Financial Management

Question Bank

Unit – I
Section – A
1. Define Financial Management?
2. What is meant by Financial Planning?
3. Who is a Corporate Planner?
4. What is meant by Profit Maximization?
5. What is meant by Wealth Maximization?
6. Name the area of Finance Function.
7. What are the objectives of finance function?
8. What is financial management process?
9. Define Annuity.
10. Define Discount rate.
11. Define Present Vale.
12. What is time preference for money?
13. Name the techniques of time value of money.
14. What is the concept of ‘time value’?
15 Write the formulas for discounting technique.
16. Write the formulas for compounding technique.
17. If you deposit Rs. 5000 today at 6% rate of interest, in how many years will this amount
double? Work out using Rule 72.
18. Mr. A has to receive Rs. 1000 at the beginning of each year for 5 years. Calculate the
present value of the annuity due assuming 10% rate of interest.
19. Calculate the future value of Rs. 20,000 invested now for a period of 5 years at a time
preference rate of 8%.
20. What are the two forms of Corporate Securities?
Section – B
1. Explain the objectives of Financial Management.
2. What is Finance Function? What are its objectives?
3. What are the sources of Financial Information?
4.”A rational human being has a time preference for money.” What are the reasons for such a
preference?
5. Calculate the present value of the following cash flows assuming a discount rate of 8%.
Year Cash flows
1 Rs. 10,000
2 Rs. 20,000
3 Rs. 10,000
4 Rs.5,000

6. Mr. Rakesh receives a sum of Rs. 2, 00,000 as provident fund on his retirement. He
deposits it in a bank which pays 12 per cent interest. If he withdraws annually Rs 29,364 how
long can he do so?
7. A company needs Rs 10, 00,000 after 5 years from now for replacement of its fixed assets.
It has established a Sinking Fund for the purpose. The investments are to be made at the end
of each year. What annual payment must be made to ensure the needed Rs 10, 00,000 after 5
years? Assume 10% interest per year on investments.
8. a) An investment company offers to pay Rs 60,965 at the end of 15 years to investors who
deposit annually Rs 1000. What interest rate is implicit in the offer?
b) Mr. A offers to pay you Rs 12,000 after 15 years in exchange of Rs 1000 today. What
interest rate is implicit in the offer?
Section – C
1. Critically analyse the functions of the Financial Planner.
2. “Finance Function of a business is closely related to its other functions”. Discuss.
3. Discuss the limitations of Financial Planning.
4. Discuss the Determinants of a Financial Plan.
5. Explain the various source of Business finance available for a businessman.
6. Examine the various techniques employed to adjust the time valu of money.
7. Explain the mechanics of calculating present value of cash flows giving suitable examples.
8. Explain the role of corporate planner.

Unit – II
Section – A
1. What is Cost of Capital?
2. What is Explicit Cost?
3. What is Real Cost?
4. What is Specific Cost?
5. What is meant by Cost of Retaining earnings?
6. What is Weighted Average Cost of Capital?
7. Cost of Capital?
8. What is meant by Minimum rate of return?
9. X Ltd. Issues 50000 8% debentures of 10 each at par. The tax rate applicable to the
company is 50%. Compute the cost of Debt.
10. Z Ltd. Issues 50000 8% debentures of 10 each at a premium of 10%. The rate of tax
applicable to the company is 60%. Compute the cost of Debt Capital?
11. Define Capital budgeting.
12. What is the need of capital budgeting?
13. Name various methods of capital budgeting.
14. What are the limitations of capital budgeting?
15. What are the kinds of capital budgeting decisions?
16. Writ a short note on Net Present Value.
17. A project cost Rs5, 00, 000 and yields annually a profit of Rs80, 000 after depreciation @
12%p.a. but before tax of 50%. Calculate the payback period.
18. A project requires an investment of Rs 5, 00,000 and has a scrap value of Rs 20,000 after
five years. It is expected to yield profits depreciation and taxes during the five years
amounting to Rs 40,000, Rs 60,000, Rs 50,000 and Rs. 20,000. Calculate the average rate of
return on the investment.
19. Write the advantages of pay-back period.
20. The initial cash outlay of a project is Rs 50,000 and it generates cash inflows of Rs.
20,000, Rs 15,000, Rs. 25,000 and Rs 10,000 in four years. Using Present value index
method, appraise profitability of the proposed investment 10% rate of discount.
Section – B
1. What is Cost of Capital? What is meant by explicit cost and real cost of capital?
2. A company issues 5,000 12%debentures of Rs.100 each at a discount of 5%.The
commission payable to underwriters and brokers is Rs.25, 000.The debentures are
redeemable after 5 years. Compute the after tax cost of debt assuming a tax rate of 50%.

3.(i) A company issues 1,000 10%. Preference Shares of Rs.100 each at a discount of 5%.
Costs or raising capital are Rs.2, 000. Compute the cost of Preference Capital.
(ii) Assume that the firm pays tax at 50%. Compute the after-tax cost of capital of a
preferred share sold at Rs.100 with a 9% dividend and a redemption price of Rs.110, if the
company redeems it in five years.
4. XYZ Ltd is currently earning Rs 1, 00,000 and its share is selling at a market price of Rs
80.the firm has 10000 shares outstanding and has no debt. The earnings of the firm are
expected to remain stable, and it has a payout ratio of 100%.What is the cost of equity? If the
firm’s payout ratio is assumed to be 60% and that it earns 15% rate of return on its
investment opportunities, then what would be the firm’s cost of equity.

5. Calculate the average rate of return for projects A and B from the following:
Project A Project B
Investments Rs 20,000 Rs 30,000
Expected Life(no salvage 4 years 5 Years
value)

Projected Net Income (after interest, depreciation and taxes)

Years Project A (Rs) Project B(RS)
1 2,000 3,000
2 1,500 3,000
3 1,500 2,000
4 1,000 1,000
5 - 1,000
Total 6000 10,000

6. A project costing Rs 10 Lakh has a life of 10 years at the end of which its scrap value is
likely to be Rs1 Lakh. The firm’s cut off rate is 12%. The Project is expected to yield an
annual profit after tax of Rs 1 Lakh, depreciation being charged on straight line basis. At 12%
p.a., the present value of one rupee received annually for 10 years of Rs5.650 and the value
of one rupee received at the end of 10 years is 0.322. Ascertain the net value of the project
and state whether we should go for the project.
7. The Tamil Nadu Fertilizers Ltd. is considering a proposal for the investment of Rs 5 alkhs
on product development which is expected to generate net cash inflows for 6 years as under.
Years Net Cash Flows( Rs in Thousands)
1 Nil
2 100
3 160
4 240
5 300
6 600
The following are the present value factor @15% per annum

1 0.87
 2 0.76
3 0.66
4 0.57
5 0.50
6 0.43
The Company’s cost of capital is 15%. Advise the company on the desirability or otherwise
of accepting the proposal.

8. Calculate the pay-back periods of the following projects each requiring a cash outlay of Rs
1, 00,000. Suggest which projects are acceptable if the standard pay-back period is 5 years.
Year Cash Inflows
Project A Project B Project C
1 30,000 30,000 10,000
2 30,000 40,000 20,000
3 30,000 20,000 30,000
4 30,000 10,000 40,000
5 30,000 5,000 -

Section – C
1. Explain the concept of “Cost of Capital”. And also explain different types of Costs.
2. The following items have been extracted from the ‘Liabilities’ side of the Balance Sheet
of A, B, C company as on 31st December 2007;
Paid up capital: Rs.
50,000 Equity Shares of Rs.10 each 5,00,000
Reserves and Surplus 7,00,000
Loans:
17% Non-Convertible Debentures 2,00,000
16% Institutional Loans 6,00,000
Other information about the company as relevant is given below:
Average Market
Year ended Dividend per Earnings per
Price per share)
31st Dec. share (Rs.) share (Rs.)
(Rs.)
2007 5.00 9.00 60.00
2006 4.00 7.50 50.00
2005 5.00 6.00 40.00
You are required to calculate the weighted average cost of capital using book values
as weights and Earnings Price (E/P) ratio as the basis of cost of equity. Assume 50%
tax rate.
3. A company issues 1,000 10% preference Shares of Rs.100 each at a discount of 5%. of
raising capital are Rs.2,000.
(i) Compute the cost of Preference Capital.
(ii) Assume that the firm pays tax at 50%. Compute the after-tax cost of capital of a
preferred share sold at Rs.100 with a 12% dividend and a redemption price of Rs.110,
if the company redeems it in five years.
4. Examine the different approaches for computing the cost of equity. Discuss the merits and
the demerits of each.
5. X Ltd. is considering the purchase of a machine. Two machines are available, E and F. The
cost of each machine is Rs.60, 000. Each machine has an expected life of 5 years. Net profits
before tax (after depreciation) during the expected life of the machine are given below:
Year Machine E (Rs) Machine F(Rs)
1 15,000 5,000
2 20,000 15,000
3 25,000 20,000
4 15,000 30,000
5 10,000 20,000
Total 85,000 90,000

Following the method of return on investment ascertain which of the alternatives will be
more profitable. The average rate of tax may be taking at 50%.

6. A company is considering investment in a project that costs Rs 2, 00,000. The project has
an expected life of 5 years and zero salvage value. The company uses straight line method of
depreciation. The company’s tax rate is 40%. The estimated earnings before depreciation and
before tax from the project are as follows:
Year Earnings before Depreciation Presented value
and tax (Rs) factor at 10%
1 70,000 0.909
2 80,000 0.826
3 1,20,000 0.751
4 90,000 0.683
5 60,000 0.621
You are required to calculate the net present value at 10% and advise the company.

7. A Company proposes to install a machine involving a capital cost of Rs 1, 80,000. The life
of the machine is 5 years and its salvage value at the end of the life is nil. The machine will
produce the net operating income after depreciation of Rs 34,000 per annum. The company
tax rate is 45%.
The net present value factors for 5 years are as under.
Discount rate 14 15 16 17 18
Cumulative factor 3.43 3.35 3.27 3.20 3.13

8. A chemical company is considering investment in a project that costs Rs 5, 00,000. The

life of the project is 5 years and estimated salvage value is zero. Tax rate is 55%. The
company uses straight line depreciation and proposed project has estimated earnings before
depreciation and before tax as follows:
Year Earnings before depreciation and tax (Rs)
1 1,00,000
2 1,00,000
3 1,50,000
4 1,50,000
5 2,50,000

Determine the following:

(i) Payback period (ii) Average rate of return (iii) Net present value at 15%

Unit – III
Section – A
1. What is Financial Leverage?
2. Write a note on Trading on Equity.
3. What is meant by working capital leverage?
4. Write a detailed note on financial leverage and financial decisions.
5. A company has sales of Rs.500000, variable cost of Rs.300000, fixed costs of Rs.100000
and long-term loans of Rs.400000 @10% rate of interest. Calculate the composite leverage.

6. Calculate the operating leverage from the following data

Sales (1000000 units) = Rs.200000
Variable cost per unit = Re.0.70
Fixed cost = Rs.65000
Interest charges = Rs.15000
7. Calculate the financial leverage from the following data
Sales (1000000 units) = Rs.200000
Variable cost per unit = Re.0.70
 Fixed cost = Rs.65000
Interest charges = Rs.15000
8. A firm has sales of Rs.2000000, variable cost of Rs.1400000 and fixed cost of Rs.400000
and debt of Rs.1000000 at 10% rate of interest. What is the operating leverage?
9. A firm has sales of Rs.2000000, variable cost of Rs.1400000 and fixed cost of Rs.400000
and debt of Rs.1000000 at 10% rate of interest. What is financial leverage?
10.A firm has sales of Rs.2000000, variable cost of Rs.1400000 and fixed cost of Rs.400000
and debt of Rs.1000000 at 10% rate of interest. If firm wants to double its earnings before
interest and tax (EBIT), how much of a rise in sales would need on a percentage basis?
11. A simplified income statement of Zenith ltd., is given below. Calculate degree of
operating leverage.
Particulars Rs.
Sales 10, 50,000
Variable cost 7, 67,000
Fixed cost 75,000
EBIT 2, 08,000
Interest 1, 10,000
Taxes (30%) 29,400
Net Income 68,600
12. Define Capital Structure.
13. What is Optimal Capital Structure?
14. What is Capital gearing?
15. What is trading on Equity?
16. Calculate EPS of sky ltd and smart ltd assuming (a) 20% before tax rate of return on asset
(b) 10% before tax rate of return based on the following data.
Sky ltd (Rs. In lakhs) Smart ltd (Rs. In lakhs)
Assets 200 200
Debt 12% - 100
Equity 200(Shares of Rs.10 100(Shares of Rs.10
each) each)
Assume 10% income tax in both cases give your comment.
17. Explain the Theory of Net Income Approach?
18. What is meant by Net Operating Income Approach?
19. What is meant by Traditional Approach?
20. What is meant by Modigliani and Miller Approach in Capital Structure?
Section – B
1. Calculate the operating, financial and combine leverage from the following information.
Rs.
Interest 5,000
Sales 50,000
Variable Cost 25,000
Fixed Costs 15,000

2. A firm has sales of Rs.10, 00,000 variable cost Rs.7, 00,000 and fixed cost Rs.2, 00,000
and debt of Rs.5, 00,000 at 10% rate of interest. What are the operating and financial
leverages?

3. Calculate degree of operating leverage, financial leverage and combined leverage from the
following data
Sales 1, 00,000 units @ Rs.2 unit – Rs.2, 00,000
Variable cost per unit @ Re.0.70
Fixed Costs – Rs.1, 00,000
Interest charges – Rs.3, 668

4. A firm has sales of Rs.20, 00,000 variable cost of Rs.14, 00,000 fixed costs of Rs.4,00,000
and debentures of Rs.10,00,000 in its capital structure obtained @ 10 percent. What are its
financial leverage, operating leverage and combined leverage?

5. The earnings per share of company are Rs.8 and the rate of capitalization applicable to the
company is 10%. The company has before it an option of adopting a payout ratio of 25% or
50% or 75% using Walter’s formula dividend payout. Compute the market value of the
company’s share if the productivity of retained earnings is (i) 15% (ii) 10% (iii) 5%

6. The firms A and B are identical in all respects including risk factors except for debt equity
mix. Firm A has issued 12% debentures of Rs.15 lakhs while B has issued only equity. Both
the firms earn 30% before interest and taxes on their total assets of Rs.25 lakhs.
Assuming a tax rate of 50% and capitalization rate of 20% for an all-equity company, you are
required to compute the value of two firms using i) Net Income Approach ii) Net Operating
Income Approach.
7. H.B.P Ltd. expects annual net operating income of Rs. 2, 00,000. It has Rs. 5, 00,000
outstanding debt cost of debt is 10%. If the overall capitalization rate is 12.5% what would
be the total value of the firm and the equity capitalization rate according to the Net operating
Income approach. What will be the effect of the following on the total value of the firm and
equity capitalization rate if:
(i) The firm increases the amount of debt from Rs. 5, 00,000 to Rs. 7, 50,000 and uses
the proceeds of the debt to repurchase equity shares.
(ii) The firm redeems debt of Rs. 2, 50,000 by issuing fresh equity shares of the same
amount.

8. X Ltd. is expecting an annual EBIT of Rs. 1 lakh. The company has Rs. 4 lakhs in 10%
debentures. The cost of equity capital or capitalization rate is 12.5 %. You are required to
calculate the total value of the firm according to the Net Income approach.
Section – C
1. Calculate the pay-back 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.
Does it have favouable financial leverage?
If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset
leverage?
What are the operating, financial and combined leverages of the firm?
If the sales drop to Rs.50, 00,000, what will be the new EBIT?
At what level the EBT of the firm will be equal to zero?

2. Calculate financial leverage and operating leverage under situations. A and B and
Financial Plans I and II respectively from the following information relating to the operation
and capital structure of ABC Ltd.,
Installed capacity 1,000 units
Actual Production and sales 800 units
Selling price per unit Rs.20
Variable cost per unit Rs.15
Fixed costs: Situation A Rs.800
Situation B Rs.1,500
 Capital Structure: Financial Plan
I II
Equity Rs.5,000 Rs.7,000
Debt Rs.5,000 Rs.2,000
3. Periods of the following projects each requiring a cash outlay of Rs.1,00,000. Suggest
which projects are acceptable if the standard pay-back period is 5 years.

Cash inflows
Year
Project A Project B Project C
1 30,000 30,000 10,000
2 30,000 40,000 20,000
3 30,000 20,000 30,000
4 30,000 10,000 40,000
30,000 5,000 –

4. A) Find the operating leverage from the following:

Sales Rs.5, 00,000

Variable costs 60%
Fixed costs Rs.1, 20,000

(b) Find the financial leverage from the following data:

Net worth Rs.50, 00,000
Debt / Equity 3/1
Interest rate 12%
Operating profit Rs.40, 00,000

5. Discuss on the importance of Capital Structure.

6. What are the assumptions of MM Approach?
7. XYZ company has currently an equity share capital of Rs.40 lakhs consisting of Rs.40000
equity shares of 100 each. The management is planning to raise another Rs.30 lakhs to
finance a major programme of expansion through one of the four possible financing plans.
The options are:
i) Entirely through equity shares
ii) Rs.15 lakhs in equity shares of 100 each and the balance in 8% debentures.
 iii) Rs.10 lakhs in equity shares of 100 each and the balance through long term
borrowing at 9% interest per annum
iv) Rs. 15 lakhs in equity shares of Rs.100 each and the balance through preference
shares with 5% dividend
The company’s expected earnings before interest and taxes (EBIT) will be Rs. 15
lakhs.
Assuming corporate tax rate of 50%, you are required to determine the EPS.

8. Compute the market value of the firm, value of shares and the average cost of capital from
the following information
Net Operating Income Rs. 2, 00,000
Total Investment Rs.10, 00,000
Equity capitalisation rate
i) if the firm uses no debt-10%
ii) if the firm uses Rs.4,00,000debentures-11%
iii) if the firm uses Rs.6,00,000debentures-13%
Assume that Rs.4, 00,000 debentures can be raised at 5% rate of interest whereas Rs.6,
00,000 debentures can be raised at 6% rate of interest.
At are the assumptions of MM Approach?

Unit – IV
Section – A
1. What is the concept of working capital?
2. Name the various kinds of working capital.
3. What are the principles of working capital management?
4. Write the formula for calculating Raw Material Conversion period.
5. Write the formula for calculating Finished Goods Conversion period.
6. What is the nature of cash?
7. Name various motives for holding cash.
8. Bharat Ltd. decides to liberalise credit to increase its sales. The liberalised credit policy
will bring additional sales of Rs 3, 00, 000. The variable costs will be 60% of sales and there
will be 10% risk for non-payment and 5% collection costs. Will the company benefit from the
new credit policy?
9. From the following information, calculate average collection period:
Total sales 1, 00,000
Cash sales 20,000
Sales return 7,000
Debtors at the end of the year 11,000
Bills receivables 4,000
Creditors 15,000
10. What is a cash budget?
11. What do you mean by receivables?
12. Enumerate the various costs of Receivables?
13. Name various factors influencing the size of receivables.
14. The cost of goods sold of E.S.P. Limited is Rs 5, 00,000. The opening inventory is Rs
40,000 and the closing inventory cost is Rs 60,000. Find out inventory turnover ratio.
15. Following information is given about materials
Annual usage = Rs 2, 00,000
Cost of placing and receiving one order: Rs 80
Annual carrying cost: 10% of inventory value
Find out the economic order quantity
16. The annual demand for a product is 6,400 units. The unit cost is Rs 6 and inventory
carrying cost per unit per annum is 25% of the average inventory cost. If the cost of
procurement is Rs 75 determine EOQ.
17. What do you mean by inventory?
18. Give three objectives of holding inventories.
19. Name various tools of inventory management.
20. What is inventory turnover ratio?
Section – B
1. From the following information extracted from the books of a manufacturing concern,
compute the operating cycle in days:

Period covered 365 days

Average period of credit allowed by suppliers 16 days
(Rs in thousands)
Average total of debtors outstanding 480
Raw material consumption 4,400
Total production cost 10,000
 Total cost of goods sold for the year 10,500
Sales for the year 16,000
Value of average stock maintained:
Raw materials 320
Work-in-progress 350
Finished goods 260

2. The following information has been submitted by a borrower:

(i) Expected level of production 1,20,000 units
(ii) Raw materials to remain in stock on an average 2 months
(iii) Processing period for each unit of product ( consisting of 100% of raw 1 month
material wages and overheads)
(iv) Finished goods remain in stock on an average 3 month
(v) Credit allowed to the customers from the date of despatch 3 months
(vi) Expected ratios of cost to selling price:
(a) Raw materials-60%
(b) Direct wages -10%
(c) Overheads – 20%
(vii) Selling price per unit Rs 10
(viii)expected margin on sale 10%
You are required to estimate the working capital requirements of the borrower.
3. From the following forecast of income and expenditure, prepare a cash budget for the
month January to April, 2011
Mont Sales Purchases Wages Manufacturing Administrativ Selling
hs (credit) (credit) (Rs) Expenses(Rs) e Expenses
(Rs) (Rs) Expenses(Rs) (Rs)
2010 Nov. 30,000 15,000 3,000 1,150 1,060 500
Dec 35,000 20,000 3,200 1,225 1,040 550
2011 Jan 25,000 15,000 2,500 990 1,100 600
Feb 30,000 20,000 3,000 1,050 1,150 620
March 35,000 22,500 2,400 1,100 1,220 570
April 40,000 25,000 2,600 1,200 1,180 710
Additional information
 The customers are allowed a credit period of 2 months
 A dividend of Rs 10,000 is payable in April
 Capital expenditure to be incurred: Plant purchased on 15th January for Rs5,000; a
building has been purchased on 1st March and the payments are to be made in monthly
instalments of Rs2,000each.
 the creditors are allowing a credit of 2 months
 Wages are paid on the 1st of the next month
  Lag in payment of other expenses is one month.
 Balance of cash in hand on 1st January, 2011 is Rs15, 000
4. What do you understand by cash management? How can it be undertaken?
5. The following information is available for a company:
Monthly credit sales Rs 10,00,000
Average maturity period 40 days
Factor’s fees/commission 1%
Interest rate charged by factor 15%
Collection department’s cost(if there is no factoring) Rs 4,500 per month
Factor’s average remittance period 10 days
The company’s cost of raising funds(other than factory) 24%
Calculate the effective interest rate charged by the factor and advise the company ignoring
all other factors including risk of default.
6. Star Limited, manufactures of colour TV sets, are considering the liberalisation of existing
credit terms to three of their large customers A,B and C. The credit period and likely quantity
of TV sets that will be lifted by the customers are as follows:-
(Quantity lifted (No of Tv sets)
Credit period(Days) A B C
0 1,000 1,000 -
30 1,000 1,500 -
60 1,000 2,000 1,000
90 1,000 2,500 1,500

The selling price per TV set is Rs9, 000. The expected contribution is 20% of the selling
price. The cost of carrying debtors averages 20% per annum.
You are required to determine the credit period to be allowed to each customer.
(Assume 360 days in a year for calculation purposes).
7. Vision Tubes Ltd. are the manufactures of picture tubes for TV. The following are the
details of their operations during 2011-2012:
Ordering cost Rs 100 per order
Inventory carrying cost 20% p.a
Cost of tubes Rs 500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes
Maximum usage 200 tubes per week
Lead time to supply 6-8 weeks

Determine EOQ. If the supplier is willing to supply 1500 units at a discount of 5% is it worth
accepting?
8. Ace Ltd. Manufacture a product and the following particulars are collected for the year
ended March, 2011
Monthly demand 1000 units
Cost of placing an order Rs 100
Annual carring cost Rs 15 per unit
Normal usage 50 units per week
Minimum usage 25 units per week
Maximum usage 75 units per week
Re-order period 4-6 weeks

You are required to calculate

(i) Re-order quantity
(ii) Re-order level
(iii) Minimum level
(iv) Maximum level
(v) Average stock level

Section – C
1. From the following information prepare a statement showing the working capital
requirements
Budgeted Sales Rs 2,60,000 per annum
Analysis of one rupee of sales (Rs)
Raw material 0.30
Direct labour 0.40
Overheads 0.20
-------
Total cost 0.90
Profit 0.10
------
Sales 1.00

It is estimated that:
(1) Raw materials are carried in stock for 3 weeks and finished goods for 2 weeks
(2) Factory processing will take 3 weeks and it may be assumed to be consisting of 100% of
raw materials, wages and overheads.
(3) Suppliers will give 5 weeks credit
(4) Customers will require 8 weeks credit.
2. What do you understand by working capital? Explain the concepts of working capital?
3. Prepare cash budget for July- December from the following information
(i) The estimated sales, expenses etc. Are as follows
Rs In Lakhs
June July Aug. Sept. Oct. Nov. Dec.
Sales 35 40 40 50 50 60 65
Purchases 14 16 17 20 20 25 28
Wages and salaries 12 14 14 18 18 20 22
Misc.expenses 5 6 6 6 7 7 7
Interest received 2 - - 2 - -- 2
Sale of shares - - 20 - - - -

(ii) 20% of the sales are on cash and the balance on credit
(iii) 1% of the credit sales are returned by the customers. 2% of the total accounts receivable
constitute bad debt losses. 50% of the good accounts receivable are collected in the month of
the sales, and the rest in the next month.
(iv) The time lag in the payment of misc.expenses and purchases is one month. Wages and
salaries are paid fortnightly with a time lag of 15 days.
(v) The company keeps minimum cash balance of Rs 5 lakhs. Cash in excess of Rs 7 lakhs is
invested well by borrowings from banks. Ignore interest received and paid.
4. From the following information, prepare a cash budget for the months of January to April:

Expected purchases(Rs) Expected Sales(Rs)

January 48,000 60,000
February 80,000 40,000
March 81,000 45,000
April 90,000 40,000
Wages to be paid to workers Rs5, 000 each month. Balance at Bank on 1st January Rs 8,000
It has been decided by the management that:
(i) In case of deficit of fund within the limit of Rs 10,000, an arrangement can be made with
the bank.
(ii) In case of deficit of fund exceeding Rs 10,000 but within the limit of Rs 42,000 issue of
debentures is to be preferred
(iii) In case of deficit of fund exceeding Rs 42,000, issue of shares is preferred (considering
the fact that it is within the limit of authorised capital).

5. The following are the details regarding the operation of a firm during a period of 12
months:
 Sales Rs 12,00,000
Selling price per unit 10
Variable cost per unit 7
Total cost per unit 9
Credit period allowed to customers One month

The firm is considering a proposal for a more liberal credit by increasing the average
collection period from one month to two months. This relaxation is expected to increase sales
by 25%
You are required to advise the firm regarding adopting of the new credit policy, presuming
that the firm’s required return on investment is 25 per cent.
6. What do you understand by maximum level, minimum level, re-ordering level? Calculate
the above from the following data:
Re-order quantity 1,500 units
Re-order period 4 to 6 weeks
Maximum consumption 400 units per week
Normal Consumption 300 units per week
Minimum consumption 250 units per week

7. Nirmal Ltd. uses inventory turnover as one performance measure to evaluate its production
manager. Currently, its inventory turnover is ten times per year compared with an industry
average of four. Average sales are Rs 4,50,000 per year. Variable cost of inventory have a
consistently remained at 70% of sales with fixed costs of Rs 10,000. Carrying costs of
inventory (excluding financing costs) are 5 percent annually. Sales forces have complained
that low inventory levels are resulting in lost sales due to stock outs. Sales manager has made
an estimate based on stock-out reports as indicated below:
Inventory policy Inventory turnover Sales (Rs in thousand)
Current 10 450
A 8 500
B 6 540
C 4 565

On the basis of those estimates, assuming a 46% tax rate and an after tax required rate of
return of 16% on investment in inventory, what inventory policy would you recommend?
Show your calculations.
8.Discuss in detail the objectives of Inventory Management.

UNIT – V
SECTION –A
1. A company is expected to pay a dividend of Rs.6 per share next year. The dividends
are expected to grow perpetually at a rate of 9 %. What is the value of its share if the
required rate of return is 15%.
2. Name the two main theories of dividend.
3. Enlist the factors that influence the dividend policy of the firm.
4. What is the significance of stable dividends
5. What is Scrip Dividend?
6. What is dividend pay-out ratio?
7. What is meant by Bonus Issue?
8. Give the source of Bonus issue?
9. Bonus issue Vs Stock split.
10. Write a note on dividend policy in practice.
11. What do you mean by Rights Issue?
12. Write a note on buy back of shares?
13. Explain Walter’s Approach.
14. Explain Gordon’s Approach.
15. Explain Modigliani and Miller Approach.
16. What are the Assumptions of MM Approach?
17. Explain Residual Approach.
18. What are the Criticism of MM Approach?
19. What are the assumptions of Walter’s Approach?
20. What are the Criticism of Walter’s Approach?

SECTION –B
1. Explain the various factors which influence the dividend decision of a firm.
2. The earnings per share of a company are Rs.16. The market rate of discount
applicable to the company is 12.5%.Retained earnings can be employed to yield a
return of 10%. The company is considering a payout of 25%, 50% and 75%. Which of
these would maximize the wealth of the shareholders?
3. What are the determinants of the dividend policy of corporate enterprises?
4. Explain the Walter’s formulation on dividend policy.
5. What is the Modigliani and Miller Approach of irrelevance concept of dividends?
6. A company is expected to pay a dividend of Rs.2 per equity share. The dividends are
expected to grow at the rate of 10%. Find out the share price today, if market
capitalizes dividend at 30%.
7. The Apex Company which earns Rs.5 per share is capitalized at 10% and has a return
on investment of 12%. Using Walter’s model, determine:
(i) the optimum pay-out; and
(ii) the price of share at this pay-out.
8. The earnings per share of company are Rs.8 and the rate of capitalization applicable
to the company is 10%. The company has before it an option of adopting a payout
ratio of 25% and 50%. Using Walter’s formula of dividend payout, compute the
market value of the company’s share if the productivity of retained earnings is i)15%
and ii) 10%.
9. The following information is available in respect of a firm:
Capitalization rate =12%
Earnings per share=Rs.25
Assumed rate of return on investment:
i) 10%
ii) 12%
iii) 15%
Show the effect of dividend on market price of shares applying walter’s formula when
dividend payout ratio is a.) 20% b) 40%.

SECTION –C
1. The following information is available in respect of a firm:
Cost of capital=12%
Earning per share=Rs.10
Rate of return on investment ( r ) i) 15% ii) 12% and iii) 10%
Determine the value of its shares using Gordan’s Model assuming the following:
D/P ratio Retention ratio
a). 100 0
b) 80 20
c). 40 60

2. The following information is available in respect of a firm:

 Capitalization rate =10%
Earning per share=Rs.50
Assumed rate of return on investment: i)12% ii) 8% iii) 10%
Show the effect of dividend on market price of shares applying walter’s formula when
dividend pay out ratio is a). 20% b). 40% c) 80% and d) 100%

3. The earnings per share of a company are Rs 10 and the rate applicable to it is 10%
.The company has before it the options of adopting a pay out of 20% or 40% or 80%
Using walter’s formula, compute the market value of the company ‘s share it the
productivity of retained earnings is i)20% ii) 10%iii)8%.What inference can be drawn
from the above exercise?
4. Critically examine the Approach and assumptions of irrelevance hypothesis of
Modigliani and Miller regarding the concept of dividend distribution.
5. Discuss the Walter’s Approach and assumptions regarding the concept of dividend
distribution.
6. Sahu & Co earns Rs.6 per share capitalization rate of 10 % and has a return on
investment at the rate of 20%. According to Walter’s model, what should be the price
per share at 30% dividend payout ratio? Is this optimum payout ratio as per Walter?

7. The present share capital of A ltd., consists of 1,000 shares selling at Rs.100 each.
The company is contemplating a dividend of Rs.10 per share at the end of the current
financial year. The company belongs to a risk class for which appropriate
capitalization rate is 20%. The company expects to have a net income of Rs. 25,000.
What will be the price of the share at the end of the year if
i) Dividend is not declared and ii) Dividend is declared
Persuming that the company pays the dividend and has to make new investment of
Rs. 48,000 in the coming period. How many new shares will be issued.

8. The asbestos Co belongs to a risk class of which the appropriate capitalization rate is
10%. It currently has 1, 00,000 shares selling at Rs.100 each. The firm is
contemplating the declaration of a Rs.6 dividend at the end of the current fiscal year,
which has just begun. Based on MM approach:
a) What will be the price of the shares at the end of the year if i) dividend is
not declared and ii) if dividend is declared.
b) Assuming that the firm pays dividend, has a net income of Rs.10,00,000
and makes new investment of Rs.20,00,000 during the period, how many
shares will be issued?