know his future value of deposits at the end of 5 years.
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5. Briefly discuss the concept about ‘Optimum Capital

Structure.’
6. A company has the following features :
Earning per share for 1st year = Rs. 10/-

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Cost of capital = 10%
Rate of Return on Investment Scenario I-15% p.a.

a c.
Scenario II-10% p.a.
Scenario III-5% p.a.
Compute the price of each share if the pay-out ratio is

40% by using Walter’s model.
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GROUP – C
( Long Answer Type Questions )
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Answer any three of the following. 3 × 15 = 45
7. Define financial management ? What are the different

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functions of financial management ? How are these functions
interrelated with each other ? 3+7+5
8. XYZ Company has currently an equity share capital of

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Rs. 40 lakhs consisting of 40,000 equity shares of Rs. 100
each. The management is planning to raise another Rs. 30
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lakhs to finance a major program of expansion through one
of the four possible financing plans.
The options are as follow :
i) Entirety through equity shares.

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ii) Rs. 15 lakhs in equity shares of Rs. 100 each and the
balance in 8% Debentures.
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iii) Rs. 10 lakhs in equity shares of Rs. 100 each and the
balance through long-term borrowing at 9% interest p.a.
iv) Rs. 15 lakhs in equity shares of Rs. 100 each and the
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balance through preference shares with 5% dividend.
The company’s expected earning before interest and taxes

a c.
(EBIT) will be Rs. 15 lakhs. Assuming corporate tax of

50%, you are required to determine the EPS and comment on
the financial leverage that will be authorized under each of
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the above schemes of financing. 15
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9. From the following budget data, forecast the cash position at

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the end of April, May and June 2010. 15
Sales Purchase Wages Miscellaneous
Month
(Rs) (Rs) (Rs) (Rs)
February 1,20,000 84,000 10,000 7,000
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March 1,30,000 1,00,000 12,000 8,000
April 80,000 1,04,000 8,000 6,000
May 1,16,000 1,06,000 10,000 12,000
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June 88,000 80,000 8,000 6,000
Additional information :
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i) Sales : 20% realized in the month of sales, discount

allowed 2%. Balance realized equally in two subsequent
months.
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ii) Purchase : These are paid in the month following the

month of supply.
iii) Wages : 25% paid in the arrears following month.

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iv) Miscellaneous expenses : Paid a month in arrear.
v) Rent : Rs. 1,000 per month paid quarterly in advance

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due in April.
vi) Income tax : First installment of advance tax

Rs. 25,000 due on or before 15th June.
a c.
vii) Income from investments : Rs. 5,000 received quarterly,

in April, July etc.
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viii) Cash in hand : Rs. 5,000 on 1st April, 2010.
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10. a) Discuss the importance of Credit Period, Credit

Standard and Credit Policy.
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b) XYZ Co. currently has annual sales of Rs. 5,00,000 an
average collection period of 30 days. It is considering a
more liberal credit policy. If the credit period is
extended, the company expects sales and bad debts to
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increase in the following manner :
Credit Increase in credit Increase in salsas Bad debt % of Total
Policy periods (Rs.) Sales
A 10 days 25,000 1·2
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B 15 days 35,000 1·5
C 30 days 40,000 1·8
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The selling price per unit is Rs. 2. Average cost per unit
at the current level of operation is Rs. 1·50 and variable
cost per unit is Rs. 1·20. If the current bad debt loss is
1% of sales and required rate of return of investment is
20%, which credit policy should be undertaken ? Ignore
er.
taxes and assume 360 days in a year. 5 + 10
11. a) Explain how Miller-Modigliani analytically showed the

irrelevance of dividend decision in determining firm
value.
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b) A company has the following book value of capital

structure :
Securities Amount (Rs.) After Tax Cost
Equity Capital ( 15 lakhs share @ Rs. 100 ) 1,50,00,000 ?
ut .
10% Pref. Shares 50,00,000 10%

Retained Earnings 1,00,00,000 ?
13% Debentures 60,00,000 13%
a c.
Term Loan (12%) 70,00,000 12%
Expected dividend is Rs. 20·00 per share. The rate of

tax may be assumed at 50%. Calculate weighted
average cost. 7+8
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12. Write short notes on any three of the following : 3×5

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a) Risk-return relationship
b) Capital Rationing
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c) Permanent and variable working capital
d) Valuation of Common Stock

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e) Motive for holding cash.
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a c.
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Name : ……………………………………………………………

i) When coupon interest rate is less than required yield, it

a) premium bond b) discount bond

c) par value bond d) none of these.

ii) Which of the following statements is correct in relation

a) Business risk is assumed to be constant

b) Financial risk is assumed to be constant

c) Both (a) and (b)

16046 [ Turn over

iii) Working capital is affected by

vi) For a normal business organization

! a) IRR > K o ! b) IRR < K o

a) another term for a junk bond

common stock at a specified future date.

ix) An increase in the firm’s receivable turnover ratio

c) the project returns 85 paise in present value for

xi) A firm’s degree of operating leverage (DOL) depends

primarily upon its

c) closeness to its operating break-even point

c) that K 0 remains constant regardless of changes in

16046 3 [ Turn over

xiii) Which of the following is an argument for the relevance

4. Mr. Banerjee deposits each year Rs. 5,000 , Rs. 10,000,

5. Briefly discuss the concept about ‘Optimum Capital

6. A company has the following features :

Earning per share for 1st year = Rs. 10/-

Cost of capital = 10%

Rate of Return on Investment Scenario I-15% p.a.

Scenario II-10% p.a.

Scenario III-5% p.a.

Compute the price of each share if the pay-out ratio is

7. Define financial management ? What are the different

8. XYZ Company has currently an equity share capital of

The options are as follow :

i) Entirety through equity shares.

balance through preference shares with 5% dividend.

The company’s expected earning before interest and taxes

(EBIT) will be Rs. 15 lakhs. Assuming corporate tax of

the above schemes of financing. 15

16046 5 [ Turn over

9. From the following budget data, forecast the cash position at

i) Sales : 20% realized in the month of sales, discount

ii) Purchase : These are paid in the month following the

iii) Wages : 25% paid in the arrears following month.

iv) Miscellaneous expenses : Paid a month in arrear.

v) Rent : Rs. 1,000 per month paid quarterly in advance

vi) Income tax : First installment of advance tax

vii) Income from investments : Rs. 5,000 received quarterly,

viii) Cash in hand : Rs. 5,000 on 1st April, 2010.

10. a) Discuss the importance of Credit Period, Credit

taxes and assume 360 days in a year. 5 + 10

11. a) Explain how Miller-Modigliani analytically showed the

b) A company has the following book value of capital

10% Pref. Shares 50,00,000 10%

Term Loan (12%) 70,00,000 12%

Expected dividend is Rs. 20·00 per share. The rate of

16046 7 [ Turn over

12. Write short notes on any three of the following : 3×5