(1 Mark Question)

State whether the following statement are TRUE or FALSE(1 to 23)

1. Finance holds the key to all economic activities.
2. Investment in long term assets is popularly known as “ Capital Budgeting”
3. Investment decision relates to determination of proportion of Debt and Equity.
4. The key function of a finance manager is to maintain a proper balance between liquidity and
profitability of the firm.
5. Modern financial management is concerned with anticipation, acquiring and allocation of funds
effectively.
6. Financing decision related to determination of proportion of debt and capital.
7. Risk and return goes hand in hand.
8. Maximizing market price of equity share is the final objective of financial management.
9. Value of an equity share largely depends on EPS.
10. Wealth Maximization criterion is based on concept of cash flow,while accounting profit is the
basis for profit maximization concept.
11. Market price of a share is not the growth index of the company.
12. All financial decisions carry a certain elements of risk.
13. Stakeholders of a company includes employees,customers,suppliers,creditors,owners and
society who have a direct link to the firm.
14. Market price of a share is not the growth index of the company.
15. Profit maximization fails to take social consideration into account.
16. Discounting technique is also known as compounding technique.
17. An annuity is a series of receipts or payments of unequal amount.
18. Time value of money and Time preference of money means same.
19. Rule 72 is useful to calculate periode required for doubling principal amount,when interest rate is
not mentioned.
20. Debentures are always secured.
21. Coupon rate is the interest rate with which the bond is issued.
22. YTM is the average rate of return that an investor earns on a bond if the asset is held till maturity.
(T)
23. Market value of a share is always lower than the book value.(F)
24. Book value of a share = ______________ divided by________________.
25. The value of money in hand today is________than money receivable in future

1. The ___________ is defined as the discount rate that equates the present value of the net cash flows
from a project with the present value of the net investment.

2. Traditional payback method ignores the ___________________.

3. The ________ is defined as the present value of net cash flows from the project minus the net
investment.
State whether the following statement are TRUE or FALSE(4 to 15)

4. Investment decisions involve costs and revenues that extend over a number of years.

5. In general, a firm should undertake a project only if its net present value is positive.

6. In general, a firm should undertake any project that has an internal rate of return that is
positive.

7. One problem with the profitability index is that it ignores the time value of money.

8. Capital rationing occurs when the firm limits funds available for capital budgeting projects.

9. Capital budgeting decisions are also called long term investment decisions.

10. NPV takes into account earnings over the entire life of the project.

11. Positive NPV does not continue to maximize shareholders wealth.

12. Payback method is useful when cash flows are equal or unequal.

13. Capital investment decisions are generally irreversible in nature.

14. Capital rationing and capital budgeting means the same.

15. ARR method takes into account time value of money.

16. ARR=______________________/______________________

18. Project may be accepted or rejected if NPV is________________

19. To increase the NPV discounting rate should be____________.

20. A project can be accepted if IRR is greater than________________.

21. Depreciation is _______________________ while calculating cash flow after tax.

22. CFAT stands for_____________________________________________________

23. If more than one projects has positive NPV then _____________technique is applied to select
the project.

24. _______________________method will show higher payback period.

25. Profitability Index =______________________/__________

(2/3 Mark Question)

1. Finance Management: financial management deals with procurement of funds
and their effective utilization in business.

2. Objectives Of Financial Management: Financial management having two

objectives that Is:
• Profit maximization: The finance manager has to
make his decisions in a manner so that the profits
of the concern are maximized.
• Wealth maximization: Wealth maximization means
the objective of a firm should be to maximize its
value or wealth, or value of a firm is represented by
the market price of its common stock.

3. Functions of financial manager:

• Investment decision
• Dividend decision
• Finance decision
• Cash management decisions
• Performance evaluation
• Market impact analysis

4. Time value of money: The time value of money

means that worth of a rupee received today is
different from the worth of a rupee to be received in
future.
5. Capital structure: It refers to the mix of sources
 from where the long-term funds required in a business
may be raised; in other words, it refers to the
proportion of debt, preference capital and equity
capital.

6. Wacc: It denotes weighted average cost of capital.

It is defined as the overall cost of capital computed
by reference to the proportion of each component of
capital as weights.

7. Financial break-even point: it denotes the level at

which a firm’s EBIT is just sufficient to cover interest
and preference dividend.

8. Capital budgeting: capital budgeting involves the

process of decision making with regard to investment
in fixed assets. Or decision making with regard to
investment of money in long-term projects.

9. Pay back period: Payback period represents the

time period required for complete recovery of the
initial investment in the project.

10. ARR: Accounting or average rate of return means

the average annual yield on the project.

11. NPV: The net present value of an investment

proposal is defined as the sum of the present values
of all future cash in flows less the sum of the present
values of all cash out flows associated with the
proposal.

12. Profitability Index: where different investment

proposal each involving different initial investments
and cash inflows are to be compared.

13. IRR: internal rate of return is the rate at which the

sum total of discounted cash inflows equals the
discounted cash out flow.
14. Marketable Securities: Surplus cash can be
invested in short term instruments in order to earn
interest.

15. Ageing Schedule: In a ageing schedule the

receivables are classified according to their age.
16. Maximum Permissible Bank Finance (MPBF):
it is the maximum amount that banks can lend a
borrower towards his working capital requirements.

17. Commercial Paper: A cp is a short term

promissory note issued by a company, negotiable by
endorsement and delivery, issued at a discount on
face value as may be determined by the issuing
company.

18. Bridge Finance: It refers to the loans taken by

the company normally from a commercial banks for a
short period pending disbursement of loans
sanctioned by the financial institutions.

19. Venture Capital: It refers to the financing of

high-risk ventures promoted by new qualified
entrepreneurs who require funds to give shape to
their ideas.
20. Trade Credit: It represents credit granted by
suppliers of goods, in the normal course of business
21. Over Draft: Under this facility a fixed limit is
granted within which the borrower allowed to
overdraw from his account.

22. Cash credit: It is an arrangement under which a

customer is allowed an advance up to certain limit
against credit granted by bank.

23. Clean overdraft: It refers to an advance by way

of overdraft facility, but not back by any tangible
security.
24. Share capital: The sum total of the nominal value
of the shares of a company is called share capital.
25. Sources of funds: There are two sources of
funds Internal sources and external sources.
Internal source: Funds from operations is the only
internal sources of funds and some important points
add to it they do not result in the outflow of funds
Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss
on sale of fixed assets
Deduct the following items, as they do not increase
the funds:
Profit on sale of fixed assets, profit on revaluation Of
fixed assets
 External sources:
• Funds from long-term loans
• Sale of fixed assets
• Funds from increase in share capital

26. ICD (Inter corporate deposits): Companies can

borrow funds for a short period. For example 6
months or less from another company which have
surplus liquidity. Such Deposits made by one
company in another company are called ICD.

27. Certificate of deposits: The CD is a document

of title similar to a fixed deposit receipt issued by
banks there is no prescribed interest rate on such
CDs it is based on the prevailing market conditions.
28. Public deposits: It is very important source of
short term and medium term finance. The company
can accept PD from members of the public and
shareholders. It has the maturity period of 6 months
to 3 years.
29. Seed capital assistance: The seed capital
assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs
and persons possessing relevant experience and
skills and entrepreneur traits.
30. Unsecured loans: It constitutes a significant part
of long-term finance available to an enterprise.
31. Types of Risk- Systematic and Unsystematic risk
32. What is portfolio?

Long Question (7 Marks)

 1. Define financial management. Discuss its scope and objectives.
2. Investment,Financing and dividend decisions are interrelated. Comment
3. Explain the mechanics of evaluating present value of cash flow with suitable
example.
4. Discuss various types of risk associated with Investment.
5. What is capital budgeting? Discuss the various techniques for evaluating capital
budgeting decisions.
6. Define the concept of cost of capital. How do you determine the WACC of a firm.
7. Discuss the various sources of long term finance.
8. Briefly explain the factors effecting dividend policy of a company.
9. Explain the theory of relevance on dividend decisions.
10. Explain the factors which determine the working capital requirement of a Firm.
11. Discuss the various approaches to working capital finance.
Note
Problems will be asked from chapter-Capital budgeting,cost
of capital,dividend theory,working capital management.