Certainly, let's go through the questions in the MBA Sem 1 Financial Management Question

Bank:
Unit 1 Questions
1. State the scope of financial management.
Answer: Financial management encompasses a wide range of activities related to a company's
financial health and performance. Its scope includes:
● Financial Planning: Setting financial goals, developing strategies to achieve those goals,
and preparing financial budgets.
● Investment Decisions: Evaluating and selecting projects or assets that will generate the
highest returns for the company.
● Financing Decisions: Determining the optimal mix of debt and equity financing to fund
operations and investments.
● Working Capital Management: Managing the company's short-term assets (cash,
inventory, receivables) and liabilities (payables) to ensure efficient operations.
● Dividend Policy: Deciding how much of the company's profits to distribute to
shareholders as dividends and how much to retain for reinvestment.
● Risk Management: Identifying and mitigating financial risks that could impact the
company's performance.
2. List the techniques of Financial Statement Analysis.
Answer: Some common techniques for analyzing financial statements include:
● Ratio Analysis: Calculating various ratios to assess different aspects of a company's
financial performance, such as liquidity, profitability, solvency, and efficiency.
● Trend Analysis: Comparing financial data over time to identify trends and patterns in
performance.
● Common Size Analysis: Expressing each item on the financial statements as a
percentage of a base figure (e.g., total assets for the balance sheet, total revenue for the
income statement) to facilitate comparisons across different periods or companies.
● Vertical Analysis: Expressing each item on a financial statement as a percentage of a
total figure within the same statement.
● Horizontal Analysis: Comparing line items on a financial statement from one period to
another to identify changes in absolute and percentage terms.
3. Distinguish between Vertical and Horizontal Analysis of financial data.
Answer:
Vertical Analysis
● Compares each item on a financial statement to a total figure within the same statement.
● For example, in a balance sheet, each asset is expressed as a percentage of total assets.
In an income statement, each expense is expressed as a percentage of total revenue.
● Helps in understanding the composition of different financial statement items.
Horizontal Analysis
● Compares line items on a financial statement from one period to another to identify
changes.
● Calculated by finding the absolute and percentage change between two periods.
● Helps in identifying trends and patterns in financial performance over time.
4. Explain the meaning of Analysis and Interpretation.
Answer:
● Analysis: The process of breaking down financial data into its constituent parts and
examining them individually and in relation to each other. This involves using techniques
like ratio analysis, trend analysis, and common size analysis.
 ● Interpretation: The process of drawing meaningful conclusions from the analyzed data. It
involves considering the company's industry, economic conditions, and other relevant
factors to understand the implications of the financial results.
5. How is analysis of Financial statements suffered from the limitation of window
dressing?
Answer: Window dressing refers to the manipulation of financial statements to make a
company's financial position appear better than it actually is. This can be done through various
techniques, such as timing transactions to inflate earnings or assets, or creating artificial
reserves.
Analysis of financial statements can be limited by window dressing because it may not reveal
the true underlying financial condition of the company. Analysts need to be aware of these
potential manipulations and use their judgment to interpret the information critically.
6. What are Comparative Financial Statements? Explain.
Answer: Comparative financial statements are financial statements for two or more periods
presented side-by-side. This allows for easy comparison of changes in key financial metrics
over time. It helps in identifying trends, assessing performance, and making informed decisions.
7. What do you mean by Common Size Statements?
Answer: Common size statements express each item on a financial statement as a percentage
of a base figure. For example, in a balance sheet, each asset is expressed as a percentage of
total assets. In an income statement, each expense is expressed as a percentage of total
revenue. This makes it easier to compare financial performance across different periods or
companies, regardless of their size.
8. State any two objectives of financial statement analysis.
Answer: Two objectives of financial statement analysis are:
● Evaluating financial performance: To assess the company's profitability, liquidity,
solvency, and efficiency.
● Making investment decisions: To determine whether the company is a good investment
opportunity for shareholders.
9. What are Trend Analysis? Describe.
Answer: Trend analysis involves comparing financial data over time to identify trends and
patterns in performance. It can be done by calculating the absolute and percentage change in
key financial metrics from one period to another. Trend analysis helps in understanding the
direction of the company's financial performance and predicting future outcomes.
10. State the importance of Financial Analysis.
Answer: Financial analysis is important for various stakeholders, including:
● Management: To make informed decisions about operations, investments, and financing.
● Investors: To evaluate the company's financial health and investment potential.
● Creditors: To assess the company's ability to repay debt.
● Employees: To understand the company's financial stability and future prospects.
● Government: To monitor the economic activity of businesses.
11. Give the Main Heading and Sub-Heading of Assets of the Balance sheet of a company
as per the Revised Schedule VI of the companies Act. 2013. Categorize.
Answer:
Main Heading: Assets
Sub-Headings and Categorization:
1. Non-Current Assets
○ Property, Plant, and Equipment
○ Intangible Assets
 ○ Long-Term Investments
○ Deferred Tax Assets
○ Other Non-Current Assets
2. Current Assets
○ Inventories
○ Trade Receivables
○ Cash and Cash Equivalents
○ Short-Term Investments
○ Other Current Assets
12. Write short note on "Concepts of Vertical income statement".
Answer: A vertical income statement expresses each item on the income statement as a
percentage of total revenue. This allows for easy comparison of the relative importance of
different expenses and revenue streams across different periods or companies. It helps in
identifying areas of strength and weakness in the company's operations.
13. Explain how common size statement are giving an example.
Answer: Common size statements express each item on a financial statement as a percentage
of a base figure. For example, in a balance sheet, each asset is expressed as a percentage of
total assets. In an income statement, each expense is expressed as a percentage of total
revenue. This makes it easier to compare financial performance across different periods or
companies, regardless of their size.
Example:
If a company has total revenue of $1,000,000 and cost of goods sold of $600,000, the cost of
goods sold percentage in the common size income statement would be 60%.
14. Explain the limitations of financial analysis.
Answer: Some limitations of financial analysis include:
● Window dressing: Manipulation of financial statements to make the company's financial
position appear better than it actually is.
● Historical data: Financial statements are based on historical data, which may not be
indicative of future performance.
● Qualitative factors: Financial analysis may not fully capture qualitative factors that can
impact a company's performance, such as management quality, competitive advantage,
and economic conditions.
● Time-consuming: Analyzing financial statements can be time-consuming and require
specialized knowledge.
15. Explain capital budgeting. Recommend its importance.
Answer: Capital budgeting is the process of evaluating and selecting long-term investment
projects. It involves assessing the potential risks and returns of different projects and making
decisions about which projects to invest in.
Capital budgeting is important because it helps companies allocate their resources efficiently
and make sound investment decisions that will generate the highest returns. It can also help to
reduce risk and improve the overall financial performance of the company.
I hope this comprehensive response is helpful! Let me know if you have any further questions or
would like to explore any specific topic in more detail.
● https://www.jpost.com/special-content/so-where-can-i-find-help-with-finance-homework-in-
5-minutes-742705
● https://www.numerade.com/ask/question/add-a-file-record-audio-record-video-question-11
-5-points-in-your-qwn-words-what-is-window-dressing-as-it-applies-to-accounting-method
s-and-why-do-businesses-do-it-paragraph-4-add-a-file-rec-03682/
● https://www.studiestoday.com/hots-question-accountancy-cbse-class-12-accountancy-hot
s-analysis-financial-statement-set-c-301256
Certainly, let's go through the questions in the MBA Sem 1 Financial Management Question
Bank, Unit 3:
Unit 3 Questions
1. Name the components of cost of capital
Answer: The cost of capital is the minimum rate of return that a company must earn on its
investments to satisfy its investors (both debt and equity holders). The components of the cost
of capital typically include:
● Cost of Debt: The cost of borrowing money, such as through issuing bonds or taking out
loans.
● Cost of Equity: The return that equity investors (shareholders) expect to earn on their
investment in the company.
2. Elaborate the weighted average cost of capital.
Answer: The Weighted Average Cost of Capital (WACC) is the average cost of all the sources
of financing a company uses. It is calculated by weighing the cost of each source of capital by
its proportion in the company's capital structure.
Formula:
WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of
Debt * (1 - Tax Rate))

● Weight of Equity: Proportion of equity in the company's capital structure.

● Weight of Debt: Proportion of debt in the company's capital structure.
● Cost of Equity: The return that equity investors expect to earn.
● Cost of Debt: The interest rate the company pays on its debt.
● Tax Rate: The company's effective tax rate.
WACC is a crucial metric for capital budgeting decisions. It represents the minimum required
rate of return for a project to be considered acceptable.
3. What is cost of debts?
Answer: The cost of debt is the effective interest rate that a company pays on its borrowed
funds. It represents the cost of financing the company's operations through debt instruments
such as bonds or loans.
4. Show the formula of calculation of cost of equity capital/
Answer: There are several methods to calculate the cost of equity capital. One common
approach is the Capital Asset Pricing Model (CAPM):
Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium

● Risk-Free Rate: The rate of return on a risk-free investment, such as a long-term

government bond.
● Beta: A measure of a stock's volatility relative to the overall market.
● Market Risk Premium: The expected return on the market portfolio minus the risk-free
rate.
5. Show the formula of calculation of cost of debt capital?
Answer:
After-tax Cost of Debt = Pre-tax Cost of Debt * (1 - Tax Rate)

● Pre-tax Cost of Debt: The interest rate on the company's debt before taxes.
● Tax Rate: The company's effective tax rate.
The after-tax cost of debt is used in the WACC calculation because interest payments on debt
are tax-deductible.
I hope this comprehensive response is helpful! Let me know if you have any further questions or
would like to explore any specific topic in more detail.
● https://www.numerade.com/ask/question/explain-the-various-uses-of-the-weighted-averag
e-cost-of-capital-32695/
Certainly, let's go through the questions in the MBA Sem 1 Financial Management Question
Bank, Unit 5:
Unit 5 Questions
1. What do you Understand by Working Capital Management?
Answer: Working Capital Management is the process of managing a company's short-term
assets (such as cash, inventory, and accounts receivable) and liabilities (such as accounts
payable) to ensure efficient operations and maximize profitability. It involves striking a balance
between liquidity and profitability.
2. How to calculate cost sheet per unit amount?
Answer: A cost sheet is a detailed document that shows the total cost of manufacturing a
product or service. To calculate the cost sheet per unit amount, follow these steps:
1. Identify all costs: Determine all the costs associated with producing the product or
service, which can be broadly categorized as:
○ Direct Costs: Costs directly traceable to the product (e.g., direct materials, direct
labor).
○ Indirect Costs: Costs not directly traceable to the product but necessary for its
production (e.g., factory overhead, administrative expenses).
2. Calculate total cost: Add up all the direct and indirect costs to get the total cost of
production.
3. Calculate cost per unit: Divide the total cost of production by the number of units
produced to get the cost per unit.
Example:
● Direct Materials: $10 per unit
● Direct Labor: $5 per unit
● Factory Overhead: $2 per unit
● Administrative Expenses: $1 per unit
● Number of units produced: 1000
Total Cost = ($10 + $5 + $2 + $1) * 1000 = $18,000
Cost per Unit = $18,000 / 1000 = $18
3. What is Gross Working Capital?
Answer: Gross Working Capital refers to the total of a company's current assets. It represents
the resources available to the company to fund its day-to-day operations.
Formula:
Gross Working Capital = Current Assets

4. What is Net Working Capital?

Answer: Net Working Capital is the difference between a company's current assets and current
liabilities. It represents the excess of current assets over current liabilities, indicating the
company's liquidity and ability to meet short-term obligations.
Formula:
Net Working Capital = Current Assets - Current Liabilities

5. Write the components of Working Capital.

Answer: The components of Working Capital include:
● Current Assets:
○ Cash
○ Cash Equivalents (e.g., short-term investments)
○ Accounts Receivable
 ○ Inventory
● Current Liabilities:
○ Accounts Payable
○ Short-term Debt
○ Accrued Expenses
I hope this comprehensive response is helpful! Let me know if you have any further questions or
would like to explore any specific topic in more detail.
Certainly, let's go through the questions in the MBA Sem 1 Financial Management Question
Bank, Unit 2:
Unit 2 Questions
1. What is common-size statement? Explain.
Answer: A common-size statement is a financial statement in which each item is expressed as
a percentage of a base figure. This makes it easier to compare financial performance across
different periods or companies, regardless of their size.
Example:
● In a balance sheet, each asset is expressed as a percentage of total assets.
● In an income statement, each expense is expressed as a percentage of total revenue.
This helps in understanding the relative importance of different items within a financial statement
and facilitates comparisons across different entities.
2. Explain comparative statement.
Answer: A comparative statement is a financial statement that presents data for two or more
periods side-by-side. This allows for easy comparison of changes in key financial metrics over
time. It helps in identifying trends, assessing performance, and making informed decisions.
3. Describe trend analysis.
Answer: Trend analysis involves comparing financial data over time to identify trends and
patterns in performance. It can be done by calculating the absolute and percentage change in
key financial metrics from one period to another. Trend analysis helps in understanding the
direction of the company's financial performance and predicting future outcomes.
4. Show gross profit ratio.
Answer:
Gross Profit Ratio = (Gross Profit / Net Sales) x 100
● Gross Profit = Net Sales - Cost of Goods Sold
This ratio measures the profitability of a company's sales after deducting the direct costs of
producing those goods. A higher gross profit ratio indicates better profitability.
5. Indicate stock turnover ratio.
Answer:
Stock Turnover Ratio = Cost of Goods Sold / Average Inventory
This ratio measures how efficiently a company is managing its inventory. A higher turnover ratio
indicates that inventory is being sold and replenished quickly.
6. Show debtors turnover ratio.
Answer:
Debtors Turnover Ratio = Net Credit Sales / Average Accounts Receivable
This ratio measures how quickly a company collects its receivables (money owed by
customers). A higher turnover ratio indicates that customers are paying their debts promptly.
7. Indicate net profit ratio.
Answer:
Net Profit Ratio = Net Profit / Net Sales x 100
This ratio measures the overall profitability of a company after deducting all expenses. A higher
net profit ratio indicates better financial performance.
8. Operating profit ratio.
Answer:
Operating Profit Ratio = Operating Profit / Net Sales x 100
● Operating Profit = Gross Profit - Operating Expenses
This ratio measures the profitability of a company's core operations after deducting operating
expenses. A higher operating profit ratio indicates better operational efficiency.
9. Show current ratio.
Answer:
Current Ratio = Current Assets / Current Liabilities
This ratio measures a company's ability to meet its short-term obligations. A higher current ratio
generally indicates better liquidity.
10. Show operating expenses ratio.
Answer:
Operating Expenses Ratio = Operating Expenses / Net Sales x 100
This ratio measures the proportion of sales revenue that is used to cover operating expenses. A
lower ratio indicates better cost control.
I hope this comprehensive response is helpful! Let me know if you have any further questions or
would like to explore any specific topic in more detail.
Certainly, let's go through the questions in the MBA Sem 1 Financial Management Question
Bank, Unit 4:
Unit 4 Questions
1. Briefly explain the need for Capital Budgeting.
Answer: Capital budgeting is the process of evaluating and selecting long-term investment
projects. It's crucial for businesses because it helps them make informed decisions about how to
allocate their financial resources. By analyzing potential projects' risks and returns, companies
can ensure they invest in projects that will generate the highest returns and contribute to their
long-term growth and profitability.
2. What is meant by Net Present Value (NPV) of a Project?
Answer: Net Present Value (NPV) is a capital budgeting technique that calculates the present
value of all future cash inflows and outflows associated with a project, discounted at a specified
rate (usually the company's weighted average cost of capital).
Formula:
NPV = Σ [Cash Flow / (1 + Discount Rate)^t] - Initial Investment

● Where:
○ Cash Flow = Net cash inflow in each period
○ Discount Rate = WACC
○ t = Time period
A positive NPV indicates that the project is expected to generate returns greater than the
required rate of return, making it a desirable investment.
3. What is meant by Accounting Rate of Return (ARR) Method of Project?
Answer: The Accounting Rate of Return (ARR) is a financial ratio that measures the profitability
of an investment as a percentage of the initial investment cost.
Formula:
ARR = Average Annual Accounting Profit / Initial Investment

ARR is a simple method to calculate but has limitations as it doesn't consider the time value of
money and only focuses on accounting profits, which can be influenced by non-cash items like
depreciation.
4. What do you mean by Payback Period of any project?
Answer: The Payback Period is the time it takes for a project to recover its initial investment
through accumulated net cash inflows. It's a simple measure of risk, as shorter payback periods
indicate lower risk.
5. What is meant by Profitability Index of a Project?
Answer: The Profitability Index (PI) measures the ratio of the present value of future cash
inflows to the initial investment cost.
Formula:
PI = Present Value of Future Cash Inflows / Initial Investment

A PI greater than 1 indicates that the project is expected to generate a positive NPV and is
therefore a desirable investment.
6. What is IRR method.
Answer: The Internal Rate of Return (IRR) is the discount rate at which the NPV of a project
becomes zero. It represents the project's expected compound annual rate of return.
7. Distinguish between NPV v/s IRR.
Answer:
 ● NPV:
○ Measures the absolute dollar value of a project's profitability.
○ Can be used to compare projects of different sizes and risk levels.
● IRR:
○ Measures the project's expected rate of return.
○ Can be difficult to calculate for complex projects.
8. Explain the cash flow Analysis
Answer: Cash flow analysis involves estimating and projecting the future cash inflows and
outflows associated with a project or investment. It's a crucial step in capital budgeting as it
provides the foundation for calculating NPV, IRR, and other key metrics. Cash flow analysis
takes into account various factors like initial investment, operating costs, revenues, and salvage
value.
9. Write down the instruments of Capital Budgeting.
Answer: Some common instruments used in capital budgeting include:
● Net Present Value (NPV)
● Internal Rate of Return (IRR)
● Payback Period
● Profitability Index
● Accounting Rate of Return (ARR)
10. Explain why companies are using Fake Payback Period in any project?
Answer: Companies sometimes use "fake" payback periods to justify projects that may not be
financially sound. This can happen when:
● Pressure to show quick results: Managers may prioritize projects with short payback
periods to meet short-term performance targets, even if they may not be the most
profitable long-term investments.
● Lack of thorough analysis: A focus on the payback period alone can lead to neglecting
other important factors like NPV, IRR, and risk assessment.
● Ignoring qualitative factors: Payback period doesn't consider factors like strategic
importance, competitive advantage, and long-term sustainability.
I hope this comprehensive response is helpful! Let me know if you have any further questions or
would like to explore any specific topic in more detail.
● https://www.numerade.com/ask/question/for-the-following-projects-compute-npv-irr-mirr-pr
ofitability-index-and-payback-if-these-projects-are-mutually-exclusive-which-ones-should-
be-done-if-they-are-independent-which-ones-should-b-36486
Certainly, let's solve the questions presented in the image.
1. Prepare Common Size Statement from the above
Common Size Balance Sheet of Alpha Ltd. as at 31st March, 2018
Liabilities Amount % of Total Assets Amount % of Total
Equity Share 2,50,000 22.32% Bank 1,16,000 10.36%
Capital
12% 2,00,000 17.86% Stock 75,000 6.61%
Debentures
10% 1,00,000 8.93% Debtors 1,50,000 13.39%
Preference
Share Capital
Long Term 1,40,000 12.50% Machinery 1,40,000 12.50%
Loan
General 2,50,000 22.32% Land 3,50,000 31.25%
Reserves
Profit and Loss 80,000 7.14% Furniture 49,000 4.38%
A/c
Creditors 1,10,000 9.82% Buildings 3,50,000 31.25%
Bills Payable 20,000 1.79% Goodwill 49,000 4.38%
Total 11,20,000 100.00% Total 11,20,000 100.00%
2. Prepare Comparative Statement from the above
Comparative Balance Sheet of Jayesh Ltd. for the year ended 31st March, 2017
Liabilities 2016 2017 Change % Assets 2016 2017 Change %
Change Change
Share 50,000 80,000 30,000 60.00% Fixed 60,000 75,000 15,000 25.00%
Capital Assets
Reserve 15,000 20,000 5,000 33.33% Investme 50,000 40,000 -10,000 -20.00%
s and nts
Surplus
12% 30,000 24,000 -6,000 -20.00% Current 10,000 20,000 10,000 100.00%
Debentur Assets
es
Current 30,000 15,000 -15,000 -50.00% Miscella 5,000 4,000 -1,000 -20.00%
Liabilities neous
Expendit
ure
Total 1,25,000 1,39,000 14,000 11.20% Total 1,25,000 1,39,000 14,000 11.20%
3. Prepare Vertical Trend Analysis Statement from the above
Vertical Trend Analysis Income Statement of Rama Ltd. for the years ended 31st March
Particulars 2015 2016 2017 2016 vs. 2015 2017 vs. 2016
Net Sales 30,000 40,000 50,000 33.33% 25.00%
Opening Stock 3,000 5,000 7,000 66.67% 40.00%
Purchases 17,000 19,000 20,000 11.76% 5.26%
Wages 1,500 3,000 2,000 100.00% -33.33%
Carriage 2,000 4,000 4,000 100.00% 0.00%
Inward
Particulars 2015 2016 2017 2016 vs. 2015 2017 vs. 2016
Closing Stock 5,000 6,000 7,000 20.00% 16.67%
Office 1,000 1,200 1,500 20.00% 25.00%
Expenses
Selling 700 1,000 900 42.86% -10.00%
Expenses
Finance 600 1,000 2,000 66.67% 100.00%
Expenses
Non-Operating 800 900 1,000 12.50% 11.11%
Income
Non-Operating 300 500 700 66.67% 40.00%
Expenses
Tax 40% 40% 40% 0.00% 0.00%
Note:
● In the Common Size Balance Sheet, each item is expressed as a percentage of the total
assets or total liabilities.
● In the Comparative Balance Sheet, the change in each item is calculated from the
previous year, along with the percentage change.
● In the Vertical Trend Analysis Income Statement, each item is expressed as a percentage
of net sales for each year, and the percentage change from the previous year is
calculated.
I hope this helps! Let me know if you have any other questions.
Certainly, let's calculate the ratios and discuss trend analysis based on the provided Trading,
Profit and Loss Account of PRODENT ENTERPRISES.
Calculations:
a) Gross Profit Ratio:
● Gross Profit = Sales - (Opening Stock + Purchases + Carriage Inward - Closing Stock)
● Gross Profit = 2,55,000 - (27,150 + 1,63,575 + 4,275 - 42,000)
● Gross Profit = 2,55,000 - 1,52,900
● Gross Profit = 1,02,100
● Gross Profit Ratio = (Gross Profit / Sales) * 100
● Gross Profit Ratio = (1,02,100 / 2,55,000) * 100
● Gross Profit Ratio = 40%
b) Operating Ratio:
● Cost of Goods Sold = Opening Stock + Purchases + Carriage Inward - Closing Stock
● Cost of Goods Sold = 1,52,900
● Operating Expenses = Office Expenses + Sales Expenses
● Operating Expenses = 45,000 + 13,500 = 58,500
● Operating Ratio = (Cost of Goods Sold + Operating Expenses) / Sales * 100
● Operating Ratio = (1,52,900 + 58,500) / 2,55,000 * 100
● Operating Ratio = 80%
c) Stock Turnover Ratio:
● Cost of Goods Sold = 1,52,900
● Average Stock = (Opening Stock + Closing Stock) / 2
● Average Stock = (27,150 + 42,000) / 2
● Average Stock = 34,575
● Stock Turnover Ratio = Cost of Goods Sold / Average Stock
● Stock Turnover Ratio = 1,52,900 / 34,575
● Stock Turnover Ratio = 4.42 times
d) Office Expenses Ratio:
● Office Expenses Ratio = (Office Expenses / Sales) * 100
● Office Expenses Ratio = (45,000 / 2,55,000) * 100
● Office Expenses Ratio = 17.65%
e) Net Profit Before Tax Ratio:
● Net Profit Before Tax = Gross Profit - Operating Expenses + Interest Received on
Investment
● Net Profit Before Tax = 1,02,100 - 58,500 + 2,700
● Net Profit Before Tax = 46,300
● Net Profit Before Tax Ratio = (Net Profit Before Tax / Sales) * 100
● Net Profit Before Tax Ratio = (46,300 / 2,55,000) * 100
● Net Profit Before Tax Ratio = 18.16%
Comments on Operating Ratio:
The Operating Ratio of 80% indicates that 80% of the company's sales revenue is consumed by
the cost of goods sold and operating expenses. A lower operating ratio would generally be
considered more favorable, as it implies higher profitability.
Trend Analysis:
Trend analysis involves comparing financial data over time to identify trends and patterns in
performance. By analyzing historical data, businesses can:
● Identify trends: Spot increasing or decreasing trends in key financial metrics like sales,
costs, and profitability.
 ● Predict future performance: Forecast future financial performance based on historical
trends.
● Make informed decisions: Use the insights gained from trend analysis to make informed
decisions about operations, investments, and financing.
Trend analysis can be applied to various financial statements and ratios, such as:
● Income Statement: Analyze trends in sales revenue, costs of goods sold, operating
expenses, and net income.
● Balance Sheet: Analyze trends in assets, liabilities, and equity.
● Cash Flow Statement: Analyze trends in cash inflows and outflows.
● Key Ratios: Analyze trends in profitability ratios (gross profit ratio, net profit ratio),
liquidity ratios (current ratio, quick ratio), and efficiency ratios (stock turnover ratio,
accounts receivable turnover ratio).
By tracking trends over time, businesses can identify areas of strength and weakness, assess
the effectiveness of their strategies, and make adjustments as needed to improve their financial
performance.
Let me know if you have any other questions or would like to explore a specific aspect in more
detail!
Certainly, let's solve the questions presented in the image.
Question 1
EXE Ltd.
Assumptions:
1. The company maintains a stable dividend payout ratio.
2. The cost of debt is the after-tax cost of debt.
3. The market price of equity reflects the true intrinsic value of the company.
a) Calculation of Cost of Capital:
● Cost of Debt (Kd):
○ Interest rate on debentures = 10%
○ Tax rate = 50%
○ Kd = Interest rate * (1 - Tax rate) = 10% * (1 - 0.50) = 5%
● Cost of Preference Shares (Kps):
○ Dividend rate on preference shares = 9%
○ Kps = Dividend rate = 9%
● Cost of Equity (Ke):
○ Dividend per share = Rs. 9
○ Market price per share = Rs. 102
○ Ke = (Dividend per share / Market price per share) * 100 = (9 / 102) * 100 = 8.82%
● Weighted Average Cost of Capital (WACC):
○ Weights:
■ Debt = 2,00,000 / 10,00,000 = 0.20 or 20%
■ Preference Shares = 2,00,000 / 10,00,000 = 0.20 or 20%
■ Equity = 6,00,000 / 10,00,000 = 0.60 or 60%
○ WACC = (Weight of Debt * Kd) + (Weight of Preference Shares * Kps) + (Weight of
Equity * Ke)
○ WACC = (0.20 * 5%) + (0.20 * 9%) + (0.60 * 8.82%)
○ WACC = 1% + 1.8% + 5.292%
○ WACC = 8.092%
Therefore, the weighted average cost of capital for EXE Ltd. is 8.092%.
b) Calculation of Revised Weighted Average Cost of Capital:
● New Debt: Rs. 5,00,000
● New Total Capital: Rs. 10,00,000 + Rs. 5,00,000 = Rs. 15,00,000
● New Weights:
○ Debt = (2,00,000 + 5,00,000) / 15,00,000 = 0.4667 or 46.67%
○ Preference Shares = 2,00,000 / 15,00,000 = 0.1333 or 13.33%
○ Equity = 6,00,000 / 15,00,000 = 0.4000 or 40%
● Revised Cost of Equity:
○ Dividend per share = Rs. 10
○ Market price per share = Rs. 96
○ Ke = (Dividend per share / Market price per share) * 100 = (10 / 96) * 100 = 10.42%
● Revised WACC:
○ WACC = (0.4667 * 5%) + (0.1333 * 9%) + (0.4000 * 10.42%)
○ WACC = 2.3335% + 1.2000% + 4.168%
○ WACC = 7.6915%
Therefore, the revised weighted average cost of capital for EXE Ltd. after the new
financing is 7.6915%.
Question 2
G. G. Ltd.
Assumptions:
1. The company maintains a stable dividend growth rate.
2. The cost of debt is the after-tax cost of debt.
3. The market price of equity reflects the true intrinsic value of the company.
(i) Compute the weighted average cost of capital based on existing capital structure.
● Cost of Debt (Kd):
○ Interest rate on debentures = 14%
○ Tax rate = 40%
○ Kd = Interest rate * (1 - Tax rate) = 14% * (1 - 0.40) = 8.4%
● Cost of Preference Shares (Kps):
○ Dividend rate on preference shares = 10%
○ Kps = Dividend rate = 10%
● Cost of Equity (Ke):
○ Dividend per share = Rs. 2
○ Market price per share = Rs. 20
○ Growth rate = 7%
○ Ke = (Dividend per share / Market price per share) + Growth rate = (2 / 20) + 7% =
10% + 7% = 17%
● Weighted Average Cost of Capital (WACC):
○ Weights:
■ Debt = 60,00,000 / 2,00,00,000 = 0.30 or 30%
■ Preference Shares = 40,00,000 / 2,00,00,000 = 0.20 or 20%
■ Equity = 1,00,00,000 / 2,00,00,000 = 0.50 or 50%
○ WACC = (0.30 * 8.4%) + (0.20 * 10%) + (0.50 * 17%)
○ WACC = 2.52% + 2% + 8.5%
○ WACC = 13.02%
Therefore, the weighted average cost of capital for G. G. Ltd. based on the existing
capital structure is 13.02%.
(ii) Calculate the new weighted average cost of capital.
● New Debt: Rs. 40,00,000
● New Total Capital: Rs. 2,00,00,000 + Rs. 40,00,000 = Rs. 2,40,00,000
● New Weights:
○ Debt = (60,00,000 + 40,00,000) / 2,40,00,000 = 0.4167 or 41.67%
○ Preference Shares = 40,00,000 / 2,40,00,000 = 0.1667 or 16.67%
○ Equity = 1,00,00,000 / 2,40,00,000 = 0.4167 or 41.67%
● Revised Cost of Equity:
○ Dividend per share = Rs. 3
○ Market price per share = Rs. 15
○ Growth rate = 7%
○ Ke = (Dividend per share / Market price per share) + Growth rate = (3 / 15) + 7% =
20% + 7% = 27%
● Revised WACC:
○ WACC = (0.4167 * 8.4%) + (0.1667 * 10%) + (0.4167 * 27%)
○ WACC = 3.5001% + 1.667% + 11.2511%
○ WACC = 16.4182%
Therefore, the new weighted average cost of capital for G. G. Ltd. after the additional debt
is 16.4182%.
Question 3
Magic Spell Co. Ltd.
● Average Cost of Capital Before Tax:
○ Average Cost of Capital Before Tax = (Weight of Equity * Before Tax Cost of Equity)
+ (Weight of Preference Capital * Before Tax Cost of Preference Capital) + (Weight
of Debentures * Before Tax Cost of Debentures) + (Weight of Retained Earnings *
Before Tax Cost of Retained Earnings)
○ Average Cost of Capital Before Tax = (0.25 * 24.44%) + (0.10 * 22.29%) + (0.50 *
7.99%) + (0.15 *
Certainly, let's solve the question presented in the image.
Calculation of Weighted Average Cost of Capital (WACC)
Given Data:
● Equity Capital: Rs. 4,500,000 at 14%
● Retained Earnings: Rs. 1,500,000 at 13%
● Preference Share Capital: Rs. 1,000,000 at 10%
● Debts: Rs. 3,000,000 at 4.5%
Formula:
WACC = (Weight of Equity * Cost of Equity) + (Weight of Retained Earnings * Cost of Retained
Earnings) + (Weight of Preference Share Capital * Cost of Preference Share Capital) + (Weight
of Debt * Cost of Debt)
Calculations:
1. Total Capital: 4,500,000 + 1,500,000 + 1,000,000 + 3,000,000 = Rs. 10,000,000
2. Weights:
○ Weight of Equity = 4,500,000 / 10,000,000 = 0.45
○ Weight of Retained Earnings = 1,500,000 / 10,000,000 = 0.15
○ Weight of Preference Share Capital = 1,000,000 / 10,000,000 = 0.10
○ Weight of Debt = 3,000,000 / 10,000,000 = 0.30
3. WACC:
○ WACC = (0.45 * 0.14) + (0.15 * 0.13) + (0.10 * 0.10) + (0.30 * 0.045)
○ WACC = 0.063 + 0.0195 + 0.01 + 0.0135
○ WACC = 0.106
Therefore, the Weighted Average Cost of Capital (WACC) of the firm is 10.60%.
Let me know if you have any other questions or calculations to perform!
Certainly, let's calculate the ratios and make a decision based on the given cash flow streams
for two alternative investments, Tata and Beta.
Calculations:
i) Payback Period:
● Tata:
○ Cumulative cash flow at the end of year 2 = 50,000 + 80,000 = 130,000
○ Remaining amount to recover = 2,00,000 - 130,000 = 70,000
○ Payback period = 2 + (70,000 / 1,00,000) = 2.7 years
● Beta:
○ Payback period = 0 (Initial investment is recovered in year 0 itself)
ii) Net Present Value (NPV) using 11% discount rate:
● Tata:
○ NPV = -2,00,000 + (50,000 / (1.11)^1) + (80,000 / (1.11)^2) + (1,00,000 / (1.11)^3) +
(80,000 / (1.11)^4) + (60,000 / (1.11)^5)
○ NPV = -2,00,000 + 45,045.05 + 65,025.14 + 73,119.34 + 52,194.89 + 36,751.31
○ NPV = 71,399.54
● Beta:
○ NPV = -2,10,000 + (60,000 / (1.11)^1) + (60,000 / (1.11)^2) + (60,000 / (1.11)^3) +
(60,000 / (1.11)^4) + (60,000 / (1.11)^5)
○ NPV = -2,10,000 + 54,054.05 + 48,653.62 + 43,831.10 + 39,492.84 + 35,538.97
○ NPV = 43,175.38
iii) Benefit-Cost Ratio using 11% discount rate:
● Tata:
○ Present Value of Benefits = 50,000 / (1.11)^1 + 80,000 / (1.11)^2 + 1,00,000 /
(1.11)^3 + 80,000 / (1.11)^4 + 60,000 / (1.11)^5 = 2,71,399.54
○ Present Value of Costs = 2,00,000
○ Benefit-Cost Ratio = 2,71,399.54 / 2,00,000 = 1.36
● Beta:
○ Present Value of Benefits = 60,000 / (1.11)^1 + 60,000 / (1.11)^2 + 60,000 / (1.11)^3
+ 60,000 / (1.11)^4 + 60,000 / (1.11)^5 = 2,43,175.38
○ Present Value of Costs = 2,10,000
○ Benefit-Cost Ratio = 2,43,175.38 / 2,10,000 = 1.16
Decision:
Based on the calculations:
● Beta has a shorter payback period (0 years) compared to Tata (2.7 years).
● Beta has a higher NPV (43,175.38) compared to Tata (71,399.54).
● Beta has a lower Benefit-Cost Ratio (1.16) compared to Tata (1.36).
Recommendation:
Considering the higher NPV and shorter payback period, Beta appears to be the more favorable
investment option. However, the lower Benefit-Cost Ratio for Beta suggests that it may not
generate as much value per unit of investment as Tata.
Further Considerations:
● Qualitative Factors: Other factors like risk, strategic fit, and market conditions should
also be considered before making a final decision.
● Sensitivity Analysis: Conducting sensitivity analysis to assess how changes in discount
rate or cash flow assumptions would impact the results can provide additional insights.
I hope this helps! Let me know if you have any other questions or would like to explore a
specific aspect in more detail.
Certainly, let's analyze the questions and provide solutions:
Question 1: Project Selection using PI
Information:
● Investment Limit: Rs. 7,00,00,000
● Project M: Initial Outlay = Rs. 340 Lacs, NPV = Rs. 26.7 Lacs
● Project N: Initial Outlay = Rs. 280 Lacs, NPV = Rs. 36.7 Lacs
● Project O: Initial Outlay = Rs. 300 Lacs, NPV = Rs. 38.8 Lacs
● Project P: Initial Outlay = Rs. 320 Lacs, NPV = Rs. 70.6 Lacs
Solution:
1. Calculate Profitability Index (PI) for each project:
○ PI = (NPV + Initial Outlay) / Initial Outlay
○ PI (Project M) = (26.7 + 340) / 340 = 1.0785
○ PI (Project N) = (36.7 + 280) / 280 = 1.1311
○ PI (Project O) = (38.8 + 300) / 300 = 1.1293
○ PI (Project P) = (70.6 + 320) / 320 = 1.2206
2. Rank projects based on PI:
○ Project P (1.2206) > Project N (1.1311) > Project O (1.1293) > Project M (1.0785)
3. Select projects:
○ Start with the project with the highest PI (Project P). Its initial outlay is Rs. 320 Lacs.
○ Remaining investment limit: Rs. 7,00,00,000 - Rs. 3,20,00,000 = Rs. 3,80,00,000
○ Select the next highest PI project that fits within the remaining limit: Project N (Rs.
280 Lacs)
○ Remaining investment limit: Rs. 3,80,00,000 - Rs. 2,80,00,000 = Rs. 1,00,00,000
○ No further projects can be selected within the remaining limit.
4. Calculate Aggregate NPV:
○ Aggregate NPV = NPV (Project P) + NPV (Project N) = 70.6 + 36.7 = Rs. 107.3
Lacs
Therefore, the selected projects are P and N, and the aggregate NPV for the selected
projects is Rs. 107.3 Lacs.
Question 2: Payback Period and ARR
Information:
● Annual Profits after Tax and Depreciation: Rs. 5,20,000
● Cash Inflows: Year 1 - Rs. 30,000, Year 2 - Rs. 50,000, Year 3 - Rs. 70,000, Year 4 - Rs.
90,000, Year 5 - Rs. 1,10,000
● Estimated Life: 5 years
● Estimated Scrap Value: Rs. 20,000
a) Payback Period:
● Cumulative Cash Inflows:
○ Year 1: 30,000
○ Year 2: 80,000
○ Year 3: 1,50,000
○ Year 4: 2,40,000
○ Year 5: 3,50,000
● Initial Investment = Annual Profits - Scrap Value = 5,20,000 - 20,000 = Rs. 5,00,000
● Payback Period = 4 years + (5,00,000 - 2,40,000) / 1,10,000 = 4 + 2.36 = 6.36 years
b) Accounting Rate of Return (ARR):
● ARR = (Average Annual Profit / Initial Investment) * 100
● Average Annual Profit = Total Profit / Number of Years = 3,50,000 / 5 = Rs. 70,000
 ● ARR = (70,000 / 5,00,000) * 100 = 14%
Question 3: Project Selection using IRR
Information:
● Project Cost: Rs. 5,00,000
● Salvage Value: Zero
● Tax Rate: 55%
● Depreciation Method: Straight Line
● Cash Inflows Before Depreciation and Tax (CFBDT): Year 1 - Rs. 1,50,000, Year 2 - Rs.
2,50,000, Year 3 - Rs. 2,50,000, Year 4 - Rs. 2,00,000, Year 5 - Rs. 1,50,000
● Cost of Capital: 12%
To determine if the project should be accepted under the IRR method, we would need to
calculate the IRR. This typically involves trial and error or using financial calculators or software.
However, since we don't have specific IRR values to compare, we can make a general
assessment:
● If the calculated IRR is greater than the cost of capital (12%), the project would be
accepted.
● If the calculated IRR is less than the cost of capital (12%), the project would be rejected.
Question 4: Uses, Needs, and Importance of Payback Period
The payback period is a simple capital budgeting technique that measures the time it takes for a
project to recover its initial investment. It is used for the following purposes:
1. Risk Assessment: Projects with shorter payback periods are generally considered less
risky, as the initial investment is recovered quickly.
2. Liquidity: Payback period helps assess the liquidity of a project, indicating how quickly
the invested funds are expected to be recouped.
3. Decision Making: It can be a quick and easy way to screen projects, especially when
liquidity is a major concern.
4. Project Comparison: Payback period can be used to compare different projects and
select those that recover their investment faster.
However, the payback period has limitations:
● It does not consider the time value of money.
● It ignores cash flows beyond the payback period.
● It may not be suitable for long-term projects with delayed cash inflows.
Therefore, while the payback period provides a quick assessment of risk and liquidity, it should
be used in conjunction with other capital budgeting techniques, such as NPV, IRR, and
profitability index, for a more comprehensive evaluation of investment opportunities.
I hope this comprehensive analysis is helpful! Feel free to ask if you have any further questions.
● https://www.numerade.com/ask/question/your-bossthe-chief-financial-officer-cfo-for-south
ern-textileshas-just-handed-you-the-estimated-cash-flows-for-two-proposed-projectsproje
ct-l-involves-adding-a-new-item-to-the-firms-fabric-l-07279/
Certainly, let's solve the questions presented in the image.
Question 1: Working Capital Requirements for Alpha Ltd.
Given Information:
● Estimated annual activity: 2,60,000 units
● Raw material stock: 2 weeks
● Production cycle: 2 weeks
● Finished goods stock: 2 weeks
● Credit allowed by suppliers: 2 weeks
● Credit allowed to debtors: 4 weeks
● Time lag in payment of wages and overheads: 2 weeks each
● Selling price per unit: Rs. 15
● Cost structure:
○ Raw material: 33% of sales
○ Labor and overheads: 6:4 ratio
○ Profit: Rs. 5 per unit
● Cash & Bank Balance: Rs. 25,000
● Degree of work-in-progress: 50%
Calculations:
1. Cost of Goods Sold (COGS):
● COGS = (Selling Price - Profit) * Units
● COGS = (Rs. 15 - Rs. 5) * 2,60,000 = Rs. 26,00,000
2. Raw Material Cost:
● Raw Material Cost = 33% of COGS = 0.33 * Rs. 26,00,000 = Rs. 8,58,000
3. Labor and Overheads:
● Labor Cost = (6 / 10) * (COGS - Raw Material Cost) = 0.6 * (Rs. 26,00,000 - Rs. 8,58,000)
= Rs. 10,45,200
● Overheads Cost = (4 / 10) * (COGS - Raw Material Cost) = 0.4 * (Rs. 26,00,000 - Rs.
8,58,000) = Rs. 6,96,800
4. Working Capital Requirements:
● Raw Material:
○ Raw Material Consumption per week = Raw Material Cost / 52 weeks = Rs.
8,58,000 / 52 = Rs. 16,500
○ Raw Material Stock (2 weeks) = Rs. 16,500 * 2 = Rs. 33,000
● Work-in-Progress:
○ Work-in-Progress = (Raw Material + Labor + Overheads) * Degree of
Work-in-Progress
○ Work-in-Progress = (Rs. 16,500 + Rs. 20,080 + Rs. 13,440) * 0.5 = Rs. 24,960
● Finished Goods:
○ Finished Goods Production per week = COGS / 52 weeks = Rs. 26,00,000 / 52 =
Rs. 50,000
○ Finished Goods Stock (2 weeks) = Rs. 50,000 * 2 = Rs. 1,00,000
● Debtors:
○ Debtors = 4 weeks * (Finished Goods Production per week * Selling Price) = 4 *
(Rs. 50,000 * Rs. 15) = Rs. 30,00,000
● Creditors:
○ Creditors = 2 weeks * Raw Material Consumption per week = 2 * Rs. 16,500 = Rs.
33,000
● Wages and Overheads Payable:
 ○ Wages Payable = 2 weeks * Labor Cost per week = 2 * Rs. 20,080 = Rs. 40,160
○ Overheads Payable = 2 weeks * Overheads Cost per week = 2 * Rs. 13,440 = Rs.
26,880
● Cash & Bank Balance:
○ Rs. 25,000
● Working Capital = (Current Assets) - (Current Liabilities)
○ Working Capital = (Raw Material Stock + Work-in-Progress + Finished Goods Stock
+ Debtors + Cash & Bank Balance) - (Creditors + Wages Payable + Overheads
Payable)
○ Working Capital = (Rs. 33,000 + Rs. 24,960 + Rs. 1,00,000 + Rs. 30,00,000 + Rs.
25,000) - (Rs. 33,000 + Rs. 40,160 + Rs. 26,880)
○ Working Capital = Rs. 30,98,920
Therefore, the estimated working capital requirement for Alpha Ltd. for the year ended
31st March, 2017 is Rs. 30,98,920.
Question 2: Estimate of Working Capital
Given Information:
● Production: 30,000 units
● Selling Price per unit: Rs. 10
● Raw Material: 60% of selling price
● Direct Wages: 1/6th of raw material
● Overheads: Twice the Direct Wages
● Material in hand: 2 months requirement
● Production time: 1 month
● Finished goods in stores: 3 months
● Credit for material: 2 months
● Credit allowed to customers: 3 months
● Average cash balance: Rs. 40,000
Calculations:
● Raw Material Cost per unit: Rs. 10 * 60% = Rs. 6
● Direct Wages per unit: Rs. 6 / 6 = Rs. 1
● Overheads per unit: Rs. 1 * 2 = Rs. 2
● Total Cost per unit: Rs. 6 + Rs. 1 + Rs. 2 = Rs. 9
● Cost of Goods Sold (COGS): Rs. 9 * 30,000 units = Rs. 2,70,000
● Raw Material Stock:
○ Raw Material Consumption per month = (Raw Material Cost per unit * Production
units) / 12 = (Rs. 6 * 30,000) / 12 = Rs. 15,000
○ Raw Material Stock = 2 months * Rs. 15,000 = Rs. 30,000
● Work-in-Progress:
○ Since all material is charged in the initial stage and production time is 1 month,
Work-in-Progress is considered negligible.
● Finished Goods Stock:
○ Finished Goods Production per month = COGS / 12 = Rs. 2,70,000 / 12 = Rs.
22,500
○ Finished Goods Stock = 3 months * Rs. 22,500 = Rs. 67,500
● Debtors:
○ Debtors = 3 months * (Finished Goods Production per month * Selling Price) = 3 *
(Rs. 22,500 * Rs. 10) = Rs. 6,75,000
● Creditors:
 ○ Creditors = 2 months * Raw Material Consumption per month = 2 * Rs. 15,000 =
Rs. 30,000
● Wages and Overheads Payable:
○ Since wages and overheads are paid in the beginning of the next month, they are
not considered as a current liability in this scenario.
● Working Capital = (Current Assets) - (Current Liabilities)
○ Working Capital = (Raw Material Stock + Work-in-Progress + Finished Goods Stock
+ Debtors + Cash & Bank Balance) - (Creditors)
○ Working Capital = (Rs. 30,000 + 0 + Rs. 67,500 + Rs. 6,75,000 + Rs. 40,000) - (Rs.
30,000)
○ Working Capital = Rs. 7,42,500
Therefore, the estimated working capital is Rs. 7,42,500.
Question 3: Working Capital Management and Components of Working Capital Statement
Working Capital Management:
Working Capital Management is the process of managing a company's short-term assets (such
as cash, inventory, and accounts receivable) and liabilities (such as accounts payable) to ensure
efficient operations and maximize profitability. It involves striking a balance between liquidity and
profitability.
Components of Working Capital Statement:
1. Current Assets:
○ Cash and Bank Balance
○ Marketable Securities
○ Accounts Receivable
○ Inventory (Raw Materials, Work-in-Progress, Finished Goods)
● https://teachmint.storage.googleapis.com/public/148525180/StudyMaterial/9f783cb2-e746
-4012-bc30-1ecd3f3434fa.pdf
● https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-10-Sep-2021.pdf