Commerce guide

Teacher: Prabir Kundu

Mo. No : 9874469533
B.Com 6th Semester
Subject: FM
Previous Year Questions

2020
FINANCIAL MANAGEMENT - HONOURS
Course: DSE 6.2A
Full Marks: 80
Group - A
Answer any two questions. 15×2
1. You are working in a firm having ROI 18% and Cost of Capital 12%. For a proposed
project with effective life of 3 years, the inflows are estimated as ₹67,500, ₹76,500 and
₹56,700. Calculate the present value of benefits from the project. 15
2. Discuss Matching and aggressive approaches in the context of Working Capital
Financing strategies. 15
3.Y Ltd. started a project with the initial investment of ₹5,00,000. The life of the
project is 5 years. It is expected that cash inflows starting from first year to fifth year
will be ₹1,10,000, ₹1,40,000, ₹1,80,000, ₹2,50,000 and ₹3,80,000 respectively. What
will be the Pay-back period of the project? 15
4. From the following information, determine the theoretical market price of each
equity share of a company as per Walter's Model:
Earnings of the Company ₹10,00,000
Dividend paid ₹5,00,000
No. of equity shares outstanding ₹2,00,000
Cost of Equity capital 12%
Rate of return on investment 15%
15
Group - B
Answer any two questions. 25x2
5. Calculate weighted average cost of capital (WACC) considering market values for AD
Ltd. from the following details:
Sources of Capital
Equity share capital (₹10 each) ₹ 12,00,000
Retained Earnings ₹ 28,00,000
14% Preference shares (issued at a premium of 8%) ₹ 90,000
15% Debentures ₹ 3,60,000
Other information:
• Applicable corporate tax rate 30%

1
 • Market price per share ₹50, Dividend per share is expected to be ₹6. AD Ltd.
maintains a growth of 5% in this regard.
• Debentures of face value ₹1000 each were issued at 3% discount (with an
additional underwriters' commission of 1.5% on face value). Tenure of
Debenture 10 years.
25
6. PP Construction Ltd. is considering the five possible projects to invest in, as shown
below:
Project Cash Outflow (₹) PV of Cash Inflows (₹)
A 5,00,000 7,50,000
B 2,00,000 2,10,000
C 5,00,000 8,00,000
D 1,00,000 80,000
E 3,00,000 3,30,000
Available fund is ₹12,00,000. Apply Capital rationing decision concept and select the
projects. All the projects are divisible in nature. 25
7. Relevant information about two companies are given below:
X Y
Annual production capacity (Units) 1,00,000 1,50,000
Capacity utilisation and sales 75% 75%
Unit selling price (₹) 40 50
Unit variable cost (₹) 15 15
Fixed cost for the year (₹) 2,00,000 3,00,000
Equity capital (₹10 per share) 5,00,000 7,00,000
10% Preference share capital (₹) 50,000
15% Debentures (₹) 1,00,000 2,00,000
Determine the degree of Operating Leverage, degree of Financial Leverage, degree of
Financial Leverage and Earning per Share of two companies. (Tax rate 40%). 25
8. The capacity of your company is to produce 40,000 units of valve per annum. The
company expects to operate at 60% of the capacity level. You are required to ascertain
the working capital requirement at the current level of operation.
The following information on the cost-price structure of valves at the current level of
production is available:
Elements of costs Per unit (₹)
Raw-material 6
Direct labour 3
Overhead 4
Total cost 13
Profit 3
Selling price 16
Raw-materials are in stock, on an average, for 2 months. The duration of the
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 is

2
1.5 months, lag in payment of wages is half a month. There is usually no lag in
payment of overhead. 25
9. X Ltd. wants to purchase one machine 'out of two mutually exclusive machines
under consideration. Other information related to these machines are as below:
Particulars Machine 1 Machine 2
Purchase price (₹) 3,00,000 2,80,000
Estimated life (years) 5 5
Net cash flows (₹)
Year 1 80,000 60,000
Year 2 1,20,000 80,000
Year 3 90,000 1,20,000
Year 4 85,000 1,50,000
Year 5 1,58,000 92,000
Compute the NPV of each machine assuming a cost of capital of 10%. Which machine
should the company buy?
The present value of ₹1 to be received at the end of each year at 10% is given below:
Year 1 2 3 4 5
P.V. (₹) 0.909 0.826 0.751 0.683 0.621
25
10. (a) Mention any five important factors that a firm should consider in formulating
dividend policy.
(b) Discuss financial leverage with reference to the formulae. 13+12

2020
FINANCIAL MANAGEMENT - GENERAL
Course: DSE 6.2A
Full Marks: 80
Group-A
Answer any two questions. 15×2
1. What is the function of Financial Management? 15
2. Discuss the role of retained earnings as a source of corporate finance? 15
3. A company has issued debenture of Rs. 51 lakhs to be repaid after 7 years. How
much should the company invest at the end of each years in a sinking fund earning
12%, to repay the debenture? (CVIFA 12%, 7 = 10.089) 15
4. The current market price of an equity shares of Rs. 10 each is Rs. 40. The current
divided per share is Rs.6. If the dividend is expected to grow at the rate of 5%, find out
the case of equity capital, 15

Group-B
Answer any two questions. 25x2
5. (a) What is Trading on equity?
(b) Calculate the degree of operating leverage, degree of financing leverage and
combined leverage from the following data:

3
Sales 1,00,000 units @ ₹2 per unit = RS. 2,00,000
Variable cost per unit 2 Rs. 0.70
Fixed cost Rs. 1,00,000
Interest charges Rs. 3,000 10+15
6. You are required to prepare a statement showing the working capital needed to
finance a level of annual activity of 52,000 units of capital. The following information
are available.
Element of cost Amount per unit (Rs.)
Raw Material 8
Direct labour 2
Overhead 6
Selling price 20
Raw material is in stock, on an average for 4 weeks. Materials in process, on an
average for 2 weeks. Finished goods are in stock, on an average for 6 weeks. Credit
allowed to customer is for 8 weeks, credit allowed by supplier of goods is 4 weeks. Lag
in payment of wages is in and half weeks. It is necessary to hold cash in hand and at
bank amounting Rs. 80,000. 25
7. (a) What do you meant by working capital? Why is working capital necessary for a
business?
(b) Write about the financial policy of current assets pf a firm which follows
conservative policy of maintaining current assets. 13+12
8. Details regarding three companies are given below:
X Ltd. Y Ltd. Z Ltd.
Return on investment 15% 10% 8%
Cost of Capital 10% 10% 10%
EPS Rs. 10 Rs. 10 Rs. 10
By Walter's Models, you are required to calculate the value of an equity share each of
the companies when dividend pay-out ratio is (a) 20% and (b) 0%. 13+12
9. Ltd. is presently considering two machines for possible purchase. Other information
related to the machines is as follows:
Machine - 1 Machine - 2
Purchase Price Rs. 50,000 Rs. 60,000
Estimated Life 4 Years 4 Years
Cash Flow before Depreciation and Tax:
Year 1 Year 2 Year 3 Year4
Machine - 1 25,000 25,000 25,000 25,000
Machine - 2 45,000 19,000 25,000 27,000
Rate of Tax is 40%
Compute net present value of each machine assuming cost of capital is %. Which
machine the company should buy? The present value of Rs. 1 at 8% is as follows:
Y1 = 0.926, Y2 = 0.857, y3 = 0.794, and y4 == 0.735 (Assume straight line method of
Depreciation). 10+10+5
10. Write Short notes on the following:

4
(a) Accounting rate of return.
(b) Capital rationing. 13+12

2021
FINANCIAL MANAGEMENT — GENERAL
Course: DSE 6.2A
Full Marks: 80
Group - A
Answer any four questions:
1. Explain the functions of the Chief Financial Officer or Manager in the Modern
Business Environment. 10
2. Sugata borrows from a bank Rs.1,00,000 at 12% rate of interest to be paid in 5
equal annual installments at the end of each year. What will be the size of the
installment? [Given (PVIFA) (12,5) = 3.605] 10
3. A sum of Rs.5,000 is invested for 2 years at 10% interest rate compounded
biannually. Find the maturity amount. 10
4. (a) What do you mean by Capital Budgeting?
(b) What do you mean by Discounted Pay-back Period Method? 5+5
5. The following data relate to a firm:
(i) Earnings per share = Rs. 25
(ii) Capitalization rate = 12%
(iii) Retention ratio = 40%
Determine the share price using Gordon's Model if IRR is 15%. 10
6. Discuss the features of Optimum Capital Structure. 10
7. A firm has sales of Rs.5,00,000, variable cost of Rs.3,50,000 and fixed cost of
Rs.1,00,000 and debt of Rs.2,50,000 at 10% rate of interest. You are required to
calculate operating and financial leverages of the company. If the firm wants to double
its EBIT, how much of a rise in sales would be needed on a percentage basis? 7+3
8. Discuss the Role of Debenture in Company Financing. 10

Group - B
Answer any two questions.
9. RIL Ltd. opts for the following capital structure:
Equity Shares (1,00,000 shares) Rs.50,00,000
15% Debentures Rs.50,00,000
Total Rs.100,00,000
The company is expected to declare a dividend of Rs.5 per share. The market price per
share is Rs.50. The dividend is expected to grow by 10%.
Compute Weighted Average Cost of Capital of RIL Ltd. assuming 50% tax rate. 20
10. From the following information prepare a statement showing the Estimated
Working Capital requirement.
Projected Annual Sales: 26,000 units. Selling price per unit Rs.60
Analysis of Selling Price:

5
Material: 40%, Labour: 30%, Overhead: 20%, Profit: 10%
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 a warehouse - 2 weeks.
Cash in hand is expected to be 10% of the Net Working Capital. 20
11. (a) What do you mean by Internal Rate of Return? Discuss its accept and reject
rule. (b) Write a short note on Dividend Policy and Retained Earnings. 10+10
12. (a) Compute the Pay-back Period for the project:
End of the year 1 2 3 4 5
Book Value of fixed assets (Rs.) 90 80 70 60 50
Profit after tax 20 22 24 26 28
(b) What do you mean by Profitability Index? 15+5

2021
FINANCIAL MANAGEMENT — HONOURS
Course: DSE 6.2A
Full Marks: 80
Group - A
Answer any four questions.
1. Discuss the important functions of Financial Management? 10
2. What do you mean by wealth maximization objective of a firm? How can it be
achieved by the firm? Why is it considered superior to the profit maximization
objective of the firm? 2+3+5
3. (a) What do you mean by the time value of money? What are its reasons? 5
(b) X decides to invest Rs.6,000 at the end of each year at the compound rate of
interest of 12% p. a. for 8 years. What total amount he will get at the end of 8th year?
[FVAF at 12% for 8 years 12.30]
4. (a) Calculate the Payback Period from the following information:
Cost of machine: Rs.1,00,000; Depreciation: 10% p.a., under reducing balance
method. Corporate tax rate 40%.
Year 1 2 3 4 5
Excepted PBT (Rs. '000) Nil 54 88 104 125
(b) What are the distinguishing features of Capital Budgeting Decisions? 6+4
5. A firm is considering the proposal of buying a machine with installation cost
Rs.5,00,000. The machine will have a useful life 4 years after which it can be sold for
Rs. 70,000. Depreciation is to be charged under straight line method. Additional
working capital of Rs.50,000 will be introduced. Profits before depreciation and tax are
expected to be Rs.1,72,000, Rs.1,98,000, Rs.2,18,000 and Rs.1,80,000 in those four
years. If application tax rate is 30%, calculate ARR of the project. 10
6. Discuss the various sources of finance to meet working capital requirement? 10
7. A firm has sales of Rs.10,00,000, variable cost of Rs.7,00,000 and fixed cost of
Rs.2,00,000. The company has debt capital of Rs.3,00,000 at 10% rate of interest.

6
Computer operating, financial and combined leverages. If the firm wants to double its
earnings before interest and tax (EBIT), how much rise in sales would be required?
10
8. You are given the following information in respect of ABC Ltd.
Earning Rs.1,00,000
Equity capital 5,000 shares of Rs.10 each
Cost of capital 10%
Expected rates of return (i) 9%, (ii) 10% and (iii) 12%
Assuming that dividend pay-out ratio are 0%, 50% and 100% respectively, determine
the effects of the different dividend policies on the share price of ABC Ltd. for the
above mentioned three alternative levels of rate of returns using Gordon's model. 10

Group - B
Answer any two questions.
9. (a) Discuss the relevance of Cost of Capital. What do you mean by Implicit and
Explicit Cost of Capital? 5+5
(b) A Company's share is currently quoted in the market at Rs.30. The company paid a
dividend of Rs.5 per share last year and the investors expect a growth rate of 5% per
year.
You are required to calculate: (i) Cost of Equity Share Capital of the Company and
(ii) The Market Price per share, if the anticipated growth rate of dividend is 10%.
10
10. (a) What do you mean by EBIT - EPS Analysis? Discuss its importance in
Financing Decision? 10
(b) Discuss the significance rating Leverage and Financial Leverage? 10
11. Following details are available from the management of BAS Ltd:
Particulars Amount per unit (Rs.)
Raw materials 120
Direct labour 45
Overhead 90
The company wants to make 15% profit on sales price.
The following further particulars are available:
Raw material are kept in stock, on average, for one month. Processing time can be
taken as, on average, half a month; Finished goods in stock, on average, for 30 days.
Credit enjoyed by BAS Ltd. in one month; Credit allowed is for two months; Average
time - lag in payment of wages and overhead is one month. Cash in hand and at bank
is desired to be maintained at Rs.30,000. BAS Ltd. prefers to value debtors at sales
value. Compute the working capital required for BAS Ltd. with necessary assumptions
to finance a level of activity of 24,000 units of production in the next year. 20
12. (a) SMB Ltd. has considered two projects with economic life of 6 years having
following cash inflows after tax:
End of the 1 2 3 4 5 6 Total (Rs.)
year

7
 Project 1 1,00,000 80,000 75,000 70,000 68,000 62,000 4,55,000
Project 2 62,000 68,000 70,000 75,000 80,000 1,00,000 4,55,000
As the total cash inflows are identical and investment amount is Rs.3,30,000 for the
both projects, the management of SMB Ltd. has decided to go for any one of the given
projects.
Do you support their decision? Justify your answer?
The post-tax cost of capital of SMB Ltd. Is calculated as 10%, and the required
discounting factors are given below:
Year 1 2 3 4 5 6
DF @ 10% 0.909 0.826 0.751 0.683 0.621 0.564
(b) Project A and Project B are the two mutually exclusive projects under
consideration. While Project A has a higher NPV, Project B has a higher IRR. Which
project should be selected and why? 12+8

2022
FINANCIAL MANAGEMENT - GENERAL
Course: DSE 6.2A
Full Marks: 80
Group-A
Answer any four Questions
1. Discuss the importance of financial management.
2. Give an idea about 'Wealth maximisation' objective of financial management.
3. Mr. M is offered either to receive ₹10,000 three years from now or ₹14,000 five years
from now. Which one Mr. M will accept? Assume rate of discount is 10%
[Given present value of 1 at 10% are 0.751 and 0.621 for 3rd and 5th year
respectively.]
4. Explain 'working capital cycle'.
5. Coltex Ltd. issue a new 10% Debentures of ₹1,000 each to be redeemed at par.
However, it will involve flotation cost of 4 %. The company is in the 35 % tax bracket.
You are required to ascertain the cost of debt.
6. The Iron Ore Ltd. consists of 4000 equity shares of ₹10 each. Currently these
shares are quoted in the market at ₹200 each. The earnings available to the equity
shareholders at the end of the period ₹2,40,000. The earnings are expected to grow @
7%. What is the cost of equity capital?
Group-B
Answer any Six Questions
7. (a) Write a short note on Marginal Cost of Capital.
(b) Differentiate between Operating Leverage and Financial Leverage.
8. Calculate the degree of operating leverage, degree of financial leverage and
combined leverage from the following data:
Sales 100000 units @ ₹2 per unit = ₹2,00,000; Variable cost per unit @ ₹0.70; Fixed
cost = ₹1,00,000; Interest charges ₹3,000
9. (a) Explain 'Trading on Equity' with example.

8
(b) What do you mean by Optimum Capital Structure?
10. ABC Ltd. sells its on a gross profit of 20% on sales. The following information is
extracted from its annual accounts for the current year ended 31st March, 2021.
₹
Sales at 3 months credit 40,00,000
Raw materials 12,00,000
Wages paid - average time lag 15 days 9,60,000
Manufacturing expenses paid (one month arrear) 12,00,000
Administration expenses paid (one month arrear) 4,80,000
Sales promotion expenses (payable half yearly in advance) 2,00,000
The company enjoys one month's credit from the suppliers of raw materials and
maintains a 2 months stock of raw materials and one-and-half month stock of finished
goods. The cash balance is maintained at ₹1,00,000 as precautionary measure.
Assuming 10% margin, find out the working capital requirement of ABC Ltd.
11. Write short notes on:
(a) Commercial Paper (b) Trade Credit as a source of short-term capital.
12. Raj and Co. Ltd. has an investment project, the particulars of which are given
below:
Cost of the Asset = ₹1,80,000
Installation charges =₹ 20,000
Effective working life = 10 years
Estimated scrap value = ₹40,000
Annual profit before depreciation = ₹ 56,000
Depreciation is charged under straight line method and the rate of tax is given as 40
%. Compute the pay - back period of the project and state its acceptability.
13. (a) Why is discounted cash flow method superior to non-discounted cash flow
method in evaluation of an investment project?
(b) What is capital rationing?
14. The following figures are collected from the annual report of ABC Ltd.
Net Profit ₹60 Lakhs
Outstanding 12 % Preference Shares ₹200 Lakhs
Number of equity shares 300000
Return on Investment 20%
Cost of Capital (Ke) 16%
Compute the amount of dividend to keep the share price at ₹84 using Walter's Model.
15. X Ltd. is contemplating replacement of one of its machines which has become
outdated and inefficient. Its financial manager has prepared a report of two possible
replacement machines. The details of each machine are as follows:
Machine 1 Machine 2
Initial Investment ₹15,00,000 ₹16,00,000
Estimated useful life 5 years 5 years
Residual Value ₹1,20,000 ₹1,00,000
Contribution per annum ₹11,60,000 ₹12,00,000

9
Fixed operating costs per annum ₹7,60,000 ₹6,90,000
Depreciation has been calculated by straight line method and has been included in
fixed operating costs. The expected cost of capital for this project is assumed as 12 %
p.a. Required: Which machine is more beneficial.
Year 1 2 3 4 5
PV @ 12% 0.893 0.797 0.712 0.636 0.567

2022
FINANCIAL MANAGEMENT - HONOURS
Course: DSE 6.2A
Full Marks: 80
Group - A
1. Explain the inter-relationship between financing decision, investment decision and
dividend decision.
Or,
Discuss the significance of wealth maximisation.
2. Ms. B is considering two investment proposals for an amount of 5,000 with
following details:
Return From Investment (₹)
Proposal Maturity Period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
D 5 years 600 600 600 600 5,600 N.A.
G 6 years NIL NIL 2400 NIL NIL 6,800
PV for re. 1 At 10% 0.909 0.826 0.751 0.683 0.621 0.564
Suggest her for selecting the better option considering 10% discounting rate.
3. Briefly discuss the different strategies of financing current assets with graphical
presentation.
Or,
What are the various sources of finance to meet working capital requirement?
4. Briefly explain how the risk - return trade off play a significant role in the financial
decision making.
Or,
Explain the significance of time value of money in financial decision making. Calculate
present value of a 5 years annuity of ₹20,000 at a discount rate 10%.
5. Cost of plant ₹12.25 crore. Economic life of the plant is 6 years. Salvage value is
estimated as ₹25 lakh. Pre-tax Profit before depreciation is expected to be ₹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.
Or,
Define independent projects and mutually exclusive projects. Briefly discuss their
selection criteria based on NPV.

10
6. The initial outlay for a project of economic life 6 years is ₹72,000. The cash flow
after tax from this project for the first year is ₹19,500 and it increased steadily by *
₹6,000 per annum. Calculate payback period.
Group-B
7. Explain the concept of cost of capital. What do you mean by marginal cost of
capital? Why should we consider marginal cost of capital rather than weighted average
cost of capital while evaluating a new project?
Or,
The existing capital structure of X Ltd. is as follows:
Equity Share Capital and retained earnings (Ke = 17%) ₹ 5,00,000
14 % Preference Share Capital ₹ 2,00,000
10% Debt ₹ 3,00,000
The company wishes to implement the expansion of the plant with capital outlay of
5,00,000. Besides using the available retained earnings of ₹1,00,000, the balance
additional fund will be raised as follows:
10% Debt ₹ 3,00,000
14 % Preference Share Capital ₹ 1,00,000
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%.
8. From the following information presented by a manufacturing company, prepare a
statement showing working capital requirement for the coming year.
Expected monthly sales of 64,000 units at ₹20 per unit. The anticipated ratios of
selling price are:
Raw materials — 40%
Labour - 30%
Budgeted overhead ₹32,000 per week.
Overhead expenses include depreciation of ₹8,000 per week. Planned stock will
include raw - materials for ₹1,92,000 and 32,000 units of finished goods.
Material will stay in process 2 weeks
Credit allowed to debtors is 4 weeks
Credit allowed by creditors 5 weeks.
20% of sales may be assumed to be made against cash. Cash and Bank is to be
maintained at 10% of the working capital.
Assume that production is carried on evenly throughout the year and wages and
overhead accrue similarly.
Or,

11
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.
9. The selected financial data for companies A and B for the current year ended March
31, 2022 are as follows:
Particulars Company B Company A
Variable cost as a percentage of Sales 60 75
Interest (₹) 500 800
Degree of Operating Leverage 4 5
Degree of Financial Leverage 2 3
Income tax rate 0.30 0.30
(a) Prepare income statement of Company A and
(b) Comment on the risks of the two firms.
Or,
(a) What do you mean by optimum capital structure? what are its features?
(b) Explain the net income approach to the capital structure theory.
10. B. Bakshi Co is evaluating two independent and indivisible projects SB and AKB
with following details:
Post Cash Inflows tax (₹)
Investment
Project Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
(₹)
SB 1,50,700 36,800 38,700 44,700 50,100 41,500 55,000
AKB 74,800 15,900 28,200 30,500 32,100 37,800 Nil
(a) Comment on the selection of the project on the basis of net present value
considering 8% discounting rate.
Year 1 2 3 4 5 6
PV for Re.1 at 8% 0.926 0.857 0.794 0.735 0.681 0.630
(b) Review your decision under profitability index approach and comment.
Or,
(a) Discuss the demerits of payback period approach.
(b) Discuss the effect of income tax, salvage value of assets and depreciation on cash
inflows of a project under consideration.
11. P. Mitter Ltd. is having cost of capital 10 per cent and return on investment 12 per
cent. The company earned? 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.
Or,
(a) Discuss the pros and cons of scrip dividend.
(b) Differentiate between constant dividend rate policy and constant dividend pay - out
policy with diagram.

12
 2023
FINANCIAL MANAGEMENT - GENERAL
Course: DSE 6.2A
Full Marks: 80
Group-A
Answer any four Questions
1. Discuss the limitations of "Profit Maximization' objective of financial management.

Or.

2. Discuss the different components of financial environment.

You need a car loan of ₹8,00,000 for a tenure of 5 years and rate of interest is 12%. What will
be the annual equal instalment per year?

3. State any three advantages and any two disadvantages of Pay-back Period method.

Or.

Discuss the features of capital budgeting decision.

4. A Company is planning to purchase a machine and thus provides you the following
information:
Cost of the machine ₹8,00,000
Estimated life 3 years
Estimated Earnings before Tax (EBT):
Year 1 ₹1,80,000
Year 2 ₹3,00,000
Year 3 ₹2,40,000
Tax rate 40%
Estimated salvage value Nil
Compute the Accounting Rate of Return.

Group - B

5. The following is the capital structure of Z Ltd:

Amount (₹)
Equity Share Capital (₹10 each) 5,00,000
Reserve and Surplus 3,00,000
11% Preference Share Capital (₹100 each) 1,00,000
13% Debentures (₹100 each) 3,00,000
Total 12,00,000
The current market price per equity share is ₹18. The expected dividend per equity share is
₹2.7 and dividend growth rate is 5%.

Preference shares are redeemable after 5 years at par. At present, they are selling at ₹90 each.
The present market value of 13% Debentures are ₹2,91,000. Debentures are redeemable after 7
years at par. Assume tax rate at 50%
You are required to compute the weighted average cost of capital using market value as weight.

Or

Write short notes on (a) Retained earnings and (b) Term loan as a source of capital.

13
6. Item the following information, prepare Income Statement of P, Q and R. Ltd.
P Ltd. Q Ltd. R Ltd.
Operating leverage 4 5 3
Combined leverage 12 20 6
10% Debentures ₹ 20,000 ₹ 30,000 ₹ 50,000
Variable Cost to Sales Ratio (%) 50% 60% 75%
Assume 40% tax rate in each case.

Or.

(a) What is Optimum Capital Structure?

(b) State any five features of Optimum Capital Structure.

7. From the following details, determine working capital requirement of a manufacturing

business:
(i) Level of activity per annum: 52,000 units
(i) Cost structure (as a % of selling price):
Raw material = 40%, Wages 10%, Overheads 30%, Profit - 20%
(i) Raw materials are expected to be in store for 8 weeks in production process for 6 weeks.
(iv) After completion, the finished products are expected to be in store for one and half months.
(v) Credit to Debtors: 2 months
(vi) Credit from suppliers: 8 weeks
(vii) Lag in payment of wages and overheads: Half month
(vii) Final products are to be sold at ₹10 per unit
(x) The firm wants to keep ₹15,000 as Cash in hand
(x) Consider 4 weeks in a month and 52 weeks per annum
(xi) Assume that production is carried on evenly during the year and wages and overheads
accrue similarly.

8. Write about the aggressive and conservative policies of financing current assets.

9. Beta Ltd. wants to start a project which requires a plant. From the following information,
calculate the
Net Present Value (NPV) and suggest whether the project should be accepted or not.
Initial cost of the plant: ₹4,80,000. The effective life is 5 years. The estimated earnings before
depreciation and tax of the project are as below:
Year-1 Year-2 Year-3 Year-4 Year-5
₹1,44,000 ₹1,68,000 ₹1,92,000 ₹2,40,000 ₹2,64,000
The project also needs ₹80,000 working capital at the beginning of the project which is
expected to be realized after five years. The tax rate is 50% and cost of capital is 15%. Consider
the Scrap Value of the plant as zero and straight line method of depreciation.
The present value of Re. 1 at 15% is as follows:
Y-1 = 0.870, Y-2 = 0.756, Y-3 = 0.658, Y-4 = 0.572, Y-5 = 0.497

10. From the following information of HBC Ltd. compute the price of an equity share under
Walter's model and Gordon's model:
Book value per equity share ₹300
Return on Equity 12%
Capitalization Rate 15%
Retention Ratio 40%
Lec-13
Or.

Discuss the determinants of dividend policies.

14
 2023
FINANCIAL MANAGEMENT - HONOURS
Paper: DSE-6.2AH
Full Marks: 80

Group - A
1. Briefly discuss the role of a Chief Financial Officer (CFO) of a firm.

Or,

Explain the limitations of 'profit maximisation' as the goal of financial management.

2. Mr. Dutta borrows₹ 10,00,000 to buy a house in New town. He wants to repay this amount
in 10 equal instalment. The loan is taken @10% interest p.a. What is the amount of each
annual instalment? [PVIFA(10%,10)=6.145]

3. In receivable management discuss the effect of lengthening and shortening of the credit
period of debtors and its impact on profitability of the firm.

Or,

Explain matching policy in the context of financing working capital.

4. Cost of plant ₹12 crore. Economic life of the plant is 10 years. Salvage value is estimated as
₹ 25 lakh. Pre-tax-Profit before depreciation is expected to be ₹ 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.

Group - B

5. (a) 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) ₹4,00,000 ₹ 3,00,000
Market value per share ₹15 ₹20
Dividend per share ₹2.70 ₹4
10% Debentures (100 each) Nil ₹ 1,00,000
Market Value per debenture NA ₹125
[Ignore growth in dividend; assume income tax rate is 30%]

(b) Both the companies are from same industry and having same capital investment, then why
they are having different weighted average cost of capital?

6. (a) Briefly explain the concept of 'Trading on Equity' in financial leverage analysis.
(b) Details of a company for the year ended 31.3.2023 are as follows:
Sales ₹ 90 Lakhs

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 Profit Volume Ratio 30%
Fixed Cost (excluding interest) ₹ 10 lakhs
10% Debt ₹ 54 Lakhs
Equity Share Capital of 10 each ₹ 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%.

7. From the following information furnished by Hirani Ltd. prepare the working capital required
for the next financial year:
(i) Expected monthly sales 4000 units @ 50 each. The raw material cost is 40% of sales price
and direct wages is 30% of sales price. Expected overhead ₹ 8000 per week.
(ii) Finished goods will be kept for half a month.
(iii) Expected raw material closing stock ₹ 60,000
(iv) Processing time 2 weeks
(v) Credit allowed to customers for 35 days, credit allowed by suppliers for 28 days
(vi) Lag in payment of overhead 2 weeks
(vii) Cash is expected to be 20% of total working capital requirement.
(viii) Hirani Ltd. values debtors at sales value,
[Make necessary assumptions]

Or,

(a) Explain how you will compute the working capital cycle.
(b) Distinguish between temporary and permanent working capital.

8. Rwittik Ltd is evaluating two independent and indivisible projects, Megh and Tara with
following details:
Cash inflows (₹)
Project Investment Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Megh 100000 35780 37850 38940 42560 33500 35780
Tara 100000 44010 46560 47900 52350 41200 40100

(a) Comment on the selection of the project on the basis of net present value considering 8%
discounting rate.

(b) Will your choice remain same, if Project Tara requires an additional maintenance cost of ₹
20,000 at the end of every second year?
Year 1 2 3 4 5 6
PV for Re. 1 at 8% 0.926 0.857 0.794 0.735 0.681 0.630

Or,

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(a) Define internal rate of return (IRR) and discuss the utility of IRR approach for investment
decision making.

(b) What do you mean by profitability Index and how it is used in capital rationing?

9. 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.
Or,
(a) Briefly discuss the factors to be considered before framing the dividend policy of a company.
(b) What are the assumptions of Walter model of dividend policy?

10. (a) What do you understand by 'conservative' and 'aggressive' policies of financing
working capital?
(b) What are the merits and demerits of Payback period method of capital
expenditure decisions?

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