GOVERNMENT ARTS COLLEGE (AUTONOMOUS), NANDANAM, CH-35

DEPARTMENT OF COMMERCE
SEMESTER: II FINANCIAL MANAGEMENT II INTERNAL TEST -March, 2023
CLASS: I M.Com. Maximum marks: 50
SECTION A- (5x 2 = 10 Marks) Answer any FIVE questions.
1. What do you mean by financial decision?
2. What is meant by capitalisation?
3. State the meaning of short-term finance.
4. What is profitability index?
5. What is over capitalisation?
6. Define Leverage.
7. What is short term finance?
8. What is pay-back period?
SECTION B (4 x 5 = 20 Marks) Answer any FOUR questions.
9. What are the techniques of capital budgeting?
10. Write about the significance of operating and financial leverage analysis for a financial executive in
corporate profit and financial planning.
11. A firm sells products for ₹. 100 per unit, has variable operating costs of ₹. 50 per unit and fixed
operating costs of ₹. 50,000 p.a. Show the various levels of EBIT that would result from sale of (1) 1,000
units (ii) 2,000 units and (iii) 3,000 units.
12. ABC ltd is considering investing in a project that costs ₹. 5,00,000. The estimated salvage value is zero,
tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project
has cash flows before tax is as follows:
Year 1 2 3 4 5
Earnings before tax 1,00,000 1,00,000 1,50,000 1,50,000 2,50,000
Determine the following (i) Pay back period and (ii) Average rate of return.
13. Calculate the operating leverage for each of the four firms, A, B, C and D from the following price and
cost data. What conclusions can you draw with respect to levels of fixed cost and the degree of operating
leverage result? Explain.
Firms A B C D
Sale price p. u 20 32 50 70
Variable cost per unit 6 16 20 50
Fixed operating cost 80,000 40,000 2,00,000 Nil
14. X Ltd is expecting an annual EBIT of ₹.1 lakh. The company has ₹. 4 lakhs in 10% debentures. The
cost of equity capital is 12%. You are required to calculate the total value of the firm according to the Net
Income Approach.

SECTION C (2 x 10 = 20 Marks) Answer any TWO questions.

15. Explain the various sources of finances.
16. Cash in flows of a certain project along with cash outflows are given below:

Year 0 1 2 3 4 5
Outflows 1,50,000 30,000 - - - -
Inflows - 20,000 30,000 60,000 80,000 7,0000
Discount factor at 10% - 0.909 0.826 0.751 0.683 0.621
Calculate net present value.
17. ABC Company currently has the capital structure consisting of 15,000 equity shares of ₹.100 each. The
management is planning to raise another ₹. 25 lakhs to finance a major programme of expansion and is
considering three alternative methods of financing:
(i) To issue 25,000 equity shares of ₹. 100 each
(ii) To issue 25,000, 8% Debentures of ₹. 100 each.
(iii) To issue 25,000, 8% Preference Shares of ₹. 100 each.
The company’s expected earnings before interest and taxes will be ₹. 8 lakhs. Assuming a corporate tax
rate of 50%, determine the earnings per share (EPS) in each alternative and comment which alternative
is best and why?