UNIT I – FOUNDATIONS OF FINANCE

Financial Management-An overview-Time Value of Money-Introduction to the concept

of risk and return of a single asset and of a portfolio-Valuation of bonds and shares-
Option valuation.
PART – A
Q.No Questions BT LevelCompetence
1. Define Financial Management. BTL1 Remembering
A Rs.10,000 per value bond bearing a coupon rate of
12% will mature after 5 years. Compare the value of
2. BTL2 Understanding
bond, if the discount rate is 15%?

3. Identify the two aspects of financial management. BTL3 Applying

4. Classify the various concepts in time value of money. BTL4 Analyzing

5. Discuss the objectives and goal of financial management. BTL5 Evaluating

6. Interpret the functions of financial Manager. BTL6 Creating

7. Define Future Value of Money. BTL1 Remembering

Compare modern view of financial management with its
8. BTL2 Understanding
traditional view.
How is the term finance more comprehensive than money
9. BTL3 Applying
management?
Return on market portfolio has a standard deviation of
20% and covariance between the returns on the market
10. BTL4 Analyzing
portfolio and that of security A is 800. What is the
expected return?
How would you have a fresh look at the finance function in
11. BTL5 Evaluating
business?
12. Interpret modern view(s) on financial management. BTL6 Creating

13. Define Compound value concept. BTL1 Remembering

14. Can you explain Rule 72 and Rule 69. BTL2 Understanding

15. How is bond different from equity? BTL3 Applying

16. Why does money have time value? BTL4 Analyzing

17. What is Risk Premium? BTL1 Remembering

18. Classify the yield to maturity? BTL2 Understanding

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19. Define yield to call. BTL1 Remembering

20. What is effective rate of interest? BTL1 Remembering

PART – B
1. i) How will you measure time preference for money? BTL1 Remembering
(7 marks)

ii) List the reasons for time preference for money. (6

marks)

2. Discuss future value of an annuity explain with BTL2 Understanding

examples?

3. i) How would you show your understanding on the BTL3 Applying

estimation of time value of a put option? (7 marks)

ii) Examine the need for Black Scholes option model. (6

marks)
4. Can you list the types of risk & classify BTL4 Analyzing
Non‐diversifiable risk”&” Security market line”. How

does it differ from capital market line?

5. i) Discuss the concept and significance of risk and BTL5 Evaluating

return of a portfolio. (7 marks)
ii) Discuss the importance of correlation between
assets returns in a portfolio. (6 marks)

6. Evaluate “The goal of profit maximization does not BTL6 Creating

provide an operationally useful criterion”‐ Explain

7. i)Define the concept of risk return trade off with BTL1 Remembering
diagram. (7 marks)
ii)What is the present value of cash flow of Rs.1500 per
year forever a) At an interest rate of 8% and b) At an
interest rate of 10%. (6 marks)
8. Define, what is return? Write the various of total return. BTL2 Understanding
Whether unrealised capital gain or loss be included in the
calculations of returns?
9. i) Explain the functions of finance manager of a firm. (7 BTL3 Applying
marks)
ii) Can you explain the features & scope of financial
management? (6 marks)
10. i) Define the various decisions in financial management. BTL4 Analyzing
“Wealth maximization is the sole objective
of financial management”‐ Explain (7 marks)

ii) What is the present value of perpetuity of Rs.800 starting

in year 3 at a discount rate of 18%. (6 marks)

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11. A bond has 3 years remaining until maturity. It has a BTL1 Remembering
par value of Rs.1, 000. The coupon interest rate on the
bond is 10%. How would you compute the yield to
maturity at current market price of Rs.1, 100, assuming
interest is paid annually?
12. i) How would you explain the various concepts of value? BTL2 Understanding
State the formula for bond valuation. (7 marks)

ii) Can you explain the relationship between coupon rate,

required yield and price? (6 marks)
13. Analyse the value of a share for which the current dividend BTL4 Analyzing
is Rs.3 and the annual growth rate is 5%. Assume a
required rate of return of 10%. What will be the value of
the share if the annual growth is 8%?

14. ABC company currently paying a dividend of Rs.2 per BTL1 Remembering
share. The dividend is expected to grow at a 15%
annual rate for the three years, then at 10%rate of the
next three years, after which it is expected to grow at a
5%rate forever.
i) What is the present value of the share if the
capitalization rate is 9%?
ii) If the share is held for 3 years, what shall be its
present value?

Year 1 2 3 4 5 6

PVF 0.917 0.842 0.772 0.708 0.650 0.596

@
9%

PART-C

1 Best ltd has a Rs. 1000 par value bond carrying a coupon rate of 12% and maturing
after 7 yrs. The market value of this bond is Rs.750. What is the YTM of this bond?
What will be the YTM if the market price is 1050?
2 There are 3 securities X,Y, and Z. The returns are given as follows:‐ Select the securities

based on risk and return. Calculate average returns, variance and standard deviation.
Security X 30 20 22 33 15
Y -20 10 20 10 20
Z -20 -10 -5 10 30
3 A Company is currently paying a dividend of Rs.2 per share. The dividend is expected
to grow at a 15% annual rate for three years then at 10% for next three years, after it is
expected to grow at a 5% rate forever. (a) What is the present value of the share if the
 capitalization rate is 9%? (b) If the share is held for three years, what shall be its
present value?
4 Illustrate with the example linkage between share price and earnings. What is the
importance of P/E ratio. What are its limitations?