M.B.A. DEGREE EXAMINATION, APRIL 2016
Banking and Insurance
FINANCIAL MANAGEMENT
(CBCS 2008 onwards)
Time 3 Hours Maximum 75 Marks
Part A (10 2 20)
Answer all questions.
All questions carry equal marks.
1. How does the finance function in business different from
the accounting function?
2. What do you understand by the term 'environment of
finance'?
3. Distinguish between term loan and convertible
debenture.
4. Explain any two factors influencing working capital.
5. What is the relevance of cost of capital in financial
management?
6. What is meant by financial risk?
Sub. Code
632505
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7. What is meant by dividend policy?
8. Define the term 'optimum capital structure'.
9. Write a short note on IRR.
10. State the importance of financial leverage.
Part B 5 25)
Answer all questions choosing either or
All questions carry equal marks.
11. Describe the concept of time value of money and
discounting as fundamental principles of financial
management.
Or
What is finance function? Who discharges this
finance function and what are its specific
responsibilities?
12. Differentiate between term loan and working
capital loan. Enumerate the criteria in evaluating
term-loan proposals and working capital proposals.
Or
Describe the nature of short-term and long-term
requirements of finance in a business and the
sources from which they can be arranged.
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13. What do you understand by capital structure of a
corporation? Discuss the qualities which a sound
capital structure should possess.
Or
Calculate the degree of
Operating leverage
Financial leverage and
Combined leverage from the following data
Sales 1,00,000 units Rs. 2 per unit
Rs. 2,00,000
Variable cost per unit Rs. 0.70
Fixed costs Rs. 1,00,000
Interest charges Rs. 3,668.
14. ABC Ltd. is proposing to take up a project which
will need an investment of Rs. 40,000. The net
income before depreciation and tax is estimated as
follows
Year Rs.
1 10,000
2 12,000
3 14,000
4 16,000
5 20,000
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Depreciation is to be charged according the straight
line method 10% p.a. Tax rate is 50%. Calculate
the Pay Back Period.
Or
A company's current earnings before interest and
taxes (EBIT) are Rs. 4,00,000. The firm currently
has outstanding of Rs. 15 lakhs of debts at an
average cost of 10%. Its cost of equity capital
is estimated to equal 16%. Determine the
current value of the firm using the traditional
valuation approach.
15. Discuss briefly the factors influencing the dividend
declaration and payment.
Or
A closely-held plastic manufacturing company has
been following a dividend policy which can
maximize the market value of the firm as per
Walter's model. Accordingly, each year at dividend
time the capital budget is reviewed in conjunction
with the earnings for the period and alternative
investment opportunities for the shareholders. In
the current year the firm reports net earnings of
Rs. 5,00,000. It is estimated that the firm can earn
Rs. 1,00,000 if the amounts are retained. The
investors have alternative investment opportunities
that will yield them 10%. The firm has
50,000 shares outstanding. What should be the
dividend payout ratio of the company if it wishes to
maximize the wealth of the shareholders?
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Part C 10 30)
Answer any three questions.
All questions carry equal marks.
16. optimal combination of the decisions relating to
investment, financing and dividends will maximize the
value of the firm to its shareholders'. Examine the
statement.
17. How does cost of equity and debt be computed? Illustrate.
18. Explain in brief the theories of Dividend.
19. From the following the capital structure of a company,
calculate the overall cost of capital, using
Book value weights and
Market value weights.
Source Book value
Rs.
Market value
Rs.
Equity share capital
(Rs. 10 shares)
45,000 90,000
Retained earnings 15,000
Preference share capital 10,000 10,000
Debentures 30,000 30,000
The after-tax cost of different sources of finance is as
follows
Equity share capital Retained earnings
Preference share capital Debentures
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20. A hospital is considering to purchase a diagnostic
machine costing Rs. 80,000. The projected life of the
machine is 8 years, and it has an expected salvage value
of Rs. 6,000 at the end of 8 years. The annual operating
cost of the machine is Rs. 7,500. It is expected to generate
revenues of Rs. 40,000 per year for 8 years. Presently, the
hospital is outsourcing the diagnostic work and is earning
commission income of Rs. 12,000 per annum, net of taxes.
Whether it would be profitable for the hospital to
purchase the machine? Give your recommendation under
Net Present Value.
Year 1 2 3 4 5
PV factor 0.909 0.826 0.751 0.683 0.621
Year 6 7 8
PV factor 0.564 0.513 0.467