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Financial Management

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Financial Management QUESTION BANK

                                                              Financial Management question bank 

Repeated questions for all indian universities



Q.1 Define the term Financial Management. What are the characteristics of Financial Management?

Q.2 Explain the basic characteristics of a sound financial plan?

Q.3 Explain EBIT-EPS analysis and the methods determining indifference level of EBIT.

Q.4 Discuss the assumptions of MM Hypothesis and the criticism of this hypothesis

Q. 5. How would you measure the cost of capital in making investment decision?


How is the cost of different types of capital measured? Illustrate and explain.


How should a business firm compute the cost of long-term debt? Is debt financing always the cheapest mode of raising funds?

Q.6 Explain different theories of Capital structures with imaginary figures.

Q.7 Discuss the approaches to the Management of Working Capital.


Discuss the factors determining the working capital requirements.

Q.8 Explain in brief the provisions of Company Law relating to them and the guidelines issued by the Controller of Capital Issues in respect of them.

Q.9 Both over-capitalisation and under-capitalisation are harmful to the financial interest of a corporation." Discuss.


Write short note on `Effects of under-capitalisation.'


"In industries over-capitalisation is as dangerous as under capitalisation". Discuss.

Q.10 �The need for maintaining case balance arises form the non-synchronization of the inflows of cash. Elucidate the statement. Also point out the role of shout costs in determining the cash needs.

Q.11 Wealth maximisation is only a decision criterion and not a goal." Explain.

Q.12 Discuss the relationship between leverage and cost of capital s per the net income approach. How is it different form net operating income approach?

Q.13 What are the five traditional Cs the Finance Manager might consider in evaluating the credit worthiness of a potential customer?

Q.14 Explain and illustrate Arbitrage Process of MM theory of Capital structure.

Q.15 The key argument of Walter�s Model is the a firm would have an optimum dividend policy. Comment and explain taking suitable illustration.

Q.16 What is `Capital Gearing' ? What are the effects of high aqd low gearing on the financial position of a company during the vafious phases of trade cycle ?


Illustrate the meaning and significance of `Gearing Ratio'. Discuss the effects of capital-gearing during trade cycles.


Write a short note on `Capital Gearing'.


What do you mean by Capital gearing or form of Capital ?

Q.17 "Changes in capital structure may be sought as a means of easing tension and giving a better opportunity to the corporation to pursue its purposes." In the light of this statement advocate readjustment in the capital structure of a business corporation.

Q.18 In what circumstances would you recommend debt-financing as against equity financing ? Outline a suitable debt-management policy of a firm whose objective is to Iron-out the fluctuations in the earning per share.

Q.19 . Discuss each of the following measures of company's gearing and state which in your opinion provides the best indicator

Q.20  What are the essentials of Gordon's model of dividend effect? Does dividend policy affect the value of the firm under Gordon's model?

Q.21 . Explain the Lintner's model of dividend. How does the study of Fama and Babiak substantiate the concept of dividend policy of Lintner?

Q.22. What is Modigliani-Miller's irrelevance hypothesis? Explain and evaluate it.

Q.23 Critically evaluate the assumptions of Modigliani-Miller's irrelevance hypothesis.

Q.24 Define operating and financial leverage from an economic and social standpoint. Is the use of financial leverage Justifiable ? Explain by listing some advantages and disadvantages.


Attempt a comprehensive note on types of leverage


Explain the concept of financial "leverage. What are the managerial limitations to leverage ? Explain.


Write short note on 'Financial leverage

Q.25 What is relationship between fixed costs and operating leverage ?

Q.26 Discuss the impact of leverage on earnings per share and dividend per share in various conditions. Explain the effect of leverage on market prices of shares also

Q.27 What is Modigliani-Miller approach to the problem of capital structure? Under what assumption do their conclusion hold good?


What are the different approaches to the problem of cost of capital ?


Do your agree with the view point that a firm�s capital structure does not affect its cost of capital? Given your argument for and against the view>


Briefly discuss the Modigliani �Miller approach abut cost of capital

Q.28 Explain the 'Discounted Cash Flow Methods' of evaluating capital investment proposals.


Explain the following 'Time Adjusted Techniques' of appraising capital projects :

  1. i. Net Present Value Method
  2. ii. Present Value Index Method
  3. iii. Internal Rate of Return Method


Explain the salient features of the present value Method of project evaluation and examine its rationality.


What is the distinguishing feature of  Present Value Technique over the other methods of investment appraisal ? is the former superior to the latter in all cases?

Q.29 Define risk and uncertainty. What are the various methods available for considering risk and uncertainty in capital budgeting decisions.

Q.30 Explain various methods used for evaluation fo Capital expenditure proposals. Bringing out their relative merits and demerits


Explain the various methods used for Evaluation of Capital


Mention the characteristics and the relative merits an demerit of the different Methods of Appraising Capital Investment proposal. Which method would you prefer and why?


Give a comprehensive description of Various Methods of  Ranking Investment proposals.

Q. 31. Explain clearly the Pay-back method of evaluating alternative capital requirement. What are the advantages and limitations of this method ?


Explain with the help of suitable illustrations the Pay back Criterion of Evaluation Investment Proposals.


Explain the concept of 'Payback Period'. Why does the Payback Period. Method has acquired such popularity among businessmen ? What are its limitations ?


"Since Payback Period does not really measure profitability at all, of what value is it in Capital Budgeting ?" Comment.


"Despite all limitations of the Method of Payback Period, It has still got significance in Project Approval" Explain.


"Payback Period Method of Project Evaluation is a test of liquidity and not profitability." Discuss.


Discuss the Payback Criterion of Investment Decisions. What are its strengths and weaknesses?

Q. 32. How is the `Average Rate of turn' on an investment determined ? What are the merits and demerits of the `Average Rate of

Return Method' ?


Discuss the "Rate of Return Method" of evaluating alternative capital requirement. What are itsadvantages and disadvantages ?

Q.33 What do you understand by Capital Structure of a corporation? Distinguish between Capitalisation and Capital structure. Discuss the basic qualities of a sound Capital structure.


What are the characteristics of a sound Capital structure?


What do you mean by capital structure ? Discuss the points one should bear in mind while designing a suitable Capital structure for a business.


Discuss the factors that should enter into designing an ideal capital structure of a Company.


"Types of securities issued by a corporation depends among other factors upon the nature of its business, the state of market and the classes of investors to whom it can appeal" Discuss.

Q.34 Discuss the Dividend Policy & Goals, its legal aspects.


Write down the factors affecting the dividend policy.


Discuss the significance of dividend policy in business decisions. How can dividend policy decision influence value of firm.

Q. 35. Discuss the Baumol Model and 1lillter-Orr Model of cash Management.

Q. 36 . Discuss the Technique or Process of Cash Management.

Q.37 Role of Financial Manager in a modern enterprise.

Q.38 Time Preference of Money.

Q.39 Factors affecting the dividend policy of a company

Q.40 What is an appropriate capital structure of a company? Explain

Q.41 Explain the role working capital Management as part of overall Financial Management.

Q.42 Factors affecting Capital Structure

Q.43 Is Profit Maximisation the sole objective of Financial Management? 

Q.44 Objectives of Cash Management.

Q.45 Meaning of Financial Risks

Q.46 Importance of Cost of Capital in Financial Decision-making. 

Q.47 Operating cycle.

Q.48 Risk and Return trade off.

Q.49 Wealth Maximisation.

Q.50 Adequacy of working capital

Q.51 cash budget

Q.52 lock box system

Q.53 Receivables Management.

Q. 54 the need for maintaining cash balance arises form the non synchronization of the inflows and outflows of cash, Elucidate the statement. Also poking out role of short costs in determining the cash needs.

Q.55 How should a business firm compute the cost of long term debt? Is debt financing always the cheapest mode of raising funds.

Q.1 X Ltd. has operating profit of Rs.8,60,000 and a fixed finance burden of Rs. 60,000. The company is subjected to income tax payment of Rs. 2,00,000. The company has 3,00,000 Equity shares of Rs. 30,00,000 and 18% Debentures of Rs. 3,12,500. The market price of Equity share is Rs. 12 find:

Q.2 SIP Corporation wishes o replace its existing machine. The following information is available:

Q.3 A firm has sales of Rs. 75,00,000 variable cost of Rs. 42,00,000 and fixed cost of Rs. 6,00,000. it has a debt of Rs. 45,00,000 at 9% and equity of Rs. 55,00,000.

Q.4 Form the following data compute the duration of the operating cycle for each of the two years and give reasons for the increase\decrease.

Q.5 From the following information prepare an estimate of working capital requirements:

Q.6  Companies U and L are  identical in every  respect except that U is unleveled while L has Rs. 20 lakh of 8% debt. EBIT of both firms is Rs. 6 lakh and tax rate is 35% Equity capitalisation rate for U is 10%

Q.7 D company currently has 10 lakh  equity shares outstanding. Current market price  per share is Rs. 150. the net income for the current years is Rs 150. The net income for the current year is Rs. 2 corer and investment budget is  Rs. 4 crore  Cost of equity is 12% . the company is contemplating declaration of  dividend @  Rs. 8 per share. Assuming M-M approach

Q.8 Equity share of A Ltd. is currently selling in the market at Rs. 100 Dividends paid in the last 5 years are Rs. 4.00 Rs. 4.25 Rs. 4.60 Rs.4.85 and Rs. 5.05. the  company wants to issue new equity shares and has been advised to piece them at Rs. 90 floatation costs alkali to be s. 8 per share. Calculate the growth rate cost of existing and new equity for the company.

Q.9 Equity share of P Ltd is currently priced at Rs. 60. Dividend Expected at eh end of one year form now s Rs. 6. cost of equity for companies of similar risk is 18%. What is the expected growth rats?

Q.10 From the following data, Calculate:

(i) Operating financial and combined leverage

(ii) Financial Break even point.

(iii) Percentage drop in sales to make the earnings per share zero.

Q.11 The following annual figures relate to  ABC Ltd.

Q.12 The management of Z Ltd. subscribes to the No. 1 approach and believes that its cost of debt and overall cost of capital will remain at 9% and 12% respectively. If the debt-equity ratio is 0.8, what is the cost of equity?

Q.13  The relevant information for XYZ Ltd. for the year ended 2004 is given below:


Q.14 Arvind Textile Mill currently has 10,00,000 shares of equity outstanding with a market price of Rs. 50 per share. It also has Rs. 4 crore in 12% bonds. The company is considering a Rs. 5 crore expansion programme that it can finance through:

Q.15 A companys share is quoted in the market at Rs. 40 currently. The company pays a dividend of Rs.2 per share and investos expect a growth rate of 10% per year. Compute:

Q.16 Pranshu Ltd. plans to sell 30,000 units next year. The expected cost of goods is as follows:

Q.17 XYZ company is considering replacement of its existing machine by anew machine which is expected to cost Rs. 1,60,000. The new machine will have a life of 5 years and will yield cash revenues of Rs. 2,50,000 and incur annual cash expenses of Rs. 1,30,000. The estimated salvage value of the new machine is nil. The existing machine has book value of Rs. 40,000 and can be sold for Rs. 20,000 today. It is good or next 5 years ad is estimated to generate annual cash revenue of Rs.2,00,000 and to involve annual cash expenses of Rs. 1,40,000. its salvage value after 5 years is zero. Corporate tax rate is 40% . Depreciation rate is 25% on W.D.V. method. The companys opportunity cost of capital is 20% .

Q.18  Surabhi Co. Ltd. Currently provides 36 days of credit to its customers. The present level of sales is Rs. 50 crores. The firms cost of capital is 10% and the ratio of variable cost of  sales is 0.80. The company is considering to extend its credit period to 72 days. Such an extension  likely to push sales by Rs. 5 crores. The bad debt proportion on additional sales.  Would be 8% . The company is under 40% tax bracket. Should the credit period be extended?

Q.19 The earnings per share of a company are Rs. 10. It has rate of return of 15% and the capitalisation rate of risk class is 12.5%. If Walters model is used:

Q.20 . A company believes that it is possible to increase sales if credit terms are relaxed. The profit plan, bases on the old credit terms, envisages projected sales at Rs. 10,00,000 a 30 percent profit volume ratio, fixed cost at Rs. 50,000  bad debts of 1.00 percent and an account receivable turn over ratio of 10 times

Q.21 Two firms X and Y are  identical in all respects including risk factors except for debt/equity. X has issued 10% debentures of Rs. 18 lakhs while Y has issued only equity both the firms earn 20% before interest and taxes on their total assets of  Rs. 30 lakhs.

Q.22 Use Walters modal to determine the value of the firm in 3 cases:

Q.23 Estimate the net working capital of Firm X on the basis of the given data:


Cost per units


Q.24  On the basis of the data given below calculate:

Q.25 Chandra Ltd. purchased a special machine one year ago at a cost of Rs. 12,000. At that time the machine was estimated to have a useful life of 6 years and no salvage value. The annual cash operating cost is approximately Rs. 20,000. A new machine has just come in the market which will do the same job but with an annual cash operating cost of only Rs. 17,000. The new machine costs Rs. 21,000 and has an estimated life of 5 years with zero salvage value. The old machine can be sold for Rs. 10,000 to a scrap dealer, straight line depreciation is used, and the company's income tax rate is 40 percent. Assuming a cost of capital of 8%, you are required to compute the incremental cash flows after taxes.

Q.26 The earning per share of Dig Ltd. for the past 10 years is given below:

Q.27 ABC Ltd. expects its cost of goods sold for 2000-2001 to be Rs. 600 lakhs. The expected operating cycle is 90 days. It wants to keep a minimum cash balance of Rs. one lakh. What is the expected working capital requirement ? Assume a year consists of 360 days.

Q.28 S Ltd. and T Ltd. are in the same risk class and are identical in all respects except that company S uses debt while company T does not use debt. The levered firm has Rs. 9,00,000 debentures carrying 10% rate of interest. Both the firms earn 20% operating profit on their total assets of Rs. 15 lakhs. The company is in the tax bracket of 35% and capitalisation rate of 15% on all equity shares.

Q.29 Raja Ltd. wants to replace its existing plant. It has received three mutu�ally exclusive proposals I, II and III. The plants under the three proposals are ex�pected to cost Rs. 2,50,000 each and have an estimated life of 5 years, 4 years and 3 years respectively. The company's required rate of return is 10%. The anticipated net cash inflows after taxes for the three plants are as follows:

Q.30 Amar Ltd. is evaluating two financing plans alpha and Beta. The revenant data about the plans are given below:

Q.31 AB Ltd. provides the following particulars relating to its working:

Q.32 M Ltd. is  considering  a major expansion of its  production facilities and want to raise Rs 50 lakhs for the purpose.  The following alternatives are available to raise the required amount:

Q.33  A company has issued 14% Rs. 100 each Preference shares aggregating Rs. 1,00,000 to be redeemed after 10 years. Floatation cost  around 5%. Determine the true cost of Preference shares.

Q.34  A firms earnings per share is Rs. 8 its cost of Equity is 15% its rate of  return on investment is 10%. What will be the market price of the firm�s share as per Walter�s model of dividend payout ratio is (i) 25% ; (ii) 50% or (iii) 100%. What conclusion will you draw form these prices?

Q.35 The income Statement of X Ltd. for the current years is as follows:

Q.36 A company is currently engaged in the business of manufacturing computer component. The computer component is currently sold for Rs. 1,000 and its variable cost is Rs. 800. For the year ended 31�12�2002  the company sold on an average 500 components per month.

Q.37  A Rs. 100 perpetual bond is currently selling for Rs. 95. The coupon rate of interest is 13.5 percent and the appropriate discount rate is 15%. Calculate the intrinsic value of bond. Should it be bought? What is it yield to maturity?

Q.38 The Balance sheet of  M/s XYZ Company shows the following items as at 31st December 2002:

Q.39 The Balance sheet of Shaw & Co. is as follows:

Q.40 The  Following Data relate to two companies:

Q.41 International foods Limited has the following capital structure:

Q.42 Management of Talash Ltd. has the option to buy either Machine  A or Machine B. Machine A has a cost of Rs. 75,000 its expected lire is 6 years with no salvage value at the end. It would generate net cash flows of Rs. 20,000 per years

Q.43 H. Ltd. has a present annual sales level of 10,000 units at Rs. 300 per unit. The variable cost per unit is Rs. 200 per unit and fixed costs amount to Rs. 3,00,000 per annum. the present credit allowed by the company is one month. The company is considering a proposal to increase the credit period to two months and three months and has made the following estimates:

Q.44 A share  of the face value of Rs. 100 has current market price of Rs. 480. annual expected dividend is 30%. During the fifth year, the shareholder is expecting a bonus in the ratio of 1:5.  Dividend raster is expected to be Rs. 1,000. incidental expenses at time of purchase and sale sere estimated at 5% on the market price. there is no tax on dividend income and capital gain. The shareholder expects  minimum return of 15% per annum.

Q.45 The following data pertain to forge limited:

Q.46 Your company�s share is quoted in remarket at Rs. 20 currently. The company pays a dividend of Re. 1 per  share and the investor�s market expects a growth rate of 5  percent per year. You are required to compute:

Q.47 A trader whose current sales are Rs. 15 lakhs per annum and average collections period is 30 days want to pursue a more  liberal credit policy to improve sales.  A study made be a consultant firm reveals the following information:

Q.48 From the following information taken form the books of  a manufacturing Concern, compute the operating cycle in days:

Q.49 Satija Company has the following capital structure on 1 July 2002;

Q.50 Prepare an estimate of net-Working capital requirements of Zero company for the data given below:

Q.51 A project requires investment of Rs. 75,80,000 (With nil salvage value after 5 year) in the beginning of the years 2003. You are given the following annual operating data to compute the selling price per unit of the single production to be  production and sold:

Q.52  A firm selling a consumer durable item to its two retail dealers in considering relaxation in its credit policy. The credit terms and the expected quantity (no. of units) to be sold to these two dealers is to be as follows:

Q.53 A business firm wants to convert its 8% Convertible Debentures of Rs. 100 each into shares of Rs 10 each. 5,000 such debentures are outstanding in the books. The price Earning Ratio  before this conversion is 20:1 which is expected to be 25:1 after the conversion. The present share capital comprises 1,00,000 shares of Rs. 10 each.  Firm�s EBIT is Rs. 2,00,000. Tax Rate applicable is 40%. Debentures are commanding a premium of 10% in the open market now.

Q.54 The management of a standard firm requests Y as to advise about the economic viability of a capital investment project for expansion purposes. Relevant in formation is as under:

Q.55 A companys current market price per equity share is Rs. 40,  required rate o return 14% , EPS last year was Rs. 4 and D/P  65%. It is know that DPS will grow at an annuals rate of 8% infinitely n the future. Find its equilibrium price per equity shares.

Q.56 A company desires to take up a capital project under its expansion programme involving an outlay or  investment of Rs. 10,00,000. if it sis financed through issue of Debentures (Debt) carrying 14% interest rate, the Price Earnings Ratio will be 6 times. However, if it is finance through Equity Capital issued at premium of Rs.15. then the Price Earning Ratio is to be 7 times. This expansion programme is likely to enhance firm�s sales by Rs. 6,00,000 a year with a net return of 15% on these additional sales before interest and tax.

Q.57 The capital structure of SV LTD. consists of 8% Debentures 6% preference Shares and some equity shares of Rs. 100 each in the ratio of 3:2:5. the company is considering to introduce additional capita to met the needs of diversification plans by rising 9% loan form financial instantiations. As a result of above source would  come down by 1/10 , 1/15 and 1/6 respectively.

Q.58 Mr. X is planning for his retirement. He is 45 years of age now. He wants to have Rs. 3,00,000 when he attains the age of 60. he also wants to exposit a constant amount @ 12% p.a. at the end of each of these 15 years in a PPF account for this  Money. How much should he invest annually at the beginning of each of these 15 years obtain a sum of Rs. 3,00,000 at the end of this 15 years period?

Q.59 A company issues 10% debentures of Rs. 10,00,000 (i) at per , or (ii) at 10% discount and (iii) at 20% premium, assuming the tax rate to be 28%

Q.60 A company has 11% debentures of Rs. 5,00,000 standing in its Balance sheet as on 31-3-2002maturing after 5 year. Assume the same debentures could be ssued now only at a discount of 20%

Q.61 A company has issued equity share capita at a premium of 10% incurring 5% of the issue price as cost of issue. The expected rate of dividend is 20% what is the cost of equity capital issued if the market value of equity share is Rs. 15.

Q.62 A companys present capital structure is as under:

Q.63  From the following particulars of a capital project find (i) pay back period,(ii) Rate of Return (R.O.I.) (iii) present Value Index (Cost of Capital is 10%

Initial Capital Rs.12,000 Annual Cash inflow Rs. 2,000, Life in years 8. Present value of Rs. 1 received annually for 8 years is Rs. 5.3349 [Faculty notes]

Q.64 M/s Avi Om Gupta & Co. is considering to purchase a machine.  Two machines are available X and Y each costing Rs. 1,00.000. Earning after taxation are expected to be as follows-[Dec 2001]

Q.65 M/s G.K. Dass & Co. is considering two investment proposals each of which requires an initial investment of Rs. 90,000. The total cash flows, that is, Profits after taxes and depreciation charges for each profits are as follows-[June 2003]

Q.66 Rank the investment proposals in order of their profitability according to (a) Pay back method (b) Rate of return (c) Present value method (cost of capital 10%)[Faculty notes]

Q.67 M/s Ashutosh & Co. Ltd. Is considering the purchase of a machine.  Two machines A and B are available each costing Rs. 80,000. Earnings after taxations

Are expected to be as follows:  [Faculty notes]

Q.68 M/s Mangla & Co. has got upto Rs. 3,30,000 to invest.  The following proposal are under consideration: [Dec 98]

Q.69 The engineering Department of a Company has suggested a change in operating methods and has asked for a budget appropriation of Rs. 3,200,000 for the necessary equipment.  Annual Operating Costs of the Present and Proposed methods are as follows: [Faculty notes]

Q.70 An investment of Rs.1,00,000 ( having scarp value of Rs. 5000) yields the following return-[June 2002]

Q.71 Sh. Durga Types company has a total invested capital of Rs. 10,00,000 out of this Rs. 5,00,000 has been raised through equity capital and remaining Rs. 5,00,000 through 5% debentures.

Q.72 Following is the information of capital employed by M/s Vinod Bansal & Co.

Q.73 The  Indo-American Co. Ltd. had the  following capital structure on December 31,1973 :-

Q.74 There are three companies namely A,B and C whose owned capital in each company is Rs.  1,00,000. They earn Rs. 10,000, Rs. 15,000 and Rs.3,000 respectively. Each company is in need of Rs. 1,00,000 as additional capital. If they issue 6% debentures what will be the impact on equity?

Q.75 If a company has 30% debt and 70% equity and earns 15% on total capital before taxes, what is the recent on equity, assuming it pays 10% for debt capital an taxes are 50%?

Q.76 The Boots corporation is a new form that wishes to determine an appropriate capital structure. It can issue 8% debt and 6% preferred and has a 50% tax rate. The initial capitalization the form will be Rs. 50 lakes. The  possible capital structure is:

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