Hall Ticket No Question Paper Code: CMB008
INSTITUTE OF AERONAUTICAL ENGINEERING
(Autonomous)
MBA II Semester End Examinations (Supplementary) January, 2018
Regulation: IARE-R16
FINANCIAL MANAGEMENT
(Master of Business Administration)
Time: 3 Hours Max Marks: 70
Answer ONE Question from each Unit
All Questions Carry Equal Marks
All parts of the question must be answered in one place only
UNIT I
1. "Financial management is basically concerned with procurement and use of funds" Elucidate the
above statement in the light of main objectives of financial management.
Explain briefly the relationship of finance with other business functions.
2. Explain the key decisions of financial management.
Calculate the FV of Rs.50000 invested today at 10% interest for 5years if
i. Annual compounding
ii. Semi-annual compounding
iii. Quarterly compounding
iv. Monthly compounding
UNIT II
3. Explain the steps involved in capital budgeting process.
X limited is planning to replace an old machine with a new one. The cost of the new machine is
Rs.540000, installation charges will be Rs.20000. It is expected that additional working capital
requirement will be Rs.40000. The old machine was bought two years ago at a cost of Rs.140000
and it has economic life of 7 years. It was depreciated on straight line basis. A buyer is willing
to purchase this machine for Rs.180000 and will also bear removal expenses. It is in 55% income
tax rate and capital gains are taxed Estimate the net investment (Cash-outflow at zero
time period)
4. What is weighted average cost of capital? Explain the steps involved in the calculation of weighted
average cost of capital.
A company is planning to raise equity, preference debt capital in the following proportions:
Equity 0.50
Preference 0.20
Debt 0.30
The cost of the sources of finance for different levels of usage has been estimated as shown in
Table 1.
Page 1 of 3
Table 1
Source of finance ange of new financing Cost%
from the source (Rs.in lakh)
Equity 0-15 16.00
15-25 17.00
25 and above 18.00
Preference 0-3 14.00
3 and above 15.00
Debt 0-20 8.00
20 and above 10.00
UNIT III
5. Elucidate the factors to be considered in planning the capital structure of an organization.

A Ltd., company has ESC of Rs.500000 divided into shares of Rs.100 each. It wishes to raise
further Rs.300000 for expansion cum modernization plans. The company plans the following
financing schemes:
All common stock
Rs.1 lakh in common stock and Rs.2 lakhs in debt 10% p.a all debts at 10% p.a
Rs.1 lakh in common stock and Rs.2 lakhs in PSC with the rate of dividend at 8%.
The company's expected EBIT are Rs.150000. The corporate rate of tax is 50%. Determine the
EPS in each plan and comment on the implications of financial leverage.
6. What do you understand by financial leverage? State its merits and limitations.
X Ltd., has a total capitalization of Rs.1000000 consisting of equity shares of Rs.50 each. It
wishes to raise another 5 lakhs for expansion through one of its two possible financial plans.[7M]
All equity shares of Rs.50 each
All debentures carrying interest.
Tax rate is 50%. Calculate EBIT level at which EPS would remain the same irrespective of
raising funds through equity shares or debentures.
UNIT IV
7. Distinguish between interim dividend and final dividend.
Explain the various external and internal factors influencing dividend policy.
8. How do you calculate operating cycle duration?
From the Table 2 information supplied to you, determine the market value of equity shares of X
company as per Walter's model.Are you satisfied with the current dividend policy of the firm?
If not what should be the optimum dividend payout ratio in this cases.
Page 2 of 3
Table 2
Earnings of the company Rs.500000
Dividend paid Rs.300000
No. of shares outstanding 100000
Price earnings ratio 8
Rate of return on investment 0.15
UNIT V
9. Explain the major recommendation of Tandon committee on working capital.
What are four primary motives for maintaining cash balance? Explain.
10. Explain the significance of cash budget.
ABC Company Ltd., is considering relaxing its collection efforts. Its sales are Rs.40 million, its
ACP is 20 days, its variable costs to sales ratio is 80 its cost of capital is 12% and its bad debt
is 5%. The relaxation in collection effort is expected to push sales up by Rs. 5 million, increase
the ACP to 40 days, and raise the average bad debts ratio to 6%. The tax rate is 40%.From the
above information analyze the effect of relaxing the collection effort on net profit.