BCOM/V/CC/18a Student's Copy
2 0 1 8
CBCS
5th Semester
COMMERCE
Financial Management
Full Marks 75
Time 3 hours
PART A—OBJECTIVE
Marks 25
The figures in the margin indicate full marks for the questions
SECTION—A
Marks 10
Indicate whether the following statements are True or False by putting
a Tick mark in the brackets provided 1×5=5
1. Wealth maximization ignores the time value of money.
T F
2. Bank overdraft is one of the sources of short-term finance.
T F
3. For two mutually exclusive projects, decision should be taken on the basis
of IRR method.
T F
4. Financial leverage is also sometimes termed as 'trading on equity'.
T F
/121 1 Contd.
5. Shorter the working capital cycle, higher is the need of working capital to
be maintained.
T F
Choose the correct answer and put its code in the brackets provided 1×5=5
6. The modern approach to finance functions considers which of the
following?
Investment decisions
Financing decisions
Dividend decisions
All of the above
7. Which of the following is not short-term sources of capital/finance?
Bank Overdraft Trade Credit
Bill of Exchange Debenture
8. Project is accepted under Profitability Index method, if
PI 1 PI 1
PI 1 PI 0
9. The extent to which the firm has fixed financing costs arising from the use
of debt capital is measured by
combined leverage
operating leverage
financial leverage
None of the above
BCOM/V/CC/18a/121 2 Contd.
10. Which of the following is not the component of working capital?
Cash
Creditors
Loose tools
Bills receivable
SECTION—B
Marks 15
Write notes on the following in not more than 5 sentences each 3×5=15
UNIT—I
1. Time value of money
OR
2. Wealth maximization
UNIT—II
3. Internal sources of finance
OR
4. Debt capital
UNIT—III
5. Net present value
OR
6. Capital rationing
UNIT—IV
7. Trading on equity
OR
8. Leverage
BCOM/V/CC/18a/121 3 Contd.
UNIT—V
9. Operating cycle
OR
10. Gross working capital
PART B—DESCRIPTIVE
Marks 50
The figures in the margin indicate full marks for the questions
Answer one question from each Unit
UNIT—I
1. "The profit maximization is not an operationally feasible criterion." Do you
agree? Illustrate your views. 10
2. Mr. Lala retires at the age of 60 years and his employer gives him a pension
of R 2,00,000 per year for the rest of his life. His company gives him
another offer to receive a lump sum of R 15,00,000 at the time of his
retirement. Reckoning his expectation of life to be 15 years and the rate of
interest being 10 percent per annum, advise Lala for his best alternative.
(CVFA15, 0×10 7×606). 10
UNIT—II
3. Discuss short-term, medium-term and long-term sources of finance. 10
4. Calculate the weighted average cost of capital from the following
information 10
Capital Structure of AB Ltd.
in
Equity capital Shares of R10 each fully paid 100
Reserve (General) 50
Long-term debt 100
250
BCOM/V/CC/18a/121 4 Contd.
Market price per share of AB Ltd. is R 60 and earning per share is R 6
Expected growth rate in earnings is 5 percent per annum
Cost of debt (before tax)—12 percent per annum
Applicable corporate tax—40 percent
Use market values as weights and show your workings
UNIT—III
5. What is capital budgeting? What are the various methods for evaluation of
capital expenditure projects? 1+9=10
6. East and West Ltd. desires to invest in a new project costing R 20,00,000.
The life of the project is 5 years with no salvaged value at the end. The
company follows straight-line method of charging depreciation. The tax
rate is 50 percent. The expected cash flows before tax and debenture are as
follows
Year 1 2 3 4 5
Cash Flows before tax and
depreciation 4,00,000 6,00,000 8,00,000 8,00,000 10,00,000
The discount factors are as follows
Year 0 1 2 3 4 5
PV factor 10 percent 1 0·909 0·826 0·751 0·683 0·621
You are required to determine—
payback period;
NPV at 10 percent cost of capital;
profitability index.
UNIT—IV
7. What do you understand by capital structure? Discuss the features of an
optimum capital structure. 2+8=10
8. Calculate operating leverage, financial leverage and combine leverage
under situations A and B and financial plan II and III respectively from
the following information relating to the operation and capital structure of
XYZ Co. How are these calculations useful to the financial managers of the
company? 2½+2½+2½+2½=10
BCOM/V/CC/18a/121 5 Contd.
Installed capacity—1200 units
Actual production and sales—800 units
Selling price per unit—R 15
Variable cost per unit—R 10
Fixed cost
Situation A—R 1,000
Situation B—R 2,000
Capital Structure Financial Plan
I II III
Equity 5,000 7,500 2,500
Debt 5,000 2,500 7,500
Cost of Debt—12 percent
UNIT—V
9. What is working capital? Explain the various determinants of working
capital of a concern. 10
10. The capacity of Orpat Co. is to produce 40000 units of valve per annum.
Due to abnormal power cuts, the organization can operate at 60 percent of
the level of capacity. You are required to ascertain the working capital
requirement at the current level of operations. The following information on
the cost-price structure of the valves at the current level of production is
available 10
Elements of Cost Per Unit

Raw Materials 6
Direct Labour 3
Overheads 4
Total Cost 13
Profit 3
Selling Price 16
Raw materials are in stock, on an average for 2 months. The duration of
production process is half a month. Finished goods are in stock, on an
average, for 1 month. Credit allowed to customers is 3 months and that
obtained from suppliers of raw materials is 1·5 months. Lag in payment of
wages is half a month. There is no lag in payment of overheads.