Financial management

1st assessments

CASE STUDY

Financial Management is concerned with efficient acquisition (financing) and allocation (investment in assets, working capital etc.) of funds. In the modern times, the financial management includes besides procurement of funds, the three different kinds of decisions as well namely investment, financing and dividend. Out of the two objectives, profit maximization and wealth maximization, in today’s real world situations which is uncertain and multi-period in nature, wealth maximization is a better objective. Today the role of chief financial officer, or CFO, is no longer confined to accounting, financial reporting and risk management. It’s about being a strategic business partner of the chief executive officer. The relationship between financial management and accounting are closely related to the extent that accounting is an important input in financial decision making. 
There are several sources of finance/funds available to any company.
All the financial needs of a business may be grouped into the long term or short term financial needs. There are different sources of funds available to meet long term financial needs of the business. These sources may be broadly classified into share capital (both equity and preference) and debt.
Another important source of long term finance is venture capital financing. It refers to financing of new high risky venture promoted by qualified entrepreneurs who lack experience and funds to give shape to their ideas. Securitisation is another important source of finance and it is a process in which illiquid assets are pooled into marketable securities that can be sold to investors.
Leasing is a very popular source to finance equipment. it is a contract between the owner and user of the asset over a specified period of time in which the asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (lessee company) who pays a specified rent at periodical intervals. Some of the short terms sources of funding are trade credit, advances from customers, commercial paper, and bank advances etc.

QUESTION 1
Management of all matters related to an organisation s finances is called:
 
Cash inflows and outflows

Allocation of resources

Financial management

Finance

QUESTION 2
Which of the following is not an element of financial management?
 
Allocation of resources

Financial Planning

Financial Decision-making

Financial control

QUESTION 3
The most important goal of financial management is:
 
Profit maximisation

Matching income and expenditure

Using business assets effectively

Wealth maximisation

QUESTION 4
"To achieve wealth maximization, the finance manager has to take careful decision in respect of:"
 
Investment

Financing

Dividend

All the above.

QUESTION 5
Equity shares:
 
"Have an unlimited life, and voting rights and receive dividends"

"Have a limited life, with no voting rights but receive dividends"

"Have a limited life, and voting rights and receive dividends"

"Have an unlimited life, and voting rights but receive no dividends"

QUESTION 6
External sources of finance do not include:
 
Debentures

Retained earnings

Overdrafts

Leasing

QUESTION 7
Internal sources of finance do not include:
 
Better management of working capital

Ordinary shares

Retained earnings

Trade credit

QUESTION 8
The most popular source of short-term funding is:
 
Factoring.

Trade credit.

Family and friends

Commercial banks.

QUESTION 9
Debt capital refers to:
 
Money raised through the sale of shares.

Funds raised by borrowing that must be repaid.

Factoring accounts receivable

Inventory loans

QUESTION 10
A debenture:
 
Is a long-term loan

Does not require security

Is a short-term loan

Receives dividend payments

2nd Block Assessments:

QUESTION 1
1.    Which of the following sources of funds is related to Implicit Cost of Capital?
 
Equity Share Capital

Preference Share Capital

Debentures

Retained earnings

QUESTION 2
1.    Which of the following cost of capital require to adjust tax?
 
Cost of Equity Shares

Cost of Preference Shares

Cost of Debentures

Cost of Retained Earnings

QUESTION 3
1.    "In order to calculate Weighted Average Cost of Capital, weights may be based on:"
 
Market Values

Target Values

Book Values

Anyone

QUESTION 4
1.    Firm s Cost of Capital is the average cost of:
 
All sources of finance

All Borrowings

All share capital

All Bonds & Debentures

QUESTION 5
1.    What is the cost of equity (Ke)?
 
0.25 or 25%

0.1 or 10%

0.20 or 20%

0.15 or 15%

QUESTION 6
1.    What is the cost of Debt (Kd)
 
0.055 (approx.)

0.060 (approx.)

0.070 (approx.)

0.040 (approx.)

QUESTION 7
1.    What is the cost of preference shares (Kp)
 
0.043 (approx.)

0.063 (approx.)

0.053 (approx.)

0.073 (approx.)

QUESTION 8
1.    What is the WACC using book value weights
 
0.0968 or 9.68%

0.0456 or 4.56%

5%

0.0769 or 7.69%

QUESTION 9
1.    What is the WACC using market value weights
 
0.085 or 8.5%

0.0968 or 9.68%

0.0769 or 7.69%

none of these

QUESTION 10
1.    Total value of Equity shares as per the Market price is
 
"10,00,000"

"20,00,000"

"24,00,000"

"25,00,000"

3rd Block Assessment      

CASE STUDY

Capital structure refers to the mix of a firm’s capitalization (i.e. mix of long term sources of funds such as debentures, preference share capital, equity share capital and retained earnings for meeting total capital requirement). While choosing a suitable financing pattern, certain factors like cost, risk, control, flexibility and other considerations like nature of industry, competition in the industry etc. should be considered.
The basic objective of financial management is to design an appropriate capital structure which can provide the highest earnings per share (EPS) over the firm’s expected range of earnings before interest and taxes (EBIT). EPS measures a firm’s performance for the investors. The level of EBIT varies from year to year and represents the success of a firm’s operations. EBIT-EPS analysis is a vital tool for designing the optimal capital structure of a firm. The objective of this analysis is to find the EBIT level that will equate EPS regardless of the financing plan.
Best of Luck Ltd., a profit making company, has a paid-up capital of INR. 100 lakhs consisting of 10 lakhs ordinary shares of  INR.10 each. Currently, it is earning an annual pre-tax profit of  INR. 60 lakhs. The company’s shares are listed and are quoted in the range of INR.50 to  80. The management wants to diversify production and has approved a project which will cost INR. 50 lakhs and which is expected to yield a pre-tax income of INR. 40 lakhs per annum. To raise this additional capital, the following options are under consideration of the management:
(a) To issue equity share capital for the entire additional amount. It is expected that the new shares (face value of INR.  10) can be sold at a premium of INR.  15.
(b) To issue 16% non-convertible debentures of INR. 100 each for the entire amount.
(c) To issue equity capital for INR.  25 lakhs (face value of INR. 10) and 16% non-convertible debentures for the balance amount. In this case, the company can issue shares at a premium of INR.  40 each.
You are required to advise the management as to how the additional capital can be raised, keeping in mind that the management wants to maximise the earnings per share to maintain its goodwill. The company is paying income tax at 50%.

QUESTION 1
1.    Which of the following statements is false in the context of explaining the concept of capital structure of a firm:
 
It resembles the arrangements of the various parts of a capital

It represents the relation between fixed assets and current assets

Combinations of various long-terms sources

The relation between equity and debt

QUESTION 2
1.    Financial Structure refer to
 
All Financial resources

"Short-term funds,"

Long-term funds

None of these.

QUESTION 3
1.    The term capital structure means
 
"Long-term debt, preferred stock, and equity shares."

Current assets and current liabilities

Net working capital

Shareholders equity

QUESTION 4
1.    A firm s optimal capital structure:
 
Is the debt-equity ratio that results in the minimum possible weighted average cost of capital.

40 percent debt and 60 percent equity.

When the debt-equity ratio is .50.

When Cost of equity is minimum

QUESTION 5
1.    What is the amount of Profit before tax under option B (Issue 16% Debentures only)
 
"86,00,000"

"92,00,000"

"95,00,000"

"96,00,000"

QUESTION 6
1.    What is the amount of Profit before tax under option C (Issue Equity Shares and 16% Debentures of equal amount)
 
"75,00,000"

"96,00,000"

"90,00,000"

"92,00,000"

QUESTION 7
1.    Earnings per share under the option A is .
 
3.5

4.9

4.17

5.7

QUESTION 8
1.    Earnings per share under the option B is .
 
4.1

4.6

5.2

5.9

QUESTION 9
1.    Earnings per share under the option C is.
 
3.5

6.7

4.57

3.57

QUESTION 10
1.    "Which option is most suitable for the firm to raise additional capital for diversification, keeping in mind that the management wants to maximize the earnings per share to maintain its goodwill?”
 
Option A

Option C

Option B

None of these.

4th Block Assessment

1. 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) Pay back

2. 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 reject decisions 
(c) Contingent decisions 
(d) None of the above
3. 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 basis of cost of capital 
(b) More than those computed on the basis of cost of capital
 (c) Equal to those computed on the basis of the cost of capital 
(d) None of the above

4. The pay back technique is specially useful during times
 (a) When the value of money is turbulent 
(b) When there is no inflation
 (c) When the economy is growing at a steady rate coupled with minimal inflation. 
(d) None of the above

5. While evaluating capital investment proposals, time value of money is used in which of the following techniques,
 (a) Payback method 
(b) Accounting rate of return 
(c) Net present value 
(d) None of the above

6. IRR would favour project proposals which have,
 (a) Heavy cash inflows in the early stages of the project. 
(b) Evenly distributed cash inflows throughout the project.
 (c) Heavy cash inflows at the later stages of the project 
(d) None of the above.

7. The re investment assumption in the case of the IRR technique assumes that,
 (a) Cash flows can be re invested at the projects IRR 
(b) Cash flows can be re invested at the weighted cost of capital
 (c) Cash flows can be re invested at the marginal cost of capital 
(d) None of the above

8. Multiple IRRs are obtained when,
 (a) Cash flows in the early stages of the project exceed cash flows during the later stages.
 (b) Cash flows reverse their signs during the project 
(c) Cash flows are un even 
(d) None of the above.

9. 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

10. Management is considering a Rs 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 Rs 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%

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

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

13. While evaluating investments, the release of working capital at the end of the projects life should be considered as,
 (a) Cash in flow 
(b) Cash out flow
(c) Having no effect upon the capital budgeting decision 
(d) None of the above.

14. Capital rationing refers to a situation where,
 (a) Funds are restricted and the management has to choose from amongst available alternative investments.
 (b) Funds are unlimited and the management has to decide how to allocate them to suitable projects.
 (c) Very few feasible investment proposals are available with the management.
 (d) None of the above

15. Capital budgeting is done for
 (a) Evaluating short term investment decisions. 
(b) Evaluating medium term investment decisions.
(c) Evaluating long term investment decisions. 
(d) None of the above

5th Block Assessment

Question 1
Which one of the following is the assumption of Gordon Model:
   
Ke > g

"Retention ratio(b),once decide upon, is constant"

Firm is an all equity firm

All of the above
 
 
Question 2
"What should be the optimum Dividend pay-out ratio, when r = 15% & Ke = 12%:"
   
100%

50%

Zero

None of the above
 
Question 3
Which of the following is the irrelevance theory?
   
Walter model

Gordon model

M.M. hypothesis

Linter s model
 
Question 4
"If the company s D/P ratio is 60% & ROI is 16%, what should be the growth rate:"
   
5%

7%

6.40%

9.60%
 
Question 5
"If the shareholders prefer regular income, how does this affect the dividend decision:"
   
It will lead to payment of dividend

It is the indicator to retain more earnings

It has no impact on dividend decision

Can’t say

Question 6
"Mature companies having few investment opportunities will show high payout ratios, this statement is:"
   
FALSE

TRUE

Partial true

None of these
 
Question 7
"According to the present situation, What is the current Market price per share (MPS)"
   
INR. 20

INR. 25

INR. 30

INR. 15
 
Question 8
What would be the estimated market price of the equity share if the estimated growth rate of dividends rises to 8%?
   
INR. 30.05

INR. 25.45

INR. 26.00

INR. 28.80
 
Question 9
What would be the estimated market price of the equity share if the estimated growth rate of dividends falls to 3%.?
   
INR. 12.48

INR. 20.05

INR. 16.48

INR. 19.05
 
Question 10
A firm had been paid dividend at share last year
   
INR. 2

INR. 3

INR. 1

INR. 4
 

Full Syllabus Assessment:

Question 1
What is the value of Raw materials inventory?
   
"30,000"

"40,000"

"50,000"

"35,000"
 
Question 2
Value of Working in-process is
   
"20,000"

"18,750"

"15,750"

"21,500"
 
Question 3
Value of Finished goods inventory is ..
   
"69,500"

"67,500"

"75,000"

"65,000"
 
Question 4
Value of Debtors is.
   
"66,000"

"69,000"

"67,500"

"63,000"
 
Question 5
Cash in hand is..
   
"21,000"

"20,500"

"19,500"

"20,000"
 
Question 6
What is the value of Creditors
   
"30,000"

"32,000"

"28,000"

"35,000"
 
Question 7
Amount of Direct wages payable is
   
"4,000"

"3,300"

"2,500"

"2,200"
 
Question 8
Amount of Overheads payable is.
   
"5,000"

"10,000"

"7,000"

"3,000"
 
Question 9
What is the value of total current assets?
   
"2,03,750"

"2,10,000"

"2,05,550"

"2,00,550"
 
Question 10
What is the estimated working capital requirements?
   
"1,70,500"

"1,63,400"

"1,68,000"

"1,66,250"

Live Interactive Session Test
Question 1
The long-run objective of financial management is to
   
Maximize earnings per share

Maximize the value of the firm's common stock

Maximize return on investment

Maximize market share
 
 
Question 2
Finance functions are
   
Planning for funds

Raising of funds

Allocation of Resources

All of the above
 
Question 3
Time value of money indicates that
  
A unit of money obtained today is worth more than a unit of money obtained in future

A unit of money obtained today is worth less than a unit of money obtained in future

There is no difference in the value of money obtained today and tomorrow

None of the above

Question 4
Firm’s Cost of Capital is the average cost of
   
All sources of finance

All Borrowings

All share capital

All Bonds & Debentures
 
Question 5
Which of the following cost of capital require to adjust tax?
   
Cost of Equity Shares

Cost of Preference Shares

Cost of Debentures

Cost of Retained Earnings
 
Question 6
If the Present Value of Cash Inflows are greater than the Present Value of Cash Outflows, the project would be
   
Accepted

Rejected with condition

Rejected with approval

Rejected
 
Question 7
Financial Structure refer to
   
All Financial resources

Short-term funds

Long-term funds

None of these

Question 8
A firm’s optimal capital structure
   
40 percent debt and 60 percent equity.

Is the debt-equity ratio that results in the minimum possible weighted average cost of capital

When the debt-equity ratio is .50.

When Cost of equity is minimum
 
 
Question 9
The term “capital structure” means
   
Long-term debt, preferred stock, and equity shares

Current assets and current liabilities

Net working capital

Shareholders’ equity
 
Question 10
proposals are such that the acceptance of one shall exclude the possibility of the acceptance of another then such decision making will lead to,
   
Contingent decisions

Accept reject decisions

Mutually exclusive decisions

None of the above
 
Question 11
While evaluating capital investment proposals, time value of money is used in which of the following techniques,
   
Payback method

Accounting rate of return

Net present value

None of the above

Question 12
Assume cash outflow equals INR. 1,20,000 followed by cash inflows of INR. 25,000 per year for 8 years and a cost of capital of 11%. What is the Net present value?
   
-38,214

8,653

9,653

38,214

Question 13
0 / 10 pts
What is the Internal rate of return for a project having cash flows of INR. 40,000 per year for 10 years and a cost of INR. 2,26,009?
   
8%

9%

10%

12%
 
Question 14
If the shareholders prefer regular income, how does this affect the dividend decision:
   
It will lead to payment of dividend

It is the indicator to retain more earnings

It has no impact on dividend decision

Can’t say
 
 
Question 15
Which of the following is the irrelevance theory?
   
Walter model

Gordon model

M.M. hypothesis

Linter’s model