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FINANCIAL MANAGEMENT
SEP/OCT-2022
SEGTION - A
1. Answer any five sub-questions of the following. Each question
carries two marks.
a) Define financial management.
*Financial Management can be broadly defined as “the activity
concerned with the planning, raising, controlling and administration of
the funds which are used in the company.
b) Give the equation for EPS.

c) Fixed cost is Rs. 2,50,000, Profit is 1,75,000, Sales is
Rs.7,45,000. Calculate contribution.
*
d) EBIT = 5,00,000, EBT = 3,00,000, calculate financial leverage.
*Financial leverage= EBIT/EBT
5,00,000/3,00,000 = 1.66
FINANCIAL LEVERAGE= 1.66
e) Mention any four functions of financial management.
• Profit maximization
• Wealth maximization
• Ensuring a fair return to share holders
• Helps in growth and expansion
• Ensuring financial discipline in the organization.
f) Give the meaning of time value of money.

• The concept of time value is that the value of money received
today is more important than the value of the same amount
received after a certain period of time.
(Or)
Money received in the future is not as valuable as money
received today
g) Give the meaning of cash dividend.
• A cash dividend is a payment made by a company to its
stockholders in the form of periodic distributions of cash.
Section-B
2. Briefly explain the prime objectives of financial management.
• Profit maximization:
The objectives of financial management also help an
organization maximize profits by providing it with tools for analyzing its costs and
revenues, which allows it to determine whether its pricing is appropriate for the market or
not. It can also help determine when it should increase or decrease production based on
demand for its product or service.
• Reduce risks:
When you are managing your company's finances, it's important to
keep in mind that the financial management objectives for your business are not just to
make money—they're also to reduce risk. You want to be able to take on new projects, but
you don't want those projects to put your business at risk. If you have the goals of financial
management set aside already, you’re more likely to keep an eye on risk.
• Proper mobilization:
Proper mobilization is one of the other objectives of
financial management. This includes investing in research and development so that new
products can be developed more quickly than before; investing in human capital
development so that employees remain motivated and engaged over time; and investing in
physical capital development so that there is adequate space within which employees can
work efficiently to help the financial manager achieve its objectives.
• High efficiency:
This objective of financial management tells a company that
financial management should concentrate on the efficiency of its operations. Efficiency can
be achieved by reducing costs, maintaining a high level of output, reducing time lags
between inputs and outputs, and ensuring the financial manager's objectives are met. The
goals of financial management ensure you are in line with company strategies as well.
• Business survival:
You also need enough money in the bank so that if something
goes wrong, you can pay your employees and keep the lights on long enough until you're
able to fix whatever went wrong. As per the objectives of financial management, this means
planning ahead and making sure you have a contingency plan for any unexpected problems
or expenses that could come up.
• Balanced Structure:
Finally, it's important to have a balanced structure for your company's
finances to stay aligned with the Financial Management objectives—that is, one where all
areas of your business have equal access to capital and resources so that none are more
valuable than others or given priority over another area simply because they're more
profitable at this time. These financial management objectives can either make or break all
your financial Management strategies.
3. Briefly explain the characteristics of a sound financial plan.

1. Simplicity
2. Clear cut plan
3. Flexibility
4. Long term view
5. Forsight
6. Contigencies
7. Optimum use.
4. Compare the two companies in terms of operating leverage and

financial leverage.
FIRM X FIRM Y
Sales 30,00,000 45,00,000
Variable cost 35% on sales 45% on sales
Fixed cost 8,00,000 9,00,000
Interest 2,00,000 3,00,000
Interpret the result of the firm.
5. Mr. Anil deposits rupees 4000 at the end of every year for five
years and the deposits on a compound interest at 10% per annum
determine how much money you will have at the end of five years?
(1.10)^5=6.105.
6. Discuss the salient features of NPV method.
Characteristics of NPV
1. Based on Cash flow

Net Present Value is based on cash flow therefore it is a better measure than accounting
rate of return which is based on accounting profit because accounting profit can be
subjective.
2. Time Value of Money

This method gives do consider to time value of money which is a fundamental concept
in investment appraisal. Therefore, it a superior to accounting rate of profit and payback
period which ignores the time value of money.
3. Absolute Results
This method provides absolute results, and this information is very useful while
considering the huge investment projects.
4. Require Special Knowledge

This method requires special knowledge to calculate, and it also requires special skill to
understand this method and therefore this method is deemed to be difficult to calculate &
understand.
5. Discount Rate Determination
This method requires a discount rate and sometimes it is difficult to determine the exact
discount rate that can be used to calculate the NPV.
Section-C
7. What do you understand by dividend policy? Enumerate the
factors that determine the dividend policy.
• Meaning of Dividend Policy:
A company’s dividend policy dictates the
number of dividends paid out by the company to its shareholders and the frequency with
which the dividends are paid out. When a company makes a profit, they need to make a
decision on what to do with it. They can either retain the profits in the company (retained
earnings on the balance sheet), or they can distribute the money to shareholders in the
form of dividends.
FACTORS DETERMINING THE DIVIDENT POLICY:

a) legal rules
(b) liquidity position
(c) the need to pay off debt
(d) restrictions in debt contract
(e) rate of expansion of assets
(f) profit rate
(g) stability of earnings
(h) access to capital markets
(I) Control
8. Give the meaning of working capital. Explain the dangers of

excessive and inadequate working capital.
MEANING OF WORKING CAPITAL:
The amount that a company uses for
meeting the day to day expenses or operations of business or the amount
which company uses to invest in current assests is known as WORKING
CAPITAL
• The Dangers of Excessive working capital :

1. It results in unnecessary accumulation of inventory, thus the
chances of inventory mishandling, waste, theft and losses
increases.
2. It is an indication of effective credit policy and slack collection..
Consequently higher incidence of bad debts adversely affect
profit.
3. Excess working capital results in idle funds, which do not earn
any return for the firm.
4. tendencies of accumulating inventories to make speculative
profits and difficult to cope with in the future when the firm is
unable to make speculative profits.
• The Dangers of inadequate of working capital:
1. It's stagnant growth. It becomes very difficult for the firm to
undertake profitable projects due to inadequate working capital.
2. It becomes difficult to implement the operating plants and
achieve the firm profit target.
3. Operating inefficiencies increases when the firm finds it difficult
even to meet day-to-day commitments.
4. Lack of working capital renders the form unable to avail of
attractive credit opportunities.
5. Your form loses its reputation when it is not in a position to
honour its short term obligations.
9. Platforms cost of capital is 10%. It is considering two manual
exclusive projects X&Y. The details are given below:
Particulars PROJECT X PROJECT Y
Investment 15,00,000 15,00,000
Net annual cash
flows:
1 2,00,000 8,00,000
2 4,00,000 8,00,000
3 6,00,000 4,00,000
4 9,00,000 2,00,000
5 12,00,000 2,00,000
Compute:
a) Payback period
b) NPV
P.V. factor at 12% for 5 years.
Year 1 2 3 4 5
P.V. factor 0.893 0.797 0.712 0.636 0.567
@12%
10. ABC limited is capitalized with rupees 7,00,000 dividend into

70,000 equity shares of rupees 10 each. The management plans to
raise another rupees 5,00,000 to finance some expansion program.
The following of the four possible plans:
a) All equity shares.
b) Rupees 2,50,000 in equity shares and the balance in debenture
carrying 10% interest.
c) Rupees 2,50,000 equity shares and Rupees 2,50,000 in
different shares carrying 10% dividend.
d) All debentures carrying 8% interest.
The existing EBIT amounts to Rs 60,000 p.a. Calculate EPS in all
the four plans.
11.Discuss the factors affecting capital budgeting decisions of a

firm.
Factors affecting Capital Budgeting Decisions (CBD):
1. Technological changes:
Before taking CBD, management must undertake in-depth study of cost of
new product /equipment as well productive efficiencies of new as well as old
equipment.
2. Demand forecast:
Analysis of demand for a long period must be undertaken before CBD.
3. Competitive strategy:
If a competitor is going for new machinery /equipment of high capacity

and cost effective, we may have to follow that.
4. Type of management:
If management is innovative, firm may go for new equipment’s/

investment as compared to conservative management.
5. Cash flow:
Cash flow statement or cash budget helps a firm in identifying time when
a firm can make investment in CBD.
6. Other factors:
Like fiscal policy (tax concessions, rebate on investments) political

stability, global situation etc.

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FINANCIAL MANAGEMENT

b) Give the equation for EPS.

f) Give the meaning of time value of money.

3. Briefly explain the characteristics of a sound financial plan.

4. Compare the two companies in terms of operating leverage and

Interpret the result of the firm.

1. Based on Cash flow

2. Time Value of Money

4. Require Special Knowledge

5. Discount Rate Determination

FACTORS DETERMINING THE DIVIDENT POLICY:

8. Give the meaning of working capital. Explain the dangers of

• The Dangers of Excessive working capital :

10. ABC limited is capitalized with rupees 7,00,000 dividend into

11.Discuss the factors affecting capital budgeting decisions of a

Factors affecting Capital Budgeting Decisions (CBD):

Analysis of demand for a long period must be undertaken before CBD.

If a competitor is going for new machinery /equipment of high capacity

If management is innovative, firm may go for new equipment’s/

Like fiscal policy (tax concessions, rebate on investments) political

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