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B.COM SEMESTER-6
SUGGESTIONS FOR FINANCIAL MANAGEMENT 2025
Introduction
1. Briefly discuss the role of a chief financial officer of a firm
2. Explain the limitations of profit maximization as the goal of financial management
3. Discuss the significance of wealth maximization
Basic Concepts
1. Cost of plant RS.12.25 crore. Economic life of the plant is 6 years. Salvage value is
estimated as RS. 25 lakh. Pre-tax Profit before depreciation is expected to be RS.3.4 crore
for the first year. Find out the cash inflow from the plant considering 30% corporate tax
rate. Straight line method of depreciation is accepted.
2. Cost of plant RS.12 crore. Economic life of the plant is 10 years. Salvage value is
estimated as RS.25 lakh. Pre-tax-Profit before depreciation is expected to be RS.3.8 crore
for the first year, which will increase by 10 per cent every year. Find out the cash inflow
from the plant for first 2 years considering 30% corporate tax rate. Tax rule states 10%
rate of depreciation under reducing balance method.
3. Briefly explain how the risk-return trade off play a significant role in the financial
decision making.
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Sources of Finance and Cost of Capital
QUESTION
The existing capital structure of X Ltd. is as follows:
Equity Share Capital and retained 5,00,000
earning (Ke 17%)
14% Preference Share Capital 2,00,000
10% Debt
The company wishes to implement the expansion of the plant plant with capital outlay of RS.
5,00,000. Besides using the available retained earning of RS. 1,00,000, the balance additional
fund will be raised as follows:
14% Preference Share Capital RS.1,00,000
10% Debt RS. 3,00,000
Corporate tax rate is 20%.
Assuming that specific cost of different components of capital remaining same, you are required
to
(a) Calculate weighted average cost of capital after the issue of fresh securities;
(b) Calculate the marginal cost of capital, and
(c) Comment on the acceptance of the expansion plan if it is expected to give a return of 12%.
QUESTION
Two companies Vivek Ltd. And Ananda Ltd are from same industry. From the following details
you are required to compute weighted average cost of capital of both the companies:
Vivek Ltd. Ananda Ltd
Equity share capital (10 each) RS.4,00,000 RS.3,00,000
Market value per share RS. RS.20
Dividend per share RS. RS.4
10% Debentures (100 each) NIL RS.1,00,000
Market Value per debenture N.A RS.125
[Ignore growth in dividend; assume income tax rate is 30%]
Both the companies are from same industry and having same capital investment, then why they
are having different weighted average cost of capital?
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QUESTION
A company has following amounts of capital with corresponding specific cost of each type :
Type of capital Book Value Market Value
(RS.) (RS.)
Equity capital (25,000 shares of RS. 10 each) 2,50,000 4,50,000
13% Preference capital (500 shares of 100 each) 50,000 45,000
Reserves and Surplus 1,50,000 --
14% Debentures (1,500 Debentures of 100 each) 1,50,000 1,45,000
The expected dividend per share is RS. 1.40 and the dividend per share is expected to grow at a
rate of 8% forever. Preference shares are redeemable after 5 years at par, whereas debenture are
redeemable after 6 years at par. The tax rate for the company is 50 per cent.
You are required to compute weighted average cost of capital using market value as weight.
QUESTION
The current capital structure of a firm is given below:
Amount (lakhs)
Equity Share Capital (100 each) 400
Retained Earnings 200
12% Debentures (100 each) 400
You are given the following further information:
(i) Current market value per share: RS. 300
Dividend paid per share in the last year: RS.45
Growth rate in dividend 10%
(ii) The market value of Debenture is 110 per debenture.
(iii) Corporate tax rate : 40%
Using market values as weights, find out average cost of capital of the firm.
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QUESTION
The Capital Structure And Cost Of Capital Of A Company Are Given Below:
Source Book Value (In Lakhs) After Tax Cost Of Capital
Equity 200 16
Retained Earnings 200 ?
Debentures 400 7
Equity shares represent shares of RS. 10 each. The current market value of each share is
RS.80 and the corporate tax rate is 40%.
(i) Compute weighted average cost of capital of the company using both book values and
market values as weights.
Leverage and Capital Structure Theories
QUESTION
The following data is available for Royal Ltd :
Sales 400000
Less: variable cost@30% 120000
Contribution 280000
Less: fixed cost 200000
EBIT 80000
Less: interest 10000
Profit before tax 70000
(i)Using the concept of financial leverage, by what percentage will the taxable income increase
if EBIT increases by 5%,
ii) Using the concept of operating leverage, by what percentage will EBIT increase if there is
10% increase in sales, and
(iii) Using the concept of combined leverage, by what percentage will the taxable income
increase if the sales increases by 6%.
Also verify the results in view of the above figures.
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QUESTION
ABC Ltd. is setting up a project with a capital outlay of RS.15,00,000. It has the following two
alternatives in financing the project cost.
Alternative 1: 100% Equity [email protected] per share.
Alternative 2: Debt-Equity ratio 2:1
The rate of interest payable on the debt is 12% p.a. The corporate rate of tax is 50%. Calculate
the indifference point between two alternative methods of financing.
QUESTION
Goodshape Company has currently an ordinary share capital of 25 lakhs, consisting of 25,000
Equity shares of 100 each. The management is planning to raise another 20 lakhs to finance a
major programme of expansion through one of four possible financing plans. The options are:
I. Entirely through equity / ordinary shares.
II. 10 lakhs through equity shares and 10 lakhs through long-term borrowings at 8% interest per
annum.
III. 5 lakhs through equity shares and 15 lakhs through long-term borrowings at 9% interest per
annum.
IV. 10 lakhs through equity shares and 10 lakhs through preference shares with 5% dividend.
The Company's expected Earnings Before Interest and Tax (EBIT) will be 8 lakhs. Assuming a
Corporate tax rate of 50%, determine the earnings per share (EPS) in each alternative, and
comment on the implications of financial leverage.
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QUESTION
The selected financial data for companies A and B for the current year ended March 31, 2022
are as follows:
PARTICULARS Company A Company B
Variables cost as a 60 75
percentage of sales
Interest (RS.) 500 800
DOL 4 5
DFL 2 3
Income tax rate 30% 30%
a) Prepare income statement of Company A and Company B.
b) Comment on the risks of the two firms.
QUESTION
Sales RS. 90 LAKHS
p/v ratio 30%
Fixed cost excluding interest RS.10 LAKHS
10% Debt RS.54 LAKHS
Equity share capital of Rs.10 each RS.75 LAKHS
Income tax rate 40%
ROCE(pre tax) 13.18%
Required:
(i) Calculate operating and combined leverage of the company.
(ii) Calculate percentage change in EBIT, if sales increases by 10%.
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Working Capital Management(1)
QUESTION
You are required to prepare for the board of directors of Vigilant co. Ltd., a statement showing
the working capital needed to finance a level of activity of 5,200 units of output per annum.
You are given the following information:
Element of Cost Amount per unit
Raw-materials 8
Direct Labour 2
Overheads 6
Total cost 16
Profit 4
Selling price 20
Raw-materials are in stock on average one month month. materials are in process on average,
half a MONTH. Finished Goods are in stock on average six weeks. Credit allowed by creditors
is one month. Credit allowed to debtors is two months. Lag in payment of wages is 1.5 weeks.
Cash on hand and at bank is expected to be 7,300.
You are informed that production is carried on evenly during the year and wages and overheads
accrue similarly.
QUESTION
From the following information, prepare a statement showing the estimated working capital
requirements.
(i) Projected annual sale - 26,000 units.
(ii) Selling price per unit – RS.60
(iii) Analysis of selling Price:
Material - 40%, Labour - 30%, Overhead - 20%, Profit - 10%
(iv) Time lag (on average):
Raw materials in stock - 3 weeks.
Production process - 4 weeks.
Credit to debtors - 5 weeks.
Credit from suppliers - 3 weeks.
Lag in payment of wages and overheads - 2 weeks.
Finished goods are in warehouse - 2 weeks.
Cash in hand is expected to be 10% of net working captial.
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QUESTION
The following particulars are available from cost records of a company:
Element of Cost Amount per unit
Raw-materials 24
Direct Labour 9
Overheads 18
Total cost 51
Profit 9
Selling price 60
Further information:
(1) Raw materials are in stock - one month.
(2) Materials are in process-half a month.
(3) Finished goods are in stock one month.
(4) Credit allowed by suppliers one month.
(5) Credit allowed to debtors- two months.
(6) Lag in payment of wages - 1 weeks.
(7) Lag in payment of overhead expenses one month.
(8) 25% of output is sold against cash.
(9) Cash on hand and at bank is expected to be RS. 10,000.
QUESTION
You are required to prepare a statement showing the working capital needed to finance a
level of activity of 1,56,000 units of annual production. It may be assumed that production is
carried on evenly throughout the year, wages and overheads accrue similarly and a time
period of 4 weeks is equivalent to a month.
1. From the following particulars of Sun Ltd., determine the working capital requirement:
(a) Monthly sales (expected) - 16,000 units of RS. 10 each.
(b) Analysis of sales: Material 40%, Labour 30%, Overhead 8,000 per week.
(c) Stock will include raw materials for RS. 48,000 and 8,000 units of finished goods.
(d) Processing periods - 2 weeks.
(e) Credit to debtors - 5 weeks.
(f) Credit from creditors - 1 month.
(g) Lag in payment of overhead - 2 weeks.
(h) Production is carried out evenly during the year and expenses accrue similarly
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Working Capital Management (2)
1. In receivable management discuss the effect of lengthening and shortening of the credit
period of debtors and its impact on profitability of the firm.
2. Briefly discuss the different strategies of financing current assets with graphical
presentation.
3. What are the various sources of finance to meet working capital requirement?
4. What do you understand by working capital cycle? State the factors on which the
duration of working capital cycle depends. Explain the significance of working capital
cycle in working capital management.
Capital Expenditure Decisions (1)
QUESTION
Bp Ltd. Is Evaluting Two Independent And Indivisible Projects, Megh And Tara With
Following Details:
PROJEC INVESTMEN YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
T T
MEGHA 100000 35780 37850 38940 42560 33500 32600
TARA 100000 44010 46560 47900 52350 41200 40100
Comment on the selection of the project on the basis of net present value considering 8%
discounting rate
Will your choice remain same, if project tara requires an additional maintenance cost of
Rs. 20000 at the end of every second year?
Review your decision under profitability index approach and comment.
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QUESTION
Bp ltd. Is having a fund of Rs. 50 lakhs for investment. The company is considering
thefollowing projects with details given hereunder:
PROJECT INVESTMENT NPV NATURE OF THE
PROJECT
A 1000000 521780 INDIVISIBLE
B 1800000 877000 DIVISIBLE
C 2800000 1201000 DIVISIBLE
D 1200000 -74150 INDIVISIBLE
E 1700000 950000 INDIVISIBLE
F 3000000 1515000 DIVISIBLE
Apply the concept of capital rationing and select the combination of projects which will
maximise the npv. Also find NPV of the combination
QUESTION
The total available budget for a company is 20 crore. The projects listed below have been
ranked in order of profitability. The firm has already accepted project X whose cost is assumed
to be 13 crore and it has the profitability index of 1.40.
PROJECT COST (RS. IN CRORE) PROFITABILITY
INDEX
A 6 1.50
B 5 1.25
C 7 1.20
D 2 1.15
E 5 1.10
Which projects, including X should be acquired by the company?
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QUESTION
A company is considering two mutually exclusive projects X and Y. Following details are made
available to you
Project X (RS. IN Project Y (RS. IN
LAKHS) LAKHS)
Project cost 3500 3500
Cash inflow Year 1 500 2500
Year 2 1000 2000
Year 3 1500 1000
Year 4 2250 500
Year 5 3000 500
Assume no residual values at the end of the fifth year. The firm's cost of capital is 10%.
You are required to calculate the following in respect of the two projects -
(a) Net Present Value, using 10% discounting
(b) Internal Rate of Return;
(c) Profitability Index.
Capital Expenditure Decisions (2)
1. Discuss the effect of income tax, salvage value of assets and depreciation on cash inflows
of a project under consideration.
2. What are the merits and demerits of Payback period method of capital expenditure
decisions
3. Define internal rate of return (IRR) and discuss the utility of IRR approach for investment
decision making.
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Dividend Decisions
QUESTION
P. Mitter Ltd. is having cost of capital 10 per cent and return on investment 12 per cent. The
company earned 20 as profit per share and declared 30% dividend.
(a) Calculate the market price of equity share under Walter's model.
(b) To increase the market price per share, the management is willing to increase the dividend
pay-out ratio in the next financial year, but the CFO Mr. Tapesh has opposed such a decision.
Give your opinion in this matter.
QUESTION
Two companies Bimal Ltd. and Adoor Ltd. are from same industry, having same cost of capital
of 20%. Rate of return of the companies are given as follows:
Bimal Ltd Adoor Ltd
Rate of Return 25% 20%
Both of them earned the EPS of 10 each. Determine the price of shares of both the companies
under Gordon Model when the dividend pay-out ratio is (i) 75% and (ii) 50%. Also comment on
your answer.
QUESTION
A company's total Investment in asset is RS. 1,00,00,000. It has 1,00,000 shares of 100 each. Its
expected rate of return on investment is 30% and the cost of capital is 18%. The company has a
policy of retaining 25% of its profits. Determine the value of the firm using Gordon's Model.
QUESTION
ABC Ltd. has 1,00,000 outstanding shares of 10 each. The company earns a rate of 20% on its
investments and retains 50% of earnings as policy. If cost of capital is 15%, calculate price of
the share according to Gordon's Model. The company has total investments of around 10,00,000
in assets.
If pay-out ratio changes to 70% and 30%, how will share price change?
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QUESTION
From the following information supplied to you, ascertain whether the firm's dividend pay-out
ratio is optimal, according to Walter. The firm was started a year before, with equity capital of
20 lakh.
Earnings of the firm RS.2,00,000
Dividend Paid RS.1,50,000
Price-earning ratio 12.5
Number of shares outstanding 20,000 of RS. 100 each.
The firm is expected to maintain its current rate of earnings on investment.
(b) What should be the price-earnings ratio at which dividend pay-out ratio will have no effect
on the value of the share?
(c) Will your decision change if the P/E ratio is 8 instead of 12.5 ?
