Q.1.

(a) Explain the difference between shareholders’ wealth maximization versus profit
maximization. [2]
(b) Financial management deals with investment decisions, financing decisions and
rewarding (Dividend) decisions. Explain which decision(s) might be more critical and
when? [3]
(c) Explain the concept of risk free rate, what are the characteristics of risk free assets
and how can you choose an appropriate risk free asset when your investment horizon
is short term and long term? [3]

Q.1. (a) Difference between Shareholders’ Wealth Maximization vs. Profit Maximization
Shareholders’ Wealth Maximization:
• Objective: The primary goal is to increase the overall value of the firm as reflected in the
share price.
• Time Horizon: Focuses on long-term growth and sustainability, considering the future
potential of the business.
• Considerations: Takes into account risk and the time value of money, leading to decisions
that prioritize the long-term interests of shareholders.
Profit Maximization:
• Objective: Aims to maximize the company's short-term profits without necessarily
considering the long-term implications.
• Time Horizon: Typically focuses on immediate financial performance, often measured by
accounting profits.
• Considerations: May overlook risks, sustainability, or the impact of decisions on shareholder
value over time, leading to potentially harmful short-term strategies.
Q.1. (b) Critical Decision(s) in Financial Management
1. Investment Decisions:
o Critical when evaluating projects that require capital expenditure. These decisions
involve assessing potential returns against risks, influencing the firm’s growth and
future profitability.
o Important during periods of expansion or when entering new markets.
2. Financing Decisions:
o These decisions determine the best capital structure for the firm (debt vs. equity).
They become critical during economic downturns or when the firm needs to raise
funds for new projects.
o Affects the cost of capital and financial risk.
3. Dividend Decisions:
o Crucial when determining how much profit to return to shareholders versus
reinvesting in the business. This is particularly significant for mature companies with
stable cash flows.
o Becomes important in times of economic stability when firms can afford to return
excess cash to shareholders.
Overall Importance: While all three decisions are essential, investment decisions often hold
the most weight since they lay the foundation for future profitability. The timing and market
conditions can shift which decision is most critical.
Q.1. (c) Concept of Risk-Free Rate and Risk-Free Assets
Risk-Free Rate:
• The risk-free rate is the return on an investment with zero risk, typically represented by
government bonds or treasury bills. It serves as a benchmark for evaluating other
investments.
Characteristics of Risk-Free Assets:
 1. Guaranteed Returns: These assets provide returns that are not subject to market fluctuations.
2. Default Risk-Free: Issued by stable governments (like U.S. Treasury securities) that are
unlikely to default.
3. Liquidity: Usually highly liquid, meaning they can be quickly converted into cash without a
significant loss in value.
4. Short-Term and Long-Term Considerations: Short-term risk-free assets (like Treasury bills)
are ideal for investments with a horizon of a few months, while long-term government bonds
are suitable for longer-term investments.
Choosing Appropriate Risk-Free Assets:
• Short-Term Investment Horizon: Use short-term securities such as Treasury bills or money
market funds. These provide quick access to cash and minimize exposure to interest rate
fluctuations.
• Long-Term Investment Horizon: Consider long-term government bonds or other
government-backed securities that may offer higher yields, providing a stable return over the
investment period while still being low-risk.
In conclusion, understanding the risk-free rate and the characteristics of risk-free assets helps
investors align their investment choices with their risk tolerance and financial goals.

Q.2. The following are the financial statements for the year 2023 of Zigsaw company
engaged in manufacturing of toys.
Balance sheet as on 31 March, 2023
Liabilities + OE Amount Assets Amount
(Rs.) (Rs.)
Creditors 280000 Cash 70000
Trade Payables 140000 Debtors 350000
Outstanding expenses 40000 Stock 490000
Provision for tax 100000 Fixed assets 1050000
Long-term debt 840000 Goodwill 140000
Share capital 420000
Reserves 280000
Total 2100000 Total 2100000

Profit and Loss A/C for the year ended 31 March 2023
Amount Amount
(Rs.) (Rs.)
Sales
Cash 280000
Credit 1120000
Total Sales 1400000
(-) COGS 840000
Gross Profit 560000
(-) Selling and Admin Exp. 140000
EBDIT 420000
(-) Depreciation 98000
EBIT 322000
(-) Interest 42000
EBT 280000
(-) Tax 140000
PAT 140000
 (-) Dividend Paid 42000
You are required to
(a) What will be your advice to investors on the solvency position of the company?
Calculate debt/equity ratio and interest coverage ratio to justify your answer. [3]

(a) Advice to Investors on Solvency Position:

To assess the solvency position of Zigsaw Company, we calculate the debt/equity ratio
and interest coverage ratio.
1. Debt/Equity Ratio:
Debt/Equity Ratio=Total DebtEquity\text{Debt/Equity Ratio} = \frac{\text{Total
Debt}}{\text{Equity}}Debt/Equity Ratio=EquityTotal Debt
• Total Debt: This includes long-term debt and other current liabilities (Creditors, Trade
Payables, and Outstanding Expenses).
Total Debt=280,000+140,000+40,000+840,000=1,300,000\text{Total Debt} = 280,000 + 140,000
+ 40,000 + 840,000 = 1,300,000Total Debt=280,000+140,000+40,000+840,000=1,300,000
• Equity: This includes Share Capital and Reserves.
Equity=420,000+280,000=700,000\text{Equity} = 420,000 + 280,000 =
700,000Equity=420,000+280,000=700,000
Debt/Equity Ratio=1,300,000700,000=1.86\text{Debt/Equity Ratio} =
\frac{1,300,000}{700,000} = 1.86Debt/Equity Ratio=700,0001,300,000=1.86
A debt/equity ratio of 1.86 indicates that Zigsaw is primarily financed by debt, which
could be a concern for investors if the company struggles to meet its obligations.
2. Interest Coverage Ratio:
Interest Coverage Ratio=EBITInterest Expense=322,00042,000=7.67\text{Interest Coverage
Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}} = \frac{322,000}{42,000} =
7.67Interest Coverage Ratio=Interest ExpenseEBIT=42,000322,000=7.67
An interest coverage ratio of 7.67 is good, showing the company earns enough to cover its
interest expenses 7.67 times, indicating a relatively strong solvency position in terms of
meeting interest obligations.
Advice: While the company is heavily leveraged with a debt/equity ratio of 1.86, its strong
interest coverage ratio of 7.67 suggests it can comfortably manage its interest payments.
Investors may want to keep an eye on the company's ability to reduce its debt over time.

(b) Being the supplier to Zigsaw Co., what would be your decision if the company
wants to buy material of Rs.70000 on a three months’ credit. Calculate liquidity
ratio (Current ratio, quick ratio) and efficiency ratio (inventory turnover ratio,
debtors turnover ratio) to make decision. [4]

(b) Decision as a Supplier (Liquidity and Efficiency Analysis):

To decide whether to supply materials on credit, we calculate the company's liquidity and
efficiency ratios.
1. Current Ratio:
Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current
Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets
• Current Assets: Cash, Debtors, and Stock.
Current Assets=70,000+350,000+490,000=910,000\text{Current Assets} = 70,000 + 350,000 +
490,000 = 910,000Current Assets=70,000+350,000+490,000=910,000
• Current Liabilities: Creditors, Trade Payables, Outstanding Expenses, and Provision for Tax.
Current Liabilities=280,000+140,000+40,000+100,000=560,000\text{Current Liabilities} =
280,000 + 140,000 + 40,000 + 100,000 =
560,000Current Liabilities=280,000+140,000+40,000+100,000=560,000
 Current Ratio=910,000560,000=1.63\text{Current Ratio} = \frac{910,000}{560,000} =
1.63Current Ratio=560,000910,000=1.63
A current ratio of 1.63 suggests that the company has more than enough current assets to
cover its current liabilities, indicating good short-term liquidity.
2. Quick Ratio:
Quick Ratio=Quick AssetsCurrent Liabilities\text{Quick Ratio} = \frac{\text{Quick
Assets}}{\text{Current Liabilities}}Quick Ratio=Current LiabilitiesQuick Assets
• Quick Assets: Current assets excluding inventory (Cash and Debtors).
Quick Assets=70,000+350,000=420,000\text{Quick Assets} = 70,000 + 350,000 =
420,000Quick Assets=70,000+350,000=420,000 Quick Ratio=420,000560,000=0.75\text{Quick
Ratio} = \frac{420,000}{560,000} = 0.75Quick Ratio=560,000420,000=0.75
A quick ratio of 0.75 is below the ideal benchmark of 1.0, which indicates that the
company may face challenges meeting its short-term obligations without relying on
inventory.
3. Inventory Turnover Ratio:
Inventory Turnover Ratio=COGSAverage Inventory\text{Inventory Turnover Ratio} =
\frac{\text{COGS}}{\text{Average
Inventory}}Inventory Turnover Ratio=Average InventoryCOGS
• COGS: Rs. 840,000 (from Profit and Loss Statement).
• Average Inventory: Stock is Rs. 490,000 (as there is no opening stock data, we'll assume this
as average inventory).
Inventory Turnover Ratio=840,000490,000=1.71\text{Inventory Turnover Ratio} =
\frac{840,000}{490,000} = 1.71Inventory Turnover Ratio=490,000840,000=1.71
An inventory turnover ratio of 1.71 indicates the company sells and replaces its inventory
about 1.71 times a year, which is somewhat low for a manufacturing company.
4. Debtors Turnover Ratio:
Debtors Turnover Ratio=Credit SalesAverage Debtors\text{Debtors Turnover Ratio} =
\frac{\text{Credit Sales}}{\text{Average
Debtors}}Debtors Turnover Ratio=Average DebtorsCredit Sales
• Credit Sales: Rs. 1,120,000 (from Profit and Loss Statement).
• Average Debtors: Rs. 350,000 (assuming year-end value as average).
Debtors Turnover Ratio=1,120,000350,000=3.2\text{Debtors Turnover Ratio} =
\frac{1,120,000}{350,000} = 3.2Debtors Turnover Ratio=350,0001,120,000=3.2
A debtors turnover ratio of 3.2 indicates that the company collects its receivables 3.2 times
per year, which is relatively average.
Decision: As a supplier, the current ratio of 1.63 shows a healthy liquidity position, but
the low quick ratio of 0.75 is a concern, as the company may rely on selling inventory to
pay short-term liabilities. Additionally, the average inventory and debtors turnover ratios
suggest the company may take time to sell inventory and collect receivables. Supplying on
credit is feasible, but there is some risk involved, and close monitoring of payment
timelines is recommended.
Q.3. (a)How much does a deposit of Rs.40000 grow at the end of 10 years at the rate of 6
per cent interest and compounding is done semi-annually. [2]

(b) ABC company has taken loan of Rs.10 lakhs for an expansion program from IDBI
bank at 7 per cent interest rate per year. The amount has to be repaid in 6 equal annual
installments (EMI). Calculate the instalments amount. [2]

Q.4. (a) What is risk-return trade-off. Distinguish between unsystematic/business risk and
market risk. [2]
(b) The following table summarizes the annual returns you would have made on two
companies Airtel and Mahindra & Mahindra from 2019 to 2023:
Year Airtel Mahindra & Mahindra
2019 25% -4%
2020 -8% 28%
2021 10% -6%
2022 11% 48%
2023 36% 23%
(i) Estimate the average return of each company. [2]
(ii) Estimate risk in terms of standard deviation in annual returns in each company. [2]
Q.5. A firm has the following information about a project.
Income Statement (Rs. In thousands)

Revenue 16 14 12
(-) Expenses 8 7 6
Gross Profit 8 7 6
(-) Depreciation 4 4 4
Net Profit 4 3 2
The initial investment of the project is estimated as Rs.12000. The cost of capital is 12
per cent. Compute:
(a) Calculate the cash inflow of the project [1]
(b) Payback period and discounted payback period, and give your decision. [2]
(c) NPV for the project and give your decision. [2]