FINANCIAL MANAGEMENT CA - INTER

FINANCIAL
MANAGEMENT
( For CA – Inter )

BY

CA.K.HARIHARAN B.Com., FCA

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 FINANCIAL MANAGEMENT CA - INTER

ABOUT THE AUTHOR

CA.K.HARIHARAN

Email: [email protected]

• Fellow member of the Institute of Chartered Accountants of India (ICAI)

• Bharathidasan University Topper.
• Gold Medalist
• Recipient of Chief Minister’s Award for Excellence in academics at University
level.
• Recipient of National Award for excellence in education.
• Recipient of Star of excellence Award from National Integrity Cultural Academy.
• Recipient of Best Author Award 2022
• Recipient of Achievement Award 2023
• TNPSC – Syllabus setting committee member
• Founder of M/s. K Hariharan & Associate – Chartered Accountants
• Authored 20+ Books
• Trained more than 60K CA Students
• Motivational Speaker
• Speaker for more than 500 Colleges / Conferences & addressed more than 3,00,000
Participants
• Trainer - Finance for Non-finance for working professionals / MNCs
• Recognized as Tamil “Hikoo Poet”

FACULTY
ICAI SIRC of ICAI – Chennai, Bangalore, Mangalore, Calicut,
Ernakulam, Mysore, Coimbatore, Palghat, Kumbakonam,
Trivandrum, Tirupati, Nellore, Erode, Trichy, Pondicherry,
Alleppey, Hyderabad, Salem, Madurai & Tiruppur.
Professional • E-Lecture – ICAI – Delhi
Coaching: • The Institute of Cost and Works accountants of India
(ICWAI)
• The Institute of Company Secretaries of India (ICSI)
• Various private institutions
B-Schools: • Planet Finance Business School – Hyderabad
• Amity Global Business School
Universities: • Shiv Nadar University

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 FINANCIAL MANAGEMENT CA - INTER

• Anna University
• Madras University
• Bharath Institute of law
• SRM University
• VELS University
Colleges: • RKM Vivekananda College – Chennai
• MOP Vaishnav College - Chennai
• DG Vaishnava college – Chennai
• Layola College – Chennai
• Queen Mary’s College - Chennai
• MGR Janaki college – Chennai
• Ethiraj college for women – Chennai
• SIET college for women – Chennai
• Madras Christian College – Chennai
• Guru Shree Shantivijai Jain College For Women – Chennai
• SSS Jain College – Chennai
• AM Jain College - Chennai
• Anna Adarsh College for Women – Chennai
• Quaid-E-Millatch Govt. College - Chennai
• T.S.Krishnaswamy college – Chennai
• PSG college of arts & science – Coimbatore
• PSGR Krishnammal College - Coimbatore
• Sri Krishna college – Coimbatore
• Suguna Arts college – Coimbatore
Govt. • RTI Chennai (Regional Training Institute – C&AG)
Organisations: • RTI Mumbai (Regional Training Institute – C&AG)
• Regional Training Centre of Bank of Baroda – Chennai
• TNPSC – Syllabus Setting committee
• Board of Studies Member in varies Universities &
Colleges

BOOKS AUTHORED
CA INTER
1. Cost & Management Accounting LMR Text Book

2. Financial Management& Economic for finance LMR Text Book

3. Cost & Management Accounting– Quick Revision Pocket size Book

4. Financial Management– Quick Revision Pocket size Book
CA FINAL
5. Strategic Cost Management &Performance Evaluation – LMR Text Book
Costing Quick Revision book
6. Cost Accounting– Quick Revision Pocket size Book
7. FAQs on SFM Theory Theory Book
OTHERS
8. Corporate & Management Accounting Text Book -
CS Executive Programme
9. Financial, Treasury & Forex Management Text Book -

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CS Processional
10. Cost Accounting & Financial Management Text Book CMA Inter
11. Cost Accounting Text Book
For SAS Exam C&AG (Indian Audit
& a/c Dept.)
12. Financial Management Text Book – B.Com

OTHER ACHIEVEMENTS
• Handled 38 hours continuous class (2 full days & one full night) for CA – Final costing
crash course @ ICAI Trivandrum Branch
• Handled 36 hours continuous class (2 full days & one full night) for CA – Final costing crash
course @ Shraddha Academy – Bangalore
• Presented articles in SICASA Newsletters of CA Institute
• Presented articles in SIRC Newsletters of CA Institute
• Past committee member of Southern India Chartered Accountant Students’ Associations
(SICASA - ICAI)
• Held the post of Chairman for various conference committees of the CA Institute Conference
• Organized various seminars for CA/CWA/CS & other professionals
• Organized various Conference for CA Students
• Paper Presenter in various seminars and conferences.
• Resource person cum trainer for “Finance for Non-finance people” for various corporate.
• Participated in various live public interaction programmes on
§ DoordharshanPodhigai TV,
§ Jaya TV and
§ Kalaingar news Television - to create awareness about
professional courses
AREAS OF SPECIALISATION
• IFRS compliance Audit, Due Diligence Audits. Representation on behalf of the client for
Income Tax Assessment & Appeals. Liaison with Reserve Bank of India with respect to FEMA
& Other statutory compliance. Liaison with Labour Enforcement office, DGFT, Ministry of
Corporate Affairs (MCA), Software Technology Parks of India (STPI), GST, Commercial Tax,
Central Excise and Customs department with respect to statutory compliance and
registrations.

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EXAMINATION TIPS
COMPLICATION
FM = OR
COMMON SENSE?
Is FM paper a complicated one? Why because most of the CA Inter & Final students
are facing problem either by way of conceptual understanding of the problem or by
way time management (completing all the questions within 3 hours)
What is there in a FM paper, after all some additions, subtractions, multiplications &
division. Yes of course some time square roots too.
Is it really that much difficult paper?

Students may say ´hmm’.. come & write a CA exam then u will know costing is better
or bitter paper!!!”

Ok no violence between us….. let us see how to prepare for FM paper for the
forthcoming CA exams to score more marks.

Either Inter or Final, the weightage given for the FM theory is 30%. Failure in FM is
mainly because students don’t concentrate much on theory. Without studying theory
possibility of clearing FM paper is very very remote. Even though I am starting in a
pessimistic manner it is the fact. If you are strong in theory, minimum you can score
60%. All theory questions are direct questions and all the questions are available in
our Institute Study material itself and unlike income tax or law paper there are no
amendment in FM theory.

Studying theory alone is not important you have to understand properly. On the top
of it mere understanding alone is not important, you should remember it. Unless
otherwise you remember, recollect & write few points in the examination you won’t
get marks. Systematic/ planned study is important to remember all the points.

“Failure to plan is equal to planning to fail”. Planning is important, at the same time
execution is still more important. If you spend absolute one and half hours per day
with full concentration for three months you can finish the Inter/Final FM paper very
easily. Refer one book, reading more than one book is not advisable. How many
books you read is not important, how many time you revise one particular book is
more important.

Practical problems should be worked out at least once as if you are taking up your
final examination, instead of auditing the questions with solutions by way of ticks.
Improve your analytical skills. Practice makes perfection and unless otherwise there is

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adequate practice nothing will come. While working out the problems avoid writing
“K” for thousands and “L” for lakhs because you don’t have the privilege to write
likes that in examinations. To put zero takes one second and each and ever second
counts in an examination. If you put K or L in exam then examiner will award a big
“O”. Attend all the questions; don’t skip any questions in the exam. The attempt may
be failure but you should not fail in attempting any of the questions. Work so hard
that one day your signature will be called an “Audited Financial Statement.”

ABC ANALYSIS OF CHAPTERS

CATEGORY CHAPTERS
o Working capital management
o Cost of capital
A
o Capital Structure
o Investment Decisions
o Source of finance
B
o Scope and objectives of FM
o Leverage Analysis
C o Financial analysis
o Dividend Policy

WINNERS NEVER QUIT

&
QUITTERS NEVER WIN
WISH YOU ALL THE VERY BEST & DO WELL……

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CONTENTS

Sl. CHAPTERS Page No.

No.
L1 MCQs Theory L2
1. Scope and Objectives of Financial
Management
2. Types of Financing
3. Ratio Analysis
4. Cost of Capital
5. Capital Structure
6. Leverage Analysis
7. Investment Decisions
8. Dividend Decisions
9. Working Capital Management
• PV Table
• Annuity Table

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1 SCOPE & OBJECTIVES OF

FINANCIAL MANAGEMENT
1. Two Basic Aspects of Financial Management
2. Two Objectives of FM
3. 3 Characteristic of Source of Fund
4. 3 Important decision for achievement of Wealth Maximization
5. Difference between Profit maximization and Wealth Maximization
6. Arguments in favor of Profit maximization
7. Arguments against Profit maximization
8. Arguments in favor of Wealth maximization
9. Arguments against Wealth maximization
10. 5 Rolls of CFO
11. 9 Emerging issues affecting the future role of CFO
12. 2 Major difference between Financial Accounting & Financial Management
13. Financial distress & insolvency both are same?

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2. TYPES OF FINANCING
1. Difference between ADR & GDR
2. 2 different certificates in double option bonds
3. 4 advantages of raising funds by issue of equity shares
4. 5 advantages of raising funds by issue of preference shares
5. 5 characteristics of GDR
6. 5 characteristics of ADR
7. 3 features of Zero coupon bonds
8. Short notes of Seed Capital Assistance
9. 2 comparative conditions for the maximum assistance under Seed Capital Assistance
10. Explain Debt Securitization
11. 2 way process under Debt Securitization
12. Explain Venture Capital Assistance
13. 8 Factors that a venture capitalized should consider before financing any risky project.
14. 2 types of payment under Income Note
15. Explain Bridge Finance
16. 4 Characteristics of Bridge Finance
17. 3 principles relating to selection of marketable securities
18. Explain ECB
19. 2 different routes of ECB
20. 5 types of Packing Credit
21. 3 Phases in Participating debenture & its interest rate
22. 3 process of debt securitization
23. 4 methods of Venture Capital Financing
24. Any 5 types of Financial Instruments in International Market
25. Find out salient features of following preference share
Types of preference shares Salient Features
Cumulative ?
Non-cumulative ?
Redeemable ?
Participating ?
Non-participating ?
Convertible ?
26. Difference between equity shares and preference shares.
27. Types of Debentures – Based on convertibility
28. Find out salient features of following debenture
Type of debentures Salient Features
Bearer ?
Registered ?
Mortgage ?

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Naked or Simple ?
Redeemable ?
Non-Redeemable ?
29. Difference between Preference Shares and Debentures
30. Types of Bond – Based on Call
31. Various other types of Foreign Bonds
32. Various other types of Indian Bonds
33. Factoring vs. Debt securitization
34. Types of Post-Shipment Finance
35. Bridge Finance V/s. Seed Capital Assistance
36. Secured premium notes
37. Zero coupon bonds

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4. COST OF CAPITAL
1) ABSTEMIOUS ltd issued 20,000, 12% debentures of Rs.100 each on 1st June, 2006. The
cost of issue was Rs.45000. The company’s tax rate is 30%. Determine the cost of
debentures if they were issued
(a) at par
(b) at a premium of 8% and
(c) at a discount of 9%.
2) FACETIOUS Ltd issued 25,000, 10% debenture of Rs.100 each, redeemable in 10 years
time at 12% premium. The cost of issue was Rs.50,000. The company’s income tax is 30%.
Determine the cost of debentures if they were issued
(a) at par
(b) at a premium of 9%
(c) at a discount of 8%.

3) TABLE-TOP AIRPORT Ltd issued 50,000, 12% Preference Shares of Rs.100 each. The
cost of issue was Rs.45,000. Determine the cost of preference capital if shares are issued
(a) at par
(b) at a premium of 5% and
(c) at a discount of 4%.

4) PALINDROME Ltd issued 80,000, 11% Preference Shares of Rs.100 each, redeemable at
13% premium after 15 years. Issue Management Expenses were Rs.55,000. find out the
cost of preference capital if shares are issued
(a) at par
(b) at a premium of 12% and
(c) at a discount of 11%.

5) Find out for MUTATIS-MUTANDIS ltd

Dividend per share Rs.30
Face Value per share Rs.100
Market price Rs.180
Cost of equity ?

6) Find for AQUA-AEROBICS ltd

Dividend per share Rs.20
Face Value per share Rs.100
Market price ?
Cost of equity 19%

7) Find for PARI-PASSU

Dividend per share ?
Face Value per share Rs.100

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Market price 185

Cost of equity 15%

8) Find out PLANND-OBSOLESCENCE ltd.

Earnings per share Rs.40
Face Value per share Rs.100
Market price Rs.200
Cost of equity ?

9) Find for GREEN SHOE OPTION Ltd.

Earnings per share Rs.45
Face Value per share Rs.100
Market price ?
Cost of equity 22%

10) Find SQUASH GAME Ltd.

Earnings per share ?
Face Value per share Rs.100
Market price 220
Cost of equity 16%

11) Find for FIBONACCI associates

Earnings per share 80
Dividend payout ratio 35%
Expected growth on dividend 3%
Face Value per share Rs.100
Market price 290
Cost of equity ?

12) Find “I & O” Number Plate Ltd.,

Dividend per share Rs.5
Expected growth on dividend 12%
Market price Rs.60
Cost of equity ?

13) Calculate the cost of equity capital of “1.61” RATIO Ltd., whose risk free rate of return
equals 10%. The firm’s beta equals 1.75 and the return on the market portfolio equals to 15%.

14) Debt equity ratio 2:8

Cost of Debt 18%
Cost of Equity 19%
Tax 35%
Find Weighted Average Cost of Capital (WACC) for “BHP & Torque” Ltd.

15) Equity Share capital Rs.16 Lakhs

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Reserves & Surplus Rs.4 Lakhs

Debentures Rs.10 Lakhs
Cost of Equity 20%
Cost of Debentures 12%
Tax 30%
Find Weighted Average Cost of Capital (WACC)

16) Find Cost of Equity if-

Debt : Equity 6:4
WACC 18%
Interest on Debenture 16%
Tax Rate 50%

17) THIS OR THAT’S cost of debt is 6% (after tax) and the cost of equity is 14%. Find
WACC if the capital structure of the company is –
ü Debt : Equity = 60:40,
ü Debt : Equity = 10:90,
ü Debt : Equity = 40:60, and
ü Debt : Equity = 90:10.

18) The following is the capital structure of SV & Co. as on 31.12.2005

Rs.
Equity shares : 10,000 Shares (of Rs.100 each) 10,00,000
10% Preference Shares ( of Rs.100 each) 4,00,000
12% Debentures 6,00,000
Total 20,00,000
(i) The market price of the company’s share is Rs.110 & it is expected that a dividend of
Rs.10 per share would be declared for the year 2005. The dividend growth rate is 6%
(ii) If the company is in the 50 tax bracket, compute the weighted average cost of capital.
Assuming that in order to finance an expansion plan, the company intends to borrow a
found of Rs.10 lakhs bearing 14% rate of interest, what will be the company’s WACC?
This financing decision is expected to increase dividend from Rs.10 to Rs.12 per share.
However, The market price of equity share is expected to decline from Rs.110 to Rs.105.

19) The following is the capital structure of a Company:

Source of capital Book Value (Rs.) Market Value (Rs.)
Equity Share @Rs.100 each 80,00,000 1,60,00,000
9% cumulative preference Shares @ Rs.100 each 20,00,000 24,00,000
11% debentures 60,00,000 66,00,000
Retained earning 40,00,000 Nil
Total 200,00,000 250,00,000

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The current market price of the company’s equity share is Rs.200. for the last year the
company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent
every year.

The corporate tax rate is 30 per cent and shareholders personal income tax rate is 20 per cent.

You are required to calculate:

(i) Cost of capital for each source of capital.
(ii) Weighted average cost of capital on the basis of book value weights.
(iii)Weighted average cost of capital on the basis of market value weights.

Exercise Questions
COC
Qtn 1:
If Zeta Company borrows Rs. 5,00,000 at 10% and is required to maintain Rs.
50,000 as a minimum compensating balance at the bank. Calculate the effective
interest rate on the loan?

Ans: 11.10%
Qtn 2:
D1 = 4.10
P0 = 80
Growth = 7%
Find Ke.

Ans; 12.125%
Qtn 3:
D0 = 4.10
P0 = 80
g = 7%
Find Ke.

Ans: 12.48%
Qtn 4:
Face value of equity shares of a company is ₹ 10, while current market price is ₹
200 per share. Growth rate is 5%. Company is going to start a new project, and is
planning to finance it partially by new issue and partially by retained earnings.
You are required to calculate cost of equity shares as well as cost of retained
earnings if shareholders personal tax is 20%.

Ans: ke 10%, Kr 8%

Qtn 5:
Ganpati Limited has issued 10% debentures of nominal value of Rs. 100. The
market price is Rs.90 ex-interest. You are required to calculate the cost of
debentures if the debentures are:

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(a) Irredeemable; and

(b) Redeemable at par after 10 years.

Ans: (a) 11.11% , (b) 11.58%

Qtn 6:
9% Debenture Rs.100 per debenture Rs. 275,000, redeemable at par has 2%
floatation cost and 10 years of maturity. The market price per debenture is Rs.105.
Corporate Income-tax rate is 35%. Find Kd.

Ans: 6.11%
Qtn 7:
Debentures of Rs. 100 each is Rs. 8,00,000, redeemable at par: 20 years maturity 8%
coupon rate. 4% flotation costs. Find Kd

Ans: 4.28%
Qtn 8:
The current dividend per share is 20% and the dividends are expected to grow at
the rate of 5%. The cost of equity based on dividend growth model is 15%. Find
out the current price of equity share the face value of which is Rs. 10.

Ans: Rs.20
Qtn 9:
In considering the most desirable capital structure of a company, the following
estimates of the cost of debt and equity capital (after tax) have been made at
various levels of debt-equity mix:
Debt as percentage of Cost of debt % Cost of equity %
total capital employed
0 5.0 12.0
10 5.0 12.0
20 5.0 12.5
30 5.5 13.0
40 6.0 14.0
50 6.5 16.0
60 7.0 20.0
You are required to determine the optimal debt-equity mix for the company by
calculating composite cost of capital.

Ans: 30:70 (i.e. 10.75%)

Qtn 10:
A company has the following capital structure as on 31.3.2009 in (Rs.)
Equity capital (1,00,000 shares) = 50,00,000
15% preference shares = 15,00,000
12% debentures = 25,00,000
The equity share of the company sells for Rs.30. It is expected that the company
will pay next year a dividend of Rs. 3 per equity share which is expected to grow
at 5% p.a forever. Assume a 35% corporate tax rate. Find WACC.

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Ans: 13%
Qtn 11:
Share Price = ₹ 20
Dividend Per Share Last year = ₹ 2
G = 5% P. Yr
Find WACC

Ans: 15.5%
Qtn 12:

The following details are provided by the GPS Limited:

• Equity Share Capital Rs.65,00,000
• 12% Preference Share Capital Rs.12,00,000
• 15% Redeemable Debentures Rs.20,00,000
• 10% Convertible Debentures Rs. 8,00,000
The cost of Equity Capital for the Company is 16.30% and Income Tax Rate for
the Company is 30%. You are required to calculate the Weighted Average Cost of
Capital (WACC) of the Company.

Ans: 13.99%

Qtn 13:
Narayan Limited has the following book-value capital structure as on March
31, 2009. Rs.
Equity Share Capital (2,00,000 shares) 40,00,000
11.5% Preference Shares 10,00,000
10% Debentures 30,00,000
80,00,000
The equity share of the company sells for Rs.20. It is expected that the company
will pay next year a dividend of Rs.2 per equity share, which is expected to
grow at 5% per annum forever. Assume a 35% corporate tax rate.
You are required to calculate:
(i) Weighted average cost of capital (WACC) of the company based on the
existing capital structure.
(ii) New weighted average cost of capital, if the company raises an additional
Rs. 20 lakhs debt by issuing 12% debentures. This would result in
increasing the expected equity dividend to Rs. 2.40 and leave the growth
rate unchanged, but the price of equity share will fall to Rs.16 per share.

Ans: (i) 11.375% , (ii) 12.66%

Qtn 14:
Beeta Ltd. has furnished the following information:
- Earning per share (ESP) Rs.4
- Dividend payout ratio Rs.25%
- Market price per share Rs.40
- Rate of tax 30%
- Growth rate of dividend 8%

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The company wants to raise additional capital of Rs.10 lakhs including debt of
Rs.4 lakhs. The cost of debt (before tax) is 10% upto Rs.2 lakhs and 15% beyond
that. Compute the after tax cost of equity and debt and the weighted average cost
of capital.

Ans: 9.92%
Qtn 15:
The capital structure of a company as on 31st March, 2009 is as follows:
Particulars Rs.
Equity capital : 6,00,000 equity shares of Rs. 100 each 6 crore
Reserve and surplus 1.20 crore
12% debenture of Rs.100 each 1.80 crore
For the year ended 31st March, 2009 the company has paid equity dividend @ 24%.
Dividend is likely to grow by 5% every year. The market price of equity share is ₹
600 per share. Income-tax rate applicable to the company is 30%.
Required:
(i) Compute the current weighted average cost of capital.
(ii) Next year the company has plan to raise a further Rs. 3 crore by way of long-
term loan at 18% interest. If loan is raised, the market price of equity share
is expected to fall to Rs.500 per share. What will be the new weighted
average cost of capital of the company?

Ans: 8.88%; 10.43%

Qtn 16:
You are required to determine the weighted average cost of capital of a firm using
(1) book-value weights and (2) market value weights. The following information is
available for your perusal:

Present book Value of the firm’s capital structure is:

Particulars Rs.
Debentures of Rs. 100 each 8,00,000
Preference Shares of Rs.100 2,00,000
each
Equity shares of Rs.10 each 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are:

Debentures @ Rs.110, preference shares @ Rs.120 and equity shares @ Rs.22

Anticipated external financing opportunities are as under:
I. Rs.100 per debenture redeemable at par: 20 years maturity 8% coupon rate.
4% flotation costs, sale price Rs.100.
II. Rs.100 preference share redeemable at par : 15 years maturity, 10%
dividend rate. 5% flotation costs, sale price Rs.100.
III. Equity shares : Rs.2 per share floatation costs, sale price Rs.22.

In addition, the dividend expected on the equity share at the end of the year is Rs.2
per share; the anticipated growth rate in dividends is 5% and the firm has the

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practice of paying all its earnings in the form of dividend. The corporate tax rate is
50%.

Ans: (i) 10.25% (ii) 11.83%

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5. CAPITAL STRUCTURE
1) S&V Ltd a widely held company is considering a major expansion of its production
facilities and the following alternatives are available.
Rs. In Lakhs
Particulars A B C
Share Capital 50 20 10
14% Debentures - 20 15
Loan from a Financial Institution @18% p.a Rate - 10 25
of interest

Expected rate of return before tax is 25%. The rate of dividend of the company is not less
than 20%. The company at present has low debt. Corporate taxation 50%.Which of the
alternatives you would choose?
2) The Modern Chemicals Ltd. requires Rs.25,00,000 for a new plant. This plant is expected
to yield earning before interest and taxes of Rs.5,00,000. While deciding about the
financial plan, the company considers the objective of maximizing earning per share. It has
three alternatives to finance the project by raising debt of Rs.250,000 or Rs.10,00,000 or
Rs.15,00,000 and the balance, in each case, by issuing equity shares.

The company’s share is currently selling at Rs.150, but is expected to decline to Rs. 125 in
case the funds are borrowed in excess of Rs.10,00,000. The funds can be borrowed at the
rate of 10% up to Rs.2,50,000 at 15% over Rs.250,000 and up to 10,00,000 and at 20%
over Rs.10,00,000. The tax rate applicable to the company is 50%. Which form of
financing should the company choose?

3) A company earns a profit of Rs.3,00,000 per annum after meeting its interest liability of
Rs.1,20,000 on 12% debentures. The Tax rate is 50%. The number of Equity Shares of
Rs.10 each is 80,000 and the retained earnings amount to Rs.12,00,000. The company
proposes to take up an expansion scheme for which a sum of Rs.4,00,000 is required.

It is anticipated that after expansion, the company will be able to achieve the same return
on investment as at present. The funds required for expansion can be raised either through
debt at the rate of 12% or by issuing Equity Shares at par.
Required:-
Compute the EPS, if-
(a) the additional funds were raised as debt
(b) the additional funds were raised by issue of equity shares
Advice the company as to which source of finance is preferable
4) Calculate the level of Earnings Before Interest and Tax (EBIT) at which the EPS
indifference point between the following financing alternatives will occur.

(a) Equity share capital of Rs.6,00,000 and 12% debenture of Rs.4,00,000

or

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(b) Equity share capital of Rs.4,00,000, 14% preference share capital of Rs.200,000
and 12% debenture of Rs.400,000.
Assume the corporate tax rate is 35% and par value of equity share is Rs.10 in each case.

5) Rithika Company’s EBIT is Rs. 500,000. The company has 10%, 20 lakhs debentures. The
equity capitalization rate i.e. Ke is 16%.
You are required to calculate:
(i) Market value of equity and value of firm
(ii) Overall cost of capital

6) Amita Ltd’s operating income is ` 5,00,000. The firm’s cost of debt is 10% and
currently the firm employs ` 15,00,000 of debt. The overall cost of capital of the firm is 15%.
You are required to determine Total value of the firm.

Exercise Questions
CS
Qtn 1:
Required Capital Employed = Rs.100,00,000
Face Value = Rs.10
Premium = Rs. 10
Find number of equity shares.

Ans: 5,00,000
Qtn 2:
EAT 1,81,000
Required Capital Employed 25,00,000
Debt Equity Ratio 4:6
Face value of share Rs. 100
Share Premium 50%
Find EPS.

Ans: Rs.1.81
Qtn 3:
A company needs Rs. 12 lakhs for installation of a new factory which would yield
an annual EBIT of Rs. 2,00,000. The company has the objective of maximizing the
earnings per share. It is considering the possibility of issuing equity shares plus
raising a debt of Rs. 2,00,000, Rs.6,00,000 or Rs.10,00,000. The current market price
per share is Rs. 40 which is expected to drop to Rs. 25 per share if the market
borrowings were to exceed Rs.7,50,000. Cost of borrowings in indicated as under:
Up to Rs. 2, 50,000 10 p.a
Between Rs 2, 50,001 and Rs.6, 25,000 14 p.a
Between Rs.6, 25,001 and Rs. 10, 00,000 16 p.a
Assume a tax rate of 50% work out the EPS and the scheme which would meet the
objective of the management.

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Ans: Option II ( EPS Rs.4.20)

Qtn 4:
The existing capital structure of XYZ Ltd. is as under:
Equity Shares of Rs.100 each 40,00,000
Retained Earnings Rs. 10,00,000
9% Preference Shares Rs. 25,00,000
7% Debentures Rs. 25,00,000
The existing rate of return on the company's capital is 12% and the income-tax rate
is 50%.
The company requires a sum 25,00,000 to finance an expansion programme for
which it is considering the following alternatives:

(i) Issue of 20,000 equity shares at a premium of Rs.25 per share.

(ii) Issue of 10% preference shares.
(iii) Issue of 8% debentures
Which of the above alternatives would you consider to be the best?

Ans: Plan I (EPS Rs. 7.29)

Qtn 5:
Z Co. has a capital structure of 30% debt and 70% equity. The company is
considering various investment proposals costing less than Rs.30 Lakhs. The
company does not want to disturb its present capital structure. The cost of raising
the debt and equity are as follows:
Project Cost Cost of Debt Cost of Equity
Above Rs.5 Lakhs 9% 13%
Above Rs.5 Lakhs and upto Rs.20 10% 14%
Lakhs
Above Rs.20 Lakhs and upto Rs.40 11% 15%
Lakhs
Above Rs.40 Lakhs and upto Rs.1 12% 15.55%
Crore
Assuming the tax rate is 50%, compute the cost of two projects A and B, whose
fund requirements are Rs.5 Lakhs and Rs.8 Lakhs respectively. If the project are
expected to yield after tax return of 11%, determine under what conditions if
would be acceptable.

Ans: Project A ( ROCE 11% > Ko 10.45% )

Qtn 6:
India Limited requires Rs.50,00,000 for a New Plant. This Plant is expected to yield
Earnings before Interest and Taxes of Rs.10,00,000. While deciding about the
Financial Plan, the Company considers the objective of maximizing Earnings per
Share. It has 3 alternatives to finance the Project – by raising Debt of Rs.5,00,000 or
Rs.20,00,000 or Rs. 30,00,000 and the balance in each case, by issuing Equity Shares.
The Company’s Share is currently selling at Rs. 150, but it is expected to decline to

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Rs. 125 in case the funds are borrowed in excess of Rs.20,00,000. The Funds can be
borrowed at the rate of 9% upto Rs. 5,00,000, at 14% over Rs.5,00,000 and upto
Rs.20,00,000 and at 19% over Rs.20,00,000. The Tax rate applicable to the Company
is 40%. Which form of financing should the Company choose? Show EPS Amount
upto two decimal points.

Ans: Scheme II ( EPS Rs.22.35)

Qtn 7:
A new project is under consideration in Zip Ltd., which requires a capital
investment of Rs.4.50 crores. Interest on term loan is 12% and Corporate Tax rate is
50%. If the Debt Equity ratio insisted by the financing agencies is 2:1, calculate the
point of indifference for the project. If financing agencies insist 2:1 Debt equity
ratio then company has two options:
(i) To arrange whole amount the company can issue equity shares.
(ii) Company should arrange 3 crores by 12% term loan and 1.50 crores
through equity share so that 2:1 Debt-equity ratio can be maintained.

Ans: Rs.54
Qtn 8:
ABC Ltd. wants to raise Rs.5,00,000 as additional capital. It has two mutually
exclusive alternative financial plans. The current EBIT is Rs.17,00,000 which is
likely to remain unchanged. The relevant Information is -
Present Capital Structure: 3,00,000 Equity shares of Rs.10 each and 10% Bonds of
Rs.20,00,000.
Tax Rate: 50%
Current EBIT: Rs.17,00,000
Current EPS: Rs.2.50
Current Market Price: Rs.25 per share
Financial Plan I: 20,000 Equity Shares at Rs.25 per share.
Financial Plan II: 12% Debentures of Rs.5,00,000.
Identify the financial break-even levels.

Ans: Plan I EBIT = Rs.2,00,000; Plan II EBIT = Rs.2,60,000

Qtn 9:
There are two firms P and Q which are identical except P does not use any debt in
its capital structure, while Q has ₹ 7,00,000, 9% Debentures in its capital structure.
Both firms have EBIT of ₹ 2,60,000 p.a and the capitalization rate is 10%. Assuming
corporate tax 40%, calculate the value of these firm according to M&M hypothesis.

Ans: 18,40,000
Qtn 10:
Company’s operating income is ₹ 15,00,000. The firm’s cost of debt is 10% and
currently the firm employs ₹ 15,00,000 of debt. The overall cost of capital of the
firm is 18%. You are required to determine Total value of the firm.

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Ans: Rs.83,33,333
Qtn 11:
Company’s EBIT is₹Rs.60,00,000. The company has 15%, 30 lakh debentures. The
equity capitalization rate i.e. Ke is 20%. You are required to calculate:
(i) Market value of equity
(ii) Value of firm
(iii) Overall cost of capital.

Ans: (i) Rs. 2,77,50,000; (ii) Rs. 3,07,50,000 ; (iii) 19.51%

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7. INVESTMENT DECISIONS
1) A project costs Rs.25,00,000 and yields annually a profit of Rs.5,00,000 after depreciation
(straight line method) but before tax 50%. Life of the asset is 10 years. Find out the pay
back period.
2) Initial investment = 12 lakhs
CFAT = 3 lakhs p.a
Project life = 8 years
Compute simple payback period.

3) Initial investment = 2.10 lakhs

Project life = 6 years
CFAT p.a. Year 1 = 18,000
Year 2 = 27,000
Year 3 = 86,000
Year 4 = 98,000
Year 5 = 68,000
Compute payback period.

4) Initial Investment = ₹ 20,000

CFAT = ₹ 4,000
Find Payback Reciprocal.

5) A project requiring an investment of Rs.10,00,000 yields profit after tax and depreciation
as follows:
Years Profit after tax and depreciation
Rs.
1 50,000
2 75,000
3 1,25,000
4 1,30,000
5 80,000
Total 4,60,000
At the end of 5 years, the plant and machinery of the project can be sold for Rs.80,000.
Calculate Accounting or Average rate of return.(ARR)

6) Initial investment = 490,000

Salvage value = Nil
Life = 7 years
CFAT p.a.
Year 1 = 88,000
Year 2 = 1,25,000
Year 3 = 1,89,000
Year 4 = 2,43,000

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Year 5 = 1,20,500
Year 6 = 95,000
Year 7 = 75,000
Calculate Average rate of return.

7) Initial investment = 2.10 lakhs

Project life = 6 years
CFAT p.a. Year 1 = 18,000
Year 2 = 27,000
Year 3 = 86,000
Year 4 = 98,000
Year 5 = 78,000
Discount factor @ 10%, Compute discounted payback period.

8) The Alpha Co. Ltd, is considering the purchase of a new machine. Two alternative
machines (A & B) have been suggested, each costing Rs.4,00,000. Earnings after taxation
but before depreciation are expected to be as follows:
Cash Flows
Year Machine A Machine B
1 40,000 1,20,000
2 1,20,000 1,60,000
3 1,60,000 2,00,000
4 2,40,000 1,20,000
5 1,60,000 80,000
Total 7,20,000 6,80,000
The company has a target rate return on capital @ 10 % and on this basis, you are required:

• Compare profitability of the machines and state which alternative you consider
financially preferable,
• Compute the simple pay back period for each project
• Compute the discounted pay back period for each project and,
• Compute annual rate of return for each project.

9) Hai Ltd is considering two mutually exclusive projects X & Y. following details are made
available to you
(Rs. In Lakhs)
Project X Project Y
Project cost 700 700
Cash inflows:
Year 1 100 500
Year 2 200 400
Year 3 300 200
Year 4 450 100
Year 5 600 100
TOTAL 1650 1300

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Assume no residual values at the end of the fifth year. The firm’s cost of capital is 10%,
required in respect of each of the two projects:
Ø Net Present Value (NPV) using 10% discounting
Ø Profitability Index (PI)

10) An investment of Rs.1,36,000 yields the following cash inflows (profits before depreciation
but after tax). Determine Internal Rate of Return.
Year Rs.
1. 30,000
2. 40,000
3. 60,000
4. 30,000
5. 20,000
1,80,000

11) Viswambara Software Company want to replace its old machine with a new automatic
machine. Two models PCC and PE-2 are available at the same cost of Rs.5 lakhs each.
Salvage value of the old machine is Rs.1 lakh. The utilities of the existing machine can be
used if the company purchases PCC model.

Additional cost utilities to be purchases in that case are Rs.1 lakh. If the company
purchases PE-2 model, then all the existing utilites will have to be replaced with new
utilities costing Rs.2 lakhs. The salvage value of the old utilities will be Rs.20,000. The
PAT are expected to be as follows: Ignore depreciation

Year PCC PE-2 PVF @15%

1 1,00,000 2,00,000 0.87
2 1,50,000 2,10,000 0.76
3 1,80,000 1,80,000 0.66
4 2,00,000 1,70,000 0.57
5 1,70,000 40,000 0.50
Salvage value at the 50,000 60,000
end of 5th year

The targeted return of capital is 15%. You are required to

o Compute NPV
o Discounted Pay back period
o Desirability factor
Advice which of the machine is to be selected.

12) Following are the data on a capital project being evaluated by the management of X Ltd.,
Project M
Annual cost saving Rs.40,000
Useful life 4 years

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I.R.R. 15%
Profitability Index (PI) 1.064
NPV ?
Cost of capital ?
Cost of project ?
Payback ?
Salvage value 0
Find the missing values considering the following table of discount factor only:
Discount factor 15% 14% 13% 12%
1 year 0.869 0.877 0.885 0.893
2 years 0.756 0.769 0.783 0.797
3 years 0.658 0.675 0.693 0.712
4 years 0.572 0.592 0.613 0.636
2.855 2.913 2.974 3.038

13) The cash flow of two mutually exclusive projects are as under:-
Year Project X Project Y
0 (40,000) (20,000)
1 13,000 7,000
2 8,000 13,000
3 14,000 12,000
4 12,000 -
5 11,000 -
6 15,000 -
• Estimate the net present value (NPV) of the projects X & Y using 15% as the hurdle
rate.
• Estimate the IRR of the projects.
• Why is there a conflict in the project choice by using NPV and IRR criteria?
• Make a Project choice.

PV factors are as under

Discount Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
rate
15% 1 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
18% 1 0.8475 0.7182 0.6086 0.5158 0.4371 0.3904
20% 1 0.8333 0.6944 0.5787 0.4823 0.4019 0.3349
24% 1 0.8065 0.6504 0.5245 0.4230 0.3411 0.2751
26% 1 0.7937 0.6299 0.4999 0.3968 0.3149 0.2499

14) Company X is forced to choose between two machines A and B. The two machines are
designed differently, but have identical capacity and do exactly the same job. Machine A
costs Rs.1,50,000 and will last for 3 years. It costs Rs.40,000 per year to run. Machine B is
an “economy” model costing only Rs.1,00,000, but will last for two years, and costs
Rs.60,000 per year to run. These are real cash flows.

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The costs are forecasted in rupees of constant purchasing power. Ignore tax. Opportunity
cost of capital is 10 percent. Which machine company X should buy?

15) Find out the IRR of an investment of Rs.3.2 lakhs which yields Cash Inflows after Tax
(CFAT) of Rs.58,000 per annum for 10 years?

16) An investment of Rs.1,60,000 yields the following cash inflows. Determine the internal
rate of return.
Year 1 2 3 4 5
Rs. 40,000 50000 65,000 45,000 25,000

17) The cost of a new mobile phone is Rs. 10,000. If the interest rate is 5 percent, how much
would you have to set aside now to provide this sum in five years?

18) A doctor is planning to buy an X-ray machine for his hospital. He has two options. He can
either purchase it by making a cash payment of Rs.5 lacs or Rs.6,15,000 are to be paid in six
equal annual installments. Which option do you suggest to the doctor assuming the rate of
return is 12%? Present value of Re.1 at 12% rate of discount for 6 years is 4.111.

Exercise Questions
CB
Qtn 1:
ABC Ltd is evaluating the purchase of a new machinery with a depreciable base of
₹1,00,000; expected economic life of 4 years and change in earnings before taxes and
depreciation of ₹ 45,000 in year 1, ₹ 30,000 in year 2, ₹ 25,000 in year 3 and ₹ 35,000 in
year 4. Assume straight-line depreciation and a 20% tax rate. You are required to
Compute total relevant cash flows. (i.e. CFAT)

Ans: Rs. 128,000

Qtn 2:
Zion Limited is planning for the purchase of a machine that would cost Rs. 1,00,000
with the expectation that Rs. 20,000 per year could be saved in after-tax cash costs if the
machine was acquired. The machine’s estimated useful life is ten years, with no
residual value, and would be depreciated by the straight-line method. You are required
to calculate the payback period.

Ans: 5 years
Qtn 3:
An investment project costs Rs.1,00,000 initially. Find Simple Pay-back period if It is
expected to generate cash flows as follows
Year Rs.
1 50,000
2 40,000
3 20,000
4 20,000
Ans: 2 years + 6months

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Qtn 4:
Initial Investment is Rs.9,00,00. CFAT pa. is Rs.50,000 for 9 years. Find pay-back
reciprocal.

Ans: 5.5%
Qtn 5:
An investment project costs Rs.2,00,000 initially. Find Pay-back reciprocal if it is expected
to generate cash flows as follows.
Year Rs.
1 40,000
2 50,000
3 25,000
4 15,000
Ans: 16.25%
Qtn 6:
Initial investment = Rs. 4,00,000
Salvage value = Nil
Life = 8 years

Year CFAT p.a.

Year 1 88,000
Year 2 1,25,000
Year 3 1,89,000
Year 4 2,43,000
Year 5 1,20,500
Year 6 95,000
Year 7 75,000
Year 8 50,000
Calculate Average rate of return.

Ans: 18.30%
Qtn 7:
An investment project costs Rs.1,00,000 initially. It is expected to generate cash flows as follows
Year Amount in Rs.
1 50,000
2 40,000
3 20,000
4 20,000
The present value of Rs.1 at 10% discount rate
Year 1 2 3 4
PV 0.9091 0.8264 0.7513 0.6830
Find Discounted Pay-back period.

Ans: 3 year + 5.67months.

Qtn 8:
Initial Investment Rs.5,000/-; Required rate of return 10%
Year CFAT

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(Rs.)
1 3,000
2 2,000
3 2,000
Find
a. Simple pay back
b. Pay back reciprocal
c. ARR
d. Discounted Pay back
e. Find NPV
f. PI

Ans; (a) 2 yrs ; (b) 46% (c) 13% (d) 2years & 5 months (e ) Rs. 883 (f) 1.18 times

Qtn 9:
Kanoria Enterprises wishes to evaluate two mutually exclusive projects X and Y.

The particulars are as under:

Particulars Project X (Rs.) Project Y (Rs.)

Initial Investment 1,20,000 1,20,000
Estimated Cash inflows (per annum for 8 years)
Pessimistic 26,000 12,000
Most Likely 28,000 36,000
Optimistic 36,000 44,000

The cut off rate is 14%.

The discount factor at 14% are:

Year 1 2 3 4 5 6 7 8 9
Discount Factor 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308
Advise management about the acceptability of projects X and Y.

Ans: NPV (x) Rs.19,170, NPV (y) Rs. 22,264. Project Y is better.
Qtn 10:
There are two investment proposal A and B
Particulars A B
Capital investment 10,000 8,000
Life 5 5
PV factor 20% 20%
Income 3000 per year
1 year
st 4,000
2nd year 3,500
3rd year 3,000

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4th year 2,500

5th year 1,000
Give Present value of Re.1 1 2 3 4 5 your
@20% 0.833 0.694 0.579 0.482 0.402
recommendation among the two proposals.
Ans: Project B is preferable
Qtn 11:
A company is required to choose between two machines A and B. The two machines
are designed differently, but have identical capacity and do exactly the same job.
Machine A costs Rs. 6,00,000 and will last for 3 years. It costs Rs.1,20,000 per year to
run. Machine B is an ‘economy’ model costing Rs. 4,00,000 but will last only for two
years, and costs Rs.1,80,000 per year to run. These are real cash flows. The costs are
forecasted in rupees of constant purchasing power. Opportunity cost of capital is 10%.
Which machine company should buy? Ignore tax. PVIF0.10, 1 = 0.9091, PVIF0. 10, 2 =
0.8264, PVIF0. 10, 3 = 0.7513.

Ans: M/c A

Qtn 12: You are required to compute the IRR of the project given below and advise
whether the project should be accepted if the company requires a minimum return of
17%.
Time Rs.
0 (4,000)
1 1,200
2 1,410
3 1,875
4 1,150
Ans: 15%
Qtn 13:
Equipment A has a cost of Rs. 75,000 and net operating income after depreciation is Rs.
15,000 per year for six years. A substitute equipment B would cost Rs. 50,000 and
generate net operating income after depreciation is Rs.11,334 per year for six years. The
required rate of return of both equipment is 11 per cent. Tax rate is 50%. Calculate the
IRR and NPV for the equipment. Which equipment should be accepted and why?

Ans:
Particular A B
NPV 9,610 9,227
IRR 15.59% 17.29%
Equipment A is preferable
Qtn 14:
Given below are the data on a capital project ‘M’:

Annual cost saving Rs. 60,000

Useful life 4 years
Internal rate of return 15 %

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Profitability index 1.064

Salvage value 0

Discount factor 15% 14% 13% 12%

1 year 0.869 0.877 0.885 0.893
2 years 0.756 0.769 0.783 0.797
3 years 0.658 0.675 0.693 0.712
4 years 0.572 0.592 0.613 0.636
2.855 2.913 2.974 3.038

You are required to calculate for this project M:

(i) Cost of project
(ii) Payback period
(iii) Cost of capital
(iv) Net present value.

Ans: (i) Rs. 1,71,300; (ii) 2.855 years; (iii) 12%; (iv) Rs.10,963

Qtn 15:
You have to pay tuition fees amounting to Rs.12,000 a year at the end of each of the
next six years. If the interest rate is 8 percent, how much do you need to set aside today
to cover these fees?

Ans: Rs.55,476.

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8. DIVIDEND DECISIONS
1. M Ltd. belongs to a risk class for which the capitalization rate is 10%. It has 25,000
outstanding shares and the current market price is Rs. 100. It expects a net profit of Rs.
2,50,000 for the year and the board is considering dividend of Rs. 5 per share. M Ltd.
requires to raise Rs. 5,00,000 for an approved investment expenditure. Show how the MM
approach affects the value of M Ltd. if dividends are paid or not paid.

2. The following information is supplied to you:

Rs.
Total Earnings 2,00,000
No. of equity shares (of Rs. 100 each) 20,000
Dividend Paid 1,50,000
Price/Earning Ratio 12.5
Applying Walter’s Model:
i) Ascertain whether the company is following an optimal dividend policy.
ii) Find out what should be the P/E ratio at which the dividend policy will have no
effect on the value of the share.

3. With the help of following figures calculate the market price of a share of a
company by using:
i) Walter’s formula
ii) Dividend growth model (Gordon’s formula)
Earning per share (EPS) Rs. 10
Dividend per share (DPS) Rs. 6
Cost of capital (k) 20%
Internal rate of return on 25%
investment 60%
Retention ratio

4. The dividend payout ratio of H Ltd. is 40%. If the company follows traditional
approach to dividend policy with a multiplier of 9, what will be the P/E ratio.

5. XYZ Ltd., which earns Rs. 10 / share is capitalized at 10% and has a return on investment
of 12%. Determine the optimum dividend payout ratio and the price of the share at the
payout.

6. The following figures are collected from the annual report of XYZ Ltd.
Rs.
Net Profit 30 lakhs

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Outstanding 12% preference shares 100

No. of equity shares lakhs
Return on investment 3 lakhs
Cost of capital i.e. (Ke) 20%
16%
What should be the approximate dividend pay out ratio so as to keep the share price at
Rs.42 using Walter Model?

7. X Ltd. is a no growth company, pays a dividend of Rs. 5 per share. If the cost of
capital is 10%, what should be the current market price of the share?

8. A firm had been paid dividend at Rs. 2 per share last year. The estimated growth of
the dividends from the company is estimated to be 5% p.a. Determine the estimated
market price of the equity share if the estimated growth rate of dividends
i) Rises to 8% and
ii) Falls to 3% .
iii) Also find out the present market price of the share, given that the required rate
of return of the equity investors is 15.5%.

9. The earnings per share of a company is Rs. 30 and dividend payout ratio is 60%.
Multiplier is 2.

10. The following information regarding the equity shares of M Ltd. Is given:
Market Price Rs. 58.33
Dividend Per Share Rs. 5
Multiplier 7
According to Graham & Dodd approach to the dividend policy, compute the EPS.

11. Given the last year’s dividend is Rs. 9.80, speed of adjustment = 45%, target payout
ratio 60% and EPS for current year Rs.20. Calculate current year’s dividend.

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9. WORKING CAPITAL
MANAGEMENT
1) Calculate (a) cash cycle and (b) Number of cash cycles in a year assuming a 360 day year, with
help of following information.
a. Stockholding: Raw Material – 45 days:
b. WIP = 30 days;
c. Finished Goods – 1 month
d. Average Collection period from Debtors 70 days
e. Time lag in payment of bills 60 days.

2) Following information is forecasted by the CS Limited for the year ending 31st March, 2018:
Component Balance as at Balance as at 31st
1st April, 2017 March, 2018
Raw Material 45,000 65,356
Work-in-progress 35,000 51,300
Finished goods 60,181 70,175
Debtors 1,12,123 1,35,000
Creditors 50,079 70,469
Annual purchases of raw material (90% credit) 4,00,000
Annual cost of production 7,50,000
Annual cost of goods sold 9,15,000
Annual operating cost 9,50,000
Depreciation element included above 20,000
Annual sales (80% credit) 11,00,000
You are required to calculate:
(i) Net operating cycle period.
(ii) Number of operating cycles in the year.
(iii) Amount of working capital requirement.

3) Find out the working capital requirement with the help of following information and add 10%
for contingencies.
Average amounts locked up in stocks:
Finished Goods – Rs.8,000
Raw materials - Rs.12,000

Credit sales during the year:

Inland sales – 8 weeks credit – Rs.420,000
Export sales – 3.5 weeks credit – Rs.92,000

Other paid expenses : Rs.10,000 (paid half yearly in advance)

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Expenses incurred and their time lag:

Wages – 2.5 weeks – Rs.3,50,000
Stores, Materials Etc. – 1 months – Rs.52,000
Rent, Royalties etc. – 3 months – Rs.16,000
Salary – 0.5 months – Rs.85,000
Miscellaneous expenses – 2 months – Rs.64,000

4) From the following information you are required to find out the working capital requirements
under
(a) Total Approach
(b) Cash Cost Approach
Production- budgeted Units 900000
Holding – RM 3 months
-WIP 1month
-FG 1.5 months
Credit granted to customers 2.5 months
Credit availed 1.5 months
Minimum Cash required 50000

Particulars Cost Per Unit (Rs.)

Raw Material 12
Direct Labour 5
Overhead (Inclu. Dep. 1Re) 9
Total Cost 26
Profit 4
Selling Price 30

5) On 1st January, the Managing Director of A Ltd. Wishes to know the amount of working capital
that will; be required during the year. From the following information prepare the working
capital requirements forecast.
Production during the previous year was 60,000 units. It is planned that this level of activity
would be maintained during the present year. The expected ratios of the cost to selling prices are
Raw Materials 60%, Direct Wages 10% and Overheads 20%. Raw Materials are expected to
remain in store for an average of 2 months before issue to production.

Each unit is expected to be in process for 1 month, the raw materials being fed into the pipeline
immediately and the labour and overhead costs an average of ½ month. Finished goods will stay
in the warehouse awaiting dispatch to customers for approximately 3 months. Credit allowed by
creditors is 2 months from the date of purchase of raw materials. Credit allowed to debtors is 3
months from the date of dispatch. Selling price is Rs.5 per unit. There is a regular production
and sales cycle.

Wages and overheads are paid on the 1st of each month for the previous month. The company
normally keeps cash in hand to the extent of Rs.20,000.

6) Following annual figures relate to Vignesh Co: (Rs.)

Sales (at two months credit) 36,00,000
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Materials consumed (suppliers extend two months’ credit 9,00,000

Wages paid (monthly in arrear) 7,20,000
Manufacturing expenses outstanding at the end of the year 80,000
(cash expenses are paid one month in arrear)
Total administrative expenses, paid as above 2,40,000
Sales promotion expenses, paid quarterly in advance 1,20,000
The company sells its products on, gross profit of 25% counting depreciation as part of the cost
of production. It keeps the one month stock each of raw materials and finished goods, and a
cash balance of Rs.1,00,000. Assuming a 20% safety margin, work out the working capital
requirements of the company on cash cost basis. Ignore work –in-progress.

7) SHOBANA ltd. is commencing a new project for manufacture of a plastic component. The
following cost information has been ascertained for annual production of 12,000 units which is
the full capacity:
Cost per unit (Rs.)
Materials 40
Direct Labour and variable expenses 20
Fixed manufacturing expenses 6
Depreciation 10
Fixed administration expenses 4
80
The selling price per unit is expected to be Rs.96 and the expenses Rs.5 per unit. 80% of which
is variable
In the first two years of operations, production and sales are expected to be as follows:
Year Production Sales
(no. of units) (no.of units)
1 6,000 5,000
2 9,000 8,500
To assess the working capital requirements, the following additional information is available:
(a) Stock of materials 2.25 months’ average consumption
(b) work-in-progress Nil
(c) Debtors 1 months average sales
(d) Cash balance Rs.10,000
(e) Creditors for supply of materials 1 month average purchase during the year
(f) Creditors for expenses 1 months’ average of all expenses during the year
Prepare for the two years:
(i) A projected statement of profit/loss (Ignoring taxation); and
(ii) A projected statement of working capital requirements.
8) A firm maintains a separate account for cash disbursement. Total disbursements are Rs.1,05,000
per month or Rs.12,60,000 per year. Administrative and transaction cost of transferring cash to
disbursement account is Rs.20 per transfer. Marketable securities yield is 8% per annum.
Find
(i) Determine the optimum cash balance according to J.Baumal model.
(ii) Avg. cash balance
(iii) No. of transfers per year
(iv) Time interval between 2 transfers
(v) Total Transaction cost
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(vi) Total carrying cost

(vii) Total associated cost
9) A company currently has an annual turnover of Rs.10 lakhs and an average collection period of
45 days. The company wants to experiment with a more liberal credit policy on the ground that
increase in collection period will generate additional sales. From the following information,
kindly indicate which of the policies you would like the company to adopt:
Credit Increase in Increase in Percentage of
Policy collection period sales(Rs) Default
1 15 days 50,000 2%
2 30 days 80,000 3%
3 40 days 1,00,000 4%
4 60 days 1,25,000 6%
The selling price of the product is Rs.5, average costs per unit at current level is Rs.4 and the
variable costs per unit is Rs.3. The current bad debt loss is 1% and the required rate of return on
investment is 20%. A year can be taken to comprise of 360 days.

10) H Ltd. has a present annual sale of 10,000 units at Rs.300 per unit. The variable cost is Rs.200
per unit and the fixed costs amount to Rs.3,00,000 per annum. The present credit period allowed
by the company is 1 month.

The company is considering a proposal to increase the credit period to 2 months and 3 months
and has made the following estimates:
Existing Proposed
Credit policy 1 month 2 months 3 months
Increase in sales --- 15% 30%
%of Bad Debts 1% 3% 5%
There will be increase in fixed cost by Rs.50,000 on account of increase of sales beyond 25% of
present level. The company plans on a pre-tax return of 20% on investment in receivables. You
are required to calculate the most paying credit policy for the company.

Exercise Questions
WCM
Qtn 1:
RGB, Inc.’s receivable turnover is 10 times, the inventory turnover is 5 times, and
the payable turnover is 9 times. Find cash conversion cycle.
Ans: 69 days
Qtn 2:
From the following data compute the duration of the operating cycle & no. of
operating cycle. (Assume 360 days per year for computational purposes.)
Particulars (Rs.in Thousands)
Stocks:
Raw materials 20
Work in process 14
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Finished goods 21
Purchases 96
Cost of goods sold 140
Sales 160
Debtors 32
Creditors 16
Ans: 177 days | 2.03 cycles
Qtn 3:
Calculate (a) Net operating cycle period & (b) Number of operating cycles in a year.
Rs.
(i) Raw material inventory consumed during the year 6,00,000
(ii) Average stock of raw material 50,000
(iii) Cost of production 5,00,000
(iv) Average work-in-progress inventory 30,000
(v) Cost of Sales 8,00,000
(vi) Average finished goods stock held 40,000
(vii) Average collection period from debtors 45 days
(viii) Average credit period availed 30 days
(ix) No. of days in a year 360 days

Ans: 85 days. | 4.2 Cycles

Qtn 4: Jan 2021, May 2018, (8Marks)

The following information is provided by the DPS Ltd for the year ending 31st
March 2016
Raw material storage period 55 days
WIP conversation period 18 days
Finished goods storage period 22 days
Debt collection period 45 days
Creditors’ payment period 60 days
Annual operating cost Rs.
(Including Depreciation @10%) 21,00,000
One year = 360 days: You are required to calculate: -
1. Operating cycle period
2. Number of operating cycles in a year
3. Amount of working capital required for the company on a cash cost basis
4. The company is a market leader in its product, there is virtually no
competitor in the market. Based on a market research it is planning to
discontinue sales on credit and deliver products based on pre-payments.
There by, it can reduce its working capital requirement substantially.
5. What would be the reduction in working capital requirement due to such
decision?

Ans: (i) 80 ; (ii) 45; (iii) 420,000 ; (iv) 35 ; (v) 2,36,250

Qtn 5:
Following information is forecasted by the CS Limited for the year ending 31st
March, 2010:
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Component Balance as at Balance as at 31st

1st April, 2009 March, 2010
Raw Material 30,000 45,000
Work-in-progress 40,000 51,300
Finished goods 90,000 80,000
Debtors 2,00,000 1,50,000
Creditors 50,000 70,000
Annual purchases of raw material (80% 6,00,000
credit) 8,00,000
Annual cost of production 10,00,000
Annual cost of goods sold 12,00,000
Annual operating cost
(including depreciation 50,000 ) 16,00,000
Annual sales (70% credit)
You are required to calculate:
(i) Net operating cycle period.
(ii) Number of operating cycles in the year.
(iii) Amount of working capital requirement.

Ans: (i) 87, (ii) 4.19, (iii) Rs. 2,74,110

Qtn 6: May 2018 (10 Marks)

Bita Limited manufactures used in the steel industry. The following information
regarding the company is given for your consideration:
i) Expected level of production 9000 units per annum.
ii) Raw materials are expected to remain in store for an average of two
months before issue to production.
iii) Work-in-progress (50 percent complete as to conversion cost) will
approximate to ½ month’s production.
iv) Finished goods remain in warehouse on an average for one month.
v) Credit allowed by suppliers in one month.
vi) Two month’s credit is normally allowed to debtors.
vii) A minimum cash balance of Rs. 67,500 is expected to be maintained.
viii) Cash sales are 75 percent less than the credit sales.
ix) Safety margin of 20 percent to cover unforeseen contingencies.
x) The production pattern, is assumed to be even during the year.
xi) The cost structure for Bita Limited product is as follows:
Particulars (₹)
Raw Materials 80 per unit
Direct Labour 20 per unit
Overheads (including depreciation Rs. 20) 80 per unit
Total Cost 180 per unit
Profit 20 per unit
Selling Price 200 per unit
You are required to estimate the working capital requirement of Bita Limited.

Ans: Rs. 5,81,400

Qtn 7:
MN ltd is commencing a new project for manufacture of electric toys the

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following cost information has been ascertained for annual production of 60,000
units at full capacity:

Particulars Amount per unit

Raw materials 20
Direct Labour 15
Manufacturing over heads
Variable 15
Fixed 10 25
Selling and distribution over heads
Variable 3
Fixed 1 4
Total cost 64
Profit 16
Selling Price 80
In first year of operations expected production and sales are 40000 units and 35000
units respectively. To assess the need of working capital the following additional
information is available:
1. Stock of raw materials 3 months consumption
2. Credit allowable for debtors 1 ½ month
3. Credit allowable by creditors 4 months
4. Lag in payment of wages 1 month
5. Lag in payment of overheads ½ month
6. Cash in hand and bank is expected to be Rs.60000
7. Provision for contingencies is required @ 10 % of working capital requirement
including that provision.
You are required to prepared a projected statement of working capital
requirement for the first year of operations. Debtors are taken at cost .

Ans: Profit Rs. 3,60,000. WC Rs. =4,99,769

Qtn 8:
CCH Ltd. has furnished the following cost data relating to the year ending of 31st
March, 2008. Rs. (in Lakhs)
Sales 450
Material consumed 150
Direct wages 30
Factory overheads (100% variable) 60
Office and Administrative overheads (100% variable) 60
Selling overheads 50
The company wants to make a forecast of working capital needed for the next year
and anticipates that:

Ø Sales will go up by 100%,

Ø Selling expenses will be ₹ 150 lakhs,
Ø Stock holdings for the next year will be-Raw material for two and half
months, Work-in-progress for one month, Finished goods for half month
and Book debts for one and half months,
Ø Lags in payment will be of 3 months for creditors, 1 month for wages and
half month for

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Factory, Office and Administrative and Selling overheads.

You are required to prepare statement showing working capital requirements for
next year.

Ans: Rs136.25
Qtn 9:
Q Ltd sells goods at a uniform rate of gross profit of 20% on sales including
depreciation as part of cost of production. Its annual figures are as under:
Particulars Rs.
Sales (At 2 months credit) 24,00,000
Materials (At 2 months credit) 6,00,000
Wages paid(Monthly at the beginning of the subsequent month) 4,80,000
Manufacturing expenses(Cash expenses are paid – one month in 6,00,000
arrear)
Administration expenses(Cash expenses are paid – one month in 1,50,000
arrear)
Sales promotion expenses(Paid quarterly in advance) 75,000
The company keeps one month stock each of raw materials and finished goods. A
minimum cash balance of Rs.80,000 is always kept. The company wants to adopt a
10% safety margin in the maintenance of working capital. The company has no
work in progress
Find out the requirements of working capital of the company on cash cost basis.

Ans: Rs. 4,44,125

Qtn 10:
Amurra Limited maintains a separate account for cash disbursement. Total
disbursements are ₹ 2,62,500 per month. Administrative and transaction cost of
transferring cash to disbursement account is ₹ 25 per transfer. Marketable
securities yield is 7.5% per annum. Based on J Baumal model find out :-
(i) Time interval between 2 transfers
(ii) Total associated cost

Ans (i) 5.29 days (ii) Rs. 3,443

Qtn 11:
Sun Industries is marketing all its products through a network of dealers. All sales
are on credit and the dealers are given one-month time to settle bills. The company
is thinking of changing the credit period with a view to increase its overall profits.
The marketing department has prepared the following estimates for different
credit periods.

Current policy Plan I Plan II Plan III

Credit period (in months) 1 1.50 2.00 3.00
Sales (in lakhs of rupees) 120 130 150 180
Fixed cost (in lakhs of rupees) 30 30 35 40
Bad Debts (% of sales) 0.5 0.8 1 2
The company has a contribution/sales ratio of 40%. Further it requires a pretax
return on investment at 20%. Evaluate the above proposals and recommend the
best credit period for the company.

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Ans: Plan III net Benefit Rs.21 Lakhs

Qtn 12:
Ganpati Limited has total sales of Rs. 3.2 crores and its average collection period is
90 days. The past experience indicates that bad-debt losses are 1.5% on sales. The
expenditure incurred by the company in administering its receivable collection
efforts are Rs.5,00,000. A factor is prepared to buy the company’s receivables by
charging 2% commission. The factor will pay advance on receivables to Ganpati
Limited at an interest rate of 18% p.a. after withholding 10% as reserve. You are
required to compute the effective cost of factoring to Ganpati Limited.

Ans: 13.79%

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MCQ S

FINANCIAL
MANAGEMENT

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Chapter 1:
Scope and objectives of
Financial Management
1. Basic Aspects of FM are
a. Procurement and Effective utilization b. Profit Maximization and wealth
of funds Maximization
c. All of the above (AOA) d. None of the above (NOA)

2. Objectives of FM are
a. Procurement and Effective utilization b. Profit Maximization and wealth
of funds Maximization
c. All of the above (AOA) d. None of the above (NOA)

3. Procurement of funds
by way of
a. Own Funds b. Borrowed Funds
c. Own + Borrowed Funds d. None of the above

4. Procurement of funds
involves
a. Identification of sources of fund b. Selecting the Finance Mix
c. AOA d. NOA

5. Characteristics of
Sources of Funds are
a. Risk b. Cost
c. Control d. AOA

6. High Risk goes to

a. Own Fund b. Borrowed Fund
c. AOA d. NOA

7. High Cost goes to

a. Own Fund b. Borrowed Fund
c. AOA d. NOA

8. High Control goes to

a. Own Fund b. Borrowed Fund
c. AOA d. NOA

9. Dillution of Control is
possible

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a. Own Fund b. Borrowed Fund

c. AOA d. NOA

10. Present value of

Benefit - Present value of Cost is equal to
a. Profit b. Wealth
c. Growth d. AOA

11. It emphasize on short term objective

a. Profit maximization b. Wealth maximization
c. All of the above d. None of the above

12. Important decision for achievement of wealth maximization

a. Investment decision b. Finance decision
c. Dividend decision d. All of the above

13. Which one is the advantage of wealth maximization

a. Long term object b. Recognize risk and uncertainty
c. Consider shareholders return d. All of the above

14. Which one is not for profit maximization

a. Easy to calculate profit b. Easy to determine the link between
financial decisions and profit
c. Must for survival d. Recognize the timing of return

15. Role of CFO includes

a. Planning and source of procurement b. Investment decision
c. Risk management d. All of the above

16. Emerging issues which affects the future role of CFO

a. Globalization, stakeholders b. Technology, transformation, talent
management and strategy
c. Regulation, risk, reporting d. All of the above

17. Which of the following statement is correct

a. Financial accounting is on accrual b. Financial accounting is to collect and
basis whereas financial present the data whereas financial
management is on cash basis management is for planning,
controlling and decision making
c. Financial management begins d. All of the above
where financial accounting ends

18. In corporate, owners are not active in management so there is a separation between owners
and managers. It creates a
a. Shareholders problem b. Stakeholders problem
c. Agency problem d. None of the above

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19. Types of agency cost includes

a. Monitoring and bonding b. Opportunity and structuring
c. All of the above d. None of the above

20. Which of the following statement is correct

a. Cash flows of a firm are inadequate b. Insolvency means inability of a firm
to meet all its current obligation is to repay various debts and it is a
financial distress result of continuous financial distress
c. All of the above d. None of the above

21. Focus of financial management is mainly concerned with the decision related to:
a. Financing b. Investing
c. Dividend d. All of the above

22. The main objective of financial management is to:

a. Secure profitability b. Maximise shareholder wealth
c. Enhancing the cost of debt d. None of the above

23. The shareholder value maximisation model holds that the primary goal of the firm is to
maximise its:
a. Accounting profit b. Liquidity
c. Market value d. Working capital

24. Wealth maximisation approach is based on the concept of:

a. Cost benefit analysis b. Cash flow approach
c. Time value of money d. All of the above

25. Management of all matters related to an organisation’s finances is called:

a. Cash inflows and outflows b. Allocation of resources
c. Financial management d. Finance

26. Which of the following is the disadvantage of having shareholders wealth maximisation
goals?
a. Emphasizes the short term gains b. Ignores the timing of returns
c. Requires immediate resources d. Offers no clear relationship between
financial decisions and share price

27. The most important goal of financial management is:

a. Profit maximization b. Matching income and expenditure
c. Using business assets effectively d. Wealth maximisaton

28. To achieve wealth maximisation, the finance manager has to take careful decision in respect
of:
a. Investment b. Financing
c. Dividend d. All of the above

29. Early in the history of finance, an important issue was:

a. Liquidity b. Technology

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c. Capital Structure d. Financing options

30. Which of the following are microeconomic variables that help define and explain the
discipline of finance?
a. Risk and return b. Capital structure
c. Inflation d. All of the above

31. Financial management is mainly concerned with the –

a. Acquiring and developing assets to b. Acquiring and financing and managing
forfeit its overall benefit assets to accomplish the overall goal of
a business enterprise
c. Efficient management of the d. Sole objective of profit maximisation
business

32. Which of the following need not be followed by the finance manager for measuring and
maximising shareholders’ wealth?
a. Accounting profit analysis b. Cash flow approach
c. Cost benefit analysis d. Application of time value of money

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Chapter 2:
Types of Financing
1. Financial needs may be
a. Long Term b. Medium Term
c. Short Term d. AOA

2. Financial needs of less than a year is

a. Long term b. Medium term
c. Short term d. AOA

3. Which of the following will not form part of short term source of finance ?
a. Venture – capital financing b. Trade credit
c. Accrued expenses d. Deferred income

4. Which of the following not comes under long-term source of finance?

a. Share capital b. Retained earning
c. Bonds d. Commercial paper

5. Which of the following statements is correct?

a. Bridge finance is a long term b. Seed capital assistance is a short term
source finance
c. Factoring is a short term finance d. Debt-securitization is a short term
finance

6. If nature of business profit is highly uncertain then company can be depend on

a. Equity share capital b. Debentures
c. Long - term loan d. NOA

7. Advantages of rising fund by way of Equity share capital includes

a. It is a permanent source of finance b. Not redeemable
c. Helps further borrowings d. AOA

8. Which of the following statement is incorrect with respect to preference share capital?
a. No dilution of EPS on enlarged capital base b. Having voting rights
c. Leveraging advantages as it bears a fixed d. Redeemable after specified
charge period

9. Match it:
Types of Preference Shares Features
i. Cumulative A) Option to change in equity

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ii. Non – cumulative B) Rights also includes in surplus of the firm

iii. Participating C) Arrear dividend will accumulate
iv. Convertible D) No right to arrear dividend

a. i - C, ii – D, iii – B, iv – A b. i - D, ii – C, iii – B, iv – A
c. i - B, ii – D, iii – C, iv – A d. i - A, ii – D, iii – B, iv –C

10. Types of preference does not include

a. Cumulative and Non-cumulative b. Redeemable and Convertible
c. Participating and Non-participating d. NOA

11. Which of the following statement is incorrect

a. Inequity dividend is paid after b. Equity dividends are fluctuating
preference dividend nature
c. Preference share have voting rights d. Equity shares are not convertible
nature

12. Based on convertibility debentures can be classified into

a. Non convertible debentures b. Fully convertible debentures
c. Partly convertible debentures d. All of the above

13. Which of the following statement is correct

a. Debentures which are transferable b. Unsecured debentures are naked
like negotiable instruments are bearer debentures
debenture
c. All of the above d. None of the above

14. The right to sell the bond back to the company before maturity is
a. Callable bonds b. Puttable bonds
c. All of the above d. None of the above

15. Which of the following will not comes under foreign bond
a. Masala bond b. Plain vennila bond
c. Convertible floating rate notes d. Samurai bond

16. Which of the following will comes under Indian bond

a. Bulldog bond b. Yankee bond
c. Drop lock bond d. Municipal bond

17. This loan connect the gap between the date of sanctioning the loan and the final
disbursement of loan
a. Venture capital financing b. Bridge financing
c. Seed capital assistance d. Debt securitisation

18. Which of the following is incorrect with respect to bridge finance

a. It is a short term loan b. Low interest
c. Helps to implement the project on d. Normally secured by hypothecation
time
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19. Financing for new high risky project promoted by qualified entrepreneur is
a. Bridge finance b. Seed capital assistance
c. Venture capital financing d. Debt securitisation

20. Methods of venture capital finance includes

a. Equity financing b. Conditional loan
c. Income note d. All of the above

21. No interest is paid but royalty is payable is

a. Conditional loan b. Income note
c. Participating debenture d. All of the above

22. Both interest and royalty is paid for

a. Conditional loan b. Income note
c. Participating debenture d. All of the above

23. It's a financial transaction in which assets are pooled and securities are issued based on the
same
a. Bridge finance b. Seed capital assistance
c. Venture capital assistance d. Debt securitisation

24. In debt securitisation the company to which the underlying pool of assets are sold is known
as
a. Special asset b. Purposeful asset
c. Special purpose vehicle d. None of the above

25. In debt securitisation the company which sells the underlying pool of assets is known as
a. Seller b. Borrower
c. Originator d. None of the above

26. Benefits of the originator on debt securitisation includes

a. The assets are shifted off the balance b. It convert non liquid asset into liquid
sheet portfolio
c. Originator credit rating enhances d. All of the above

27. Debt securitisation is

a. Without recourse b. With recourse
c. With and without recourse d. None of the above

28. It’s an advance by bank to an exporter is

a. Packing credit b. Export loan
c. Import loan d. Shipment loan

29. Packing credit comes under

a. Short term advance b. Long term advance
c. Short term and long term advance d. None of the above

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30. ECGC Guarantee is

a. Pre shipment finance b. Post shipment finance
c. All of the above d. None of the above

31. Which of the following will not comes under pre shipment finance of packing credit
a. Clean packing credit b. Packing credit against hypothecation
c. Forward exchange contract d. Advance against duty drawback

32. Which of the following will not comes under post shipment finance of packing credit
a. Discounting on documentary bills b. Packing credit against pledge
c. Advance against export bills d. Advance against duty drawback

33. Which of the following statement is not correct?

a. No service charge for bridge b. 5 years moratorium period is available
finance for back seed assistance
c. NOA

34. Which of the following statement is in correct?

a. Deep discount bonds are a form of b. Sold at discount value
interest – free bond
c. Redeemed at FV d. Low rate of interest during the lock
in period

35. It refers to the commercial loan availed from Non-resident lenders by way of automatic
route or RBI approval route
a. External commercial borrowings (ECB) b. ADR
c. GDR d. Zero – coupon

36. Which of the following statement is correct?

a. GDR do not having voting right b. ADR only traded in the US
c. GDR’s are most preferred due to the easy d. AOA
operation

37. Under which phenomenon a part of the total profit is transferred to various reserves which is
re-invested in business for development.
a. Retained earnings b. Reserves and Surplus
c. General Reserve d. Ploughing back of profit

38. Principle relating to selection of marketable securities includes

a. Safety b. Maturity
c. Marketability d. AOA

39. These are the bonds where the interest rate is not fixed and is allowed to fluctuate depending
upon market condition
a. Indian bonds b. Secured premium note
c. Floating rate bonds d. Zero – coupon bonds

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40. _____ financing is a form of an equity finance where an investor is a wealthy individual
who provides capital for start up in exchange for ownership in the company.
a. Equity Finance b. Angel Finance
c. Ploughing back of profit d. AOA

41. Environmental, Social and Govt linked bond includes

a. Green bonds b. Social bonds
c. Sustainability bond d. AOA
42. Which of the following will not come under project based ESG bond ?
a. Green bonds b. Social bonds
c. Sustainability bond d. AOA

43. Instead of having the right of an asset, holding right to use the asset i.e getting rights from
the owner
a. Mortgage b. Pledge
c. Hypothecation d. Lease

44. Which of the following statement is correct with respect to lease financing
a. Owner of the asset is lessor and user of b. Lease rental charges is an income
the asset is lessee of the lessor
c. Lease rent can be deducted from total d. All of the above
income under income tax act by lessee

45. Payment by way of lease rental over the period of lease are not enough to cover the cost of a
leased asset is
a. Operating lease b. Finance lease
c. Leveraged lease d. Sales and lease back

46. Payment by way of lease rental over the period of lease are enough to cover the cost of a
leased asset is
a. Operating lease b. Finance lease
c. Leveraged lease d. Sales and lease back

47. Classification of finance lease includes

a. Tax oriented lease and leveraged lease b. Sales and lease back
c. Sales aid lease and close ended and open d. All of the above
ended lease

48. Which of the following statement is correct

a. in finance lease risk and reward b. in operating lease, lessor bears cost
incident to ownership are passed on of repairs and maintenance
to the lessee
c. finance lease is non cancellable by d. All of the above
either party

49. Under this lease a third party is involved beside lessor and lessee

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a. Sales and lease back b. Sales aid lease

c. Leveraged lease d. Tax oriented lease

50. The lessee has the option of purchasing the asset at the end of the lease period is
a. Open ended lease b. Close ended lease
c. Sales aid lease d. Sales and lease back

51. Raising the money from group of people to fund a project via internet, social media in
exchange of equity is known as
a. Crowd funding b. Peer-to-peer lending
c. Start up finding d. Donation based crowd funding

52. Equity shares:

a. Have an unlimited life, and voting b. Have a limited life, with no voting
rights and receive dividends rights but receive dividends
c. Have a limited life, and voting rights d. Have an unlimited life, and voting
and receive dividends rights but receive no dividends

53. External sources of finance do not include:

a. Debentures b. Retained Earnings
c. Overdrafts d. Leasing

54. Internal sources of finance do not include:

a. Better management of working capital b. Ordinary shares
c. Retained Earnings d. Reserves and Surplus

55. In preference shares

a. Dividends are not available b. Limited voting rights are available
c. Are not part of a company’s share d. Interest can be received
capital

56. A debenture:
a. Is a long term loan b. Does not require security
c. Is a short term loan d. Receives dividend payments

57. Debt capital refers to:

a. Money raised through the sale of b. Funds raised by borrowing that must
shares be repaid
c. Factoring accounts receivable d. Inventory loans

58. The most popular source of short term funding is:

a. Factoring b. Trade credit
c. Family and friends d. Commercial banks

59. Marketable securities are primarily:

a. Short term debt instruments b. Short term equity securities

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c. Long term debt instruments d. Long term equity securities

60. Which of the following marketable securities is the obligation of a commercial bank?
a. Commercial paper b. Negotiable certificate of deposit
c. Repurchase agreement e. T – bills

61. Reserves & Surplus are which form of financing?

a. Security financing b. Internal financing
c. Loans financing d. International financing

62. With reference to ‘IFC Masala Bonds’, which of the statements given below is / are correct?
1. The International Finance Corporation, which offered these bonds, is an arm of the World
Bank.
2. They are rupee denominated bonds and are a source of debt financing for the public and private
sector
a. 1 only b. 2 only
c. Both 1 and 2 d. Neither 1 nor 2

63. External commercial borrowings can be accessed through ------------

a. Only automatic route b. Only approval route
c. Both automatic and approval route d. Neither automatic nor approval route

Chapter 4

Cost of Capital
1. It represent cost incurred for procurement of fund
a. Cost of capital b. Cost of debt
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c. Cost of preference shares d. Cost of equity

2. Always ______ the cost of capital is preferable

a. Higher b. Lower
c. Medium d. All of the above

3. Cost of capital should be expressed in terms of

a. Rs b. Times
c. Percentage d. Any one of the above

4. Which of the following statement is correct

a. Cost of capital may be defined as the cut b. To decide whether the project is
off rate for determining estimated future worth undertaking or not
cash proceeds of a project
c. Dividend is the cost of own fund and d. All of the above
interest is the cost of borrowed fund

5. The new issue of security involves some expenditure in the form of underwriting
commission or brokerage fee or legal and administrative charges are known as
a. Cost of capital b. Flotation Cost
c. Cost of debt d. None of the above

6. Match it:
Particulars Cost
1. Kd i) Preference dividend
2. Kp ii) Equity dividend
3. Ke iii) Interest

a. i - a, ii – b, iii – c b. i – b, ii – c , iii – a
c. i – c, ii – a , iii - b

7. Finding cost of debt using present value method is

a. Cost of debt b. YTM
c. CAPM d. WACC

8. Which of the following statement is not correct with respect to YTM method
a. Cost of irredeemable debt is b. YTM is the annual return of an
calculated by discounting the investment from the current date till
relevant cash flow using IRR maturity date.
c. YTM is the internal rate of return d. It’s a cost of debt using present value
at which current price of debt method.
equal to the present value of all
cash flows
9. ( Rv - Np / N ) is ______
a. Average liability b. Average premium
c. Cost of debt d. Cost of preference share

10. Which of the following not forming part of computation of Ke

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a. Dividend price approach and earning b. Growth approach and realised yield
price approach approach
c. YTM approach d. CAPM approach

11. Dividend price + growth approach is known as

a. Realised yield approach b. CAPM approach
c. Gordon’s model d. Earnings price approach

12. Market specific risk under which a company operates is

a. Systematic risk b. Unsystematic risk
c. No risk

13. Which of the following statement is correct?

a. Company specific risk – as the risk is b. Systematic risk cannot be eliminated
related with company’s performance by diversification of securities
is unsystematic risk portfolio.
c. Example for systematic risk includes d. AOA
inflation , govt policies, interest rate,
etc..

14. It represents opportunity cost of dividend foregone by shareholders

a. Ke b. Kd
c. Kr d. Kp

15. It is defined as overall cost of capital computed by reference to the proportion of each
component of capital as weight
a. CAPM b. WACC
c. YTM NOA

16. Sum of (Cost of Individual components * Proportion in Capital) is

a. WACC b. Overall Cost of Capital
c. Ko d. AOA

17. Usage of cheaper Debt fund will ____ the WACC.

a. Increase b. Decrease
c. Maintain the same d. NOA

18. The value of the firm will be ___ at the point where WACC is ___ .
a. Maximum, Minimum b. Minimum, Minimum
c. Maximum, Maximum d. AOA

19. WACC can be computed by way of

a. Book value b. Market value
c. Any one of the above d. AOA

20. ______ won’t arise in case of market value method of WACC.

a. Ke b. Kd
c. Kr d. Kp
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21. In General Kr =
a. Ke b. Kd
c. Kr d. NOA

22. When Kr not equal to Ke?

a. In case of corporate tax b. In case of shareholder’s personal tax
c. No tax d. Any one of the above

23. EPS * Dividend Payout Ratio is equal to

a. Market price per share b. Dividend per share
c. Company’s growth d. AOA

24. Share Price = Rs.100, DPR – 20% , EPS = Rs. 80. DPS =
a. Rs. 20 b. Rs. 16
c. Rs. 80 d. NOA

25. Which of the following is not an assumption of the capital asset pricing model (CAPM)?
a. The capital market is efficient b. Investors lend or borrow at a risk free
rate of return
c. Investors do not have the same d. Investor’s decisions are based on a
expectations about the risk and return single time period

26. Given: risk free rate of return = 5%; market return = 10%; cost of equity = 15%; value of
beta (β) is:
a. 1.9 b. 1.8
c. 2.0 d. 2.2

27. _________ may be defined as cost of raising on additional rupee of capital:

a. Marginal cost of capital b. Weighted average cost of capital
c. Simple average cost of capital d. Liquid cost of capital

28. Which of the following cost of capital requires to adjust taxes?

a. Cost of equity share b. Cost of preference share
c. Cost of debentures d. Cost of retained earnings

29. Marginal cost of capital is the cost of:

a. Additional Revenue b. Additional funds
c. Additional interests d. None of the above

30. In order to calculate weighted average cost of capital weights may be based on:
a. Market values b. Target values
c. Book values d. Anyone of the above

31. Firm’s cost of capital is the average cost of:

a. All sources of finance b. All borrowings
c. All share capital d. All bonds & debentures

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32. A company has a financial structure where equity is 70% of its total debt plus equity. Its
cost of equity is 10% and gross loan interest is 5%. Corporation tax is paid at 30%. What
is the company’s weighted average cost of capital (WACC)?
a. 7.55% b. 7.80%
c. 8.70% d. 8.05

33. The cost of equity capital is all of the following except:

a. The minimum rate that a firm b. A return on the equity financed portion of
should earn on the equity an investment that, at worst, leaves the
financed part of an investment market price of the stock unchanged

c. By far, the most difficult d. Generally, lower than the before tax cost
component cost to estimate of debt

34. What is the overall (weighted average) cost of capital when the firm has Rs. 20 crores in
long term debt, Rs. 4 crores in preferred stock, and Rs. 16 crores in equity shares? The
before tax cost for debt, preferred stock, and equity capital are 8%, 9% and 15%,
respectively. Assume a 50%, tax rate.
a. 7.60% b. 6.90%
c. 7.30% d. 8.90%

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Chapter 5:

Capital Structure
1. It refers to mix of sources from where the long term funds required in the business may
be raised
a. Cost of capital b. Capital Structure
c. Optimum capital d. All of the above

2. Capital structure refers to proportion of debt, Preference capital and Equity Capital
a. The statement is correct b. The statement is incorrect

3. Fundamental principles governing capital structure includes

a. Cost and risk principle b. Control and flexibility principle
c. Other consideration like nature of d. All of the above
industry timing of issue and
competition

4. Management chooses such a combination of source of Financing which finds it easier to

adjust according to changes in need of fund in future too is known as
a. Cost principle b. Risk principle
c. Flexibility principle d. Control principle

5. An ideal pattern of capital structure is one that maximises EPS is

a. Cost Principle b. Risk principle
c. Flexibility principle d. Control principle

6. Use of more and more of debt fund means higher commitment in the form of interest
pay out is
a. Cost principle b. Risk principle
c. Flexibility principle d. Control principle

7. The debt content should not exceed the maximum which the company can bear is known
as
a. Conservation b. Solvency
c. Control d. Profitability

8. Types of capital structure theory includes

a. Net income approach b. Net operating income approach
c. MM approach d. All of the above

9. Capital structure may consists of

a. Relevance theory b. Irrelevance theory
c. Both a and b d. None of the above

10. Based on capital structure theory, company may have

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a. Equity fund alone b. Debt fund and equity fund

c. Debt, Equity fund and Preference
Share Fund

11. . Which of the Following is not an assumption under capital structure theory ?
a. No change in capital employed b. All earnings are distributed to equity
shareholders
c. No loss for the company NOA

12. Value of the firm is not equal to

a. Market value of equity and market b. EBIT / Ko
value of debt
c. EAESH / Ke d. AOA

13. Market value of equity is equal to

a. EAT / Ke b. EAESH / Ke
c. EBIT / Ke

14. M M Model approach consists of

a. Without Tax Approach b. With Tax Approach
c. AOA d. NOA

15. M.M Approach without tax approach

a. Value of levered firm = Value of b. Value of levered firm = Value of
unlevered firm unlevered firm + Tax benefit
c. AOA d. NOA

16. Assumptions under M M Approach includes

a. Kd > Ke b. Kd remain constant at various levels
of Debt Equity mix
c. Ko is constant and not affected by d. AOA
leverage

17. In M.M Approach with Tax Model, Value of the levered firm is
a. Value of unlevered firm + Tax b. Value of unlevered firm
benefit
c. AOA NOA

18. Which of the following statement is incorrect based on M M approach?

a. Capital markets are not b. Company can be grouped into equivalent risk
perfect class on the basis of their business risk
c. No transaction cost d. Ko is not affected by leverage

19. Arbitrage represents

a. Buying securities at lower price in b. As a result of arbitrage equilibrium is
one market and selling higher in attained in different markets.
another market

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c. It is a risk less profit d. AOA

20. Arbitrage process is

a. Investors of the firm whose value is b. Investors of the firm whose value is
higher will sell their shares lower will sell their shares
c. Any one of the above d. AOA

21. Which of the following statement is incorrect with respect to arbitrage process
a. Arbitrage is happening because of imperfect b. Arbitrate is a riskless
information profit
c. Due to modern technology development, d. None of the above
arbitrage opportunity will reduce

22. Risk associated with firm’s operation are known as

a. Business risk b. Finance risk
c. Market risk d. None of the above

23. It refers to additional risk placed on shareholders as a result of debt fund is

a. Business risk b. Finance risk
c. Market risk d. None of the above

24. Which of the following statement is correct with respect to business risk
a. It is the uncertainty about the future b. That is how well can the
operating income operating income can be
predicted
c. It can be measured by standard deviation d. All of the above
of basic earning power ratio

25. Financial risk may be

a. Risk of cash insolvency b. Risk of variation in EPS
c. All of the above d. NOA

26. Which of the following statement is incorrect

a. Companies having more debt fund b. Financial risk can be measured by
would have higher financial risk financial leverage multiplier
c. For fully equity based company's d. All of the above
financial risk is high

27. Which of the following statement is form part of business risk

a. Cash insolvency b. Variation in EPS
c. All of the above d. None of the above

28. Situation where a firm has more capital than its needs is known as
a. Over capitalisation b. Under capitalisation
c. Business risk will be high d. None of the above

29. Which of the following form part of over capitalisation

a. Raising more money through shares b. Borrowing huge amount at higher
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and debentures than company can rate than the rate at which the
employ profitably company can earn
c. Excessive payment for the d. All of the above
acquisition of fictitious asset

30. Which of the following is not the consequence of over capitalisation

a. Considerable reduction in rate of b. Increase in market price of the share
dividend
c. Leads to window dressing d. All of the above

31. Remedies for overcapitalisation include

a. Components should go for b. Buyback of shares
reorganization
c. Reduction in climbs of debenture d. All of the above
holder

32. The idea that the company chooses how much debt fund and how much equity fund to
use by balancing cost and benefit is known as
a. Cost of capital b. Capital structure
c. Trade off theory d. None of the above

33. Trade off theory of capital structure deals with the concept of
a. Cost of financial distress b. Agency cost
c. Both A and B d. None of the above

34. Order of preference of fund in case of pecking order theory is

a. Internal fund, debt fund and equity b. Internal fund, equity fund and debt
fund fund
c. Equity fund, internal fund and debt d. Debt fund, internal fund and equity
fund fund

35. Based on pecking order theory

1) This theory states that firms prefers to issue debt when they are positive about future
earning
2) Equity is issued when they are doubtful and internal finance is insufficient
a. Statement 1 is correct b. Statement 2 is correct
c. Both 1 and 2 are correct d. Both are wrong

36. In general, EPS is a criteria for selection of capital structure but if number of equity
share are not available, then we have to select capital structure by way of
a. Earnings available to equity b. ROCE
shareholders
c. ROE d. AOA

37. The assumption of MM hypothesis of capital structure do not include the following:
a. Capital markets are perfect b. Investors have homogeneous
expectations
c. All firms can be classified into d. The dividend payout ratio is cent
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homogeneous risk classes percent, and there is no corporate tax

38. Which of the following is irrelevant for optimal capital structure?

a. Flexibility b. Solvency
c. Liquidity d. Control

39. Financial statement refers to:

a. All financial sources b. Short term funds
c. Long term funds d. None of these

40. EBIT – EPS indifference analysis chart is used for

a. Evaluating the effects of business risk b. Examining EPS results
on EPS
c. Determining the impacts of a change d. Showing the changes in EPS quality
in sales on EBIT over time

41. The term capital structure means:

a. Long term debt, preferred stock and b. Current assets and current liabilities
equity shares
c. Net working capital d. Shareholders equity

42. The cost of monitoring management is considered to be a (an):

a. Bankruptcy cost b. Transaction cost
c. Agency cost d. Institutional cost

43. The traditional approach towards the valuation of a firm assumes:

a. That the overall capitalization rate b. That there is an optimum capital
changes in financial leverage structure
c. That the total risk is not changed with d. That the markets are perfect
the changes in the capital structure

44. Market values are often used in computing the weighted average cost of capital because:
a. This is the simplest way to do the b. This is consistent with the goal of
circulation maximizing shareholder value
c. This is required by SEBI d. This is very common mistake

45. A firm’s optional capital structure:

a. Is the debt equity ratio that results in the b. 40 percent debt and 60
minimum possible weighted average cost of percent equity
capital
c. When the debt equity ratio is 0.50 d. When cost of equity is
minimum

46. Capital structure of a firm influences the:

a. Risk b. Return
c. Both risk and return d. Return but not risk

47. Consider the below mentioned statements:

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1.A company is considered to be over capitalised when its actual capitalisation is lower
than the proper capitalisation as warranted by the earning capacity.

2.Both over capitalisation and under capitalisation are detrimental to the interests of the
society.

State true or false:

a. 1 – True, 2 - True b. 1 – False, 2 - True
c. 1 – False, 2 - False d. 1 – True, 2 – True

48. A critical assumption of the Net Operating Income (NOI) approach to valuation is:
a. That debt and equity levels remain b. That dividends increase at a constant
unchanged rate
c. That Ke remains constant regardless d. That interest expense and taxes are
of changes in leverage included in the calculation

49. Which of the following steps may be adopted to avoid the negative consequences of
over capitalisation?
a. The shares of the company should be split up. b. Issue of bonus shares
This will reduce dividend per share, though
EPS shall remain unchanged.
c. Revising upward the par value of shares in d. Reduction in claims of
exchange of the existing shares held by them debenture holders and
creditors

50. If the company is having Debt equity ratio of 70:30 then the company is considered as
a. Levered firm b. Unlevered firm
c. Hight cost company d. NOA

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CHAPTER 7 :
INVESTMENT DECISIONS
1. Time Period required to get back the amount invested is
a. Simple pay back b. Discounted pay back
c. Pay-back reciprocal d. ARR

2. In case of uneven cash flow we have to compute simple pay back by way of
a. Formula based b. Tabular based
c. Any one of the above

3. Which of the following considering time value of money?

a. Simple pay back b. Pay Back Reciprocal
c. ARR d. IRR

4. Which of the following is with considering Time value of money?

a. Discounted pay back b. Net Present Value (NPV)
c. Profitability index d. AOA

5. Modified IRR is
a. Traditional method b. Time – Adjusted Method
c. AOA d. NOA

6. In case of uneven cash flow, Simple Pay Back =

a. Initial Investment / CFAT p.a b. Time at which cumulative CFAT =
Initial Investment
c. NPV = 0 d. AOA

7. This is similar to Simple Pay Back, but after considering time value of money
a. IRR b. Discounted Pay Back
c. ARR d. NPV

8. Pay back should be expressed in terms of

a. Percentage b. Years
c. Times

9. Pay back reciprocal should be expressed in terms of

a. % b. Years
c. Times

10. (CFAT p.a / Initial Investment) *100 =

a. ARR b. IRR
c. Pay Back Reciprocal d. NOA

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11. In case of uneven cash flow, we have to consider ____ to compute payback
reciprocal
a. CFAT p.a b. Cumulative CFAT
c. Average CFAT d. Total CFAT

12. Profit after tax is considered in

a. Simple payback b. ARR
c. Discounted payback d. IRR

13. ARR should be expressed in

a. Percentage b. Times
c. Years

14. If profitability index is less than 1 then

a. Accept the project b. Reject the project
c. Accept or reject

15. Profitability index for the project A and project B are 1.35 and 1.28 respectively.
Which project is profitable
a. Project A b. Project B
c. All of the above d. None of the above

16. Profitability index for the project A and project B are 1.35 and 1.28 respectively.
Which project is more profitable
a. Project A b. Project B
c. All of the above d. None of the above

17. If net present value is less than 0

a. Accept the project b. Reject the project
c. Accept or reject

18. Excess of total discounted CFAT over initial investment is

a. ARR b. IRR
c. Net present value d. Profitability index

19. In case of accept or reject decision net present value of project A - Rs.10,00,000
and project B - Rs.12,00,000. Which project you will accept
a. Project A b. Project B
c. Project A and B d. None of the above

20. In case of mutually exclusive decision net present value of project A - Rs.
10,00,000 and project B - Rs. 12,00,000. Which project you will accept
a. Project A b. Project B
c. Project A and B d. None of the above

21. IRR is preferable in case of

a. Higher b. Lower

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c. Neutral d. None of the above

22. In case of IRR which of the following statement is correct.

a. Total discounted CFAT = Initial Investment b. Net present value = 0
c. Profitability index = 1 d. All of the above

23. If IRR > Ko, NPV will be

a. Positive b. Negative
c. 0 d. NOA

24. If company incur loss out of the project then

a. IRR > Ko b. IRR = Ko
c. IRR < Ko

25. PAT + Depreciation =

a. Earnings available to equity shareholders b. Earnings after Tax
c. CFAT d. EBT

26. While calculating net initial investment, Investment in working capital should be
_____ and government grant should be ___
a. Add, Less b. Less, Add
c. Add, Add d. Less, Less

27. Initial Investment = Rs. 20,000, CFAT p.a = Rs. 4000. Pay-back reciprocal is
a. 20% b. 5 years
c. 5 times d. 5%

28. If life of the project are not equal then project has to be selected based on
a. Higher the IRR b. Higher the NPV
c. Equivalent annual cash flow method d. Based on capital rationing

29. If the life of the project are same then, project should be based on
a. Higher the IRR b. Higher the NPV
c. Equivalent annual cash flow method d. Based on capital rationing

30. Annuity factor can be applied only in case of

a. Uniform cash flow b. Uneven cash flow
c. AOA d. NOA

31. If available fund is less than total required amount of all the projects (Initial
Investment) then we can select the projects by way of
a. Equivalent annual cash flow method b. Capital rationing
c. MIRR d. NOA

32. Based on Capital Rationing project can be classified into

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a. Divisible project b. Indivisible project

c. Divisible and indivisible project d. NOA

33. If partial investment is permitted then it is known as

a. Divisible project b. Indivisible project
c. Divisible and indivisible project d. None of the above

34. In case of divisible project, project should be selected based on

a. Profitability index b. Net present value

c. IRR d. All of the above

35. In case of indivisible project, project has to be selected based on

a. Profitability index b. Net present value
c. IRR d. All of the above

36. Worth of a rupee received today is not equal to worth of a rupee to be received in
future is known as
a. Value of money b. Preference of cash
c. Time value of money d. MIRR

37. Reason for time preference of money

a. Risk and preference for present b. Investment opportunities and
consumption inflation
c. Capital budgeting decision d. All of the above

38. Which of the following will come under methods of computation of time value of
money
a. Present value of future money b. Future value of present money
c. All of the above d. None of the above

39. In case of present value of future money we have to use

a. Compounding technique b. Discounting technique
c. Anyone of the above d. None of the above

40. In case of future value of present money we have to use

a. Compounding technique b. Discounting technique
c. Anyone of the above d. None of the above

41. Initial investment - Rs. 20,00,000 , CFAT per annum - Rs. 5,00,000. Payback
period =
a. 25% b. 4 times
c. 4 years d. None of the above

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42. Initial investment = Rs.31,00,000 , CFAT for the year 1 - Rs.5,00,000 , year 2 –
Rs.12,00,000 , year 3 - Rs.14,00,000 , year 4 - Rs. 16,00,000. Payback period is
a. 2 years b. 3 years
c. 4 years

43. Initial investment - Rs.10,00,000 , CFAT per annum - Rs.2,00,000 , life - 6 years,
ARR =
a. 20% b. 5 years
c. 5 times d. None of the above

44. A capital budgeting technique which does not require the computation of cost of
capital for decision making purposes is:
a. Net Present Value Method b. Internal Rate Of Return Method
c. Modified Internal Rate Of Return Method d. Payback Period Method

45. If two alternative proposals are such that the acceptance of one shall exclude the
possibility of the acceptance of another then such decision making will lead to:
a. Mutually exclusive decisions b. Accept or reject decisions
c. Contingent decisions d. None of the above

46. In case a company considers a discounting factor higher than the cost of capital for
arriving at present values, the present values of cash inflows will be:
a. Less than those computed on the b. More than those computed on the
basis of cost of capital basis of cost of capital

c. Equal to those computed on the basis d. None of the above

of the cost of capital

47. If the cut off rate of a project is greater than IRR, we may:
a. Accept the proposal b. Reject the proposal
c. Be neutral about it d. Wait for the IRR to increase and match the cut off rate

48. While evaluating capital investment proposals, time value of money is used in
which of the following techniques:
a. Payback Period Method b. Accounting Rate of Return
c. Net Present Value d. None of the above

49. IRR would favour project proposals which have:

a. Heavy cash inflows in the early b. Evenly distributed cash inflows
stages of the project throughout the project
c. Heavy cash inflows at the later stages d. None of the above
of the project

50. The re-investment assumption in the case of the IRR technique assumes that:
a. Cash inflows can be re-invested at the b. Cash flows can be re-invested at the

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projects IRR weighted cost of capital

c. Cash flows can be re-invested at the d. None of the above
marginal cost of capital

51. Multiple IRRs are obtained when:

a. Cash inflows in the early stages of the b. Cash flows reverse their signs
project exceed cash flows during the early during the project
stages
c. Cash flows are uneven d. None of the above

52. Depreciation is included as a cost in which of the following techniques:

a. Accounting rate of return b. Net present value
c. Internal rate of return d. None of the above

53. Management is considering a ₹ 1,00,000 investment in a project with a 5 year life

and no residual value. If the total income from the project is expected to be ₹
60,000 and recognition is given to the effect of straight line depreciation on the
investment, the average rate of return is:
a. 12% b. 24%
c. 60% d. 75%

54. Assume cash outflow equals ₹ 1,20,000 followed by cash inflows of ₹ 25,000 per
year for 8 years and a cost of capital 11%. What is the Net present value?
a. (₹ 38,214) b. ₹ 9,653
c. ₹ 8,653 d. ₹ 38,214

55. What is the internal rate of return for a project having cash flows of ₹ 40,000 per
year for 10 years and a cost of ₹ 2,26,009?
a. 8% b. 9%
c. 10% d. 12%

56. While evaluating investments, the release of working capital at the end of the
project’s life should be considered as:
a. Cash inflow b. Cash outflow
c. Having no effect upon the capital budgeting decision d. None of the above

57. Capital rationing refers to a situation where:

a. Funds are restricted and the b. Funds are unlimited and the
management has to choose from management has to decide how to
amongst variable alternative allocate them to suitable projects
investments
c. Very few feasible investment d. None of the above
proposals are available with the
management

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58. Capital budgeting is done for:

a. Evaluating short term investment b. Evaluating medium term investment
decisions decisions
c. Evaluating long term investment d. None of the above
decisions

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Chapter 8 :
Dividend Decisions
1. It is a cash disbursement of earnings and these major cash outlay for many companies
a. Owner’s Shares b. Retained Earnings
c. Dividend d. Interest

2. In case of Dividend policy company should consider

a. Retained earnings b. Pay – Out Cash
c. Issuing shares d. AOA

3. Types of Dividend Includes

a. Regular and Extra Dividend b. Special and Stock Dividend
c. Interim and Final Dividend d. AOA

4. Factors that determine the dividend policy includes

a. Dividend Pay-Out b. Stability of Dividend
c. Legal Restrictions d. AOA

5. Forms of Dividend includes

a. Cash Dividend b. Stock Dividend
c. AOA d. NOA

6. Which of the following is not the feature of stock dividend ?

a. Stock dividends does not affect the wealth of b. Shareholder’s gets value out of
the shareholder’s stock dividend
c. It is a method of capitalizing past earnings d. NOA

7. Which of the following statements are true?

Statement I – Stock dividend does give any extra benefit to the shareholder’s
Statement II – Company has to pay tax on distribution
a. I is correct b. II is correct
c. I and II are correct d. I and II are wrong

8. Converting Rs.1000 shares into 5 shares of Rs.200 each is called

a. Bonus shares b. Stock Split
c. AOA d. NOA

9. Which of the following are the advantages of stock split?

a. It makes the share affordable to b. No. of shares may increase shareholders,
small investors hence the potential investment may increase
c. AOA d. NOA

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10. Which of the following are not the limitation of stock split?
a. Additional expenses need to incurred b. Low share price may attract
on the process of stock split speculators
c. AOA d. NOA
11. Match it:
Decision Object
i. Finance decision a. Maximization of profit
ii. Investment decision b. Minimisation of cost
iii. Dividend decision c. Determining of dividend payout

a. i – b, ii – a, iii – c b. i - c, ii - b, iii – a
c. i - a, ii - b, iii – c

12. Categories of theory of dividend decision includes

a. Gordon’s model b. Relevant
c. Irrelevant d. Relevant and irrelevant Theory

13. Which of the following not comes under relevant theory of dividend decision
a. MM Approach b. Walter’s model
c. Gordon’s model d. All of the above

14. Which of the following is correct with respect to MM Approach

i) Market price of the share does not depend on the dividend payout
ii) Dividend policy is irrelevant
a. Statement i is correct b. Statement ii is correct
c. Statement i and ii are correct a. None of the above

15. Relationship between DPS and MPS are known as

a. Dividend rate b. Dividend yield
c. Dividend payout d. None of the above

16. Relationship between DPS and face value is

a. Dividend rate b. Dividend yield
c. Dividend payout d. None of the above

17. Relationship between DPS and EPS is

a. Dividend rate b. Dividend yield
c. Dividend payout d. None of the above

18. . P1 = _____
a. Po (1 + ke) b. Po (1 + ke) - D1
c. Po (1 + ke) + D1

19. Based on Walter’s model match it:

Condition Optimum dividend payout ratio

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i. r > Ke a. Zero
ii. r = Ke b. Every payout ratio
iii. r < Ke c. 100%

a. i - a, ii – b, iii - c b. i - b, ii – c, iii – a
c. i – c, ii – b, iii – a

20. E ( 1 - b ) = ______
a. D1 b. Po
c. Ke

21. br = _____
a. Ke b. D1
c. g

22. Which one is the dividend discount model?

a. Walter’s b. Gordon’s model
c. Traditional d. Linter’s model

23. Assumptions under Gordon’s model includes

a. The firm is all equity firm b. No external financing is used and only retained
earnings finance is used for investment
c. Firm has perpetual life d. AOA

24. Based on Gordon’s model , which of the following is correct ?

I – Retention Ratio is constant
II – Growth rate is constant
a. I – is correct b. II – is correct
c. I and II are correct d. I and II are incorrect

25. Based on Gordon’s argument , what is correct ?

a. Investors are risk - aware b. Investors put a premium on certain
return
c. Investor’s put a discount on uncertain d. AOA
return

26. Dividend Discount model includes

a. Zero – Growth model b. Constant – growth model
c. Variable – growth model d. AOA

27. P = D / Ke, is the formula for

a. Zero – Growth model b. Constant – Growth model
c. Variable – Growth model d. AOA

28. Match based on variable:

Situation Impact

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i. Initial Stage A) Study rate of growth

ii. Transition Stage B) High rate of growth
iii. Sustainable Stage C) Slow rate of growth

a. i - B, ii – C, iii – A b. i - C, ii – B, iii – A
c. i - A, ii – C, iii – B

29. ’”Graham and Dodd’” model is

a. Walter’s model b. Linter’s model
c. Traditional model d. Gordon’s model

30. Parameter for linter model includes

a. Target payout ratio b. The speed at which current dividend is adjusted to
target rate
c. AOA d. NOA

31. Which of the following is not the assumptions under linter model ?
a. Matured company with stable earnings may b. Growth company have low
have high payout payout
c. Management concerned with changes in d. NOA
dividend that the absolute amount of dividend

32. Based on linter’s model, which is correct ?

a. Current year dividend depend on b. Current year dividend depend on
current year earnings only current year earnings and last year
dividend
c. Current year dividend depends on last
year earnings an last year dividend

33. In linter’s model, ‘Af’ Represent

a. Annuity factor b. Adjustment factor
c. Annual factor d. Average factor

34. Which one of the following is the assumption of Gordon’s Model:

a. Ke> g b. Retention ratio (b) once decide upon, is constant

c. Firm is an all equity firm d. All of the above

35. What should be the optimum dividend pay-out ratio, when r = 15% &Ke = 12%.
a. 100% b. 50%
c. Zero d. None of the above

36. Which of the following is the irrelevance theory?

a. Walter Model b. Gordon Model
c. M M Hypothesis d. Linter’s model

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37. If the company’s D/P ratio is 60% & ROI is 16%, what should be the growth rate?
a. 5% b. 7%
c. 6.4% d. 9.6%

38. If the shareholders prefer regular income, how does this affect the dividend decision:
a. It will lead to payment of dividend b. It is the indicator to retain more
earnings
c. It has no impact on dividend decision d. Can’t say

39. Mature companies having few investment opportunities will show high payable ratios,
this statement is:
a. False b. True
c. Partial true d. None of these

40. Which of the following is the limitation of linter’s model?

a. This model does not offer a b. The adjustment factor is an arbitrary number
market price for the shares and not based on any scientific criterion or
methods
c. Both (a) & ( b) d. None of the above

41. What are the different options other than cash used for distributing profits to
shareholders?
a. Bonus shares b. Stock split
c. Both (a) & (b) d. None of the above

42. Which of the following statement is correct with respect to Gordon’s model?
a. When IRR is greater than cost of b. When IRR is greater than cost of
capital, the price per share increases capital, the price per share decreases
and dividend pay-put decreases and dividend pay-out increases
c. When IRR is equal to cost of capital, d. When IRR is lower than cost of
the price per share increases and capital, the price per share increases
dividend pay-out decreases and dividend pay-out decreases

43. Compute EPS according to Graham & Dodd approach from the given information:
Market Price ₹ 56
Dividend pay-out ratio 60%
Multiplier 2
a. ₹ 30 b. ₹ 32

c. ₹ 28 d. ₹ 84

44. Which among the following is not an assumption of Walter’s Model?

a. Rate of return and cost of capital are b. Information is freely available to all
constant
c. There is no discrimination in taxes d. The firm has perpetual life

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CHAPTER – 9 :
WORKING CAPITAL MANAGEMENT
1. Period required to convert the cash into cash equivalent. Thereafter back into cash___
a. Working capital b. Working capital cycle
c. Treasury management d. Float management

2. Working capital cycle is also known as _____

a. Cash cycle b. Operating cycle
c. Business cycle d. All of the above

3. Time gap between cash to raw material is______

a. Lead time b. Process cycle
c. Stock holding period d. Average collection period

4. Match
Time Gap Segment
a) Cash to raw material 1. Process cycle
b) Raw material to finished goods 2. Lead time
c) Finished goods to debtors 3. Average collection period
d) Debtors to cash 4. Stock holding period

a. 1 – b, 2- a , 3 – d , 4 – c b. 1-c, 2-b, 3-a, 4-d

c. -b, 2-c, 3-d, 4-a d. 1-a, 2-d, 3-b, 4-c

5. Raw material turnover ratio = _____

a. Cost of production / Average stock of b. Cost of goods sold / Average stock of
raw materials raw materials
c. Consumption / Average stock of raw d. None of the above
materials

6. Factors to be taken into consideration while the determination of working capital

requirement includes
a. Production policy and credit policy b. Nature of business and inventory
policy
c. Abnormal factors and market d. All of the above
conditions

7. Work-in-Progress valuation under the cash cost approach

a. Raw material + 50%( direct labour + b. Raw material + 50%( direct labour +
production overhead) production overhead) – depreciation
c. Raw material + 50%( direct labour + d. None of the above
production overhead - depreciation)

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8. If depreciation element and profit elements are given then it is better to solve by way
of
a. Total approach b. Cash cost approach
c. Any one of the above d. None of the above
9. Creditors for expenses means
a. Sundry Creditors b. Outstanding expenses
c. Sundry debtors d. Prepaid expenses

10. Impact on work-in-progress in case of double shift is

a. Double the normal quantity b. No change in quantity
c. All of the above d. None of the above

11. Impact on double shift in raw material cost per unit will be
a. Remains same b. Increase
c. May decrease

12. Quantity of FG due to double shift

a. Remains same b. Increase
c. May decrease

13. Functions of treasury management includes

a. Cash and currency management b. Fund management and banking
c. Corporate finance d. AOA

14. It represents managing foreign currency risk by way of hedging

a. Cash b. Currency management
c. Fund management and banking d. Corporate finance

15. Planning of long term, medium term and short term cash needs are
a. Cash management b. Currency management
c. Fund management d. Corporate finance

16. Advising on various issues such as buy back, mergers and acquisitions and
disinvestments will come under
a. Cash management b. Currency management
c. Fund management and banking d. Corporate finance

17. Planning / Forecasting future cash requirement through cash budget are
a. Cash management b. Currency management
c. Fund management d. Corporate finance

18. The term float donates

a. Delay in receivable b. Delay in payment
c. Delay between two events d. None of the above

19. To convert receivable into cash quickly, all floats has to be

a. Increase b. Minimize

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c. Maintain the same level d. NOA

20. Time log between the sales and mailing of invoice is

a. Billing float b. Mailing float
c. Credit period d. Cheque processing float

21. This is the time when a cheque is being processed by post office
a. Billing float b. Mailing float
c. Credit period d. Cheque processing float

22. This is the period allowed by the seller on the basis of credit granting decision
a. Billing float b. Mailing float
c. Credit period d. Cheque processing float

23. It helps to reduce the mailing float, cheque processing float and bank processing float
a. Concentration banking b. Lock box system
c. All of the above d. None of the above

24. Opening a local collection centre for receiving cheques from the customer
a. Concentration banking b. Lock box system
c. All of the above d. None of the above

25. Decisions relating to short term financing are

a. Working capital b. Working capital management
c. Treasury management d. Float management

26. Which of the following statement is incorrect

a. Shorter the duration of operating b. Lower the number of operating cycle
cycle is better in a year is better
c. operating cycle indicates total time d. operating cycle is computed in terms
required for rotation of funds of number of days

27. If Closing stock of raw material is 10,000 then average stock of raw material =
a. 5000 b. 10,000
c. None of the above

28. The corporate handling of all financial matters, the generation of external and internal
funds, the management of currencies, cash flows, strategies, policies and procedures are
known as
a. Working capital management b. Float management
c. Treasury management

29. It helps to determine optimum cash balance to be carried at any given point of time
a. Cash management b. Currency management
c. Treasury management d. Float management

30. The main objectives of cash management model

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a. To determine optimum cash balance b. Cash does not remain idle

c. To avoid cash storage d. All of the above

31. It refers to the cost involved in getting marketable securities converted into cash
a. Carrying cost b. Transaction cost
c. Holding cost d. None of the above

32. Assumptions under J. Baumol's cash management model is

a. Uniform cash flow b. Fixed transaction cost
c. Fixed holding cost d. All of the above

33. Levels in cash under Miller-Orr cash management model

a. Upper limit b. Return point
c. Lower limit d. All of the above

34. Which of the following statements is incorrect with respect to Miller-Orr cash
management model?
a. It’s an inventory type model b. Based on the assumption of uneven
cash flow
c. Cash payments are scholastic

35. J Boumol's model is similar to the EOQ approach.

2) In J Baumol's model Carrying cost and transaction cost are minimum is the object.
3) Cash payments are presumed at different amounts on different days in Miller - Orr
order
a. Statement 1 is correct b. Statement 2 is correct
c. Statement 3 is correct d. All the statement are correct

36. It is an arrangement under which the borrower receives advance against its receivables
from a financial institution
a. Commercial paper b. Factoring
c. Cash management model d. None of the above

37. Factoring will provide the allied services are

a. Credit investigation b. Sales ledger management
c. Collection d. All of the above

38. Types of factoring include

a. Recourse factoring b. Non-recourse factoring
c. Disclosed factoring d. All of the above

39. In India, which of the factoring is allowed

a. Disclosed and undisclosed b. Recourse and non-recourse
c. Disclosed and recourse d. Undisclosed and non-recourse

40. Which of the statements is incorrect in respect of factoring

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a. It is a financial arrangement b. Factor will provide advance amount

between the borrower and factor
c. Borrower sells his accounts d. Borrower collects the amount from debtor
receivable to factor and settles the due to factor in a later point
of time

41. Current assets = 11,00,000 , current liabilities = 6,00,000 , required safety margin is
10% on required amount of working capital find amount of working capital
requirement
a. 5,00,000 b. 5,50,000
c. 5,55,555 d. None of the above

42. Working capital finance may be by way of

a. Spontaneous source b. Negotiable source
c. All of the above d. None of the above

43. Which of the following statement is incorrect

a. Bills discounting is a borrowings b. Bills discounting is based on
from commercial bank negotiable instrument act
c. For factoring no specific act d. 3 days grace period is available for
factoring

44. When receivables are analysed according to the pending period is known as
a. Factoring b. Bills discounting
c. Ageing schedule d. Commercial paper

45. Which of the following statement is true based on ageing schedule

1. Old the receivable is risky
2. Earlier the receivable is risky
a. Statement 1 b. Statement 2
c. All of the above d. None of the above

46. Benefits of ageing schedule includes

a. It provides an early warning b. It helps in analysing the
proclaiming collection policy
c. It directly point out those customers d. All of the above
who requires special attention

47. It is a short term usance promissory note issued at a discount on face value
a. American depository receipt b. Global depository receipt
c. Commercial paper d. None of the above

48. Which of the following is incorrect with respect to commercial paper

a. Issued at discount b. Redeemed at face value
c. Redeemed at premium d. Denomination of ₹ 5 lakh

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49. Features of commercial paper includes

a. Subject to payment of stamp duty b. Issued to any person, banks
and companies
c. Issued upto 100% of the fund based on d. All of the above
working capital loan limit

50. Procedure for issuing commercial paper not includes

a. Application to RBI b. Approval from RBI
c. Private placement d. No need to intimation of compliance
51. Advantages of trade credit includes
a. Easy availability b. Flexibility
c. Informality d. AOA

52. It represent relinquishment of right

a. Forfeiting b. Bills discounting
c. Ageing schedule

53. Which of the following statement is correct with respect to forfeiting?

a. Exporter will get quick financing b. Forfeiter will get forfeiting charges
c. Importer will get product on time d. AOA

54. Which of the following statement does not come under features of forfeiting?
a. It motivates exporters to explore new b. Importer can import goods on
Geographic’s as payment is assured deferred payment terms.
payment is assured
c. Exporter enjoys reduced transaction cost d. Exporter gets to compete in local
and complexities markets.

55. Which of the following statement is not true?

a. Bad debts is always on percentage of b. If no info about cash sales, we can
credit sales assume all the sales are credit sales
c. Interest-opportunity cost should be d. If there is no incremental fixed cost
calculated on value of debtor . then Benefit = Contribution

56. The credit terms may be expressed as “3/15 net 60”. This means that a 3% discount will
be granted if the customer pays within 15 days, if he does not avail the offer, he must
make payment within 60 days
a. I agree with the statement b. I do not agree with the statement

c. I cannot say

57. The term ‘net 50’ implies that the customer will make payment:
a. Exactly on 50th day b. Before 50th day
c. Not later than 50th day d. None of the above

58. Trade credit is a source of

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a. Long term finance b. Medium term finance

c. Spontaneous source of finance d. None of the above

59. The term float is used in:

a. Inventory management b. Receivable management
c. Cash management d. Marketable securities

60. William J Baumal’s model of cash management determines optimum cash level where
the carrying cost and transaction cost are:
a. Maximum b. Minimum
c. Medium d. None of the above

61. In Miller – ORR Model of Cash Management:

a. The lower, upper limit, and return b. Only upper limit and return point
point of Cash Balances are set out are decided
c. Only lower limit and return point are d. None of the above are decided.
decided

62. Working capital is defined as:

a. Excess of current assets over current b. Excess of current liabilities over
liabilities current assets
c. Excess of fixed assets over long term d. None of the above
liabilities

63. Working Capital is also known as ‘Circulating Capital, fluctuating capital and
revolving capital”. The aforesaid statement is:
a. Correct b. Incorrect
c. Cannot say

64. The basic objectives of Working Capital Management are:

a. Optimum utilization of resources for b. To meet day to day current
profitability obligations
c. Ensuring marginal return on current d. Select any one of the above
assets is always more than cost of statements
capital

65. The term Gross Working Capital is known as:

a. The investment in current b. The investment in long term liability
liabilities
c. The investment in current assets d. None of the above

66. The term net working capital refers to the difference between the current assets minus
current liabilities:
a. The statement is correct b. The statement is incorrect
c. I cannot say

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67. The term ‘Core current assets’ was coined by:

a. Chore committee b. Tandon committee
c. Jilani commitee d. None of the above

68. The concept of operating cycle refers to the average time which elapses between the
acquisition of raw materials and the final cash realization. This statement is:
a. Correct b. Incorrect
c. Partially true d. I cannot say

69. As a matter of self imposed financial discipline can there be a situation of zero working
capital now-a-days in some of the professionally managed organizations.
a. Yes b. No
c. Impossible d. Cannot say

70. Over trading arises when a business expands beyond the level of funds available. The
statement is:
a. Incorrect b. Correct
c. Partially correct d. I cannot say

71. A Conservative Working Capital strategy calls for high levels of current assets in
relation to sales
a. I agree b. Do not agree
c. I cannot say

72. The term Working Capital leverage refer to the impact of level working capital on
company’s profitability. This measures the responsiveness of ROCE for changes in
current assets.
a. I agree b. Do not agree
c. The statement is partially true

73. The term spontaneous source of finance refers to the finance which naturally arise in
the course of business operations. The statement is:
a. Correct b. Incorrect
c. Partially correct d. I cannot say

74. Under hedging approach to financing of working capital requirements of a firm, each
asset in the balance sheet assets side would be offset with a financing instrument at the
same approximate maturity. This statement is:
a. Correct b. Partially correct
c. I cannot say

75. Trade credit is a:

a. Negotiated source of finance b. Hybrid source of finance
c. Spontaneous source of finance d. None of the above

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76. Factoring is a method of financing whereby a firm sells its trade debts at a discount to a
financial institution. The statement is:
a. Correct b. Incorrect
c. Partially correct d. I cannot say

77. A factoring arrangement can be both with recourse as well as without recourse:
a. True b. False
c. Partially correct d. Cannot say

78. The bank financing of working capital will generally be in the following form. Cash
Credit, Overdraft, bills discounting, bills acceptance, line of credit; Letter of Credit and
bank guarantee.
a. I agree b. I do not agree
c. I cannot say

79. When the items of inventory are classified according to value of usage, the technique is
known as:
a. XYZ Analysis b. ABC Analysis
c. DEF Analysis d. None of the above

80. When a firm advises its customers to mail their payments to special Post Office
collection centers, the system is known as:
a. Concentration banking b. Lock box system
c. Playing the float d. None of the above
***************

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FM Theory
Past Exam Questions

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FM Theory
Past Exam Questions

Chapter 1: Basic Concepts

1) Two basic aspects of Financial Management.
2) Two objectives of FM
3) 3 characteristics of Source of Fund
4) 3 Important decision for achievement of Wealth Maximization
5) Difference between Profit Maximization and Wealth Maximization
6) Arguments in favor of Profit Maximization
7) “The profit maximization is not an operationally feasible criterion”. Identify.
8) Arguments in favor of wealth maximization
9) Arguments against wealth maximization
10) Concept based theory questions:
Identify the appropriate objectives of FM
Items Object
1. It is the intention behind starting a business ?
2. It serves as a protection against risk ?
3. It helps to increase the market price of the company’s common stock ?
4. Future is uncertain. So it is required to meet the future contingencies ?
5. It helps, various resources are put to economical and efficient use ?
6. It cannot be the sole objective of a company ?
7. It is a vague concept and means differently to different people ?
8. It is a narrow concept at the cost of social and moral obligations ?
9. It indicates how well management is doing on behalf of stockholders ?
10. It promote employee welfare & To increase customer satisfaction ?
11) Rolls of CFO (M 19)
12) Functions of FM Manager (RTP – M 19)
13) Emerging issues affecting the future role of CFO & Role of Financial Executive in modern
world. (M 18)
14) Major difference between Financial Accounting / Financial Management.

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Chapter 2: Sources of Finance

1) Tell any 4 sources of short term Finance.
Tell any 4 uses of long-term Finance.
2) ADR Vs. GDR.
3) Concept based Theory Qtn: Identify the following will fall under ADR or GDR
Explanation ADR/GDR
1. It do not have voting rights ?
2. The depository receipts in the world market are called ?
3. The depository receipts in the US market ?
4. These are most preferred due to their easy operation. ?
5. Cost involved in operation is comparatively higher ?

4) 3 principles relating to marketable securities.

5) Concept based Theory Question: relating to marketable securities.
Find-out the appropriate principles relating to selection of marketable securities;
Explanation Principle
1. As the objective in this investment is ensuring liquidity, minimum risk is the ?
criterion of selections.
2. Matching of maturity and forecasted cash needs is essential. Prices of long- ?
term securities fluctuate more with changes in interest rates and are, therefore
riskier
3. It refers to convenience, speed and cost at which a security can be converted ?
into cash.

6) Seed Capital Assistance

7) Bridge Finance
8) Difference between Seed Capital Assistance & Bridge Financing
9) Concept based Theory Question
Identify the following info will comes under Bridge Finance or Seed Capital Assistance
Explanation Finance type
1. This loan is for business people ?
2. Scheme designed by IDBI for professionally / technically ?
qualified persons.
3. Interest free loan ?
4. Lone taken by a company from commercial bank for pending ?
disbursement of loan.
5. Short term loan. ?
6. Moratorium period up to 5 years. ?

10) Zero Coupon Bonds.

11) Short notes on: Deep Discount Bonds.
12) Secured Premium Notes.
13) ECB

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14) Explain Agency Cost

15) Venture Capital Financing
16) Debt Securitisation
17) Factor Vs. Securitisation
18) Types of Packing Credit.
19) Types of Foreign Bands.
20) Types of Indian Bands.
21) Short notes on – Convertible FRN
22) Short notes on Masala Bonds

Lease Financing
1) Explain the concept of lease financing.
2) Explain Operating Lease
3) Explain finance Lease & its classification
4) Difference between Operating Lease & Finance Lease. (M 19)
5) Write short notes on Tax Oriented Lease.
6) Explain Sales and Lease Back. (M 18)
7) Short notes on Leveraged Lease.
8) Explain Sale Aid Lease.
9) Difference between Close-ended and Open-ended lease.
10) Difference between Lease and Hire Purchase.
11) Limitations of Leasing. (M 19)
12) FIND TYPE OF LEASE FINANCING
a) Lessee has the option of purchasing the assets at the end of lease period.
b) Lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the
claims of the lender goes to the lessor.
c) Lessor enters into a tie up with a manufacturer for marketing the latter’s product through his own
leasing operations.
d) Seller gets the agreed selling price and the buyer gets the lease rentals.
e) Third party is involved beside lessor and lessee.
f) Owner of an asset sells the asset as to a party, who in turn leases back the same in consideration of
a lease rentals.
g) Lessor bears cost of repairs, maintenance of operations.

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h) Lessor is interested in his rentals and not in the asset. He must get his principal back along with
interest. Therefore, the lease is non-cancellable by either party.

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Chapter 4: Cost of Capital

1) Explain WACC.
2) 5 advantages of raising funds by issue of preference share.
3) 4 advantages of raising funds by issue of equity share.
4) Explain the significance of CoC. (N 19)

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Chapter 5: Capital Structure

1) 5 fundamental principles governing capital structure.
2) Concept Based Theory Question:
Find-out the appropriate principles relating to Capital Structure:
Explanation Principle
1. Management chooses such a combination of sources of financing which ?
it finds easier to adjust according to changes in need of funds in future
too.
2. An ideal pattern or capital structure is one the minimises cost of capital ?
structure and maximises EPS
3. While designing a capital structure, the finance manager may also keep ?
in mind that existing management control and ownership remains
undistributed.
4. Use of more and more debt means higher commitment in form of ?
interest payout.
5. Other factors such as nature of industry, timing of issue and competition ?
in the industry should also be considered.

3) Explain optimum capital structure.

4) Concept Based Theory Question:
Find-out the suitable features of appropriate Capital Structure:
Explanation Features
1. There should be minimum risk of loss or dilution of control of the ?
company
2. It should optimize the cost of financing and maximise earning per equity ?
share
3. The capital structure should be such that the firm does not run the risk of ?
becoming insolvent
4. The capital structure should be such that company can raise funds ?
whenever needed
5. The debt content should not exceed the maximum which the company ?
can bear

5) Assumption under capital structure theory – 7 Nos.

6) Concept Based Theory Question:
Validated the following assumption based on capital structure theory. P – 145
Explanation Valid/Invalid
1. Debt equity mix can be changed ?
2. Only two sources of funds viz., debt and equity ?
3. Total assets of a firm and its capital employed are not fixed ?
4. No retained earnings ?
5. There are no corporate or personal taxes ?
6. All earnings are distributed to equity shareholders
7. Investors may not have the same subjective probability distribution of ?
expected earnings
8. The business risk is assumed to be constant and is not affected by the ?
financing mix decision

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7) Types of Capital Structure Theories

8) Short notes on NI Approach
9) NOI Approach. (N 19)
10) Assumption under MM Approach.
11) Concept Based Theory Question
Validate the following assumption based on MM Theory.
Explanation Valid/Invalid
1. Ke < Kd ?
2. Ko is a constant and not affected by leverage ?
3. The capital markets are not perfect ?
4. Kd remains constant at various levels of debt-equity risk ?
5. Firms can be grouped into “Equivalent Risk Classes” on the basis of ?
their business risk
6. There are no transaction costs
7. Ke increases as debt content increases due to higher financial risk and ?
higher expectations of equity investors

12) Difference between Business Risk & Finance Risk. (M 18)

13) Concept Based Theory Question:
Find out the appropriate types of Risk.
Explanation Types of Risk
1. Risk associated with the firm’s operations ?
2. Additional risk placed on firm’s shareholders as a result of debt ?
used in financing companies
3. It is the uncertainty about the future operating income ?
4. It can be measured by standard deviation of basic earning power ?
ratio
5. It can be measured by ratios such as firm’s financial leverage ?
multiplier, total debt to assets ratio etc.
6. It consists of two types:
a. Risk of cash insolvency and
b. Risk of variation in the EPS

14) Causes of over capitalization.

15) Explain Trade-off Theory.
16) Explain Packing Order Theory.

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Chapter 7: Capital Budgeting

1. Tech in CB = “PET”
2. Acceptance Rules for
n NPV
n P1
n IRR

3. Explain IRR
4. Short notes on Capital Rationing
5. Five reasons for TVM (M 18)
6. Two methods of computation of TVM
7. Write short notes on MIRR
8. Write short notes on Pay Back Reciprocal
9. Explain the steps while using the equivalent annualized criterion. (N 19)

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Chapter 8: Dividend Decisions

1) Short notes on Financial Division.
2) Concept Based Theory Question:
Identity the appropriate decision for achievement of wealth maximization
Items Decision
1. In the long-term funds is made after a careful assessment of the various ?
projects through capital budgeting and uncertainty analysis.
2. This has an influence on the profitability of the company and ultimately ?
on its wealth.
3. With the total volume of long-term funds, finance manager has to ensure a ?
proper mix of loan funds and owner’s funds.
4. The top management in consultation with finance manager decides as to ?
what portion of the profit should be paid to the shareholders by way of
dividend, pay-out-ratio maximises shareholders’ wealth.

3) Factors that determine the dividend policy.

4) Advantages and disadvantages of stock dividend.
5) Walter Model – Assumption
6) Gordon Model / Dividend Discount Model
7) Stock splits and its advantages.
8) Objectives of portfolio management.
9) Explain Theory of dividend
10) Assumptions of M.M. hypothetical.
11) Traditional Model.
12) Short notes on Linter Model

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Chapter 9: Working Capital Management

1) Explain Operating Cycle. (N 19)

2) Concept Based Theory Question:
Identify the appropriate segment based on operating cycle.
Time Gap Segment
RM → FG ?
Cash → RM ?
Drs. → Cash ?
FG → Drs. ?

3) How to estimate the working capital requirement?

4) Find RATES OF VALUATION OF VARIOUS ITEMS

Component Approach Valuation ?

RM Total Approach ?
WIP Cash Cost Approach ?
FG Total Approach ?
Creditors Total Approach ?
Debtors Cash Cost Approach ?

5) Factors to be taken into consideration while determining the requirement of WC – Discuss.

6) Explain the impact of double shift working on various components of working capital.
7) Find impact on double shift working.

Raw Quantity Rate

Raw Materials ? ?
Work in Progress ? ?
Finished Goods ? ?
Sundry Debtors ? ?
Sundry Creditors ? ?

8) Functions of the treasury department. (RTP N 19)

9) Concept Based Theory Question:
Find the function of treasury management
Details Function
1. Managing foreign currency risk exposure through hedging / towards / ?
futures
2. Planning on forecasting future cash requirements through Cash ?
Budgets
3. Participation in decision concerning capital structure, dividend, ?
payout, etc.

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4. Advising on various issues such as buy-back, mergers, acquisitions ?

and divestments, and planning the financial needs thereof
5. Maintaining cordial and good relationships with bankers and financial ?
institutions

10) Explain Float management & how to reduce float

11) Differences between concentration banking and lock box system.
12) Advantages of concentration banking.
13) Concept Based Theory Question: Find out – FLOAT?
MEANING FLOAT
1. It is the period allowed by the seller on the basis of credit granting ?
decision.
2. The time between the sale and the mailing of the invoice. ?
3. This is the time when a cheque is being processed by post office, ?
messenger service or other means of delivery.
4. This is the time from the deposit of the cheque to the crediting of funds in ?
the sellers account.
5. This is the time when a cheque is being processed by post office, ?
messenger service or other means of delivery.
6. This is the time required for the seller to sort, record and deposit the ?
cheque after it has been received.

14) Find TECHNIQUES OF REDUCING DELAY for the following FLOAT.

FLOAT TECHNIQUES OF REDUCING DELAY

1. Billing Float ?
2. Mailing Float ?
3. Credit period ?
4. Cheque processing float ?

15) 2 types of cash management models

16) Assumptions under William J. Baumol’s cash management model
17) Explain – Miller – Orr Cash Management Model
18) 2 assumptions in Miller – Orr Cash Management Model
19) Concept Based Theory Question:
Find out appropriate cash management model
MEANING Cash Mgt. Model
1. Inventory type model ?
2. These limits may consist of upper limit, return point, lower limit ?
3. According to this model, optimum cash level is that level of cash ?
where the carrying costs and transactions costs are the minimum
4. This model is similar to the Wilson’s model on raw material ?
EOQ

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5. Cash payments are presumed at different amounts on different ?

days
6. Based on the assumption of uniform cash flow ?
7. Based on the assumption of uneven cash flows ?
8. Stochastic Models ?
9. Fixed transaction cost and holding cost ?
10. This model is designed to determine the time and size of ?
transfers between an investment account and cash account
11. In this model, control limits are set for cash balances ?

20) Explain 4 procedure for Factoring

21) 2 types of Factoring
22) Benefits of Factoring (MTP 19)
23) Differentiate between factoring and bills discounting
24) Concept Based Theory Question
Validate the statement based on concept of factoring
Valid /
Particulars
Invalid
1. Accounts receivables are not easily converted into cash ?
2. Fixing Credit Limits for each borrower and each customer ?
3. Sale to sister concerns cannot be factored ?
4. Instruction to customers that the payments shall be forwarded directly ?
to the factor is not required
5. There is no need for a separate credit department since credit ?
management may also be undertaken by the factor
6. Financial arrangement between borrower and factor ?
7. Borrower purchase account receivables to factor ?
8. Two types of factoring are: ?
a. Disclosed &
b. Undisclosed
9. Borrower forwards collection to factor ?

25) Identify the following info will comes under Factoring or Bills Discounting.

Explanation Type
1. Parties involved drawer, drawee and payee ?
2. It is a sort of management of book debts ?
3. It is a sort of borrowing from commercial banks ?
4. Based on Negotiable Instruments Act ?
5. There is no specific Act for this ?
6. No grace period is available ?

26) 4 benefits of Ageing Schedule & Short notes on Ageing Schedule. (N 18)
27) Features of commercial paper. (MTP J 2020)
28) Procedure for issuing of commercial paper.

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29) What are the cost of availing trade credit. (MTP J 2020)
30) Two steps of Decision Tree.
31) Credit policy of the supplier is 3/10, net 40, Company wants to utilise full trade credit. Find
interest cost.

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Level - 2
FM “2.O”

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CHAPTER 4 – COST OF CAPITAL

Concept Based Qtns:
1. How to identify R/IR
2. COC always expressed in?
3. Formula for
a. Kd-R
b. Kd-IR
c. Kp-R
d. Kp-IR
e. Ke
f. Dps
4. To find DPS when we have to add g%?
5. RV - NP / N = What is Avg Premium?
6. What is average liability?
7. What is Risk premium?
8. Tax benefit applicable only for ?
9. Lower the WACC is best or higher?
10. For Kd when we need to adj tax?
11. Which fund is cheaper, DT or Eqt ?
12. When can we depend more on Dt fund?
13. In general Kr = —-?
14. When Kr, tax benefit is applicable?
15. When Kr, no applicable?
15. Methods of computation of WACC?

Theory Quick Revision:

2 Types of Risks in FM
2 Types of Financial Risk
2 main reason for arising Trading on Equity

1. Par Value of Debenture = Rs.100,00,000

Expenses on issue = Rs.10,00,000
Interest = Rs. 10,00,000
Find Kd, if
a) Its is irredeemable if No tax
b) Its is irredeemable if 30% tax
c) If Redeemable @ 10 years & No tax
d) If Redeemable @ 10 years & 30% tax
2. If the company issues 10% debentures of face value of ₹ 100 each and realises ₹ 98
perdebenture while the debentures are redeemable after 12 years at a premium of
10%,calculate cost of debenture using YTM? Assume Tax Rate to be 50%.

3. A Company issues 25,000, 14% Debentures of Rs.1,000 each. The Debentures are
redeemable after the expiry period of 5 years. Tax Rate applicable to the Company

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is 35% (including Surcharge and Education Cess).Calculate the Cost of Debt after
tax ,if Debentures are issued at 5%Discountwith 2%Floatation Cost.

4. Y Ltd. retains Rs.7,50,000 out of its current earnings. The expected rate of return to
the shareholders, if they had invested the funds elsewhere is 10%. The brokerage is
3% and the shareholders come in 30% tax bracket. Calculate the cost of retained
earnings.

5. Alpha Ltd. has furnished the following information:

- Earning Per Share (EPS) Rs. 4
- Dividend payout ratio 25%
- Market price per share Rs. 50
- Rate of Tax 30%
- Growth rate of dividend 10%
The company wants to raise additional capital of Rs. 10 lakhs including debt of Rs. 4 lakhs.
The cost of debt (before tax) is 10% up to Rs. 2 lakhs and 15% beyond that. Compute the
after tax cost of equity and debt and also weighted average cost of capital.

6. The capital structure of MNP Ltd. is as under:

9% Debenture Rs. 2,75,000
11% Preference shares Rs. 2,25,000
Equity shares (face value : Rs. 10 per
share) Rs. 5,00,000
Rs.10,00,000

Additional information:
(i) Rs.100 per debenture redeemable at par has 2% floatation cost and 10 years of
maturity. The market price per debenture is Rs.105.
(ii) Rs.100 per preference share redeemable at par has 3% floatation cost and 10
years of maturity. The market price per preference share is Rs. 106.
(iii) Equity share has Rs.4 floatation cost and market price per share of Rs.24. The
next year expected dividend is Rs. 2 per share with annual growth of 5%. The
firm has a practice of paying all earnings in the form of dividends.
(iv) Corporate Income-tax rate is 35%.
Required :Calculate Weighted Average Cost of Capital (WACC) using market value
weights.

7. ABC Ltd. wishes to raise additional finance of Rs. 20 lakhs for meeting its
investment plans. The company has Rs.4,00,000 in the form of retained earnings
available for investment purposes. The following are the further details:
Ø Debt equity ratio 25 : 75.
Ø Cost of debt at the rate of 10 percent (before tax) upto Rs. 2,00,000 and
13% (before tax) beyond that.
Ø Expected EPS Rs.12.
Ø Dividend payout 50% of earnings.
Ø Expected growth rate in dividend 10%.
Ø Current market price per share, ₹ 60.
Ø Company’s tax rate is 30% and shareholder’s personal tax rate is 20%.

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Required:
(i) Calculate the post tax average cost of additional debt.
(ii) Calculate the cost of retained earnings and cost of equity.
(iii) Calculate the overall weighted average (after tax) cost of additional finance.

8. Shubhlaxmi Forgings is considering a

project for the coming year that will cost Rs.5,00,00,000. It plans to use the
following combination of debt and equity to finance the investment:
(i) Issue Rs.1,50,00,000 of 20-year bonds at a price of 101, with a coupon rate of
8%, and flotation costs of 2% of par.
(ii) Use Rs. 3,50,00,000 of funds generated from earnings. The equity market is
expected to earn 12%. The risk-free rate of return is 5%. The beta coefficient for
Shubhlaxmi Forgings is estimated to be 0.60. Shubhlaxmi Forgings is subject to
an effective tax rate of 40%.
You are required to compute:
(a) The weighted average cost of capital, if the after-tax cost of debt is 7% and the
cost of equity is 12%.
(b) Shubhlaxmi Forgings expected rate of return using the Capital Asset Pricing
Model (CAPM).
9. The X Company has following Capital Structure at 31st March 2015, which is considered to be
optimum.
14% Debentures Rs. 3,00,000
11% Preference Shares Rs. 1,00,000
Equity (1,00,000 Shares) Rs. 16,00,000
Total Rs. 20,00,000
The Company’s Share has a current Market Price of ₹23.60 per Share. The expected Dividend per
Share next year is 50% of 2015 EPS. The following are the Earning Per Share figure for the Company
during preceding ten years. The past trends are expected to continue.
Year EPS (Rs.) Year EPS (Rs.)
2006 1.00 2011 1.61
2007 1.10 2012 1.82
2008 1.21 2013 1.95
2009 1.33 2014 2.15
2010 1.46 2015 2.36
The Company issued new Debentures carrying 16% Rate of Interest and the
Current Market Price of Debenture is Rs. 96. Preference Share Rs. 9.20 (which
Dividend of Rs. 1.1 per Share) were also issued. The Company is in 50% tax
bracket.
(i)Calculate after–tax cost of (a) New Debt, (b) New Preference Share (c) New Equity
Share (assuming New Equity from Retained Earning)
(ii) Calculate Marginal Cost of Capital when no New Shares was issued.
(iii) How much can be spent for Capital Investment before New Ordinary Shares must
be sold? Assuming the Retained Earning for next year’s investment are 50% of 2015.
(iv) What will be the Marginal Cost of Capital when the funds exceeds the amount
calculated in (iii), assuming New Equity is issued at Rs.20 per Share?

10) COST OF DEBT – MDDLE OF THE PERIOD

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A company issued 10,000, 10% debentures of ₹ 100 each at par on 1.4.2018to be matured on 1.4.2028. The
company wants to know the cost of its existing debt on 1.4.2023 when the market price of the debentures is 80.
COMPUTE the cost of existing debentures assuming 35% tax rate.

11. Gamma Limited has in issue 5,00,000 Re. 1 ordinary shares whose current ex
dividend market price is Rs. 1.50 per share. The company has just paid a dividend of
27 paise per share, and dividends are expected to continue at this level for some
time. If the company has no debt capital, what is the weighted average cost of
capital?

Qtn 12. Intrinsic Value method

D Ltd is foreseeing a growth rate of 12% per annum in the next two years. The growth
rate is likely to be 10% for the third and fourth year. After that the growth rate is
expected to stabilize at 8% per annum. If the last dividend was Rs.1.50 per share and the
investor’s required rate of return is 16% determine the current intrinsic value of equity
share of the company.
-------------------

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CHAPTER 5 - CAPITAL STRUCTURE

Concept Based Qtns:
1. What is the Criteria for selection of CS.
2. For computation of no or shares we have to take Face value of Share or MP?
3. Formula for
a. ROCE?
b. ROE
c. EPS
d. MVf
e. MVe
4. EBIT/Ko = ?
5. EBIT which leads to EPS of Option 1, Option 2, is called?

Theory Quick Revision:

5 Features of Appropriate Capital Structure
4 Types of Capital Structure Theories
7 No’s – Assumptions in Capital Structure Theories
4 consequences of over capitalisation
3 Assumptions under NOI approach
8 Assumptions under MM approach

1. X Ltd is considering 3 financing plans. Total investment to be raised Rs.

2,00,000
Plan Equity Debt Preference shares
A 100%
B 50% 50%
C 50% 50%
Cost of debt 8% and cost of preference shares 8%
Tax rate 50%
Equity shares of face value of Rs. 10 each will be issued at a premium of Rs.10
per share
Expected EBIT is Rs.80,000
Determine for each plan (a) EPS (b) The financial breakeven point (c) The EBIT
range among the plans of indifference

2. X Ltd. is considering the following two alternative financing plans:

Particulars Plan – I Plan – II
Rs. Rs.
Equity shares of 10 each 4,00,000 4,00,000
12% Debentures 2,00,000 -
Preference Shares of 100 each - 2,00,000
6,00,000 6,00,000

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The indifference point between the plans is Rs.2,40,000. Corporate tax rate is 30%.
Calculate the rate of dividend on preference shares.
3. There are two firms P and Q which are identical except P does not use any
debt in its capital structure, while Q has ₹ 8,00,000, 9% Debentures in its
capital structure. Both firms have EBIT of ₹ 2,60,000 p.a and the capitalization
rate is 10%. Assuming corporate tax 30%, calculate the value of these firm
according to M&M hypothesis.

4. There are two firms N and M, having same EBIT of Rs. 20,000.
Firm M is levered company having a debt of Rs.100,000 @ 7% rate of interest.
The cost of equity of N company is 10% and M is 11.50%.
Find,
(i) Value of Equity and
(ii) Value of Firm

5. Z Ltd.’s operating income (before interest and tax) is Rs.9,00,000.The firm’s

cost of debt is 10% and currently firm employs Rs.30,00,000 of debt. The
overall cost of capital of firm is 12%.
You are Required to Calculate Cost Of Equity.

6. Xansa Limited’s operating income is Rs.1,80,000. The company’s cost of debt is

12% and currently it employs Rs. 5,25,000 of debt. The overall cost of capital of the
company is 16%. You are required to determine the cost of equity of Xansa Limited.

7. The following table gives dividend and share price data for Bharath Limited.
Year Dividend Per Share Closing Share Price
2003 2.50 12.25
2004 2.50 14.20
2005 2.50 17.50
2006 3.00 16.75
2007 3.00 18.45
2008 3.25 22.25
2009 3.50 23.50
2010 3.50 27.75
2011 3.50 25.50
2012 3.75 27.95
2013 3.75 31.30
You are required to calculate: (1) the annual rates of return,(2) The
expected(average) rate of return.

8. A & B ltd are identical in every aspect except capital structure. A does not
employ debt in capital structure. But B employs 12 % debentures amounting Rs.
10,00,000. Assume that
(i) All assumptions are met M-M model
(ii)income tax rate is 30%
(iii) EBIT is RS 2500000
Equity capitalization rate of A is 20%
Calculate value & WACC of both the companies

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9. Company P and Q are identical in all respects including risks factors except for
debt / equity , company P having issued 10% debentures of Rs.18 lakhs while
company Q is unlevered .both the companies earn 20 % before interest and taxes
on their total assets of Rs.30 lakhs .
Assuming a tax rate of 50% and capitalisation rate of 15% from an all-equity
company. Compute the value of companies P and Q

10. There are two company N Ltd. and M Ltd., having same earnings before interest
and taxes i.e. EBIT of ₹ 20,000. M Ltd. is a levered company having a debt of
₹1,00,000 @ 7% rate of interest. The cost of equity of N Ltd. is 10% and of M Ltd. is
11.50%.
Compute how arbitrage process will be carried on if you are having 10% holding in
M ltd. ?

11. PRI Ltd. and SHA Ltd. are identical, however, their capital structure (in market-
value terms) differs asfollows:
Company Debt Equity

PRI Ltd. 60% 40%

SHA Ltd. 20% 80%
The borrowing rate for both companies is 8% in a no-tax world and capital markets
are assumed to beperfect.
(a) (i) If Mr. Rhi, owns 6% of the equity shares of PRI Ltd., determine his return if the
Companyhas net operating income of ₹ 9,00,000 and the overall capitalization rate of
the company (Ko)is 18%.
(ii) calculate the implied required rate of return on equity of PRI Ltd.
(b) SHA Ltd. has the same net operating income as PRI Ltd.
(i) Calculate the implied required equity return of SHA Ltd.
(ii) Analyse why does it differ from that of PRI Ltd.

12. Delta Ltd. has an equity share capital of Rs.10,00,000 consisting of 1,00,000 equity
shares of Rs.10 each. The company is going through a major expansion plan
requiring to raise funds to the tune of rs.6,00,000. To finance the expansion the
management has following pans:
Plan –I - Issue 60,000 equity shares of Rs.10 each
Plan- II - Issue 40,000 equity shares of Rs.10 each and balance through long
term borrowing at 12% interest p.a.
Plan-III - Issue 30,000 equity shares of Rs.10 each and 3,000 Rs.10 , 9%
debentures.
Plan –IV - Issue 30,000 equity shares of Rs.10 each and the balance through
6% preference shares.
The EBIT is expected to be Rs.4,00,000 p.a. Assume tax rate of 40%.
Required:
(i) Calculate EPS in each of the above plans.

***************

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Chapter 7:
INVESTMENT DECISION
CAPITAL BUDGETING
Concept Based Qtns:
1. PAT + Depreciation = ?
2. EAT but before depreciation = ?
3. EAT and depreciation = ?
4. Net Initial Investment = ?
5. Methods of Computation of Simple Pay back
6. Simple Payback and discounted pay back we have to express in —-
7. Payback Reciprocal ARR and IRR we have to express in —----
8. Profitability Index we have to express in —--------
9. What are the project evaluation techniques with considering time value of money is
_____
10. What are the project evaluation techniques without considering time value of money
is _____
11. When Annuity factor has to be considered
12. When equivalent annual cash flow method arises
13. How to treat Salvage value at the beginning and at the end of the project
14. In IRR total discounted CFAT = 5 Lakhs. Find Initial Investment
15. Will PV Factor applicable at the end of the project life
16. If there is a conflict in selecting project whether net present value or IRR is a criteria
for selection
17. When Capital rationing arises
18. In Capital rationing project can be classified into what and what?
19. What is divisible project
20. In case of divisible project what is the criteria for selection
21. In case of divisible project what is the criteria for selection
22. In case of in-divisible project what is the criteria for selection

Theory Quick Revision:

2 Methods of Computation of TVM
5 Reasons of Time Preference of Money
5 Capital budgeting technique with use of TVM
3 Capital budgeting technique with out use of TVM
2 Types of project under Capital Rationing

1. PR engineering Ltd is considering the purchase of a new machine which will carry
out some operations which are at present performed by manual labour. The
following information related to two alternative models- ‘MX’ and ‘MY’ are
available:
Particulars Machine Machine
‘MX’ ‘MY’
Cost of machine Rs. 8,00,000 Rs. 10,20,000

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Expected value 6 years 6 years

Scrap value Rs. 20,000 Rs. 30,000

Estimated Net Income before Depreciation and taxes are as under:

Machine Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Machine ‘MX’ 2,50,000 2,30,000 1,80,000 2,00,000 1,80,000 1,60,000
Machine ‘MY’ 2,70,000 3,60,000 3,80,000 2,80,000 2,60,000 1,85,000
Corporate tax rate this company is 30% and the company’s required rate of return on
investment proposals is 10%. Depreciation on straight line basis. You are required to:
Ø Calculate the pay back period on each proposal.
Ø Calculate the net present value on each proposal, if the PV factor at
10% is 0.909, 0.826, 0.751, 0.683, 0.621, and 0.564.
Ø Which proposal would you recommend and why?

2. FH Hospital is considering to purchase a CT–Scan Machine. Presently the hospital

is outsourcing the CT–Scan Machine and is earning Commission of Rs. 15,000 per
month (net of tax). The following details are given regarding the Machine:
Particulars Rs.
15,00,00
Cost of CT–Scan Machine 0
Operating Cost per annum (excluding Depreciation) 2,25,000
Expected Revenue per annum 7,90,000
Salvage Value of the Machine (after 5 years) 3,00,000
Expected Life of the Machine 5 years
Assuming Tax Rate at 30%, whether it would be profitable for the
Hospital to purchase the Machine?
Give your recommendation under – (1) Net Present Value Method, and
(2) Profitability Index Method.
PV Factors at 12% are given below:
Year 1 2 3 4 5
PV Factor 0.893 0.797 0.712 0.636 0.567

3.Sanghmani Enterprises is planning to introduce a new product with a project life

of 8 years. The project is to be set up in Special Economic Zone (SEZ), qualifies for
one time (at starting) tax free subsidy from the State Government of Rs. 25,00,000 on
capital investment. Initial equipment cost will be Rs.1.75 crores. Additional
equipment costing Rs.12,50,000 will be purchased at the end of the third year from
the cash inflow of this year. At the end of 8 years, the original equipment will have
no resale value, but additional equipment can be sold for Rs.1,25,000. A working
capital of Rs.20,00,000 will be needed and it will be released at the end of eighth
year. The project will be financed with sufficient amount of equity capital. The sales
volumes over eight years have been estimated as follows:
Year 1 2 3 4-5 6-8
Units 72,000 1,08,000 2,60,000 2,70,000 1,80,000

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A sales price of Rs.120 per unit is expected and variable expenses will amount to 60% of
sales revenue. Fixed cash operating costs will amount Rs.18,00,000 per year. The loss of
any year will be set off from the profits of subsequent two years. The company is
subject to 30 per cent tax rate and considers 12 per cent to be an appropriate after tax
cost of capital for this project. The company follows straight line method of
depreciation.You are required to calculate the net present value of the project and
advise the management.

4. A company wants to invest in machinery that would cost Rs 50,000 at the

beginning of 1st year. Net Cash inflow from operation will be Rs18,000 p.a For
3 years, if the company opts to service a part of machine at the end of year -1 at
Rs 10,000 .In such a case ,the scrap value at the end of the 3rd year will be Rs
12,500.However if the company doesn’t to serve the part then it will have to be
replaced at the end of year 2 at Rs 15,400 but in this case machine will work for 4
years . It will have scrap at the end of 4th year @Rs 9,000 Assuming cost of capital
@10% will you recommend the purchase of machine.If supplies gives a discount of
Rs 5,000 for purchase what will be your decision.

5.Shiva ltd is planning its capital investment programme for the next year. It has five
projects all of which give a positive NPV at the company cut-off rate of 15 percent,
the investment outflows and present values being as follows:

Project Investment NPV @ 15%

Rs.000 Rs. 000
A (50) 15.4
B (40) 18.7
C (25) 10.1
D (30) 11.2
(35) 19.3
E
The company is limited to a capital spending of Rs. 1,20,000.
You are required to optimise the returns from a package of projects within the
capital spending limit. The projects are independent of each other and are divisible
(i.e. part-project is possible).

6. Elite Cooker Company is evaluating three investment situations: (1) produce a new
line of aluminum skillets, (2) expand its existing cooker line to include several new
sizes, and (3) develop a new, higher quality line of cookers. If only the project in
question is undertaken, the expected present values and the amounts of investment
required are:
Investment Present value of Future Cash-
Project
in Rs. Flows in Rs.

1 200,000 290,000

2 115,000 185,000

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3 270,000 4,00,000

If projects 1 and 2 are jointly undertaken, there will be no economies; the investments
required and present values will simply be the sum of the parts.
With projects 1 and 3, economies are possible in investment because one of the
machines acquired can be used in both production processes. The total investment
required for projects 1 and 3 combined is ` 4,40,000.

If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and
producing the products but not in investment. The expected present value of future cash
flows for projects 2 and 3 is ` 6,20,000.
If all three projects are undertaken simultaneously, the economies noted will still hold.
However, a ` 1,25,000 extension on the plant will be necessary, as space is not available
for all three projects. Which project or projects should be chosen?

7.A limited company is considering investing a projectequiring a capital outlay of

Rs.2,00,000. Forecast for annual income after depreciation but before tax is as
follows:
Year Rs.
1 1,00,000
2 1,00,000
3 80,000
4 80,000
5 40,000
Depreciation may be taken as 20% on original cost and taxation at 50% of net
income. You are required to evaluate the project according to each of the following
methods:
a) Pay-back method
b) Rate of return on original investment method
c) Rate of return on average investment method
d) Discounted cash flow method taking cost of capital as 10%
e) Net present value index method
f) Internal rate of return method.

8. CFAT Rs. 10,000 for the first two years & thereafter Rs. 2,000 increased in every
year. Life 5 years. Final Initial Investment if IRR = 15%.

9.ABC & Co. is considering whether to replace an existing machine or to spend

money on revamping it. ABC & Co. currently pays no taxes. The replacement
machine costs₹18,00,000 now and requires maintenance of ₹2,00,000 at the end of
every year for eight years. At the end of eight years, it would have a salvage value of
₹4,00,000 and would be sold. The existing machine requires increasing amounts of
maintenance each year and its salvage value fall each year as follows:
Year Maintenance (₹) Salvage (₹)
Present 0 8,00,000

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1 2,00,000 5,00,000
2 4,00,000 3,00,000
3 6,00,000 2,00,000
4 8,00,000 0
The opportunity cost of capital for ABC & Co. is 15%.
Required: When should the company replace the machine?
The following present value table is given for you:
Year Present value of ₹ 1 at 15% discount
rate
1 0.8696
2 0.7561
3 0.6575
4 0.5718
5 0.4972
6 0.4323
7 0.3759
8 0.3269

10.Ms. Vedhu Ltd is unlevered company

Initial Investment - ₹.270lakh
CFAT – ₹. 42lakh
Discount Factor -14%

To get the tax advantage, company wants to use the debt fund.
Other details:
Interest-10%
Expenses on Issue -₹.10 lakh
Tax-30%
Find
(a) Adjusted present value of Investment.
(b) Adjusted Discount Rate.

Qtn 11
Particulars Project Y Project Z
Initial Investment Rs. 15,000 20,000
Life 5 years 4 years
CFAT pa Rs. 5,000 7,500
Discount factor 12% 12%
a)If the projects are independent, the company should accept which project?
b)If the projects are mutually exclusive, the company should accept which
project?

Qtn 12:
Initial investment = 2.10 lakhs

CFAT p.a. Year 1 = 18,000

Year 2 = 27,000

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Year 3 = 86,000
Year 4 = 98,000
Year 5 = 68,000
Compute payback reciprocal .

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Chapter 8:
DIVIDEND DECISION
1. EPS = ₹20
Ke = 11%
ROI = 10%
Find DPS, as per Walters ‘Optimum Dividend Payout Policy ’?

2. EPS=₹25
Ke=12%
ROI=15%
Find Share Price, based on Walter Optimum Dividend Payout Policy ?

3. Earnings = 2,00,000
Number of Shares = 20,000 @100
Dividend paid =1,50,000
Price Earning Ratio=12.5
Find
(i) MPS as per Walter model.
(ii) MPS based on optimum dividend payout situation .

4. XYZ Ltd., which earns Rs. 10 per share is capitalized at 10% and has a return
on investment of 12%.
Find
i) Market Price if pay out rate = 25%
ii) Market price if pay out rate = 50%
iii) Market price if pay out rate = 100%
iv) Optimum Divpayout ratio. – Under Walter Model.
5. EPS=₹20
Ke=20%
ROI=30%
DPOR=75%. Find MPS, as per Gordon’s model of dividend policy.

6. EPS = ₹50
Ke=20%
ROI = 25%
DPS=20
Find MPS, as per Gordon’s model of dividend policy.

7. DPS=20
Ke=20%
g=15%
Find MPS, as per Gordon’s model of dividend policy.

8. EPS = ₹100
g =15%

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ROI=25%
Find DPOR
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CHAPTER 9
WORKING CAPITAL MANAGEMENT
Concept Based Qtns:
1. Year = 360 or 365 days?
2. Operating Cycle should be expressed in?
3. Shorter the cycle is best or longer?
4. Number of cycles should be more or less?
5. If Financial info alone given (i.e in Rs.) then how to find operating cycle?
6. Formula for amount of Working Capital required based on operating cycle
7. Formula for Operating cycle
8. Formula for number of Operating cycles in a year
9. Formula for Turnover Ratios,
a. Raw Material
b. Work In Progress
c. Finished Goods
d. Debtor
e. Creditor
10. Total sales - 120 Lakhs, If Cash sales is 80% less than Credit Sales, find Credit Sales
11. Time Lag represents what?
12. Time Lag for Stores represent what?
13. Creditors for expenses represent what?
14. Creditors for purchase represent what?
15. While estimation of Working Capital, is it necessary that all the computation should
be uniformly in months or weeks?
16. All the components in estimation of Working Capital are items of P&L or B/s?
17. Is Outstanding Expenses is applicable for Depreciation?
18. Outstanding Overhead Rs. 1,000 for one month. Total Overheads Rs. 14,000. Find
Depreciation , Find Cash Expenses
19. Current Assets - 20 Lakhs, Current Liabilities - 10 Lakhs, Safety Margin - 20%
a. Find Required Working Capital
b. If Safety Margin is 20% included in Working Capital required, find Working
Capital
21. Formula for
a. Optimum Cash balance
b. Average Cash balance
c. Number of transfers per year
d. Time Interval between 2 Transfers
e. Total Transaction cost
f. Total Carrying Cost
g. Total Associated Cost

22. Sales Revenue - 10 Lakhs, Cost of Purchase - 6 Lakhs, Probability of recovery - 70%
a. Find Gross Income
b. Find Gross Cost
c. Find Net Benefit/Loss

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23. “Net 40? ?

24. “2/10, net 40”
25. In which method, the assumption is, availability of cash will not remain constant
26. 3 Limits in Cash Management Model
27. What is Return Print?
28. While credit granting decision when FC is relevant
29. While credit granting decision Opportunity cost should be computed on?
Theory Quick Revision:
4 Segments of Working Capital Cycle
5 Functions of Treasury Department
6 Types of Floats
2 Types of Cash Management Model
2 Types of Factoring
4 Procedures of Factoring
9 Features of Commercial Paper
4 Procedure of Issuing Commercial Paper
4 Assumptions under J Baumol’s cash management model
2 Assumptions under Miller-Orr’s cash management model
3 Control limits under Miller-Orr’s cash management model
3 Advantages of Concentration Banking
3 Deduction by Factor before providing advance to borrower
3 Allied services provided by the Factor
4 Benefits under ageing schedule

1. Production Quantity 9000

Selling price 200
Cost of Sales = 16,20,000
Depreciation ₹ 20 per units
Cash sales are 75% less than Credit sales
Debtors pay period 2 months.
Find Debtors?

2.
Particulars Year I Year II
Sales Revenue 500 1100
Raw Material 200 ?
Direct Wages 25 ?
Factory OH 50 ?
Admin. OH 60 ?
Selling & Distribution 55 ?
OH
i. There is an increase in selling price to the extent of 10% in Year II.
ii. In Year II company has introduced JIT system, due to suppliers having agreed
to transfer materials with 2.5% discount.

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iii. Year II bonus for the workers amounts to Rs.200,000.

iv. Factory OH = 80% Variable cost and ½ month outstanding.
v. Admin. OH = 100% Fixed cost paid 1 month in advance.
vi. Outstanding wages 2 months (excl. bonus).
vii. Selling OH in Year II additional to the extent of 150% hike & 6 weeks
outstanding.
viii. Safety margin 5% on required amount of working capital.
You are required to estimate the working capital for Year II
Stock holding period –
Raw Materials - 2 weeks
WIP - 2 months
Finished Goods - 1 month
Debtors(60% credit sales)- 8 weeks
Creditors - 2 weeks

3. Vijaylaxmi Limited, a newly formed company, has applied to a commercial

bank for the first time for financing its working capital requirements. The
following information is available about the projections for the current year:
Estimated level of activity: 1,04,000 completed units of production plus 4,000
units of work-in-progress. Based on the above activity, estimated cost per unit is:
(Rs.)
Raw material 80 per unit
Direct wages 30 per unit
Overheads (exclusive of depreciation) 60 per unit
Total cost 170 per unit
Selling price 200 per unit
Raw materials in stock: Average 4 weeks consumption, work-in-progress (assume
50% completion stage in respect of conversion cost) (materials issued at the start
of the processing).
Finished goods in stock 8,000 units
Credit allowed by suppliers Average 4 weeks
Credit allowed to debtors/receivables Average 8 weeks
1
Lag in payment of wages Average 1 weeks
2
Cash at banks (for smooth operation) is expected to be ₹ 25,000.
Assume that production is carried on evenly throughout the year (52 weeks) and
wages and overheads accrue similarly. All sales are on credit basis only.
You are required to determine:
(i) The net working capital required;
(ii) The maximum permissible bank finance under first and second methods of
financing as per Tandon Committee Norms.

4. Samreen Enterprises has been operating its manufacturing facilities till

31.3.2010 on a single shift working with the following cost structure:
Per Unit (Rs.)
Cost of Materials 6.00
Wages (out of which 40% fixed) 5.00

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Overheads (out of which 80% fixed) 5.00

Profit 2.00
Selling Price 18.00
Sales during 2009-10 – Rs. 4,32,000.

As at 31.3.2010 the company held:

Stock of raw materials (at cost) 36,000
Work-in-progress (valued at prime cost) 22,000
Finished goods (valued at total cost) 72,000
Sundry debtors 1,08,000

In view of increased market demand, it is proposed to double production by working

an extra shift. It is expected that a 10% discount will be available from suppliers of
raw materials in view of increased volume of business. Selling price will remain the
same. The credit period allowed to customers will remain unaltered. Credit availed
of from suppliers will continue to remain at the present level i.e., 2 months. Lag in
payment of wages and expenses will continue to remain half a month.
You are required to assess the additional working capital requirements, if the policy
to increase output is implemented.

5. GT Ltd. is taking into account the revision of its credit policy with a view to
increasing its sales and profit. Currently, all its sales are on one month credit.
Other information is as follows:
Contribution 2/5th of Sales Revenue
Additional funds raising cost 20% per annum
The marketing manager of the company has given the following options along with
estimates for considerations:
Particulars Current Option I Option II Option III
Position
Sales Revenue (₹) 40,00,000 42,00,000 44,00,000 50,00,000
Credit period (in
1 1½ 2 3
months)
Bad debts (% of
2 2½ 3 5
sales)
Cost of Credit
24,000 26,000 30,000 60,000
administration (₹)
You are required to ADVISE the company for the best option.

6. Suppliers’ Credit policy is 3/10, net 40. If the company wants to utilize the full
trad credit, what could be the interest cost for the company?

7. M/S.PREMIER company purchases raw materials on terms of 2/10, net 30. A

review of the company’s records by the owner Mr. Shanmugam, revealed that
payments are usually made 15 days after purchases are received. When asked
why the firm did not take advantage of its discounts, the accountant,
Mr.Sridhar, replied that it cost only 2 per cent for these funds, whereas a bank
loan would cost the company 12 per cent.
a) What mistake is Mr. Sridhar making?

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b) What is the real cost of not taking advantage of the discount?

c) If the firm could not borrow from the bank and was forced to resort to the use of
trade credit funds, what suggestion might be made to Mr. Sridhar that would reduce
the annual interest cost?

8. A Ltd uses inventory turnover as one performance measure to evaluate its

production manager. Currently, its inventory turnover (based on cost of goods
sold /inventory) is 10 times per annum, as compared with industry average of
4. Average sales are Rs.4,50,000 p.a. variable costs of inventory have
consistently remained at 70% of sales with fixed costs of Rs.10,000. Carrying
costs of inventory (excluding financing costs) are 5% per annum. Sales force
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 under:

Inventory Policy Inventory Turnover Sales in Rs.

Current 10 4,50,000
A 8 5,00,000
B 6 5,40,000
C 4 5,65,000
On the basis of above estimates, assuming a 40% tax rate and an after tax required
return of 20% on investment in inventory, which policy would you recommend?

9.
Sales Rs. 50,00,000
Cash : Credit 30:70
Terms “3/40, net 100”
Cash Discount 40 % of customer
availed
Find,
• How much receivable we can give for Factoring?
• What are all the deductions the Factor can do it?

10. A Firm has a total sales of Rs. 200Lakhsof which 80% is on credit. It is offering credit
terms of 2/40, net 120. Of the total, 50% of the customers avail of discount and the
balance pay in 120 days. Past experience indicates that Bad Debt losses are around 1%
ofCredit Sales. The Firm spends about Rs. 2,40,000 per annum to administer its credit sales.
These are avoidable as a Factor is prepared to buy the Firm’s Receivables. He will charge
2%Commission. He will pay Advance against Receivables to the Firm at an Interest Rate of
18% after withholding 10% as Reserve.
(i) What is the Effective Cost of Factoring? Consider year as 360 days.
(ii) If Bank Finance for Working Capital is available at 14% Interest, should the Firm
avail of factoring service?

11. Sri Ganesh has given the sales forecast for Jan to Jul 2014 & actual sales for Nov,
Dec. with the other particulars:
Sales (Rs.):
Nov’13 ………………. 80,000 Apr’14 ……………………………….
1,00,000

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Dec’13 ………………. 70,000 May’14 ………………………………

90,000
Jan’14 ……………….. 80,000 Jun’14 ……………………………….
1,20,000
Feb’14 ……………….. 1,00,000 Jul’14 ………………………………..
1,00,000
Mar’14 ………………. 80,000

Sales 20% cash 80% credit payable in the third month (Jan sales in Mar)
Variable expenses 5% on turnover, time lag half month.
Commission 5% on credit sales payable in the third month.
Purchases 60% of the sales of the third month.
Payment 3rd month of purchases.
Rent and other expenses Rs.3,000 paid every month.
Other payments: Fixed Assets Purchase March Rs.50,000.
Taxes paid in Apr. Rs.20,000; Opening cash balance Rs.25,000.
Required: Prepare cash budget for five months Jan to May 2014.

12. Following is the balance sheet of XYZ Ltd. Calculate the amount of Maximum
Permissible Bank Finance by all the three methods for working capital as per Tandon
Committee norms. You are required to assume the level of core current assets to be Rs.30
lakhs. You are also required to calculate the current ratios under each method and compare
the same with the current ratios as recommended by the Committee, assuming that the bank
has granted MPBF.
BALANCE SHEET OF XYZ LTD.
As on 31. March, 2013 (Rs. In lakhs)
Liabilities Assets
Equity Shares Rs.10 each 200 Fixed Assets 500
Retained earnings 200 Current Assets
11% Debentures 300 Inventory:
Public deposits 100 Raw materials 100
Trade creditors 80 W.I.P. 150
Bills payable 100 Finished goods 75 325
Debtors 100
Cash / Bank 55 480
980 980

Qtn 13
Demand for the material 401 in the first quarter is 25,000 kgs. One unit of item
401 costs Re.1 per half year to hold in stock in addition to that company has
incurred Rs.2/- unit for other maintenance expenses. Last year they made four
orders at the total cost of Rs.80. What should the reorder quantity be in order
to minimize the total costs associated with the stock?

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Qtn 14.
Material: HSLM
Code No. 91163
Monthly usage: 250 pcs
Cost of placing and receiving one order Rs.60.
Cost of material p.u Rs.10
Carrying cost=10% of inventory value.
Find out EOQ & Verify.

Qtn 15.
A manufacturer requires 9600 units of a certain component annually. This is
currently purchased from a regular supplier at Rs.50 p.u The cost of placing an
order is Rs.60 per order and the annual carrying cost is Rs.5 per piece. What is
the EOQ for placing order?
Recently the supplier has expressed his willingness to reduce the price to
Rs.48, if the total requirements are obtained from him in two equal orders and
to Rs. 47, if the entire quantity required is purchased in one lot. Analyse the
cost of the three options and recommend the best course. What other factors
should also be considered before the decision is taken?

Qtn 16
Amurra Ltd has told cash disbursement amounting Rs.5,62,500 in first quoter of the
year 2025 and maintains a separate account for cash disbursements. The Company
has an Administrative and Transaction Cost on transferring Cash to Disbursement
Account Rs.15 per transfer. The Yield Rate on Marketable Securities is 1% pm.
You are required to determine optimum cash balance according to William J.
Baumol Model.

WINNERS NEVER QUIT

&
QUITTERS NEVER WIN

ALL THE VERY BEST

CA.K.HARIHARAN, FCA
= = = = **** = = = =

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Table A PV of Re.1 at the end of ‘n’ Years.

Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229
16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1883 0.1631 0.1415 0.1229 0.1069
17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1696 0.1456 0.1252 0.1078 0.0929
18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1528 0.1300 0.1108 0.0946 0.0808
19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1377 0.1161 0.0981 0.0829 0.0703
20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1240 0.1037 0.0868 0.0728 0.0611
21 0.8114 0.6598 0.5375 0.4388 0.3589 0.2942 0.2415 0.1987 0.1637 0.1351 0.1117 0.0926 0.0768 0.0638 0.0531
22 0.8034 0.6468 0.5219 0.4220 0.3418 0.2775 0.2257 0.1839 0.1502 0.1228 0.1007 0.0826 0.0680 0.0560 0.0462
23 0.7954 0.6342 0.5067 0.4057 0.3256 0.2618 0.2109 0.1703 0.1378 0.1117 0.0907 0.0738 0.0601 0.0491 0.0402
24 0.7876 0.6217 0.4919 0.3901 0.3101 0.2470 0.1971 0.1577 0.1264 0.1015 0.0817 0.0659 0.0532 0.0431 0.0349
25 0.7798 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1460 0.1160 0.0923 0.0736 0.0588 0.0471 0.0378 0.0304

CA K HARIHARAN FCA 124

 FINANCIAL MANAGEMENT CA - INTER

Table A PV of Re.1 at the end of 'n' Years

Year 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
1 0.8621 0.8547 0.8475 0.8403 0.8333 0.8264 0.8197 0.8130 0.8065 0.8000 0.7937 0.7874 0.7813 0.7752 0.7692
2 0.7432 0.7305 0.7182 0.7062 0.6944 0.6830 0.6719 0.6610 0.6504 0.6400 0.6299 0.6200 0.6104 0.6009 0.5917
3 0.6407 0.6244 0.6086 0.5934 0.5787 0.5645 0.5507 0.5374 0.5245 0.5120 0.4999 0.4882 0.4768 0.4658 0.4552
4 0.5523 0.5337 0.5158 0.4987 0.4823 0.4665 0.4514 0.4369 0.4230 0.4096 0.3968 0.3844 0.3725 0.3611 0.3501
5 0.4761 0.4561 0.4371 0.4190 0.4019 0.3855 0.3700 0.3552 0.3411 0.3277 0.3149 0.3027 0.2910 0.2799 0.2693
6 0.4104 0.3898 0.3704 0.3521 0.3349 0.3186 0.3033 0.2888 0.2751 0.2621 0.2499 0.2383 0.2274 0.2170 0.2072
7 0.3538 0.3332 0.3139 0.2959 0.2791 0.2633 0.2486 0.2348 0.2218 0.2097 0.1983 0.1877 0.1776 0.1682 0.1594
8 0.3050 0.2848 0.2660 0.2487 0.2326 0.2176 0.2038 0.1909 0.1789 0.1678 0.1574 0.1478 0.1388 0.1304 0.1226
9 0.2630 0.2434 0.2255 0.2090 0.1938 0.1799 0.1670 0.1552 0.1443 0.1342 0.1249 0.1164 0.1084 0.1011 0.0943
10 0.2267 0.2080 0.1911 0.1756 0.1615 0.1486 0.1369 0.1262 0.1164 0.1074 0.0992 0.0916 0.0847 0.0784 0.0725
11 0.1954 0.1778 0.1619 0.1476 0.1346 0.1228 0.1122 0.1026 0.0938 0.0859 0.0787 0.0721 0.0662 0.0607 0.0558
12 0.1685 0.1520 0.1372 0.1240 0.1122 0.1015 0.0920 0.0834 0.0757 0.0687 0.0625 0.0568 0.0517 0.0471 0.0429
13 0.1452 0.1299 0.1163 0.1042 0.0935 0.0839 0.0754 0.0678 0.0610 0.0550 0.0496 0.0447 0.0404 0.0365 0.0330
14 0.1252 0.1110 0.0985 0.0876 0.0779 0.0693 0.0618 0.0551 0.0492 0.0440 0.0393 0.0352 0.0316 0.0283 0.0254
15 0.1079 0.0949 0.0835 0.0736 0.0649 0.0573 0.0507 0.0448 0.0397 0.0352 0.0312 0.0277 0.0247 0.0219 0.0195
16 0.0930 0.0811 0.0708 0.0618 0.0541 0.0474 0.0415 0.0364 0.0320 0.0281 0.0248 0.0218 0.0193 0.0170 0.0150
17 0.0802 0.0693 0.0600 0.0520 0.0451 0.0391 0.0340 0.0296 0.0258 0.0225 0.0197 0.0172 0.0150 0.0132 0.0116
18 0.0691 0.0592 0.0508 0.0437 0.0376 0.0323 0.0279 0.0241 0.0208 0.0180 0.0156 0.0135 0.0118 0.0102 0.0089
19 0.0596 0.0506 0.0431 0.0367 0.0313 0.0267 0.0229 0.0196 0.0168 0.0144 0.0124 0.0107 0.0092 0.0079 0.0068
20 0.0514 0.0433 0.0365 0.0308 0.0261 0.0221 0.0187 0.0159 0.0135 0.0115 0.0098 0.0084 0.0072 0.0061 0.0053
21 0.0443 0.0370 0.0309 0.0259 0.0217 0.0183 0.0154 0.0129 0.0109 0.0092 0.0078 0.0066 0.0056 0.0048 0.0040
22 0.0382 0.0316 0.0262 0.0218 0.0181 0.0151 0.0126 0.0105 0.0088 0.0074 0.0062 0.0052 0.0044 0.0037 0.0031
23 0.0329 0.0270 0.0222 0.0183 0.0151 0.0125 0.0103 0.0086 0.0071 0.0059 0.0049 0.0041 0.0034 0.0029 0.0024
24 0.0284 0.0231 0.0188 0.0154 0.0126 0.0103 0.0085 0.0070 0.0057 0.0047 0.0039 0.0032 0.0027 0.0022 0.0018
25 0.0245 0.0197 0.0160 0.0129 0.0105 0.0085 0.0069 0.0057 0.0046 0.0038 0.0031 0.0025 0.0021 0.0017 0.0014

CA K HARIHARAN FCA 125

 FINANCIAL MANAGEMENT CA - INTER

Table
B AV of Re.1 at the end of 'n' Years

Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696

2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257

3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832

4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550

5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522

6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845

7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604

8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873

9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716

10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188

11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337

12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206

13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.7499 6.4235 6.1218 5.8424 5.5831

14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.9819 6.6282 6.3025 6.0021 5.7245

15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 7.1909 6.8109 6.4624 6.1422 5.8474

16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 7.3792 6.9740 6.6039 6.2651 5.9542

17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.5488 7.1196 6.7291 6.3729 6.0472

18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280

19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.8393 7.3658 6.9380 6.5504 6.1982

20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.9633 7.4694 7.0248 6.6231 6.2593

21 18.8570 17.0112 15.4150 14.0292 12.8212 11.7641 10.8355 10.0168 9.2922 8.6487 8.0751 7.5620 7.1016 6.6870 6.3125

22 19.6604 17.6580 15.9369 14.4511 13.1630 12.0416 11.0612 10.2007 9.4424 8.7715 8.1757 7.6446 7.1695 6.7429 6.3587

23 20.4558 18.2922 16.4436 14.8568 13.4886 12.3034 11.2722 10.3711 9.5802 8.8832 8.2664 7.7184 7.2297 6.7921 6.3988

24 21.2434 18.9139 16.9355 15.2470 13.7986 12.5504 11.4693 10.5288 9.7066 8.9847 8.3481 7.7843 7.2829 6.8351 6.4338

25 22.0232 19.5235 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.8226 9.0770 8.4217 7.8431 7.3300 6.8729 6.4641

CA K HARIHARAN FCA 126

 FINANCIAL MANAGEMENT CA - INTER

Table
B AV of Re.1 at the end of 'n' Years

Year 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%

1 0.8621 0.8547 0.8475 0.8403 0.8333 0.8264 0.8197 0.8130 0.8065 0.8000 0.7937 0.7874 0.7813 0.7752 0.7692

2 1.6052 1.5852 1.5656 1.5465 1.5278 1.5095 1.4915 1.4740 1.4568 1.4400 1.4235 1.4074 1.3916 1.3761 1.3609

3 2.2459 2.2096 2.1743 2.1399 2.1065 2.0739 2.0422 2.0114 1.9813 1.9520 1.9234 1.8956 1.8684 1.8420 1.8161

4 2.7982 2.7432 2.6901 2.6386 2.5887 2.5404 2.4936 2.4483 2.4043 2.3616 2.3202 2.2800 2.2410 2.2031 2.1662

5 3.2743 3.1993 3.1272 3.0576 2.9906 2.9260 2.8636 2.8035 2.7454 2.6893 2.6351 2.5827 2.5320 2.4830 2.4356

6 3.6847 3.5892 3.4976 3.4098 3.3255 3.2446 3.1669 3.0923 3.0205 2.9514 2.8850 2.8210 2.7594 2.7000 2.6427

7 4.0386 3.9224 3.8115 3.7057 3.6046 3.5079 3.4155 3.3270 3.2423 3.1611 3.0833 3.0087 2.9370 2.8682 2.8021

8 4.3436 4.2072 4.0776 3.9544 3.8372 3.7256 3.6193 3.5179 3.4212 3.3289 3.2407 3.1564 3.0758 2.9986 2.9247

9 4.6065 4.4506 4.3030 4.1633 4.0310 3.9054 3.7863 3.6731 3.5655 3.4631 3.3657 3.2728 3.1842 3.0997 3.0190

10 4.8332 4.6586 4.4941 4.3389 4.1925 4.0541 3.9232 3.7993 3.6819 3.5705 3.4648 3.3644 3.2689 3.1781 3.0915

11 5.0286 4.8364 4.6560 4.4865 4.3271 4.1769 4.0354 3.9018 3.7757 3.6564 3.5435 3.4365 3.3351 3.2388 3.1473

12 5.1971 4.9884 4.7932 4.6105 4.4392 4.2784 4.1274 3.9852 3.8514 3.7251 3.6059 3.4933 3.3868 3.2859 3.1903

13 5.3423 5.1183 4.9095 4.7147 4.5327 4.3624 4.2028 4.0530 3.9124 3.7801 3.6555 3.5381 3.4272 3.3224 3.2233

14 5.4675 5.2293 5.0081 4.8023 4.6106 4.4317 4.2646 4.1082 3.9616 3.8241 3.6949 3.5733 3.4587 3.3507 3.2487

15 5.5755 5.3242 5.0916 4.8759 4.6755 4.4890 4.3152 4.1530 4.0013 3.8593 3.7261 3.6010 3.4834 3.3726 3.2682

16 5.6685 5.4053 5.1624 4.9377 4.7296 4.5364 4.3567 4.1894 4.0333 3.8874 3.7509 3.6228 3.5026 3.3896 3.2832

17 5.7487 5.4746 5.2223 4.9897 4.7746 4.5755 4.3908 4.2190 4.0591 3.9099 3.7705 3.6400 3.5177 3.4028 3.2948

18 5.8178 5.5339 5.2732 5.0333 4.8122 4.6079 4.4187 4.2431 4.0799 3.9279 3.7861 3.6536 3.5294 3.4130 3.3037

19 5.8775 5.5845 5.3162 5.0700 4.8435 4.6346 4.4415 4.2627 4.0967 3.9424 3.7985 3.6642 3.5386 3.4210 3.3105

20 5.9288 5.6278 5.3527 5.1009 4.8696 4.6567 4.4603 4.2786 4.1103 3.9539 3.8083 3.6726 3.5458 3.4271 3.3158

21 5.9731 5.6648 5.3837 5.1268 4.8913 4.6750 4.4756 4.2916 4.1212 3.9631 3.8161 3.6792 3.5514 3.4319 3.3198

22 6.0113 5.6964 5.4099 5.1486 4.9094 4.6900 4.4882 4.3021 4.1300 3.9705 3.8223 3.6844 3.5558 3.4356 3.3230

23 6.0442 5.7234 5.4321 5.1668 4.9245 4.7025 4.4985 4.3106 4.1371 3.9764 3.8273 3.6885 3.5592 3.4384 3.3254

24 6.0726 5.7465 5.4509 5.1822 4.9371 4.7128 4.5070 4.3176 4.1428 3.9811 3.8312 3.6918 3.5619 3.4406 3.3272

25 6.0971 5.7662 5.4669 5.1951 4.9476 4.7213 4.5139 4.3232 4.1474 3.9849 3.8342 3.6943 3.5640 3.4423 3.3286

CA K HARIHARAN FCA 127