1. Write the advantages of Share Split.

Ans : The advantage of share split are –

I. Increased liquidity: Share split can enhance the liquidity of a stock, making it easier to buy and
sell shares.
II. Lower entry barrier: By reducing the share price, a split makes the stock more affordable,
attracting a wider range of investors.
III. Positive market perception: A share split is often seen as a positive signal, boosting investor
confidence and potentially increasing demand for the stock.
IV. Improved marketability: Lower-priced shares resulting from a split can make the stock more
attractive to retail investors, increasing trading volumes and interest.
V. Convenient dividend reinvestment: Share split facilitates dividend reinvestment by making it
easier for shareholders to purchase more shares with their dividend payments.
VI. Psychological impact: Lower-priced shares can be psychologically easier to buy, attracting more
investors and potentially driving up demand for the stock.

2. Write notes on Stock Dividend.

Ans : A stock dividend is a distribution of additional shares of a company's stock to its existing
shareholders. It is a form of dividend payment in which shareholders receive additional shares instead
of cash. The number of additional shares distributed is typically based on the proportion of shares
owned by each shareholder.

For example: if a company declares a 5% stock dividend and a shareholder owns 100 shares, they
would receive an additional 5 shares.

The purpose of a stock dividend is to reward shareholders while conserving cash for the company. By
issuing additional shares instead of cash dividends, the company can retain earnings and reinvest them
in the business.

3. Explain ‘ Birds in the Hand’ argument as explained by Prof. Myron Gordon.

Ans : The "Birds in the Hand" argument, put forth by Professor Myron Gordon, suggests that investors
tend to value dividends received in the present more highly than potential future capital gains. This
argument is based on the belief that investors generally prefer the certainty and immediate benefits of
cash flows from dividends, as opposed to the uncertain and future returns associated with capital gains.
According to Gordon's argument, investors place a higher value on dividends because they provide
tangible benefits in the form of regular income. Dividends can be reinvested, used to meet current
financial needs, or provide a sense of security by ensuring a steady stream of cash flow. The "Birds in
the Hand" argument has important implications for both investors and companies. For investors, it
suggests that dividend-paying stocks may be more attractive, particularly for those seeking a steady
income stream. Conversely, companies that consistently pay dividends may be viewed more
favourably by investors, potentially leading to higher stock prices.

4. Write about any FIVE determinants of Working Capital as per your choice.

Ans : Five determinants of working capital:

 Size of the Business : working capital requirement of a firm is directly influenced by the size of its
business operation. Big business organization require more working capital than the small business
organization.
  Nature of business : Working capital requirement depends also upon the nature of business carried
by the firm. Normally manufacturing industries and trading organizations need more working
capital than in the service business organization.
 .Storage period : Time need for keeping the stock in store is called storage period. The amount of
working capital is influenced by the storage period. If storage period is high a firm should keep
more quality of good in store and hence requires more working capital.
 Credit period : The credit period is the number of days that a customer is allowed to wait before
paying an invoice. Thus ,a longer credit period equates to a large investment in receivable.
 Potential growth : Growth potential is an organization’s future ability to generate large profits,
expands its workforce and increase production.
5. Discuss about (i) implicit cost and (ii) explicit cost in details.
Ans : Implicit cost :
 Implicit cost is the cost of inputs owned by the firm and used by the firm in its own production
process.
 It does not enter in the firm’s book of accounts
 It is a receipt concept, i.e., the payment are received by the producer for supplied services.
 Example – wages of self labour, rent for self owned premises, ect

Explicit Cost :

 Explicit cost is the actual expenditure incurred by a firm to purchase or hire the inputs it needs
in gthe production process.
 Explicit cost are ‘out of the pocket’ cost and accounting cost as they are shown in the company
books.
 It is a payment concept
 Example – wages, rent interest, insurance, etc
6. Explain briefly the Internal Rate of Return Method with the formula used.
Ans : IRR is the rate at which NPV becomes zero. In other words, we could say that IRR is the rate at
which present value of cash inflows and present value of cash outflows will be equal.
7. Discuss about Financial Leverage with hypothetical numerical example.
Ans : = The process of using debt capital along with owner’s capital as a means of increasing the
earnings of owner’s capital is known as Financial Leverage or Trading on Equity.
Example :
The capital structure of Sai Ltd. Consists of 10,000 equity shares of Rs. 10 each fully paid up
and 10 % 800 debenture of Rs. 100 each . Find out the financial leverage and earning per
shares (EPS) when companies operating profits or EBIT is Rs. 50,000 assume a 50% tax rate.
Solution –
Rs
EBIT 50,000
Less : Interest on debenture (I) (10% on 80,000) 8,000
EBT 42,000
Less tax @50% (T) 21,000
EAIT 21,000

Financial Leverage = EBIT / EBT = 50,000 / 42,000 = 1.20

Earning per shares (EPS) = EAIT / No. Of shares = 21,000 / 10,000 = 2.10
8. Write Short notes on (i) Concentration Banking (ii) Lock Box System in relation to
collection of cash.

Ans :
Concentration Banking : Concentration banking is a cash management strategy used by
businesses, especially those with multiple locations or branches, to consolidate their funds from
various accounts into a central account, known as a concentration account. The primary goal of
concentration banking is to improve cash management, optimize the use of available funds, and
streamline account reconciliation.
Lock – Box System : A lock box system is a method used by businesses to streamline
and secure the collection of cash payments. It involves the use of a physical lock box or a digital
system to receive and store cash payments from customers. The purpose of a lock box system is to
expedite the processing of cash payments, improve cash flow, and enhance security.

9. Clearly explain Hedging Approach and Conservative Approach in Working Capital financing.
Ans : The Hedging approach in working capital financing involves using financial tools and techniques
to manage risks associated with a company's working capital needs. It aims to protect the company from
adverse events that could impact its cash flow or liquidity.
Under the hedging approach, a company identifies potential risks, such as currency fluctuations, interest
rate changes, or commodity price volatility. It then employs various hedging instruments, such as futures
contracts, options, swaps, or forward contracts, to offset or minimize the impact of these risks.

For example, if a company relies on imported raw materials and is concerned about currency
exchange rate fluctuations, it may enter into a currency hedging arrangement. This could involve using
 forward contracts to lock in a specific exchange rate for future currency conversions, thereby
protecting against potential cost increases due to un-favourable currency movements.

The conservative approach in working capital financing refers to a strategy where a company
maintains a cautious and risk-averse approach to managing its working capital needs. It involves
maintaining high levels of liquidity by holding larger cash reserves, keeping higher inventory levels,
and adopting conservative policies for managing accounts receivable and accounts payable.

Under the conservative approach, the company prioritizes stability and financial security over
maximizing short-term profitability. By holding larger cash reserves, the company ensures it has
sufficient funds to cover operational expenses, unforeseen emergencies, and short-term obligations.
This reduces the risk of cash flow shortages and allows the company to meet its financial commitments
on time.

10. Discuss about various costs associated with collection of Receivables.

Ans : Various cost associated with collection of receivables are :
1. Carrying cost : Cost incurred for arranging additional funds to support credit sales.
2. Administrative costs : Cost associated with maintain records & collection of receivables.
3. Deliquency cost : Sometimes additional steps may be taken to recover the amount due from
defaulting customers. The cost of such extra steps are known as Deliquency cost.
4. Defaulting cost : Sometimes the firm may not collect the overdue from the customer since
they are able unable to pay . These debts are treated as bad debts and are to be written of
accordingly since the amounts will not be realised in future.
11. Explain briefly the Profitability Index Method with numerical example.
Ans :
 Profitability index method is a discounted technique of capital Budgeting.
 It is a method of evaluating investment proposals.
 PI is the ratio between the present value of cash inflow and present value of cash out flow of the
project, that’s why it is also called benefit cost ratio.
 It is basically refinement of NPV Method.
 It measures the value of a project in the term of Rs. 1 or in percentage.

Formula :

PI = Present value of cash inflows / Present value of cash outflows

The initial Cash outlay of the project is Rs. 1,00,000 and its generate cash inflow of Rs. 20,000,
Rs. 40,000, Rs. 60,000 & Rs. 80,000 in 4 yrs. Assume 10% Rate of Discount calculate Profitability
Index and also suggest whether to accept or reject a Project.
 Solution :

Year Cash inflow Discount @10% PVCIF

1. 20,000 0.909 18,180

2. 40,000 0.826 33,040

3. 60,000 0.751 45,060

4. 80,000 0.683 54,640

Total PVCIF : Rs. 1,50,920

So, PI = 1,50,920 / 1,00,000 = 1.5092 (Ans)

12. Write notes on (i) Inventory Turnover Ratio and (ii) Debtors Turnover Ratio.
Ans :
Inventory Turnover Ratio : It is also referred as the stock turnover ratio which is used to measure the
number of sales generated from its inventory and how efficiently the inventories in a company is used.
This ratio reveals the number of times stock is replaced during a given accounting period.
Inventory Turnover ratio = Cost of Goods sold / Average stock

Debtors Turnover Ratio : The Debtors Turnover Ratio also called as Receivables Turnover Ratio or
Debtors velocity shows how quickly the credit sales are converted into the cash. This ratio measures the
efficiency of a firm in managing and collecting the credit issued to the customers.
Debtors Turnover ratio = Net credit sales / Average Debtors.

13. Write notes on (i) Straight Line Method and (ii) Written Down Value methods of
depreciation calculation.

Ans :
Straight line Method of depreciation calculation : The straight-line method of
depreciation is a commonly used approach for allocating the cost of an asset evenly over its
useful life. The straight-line method assumes that the asset's value decreases by an equal amount
each year over its useful life.

(Cost – Expected salvage Value) / Useful life

Steps –
 Determine the cost of the asset
 Subtract the residual value from cost
 Determine the useful life of the Asset
 Depreciation = Divided Depreciation amount by useful life of asset
Use –
This method can be used for calculation of tax deduction and for accounting purpose.
 Written down Value methods of depreciation calculation : The written Down Value
method is a depreciation technique that applies a constant rate of depreciation to the net book
value of assets each year, thereby recognizing more depreciation expenses in the early years of
the asset’s life and less depreciation in the later years of the life of the asset. In short, this
method systematically accelerates the recognition of depreciation expenses and helps businesses
recognize more depreciation in the early years. It is also known as the Diminishing Balance
Method or Declining Balance Method.
‘
Formula : ( cost of Asset – Salvage value of the Asset) * rate of Depreciation in %

14. Discuss about (i) Current Assets and (ii) Current Liabilities in detail.

Ans :
Current Asset : A current asset is an asset that a company holds and can be easily sold
or consumed and further lead to the conversion of liquid cash. For a company, a current asset is
an important factor as it gives them a space to use the money on a day-to-day basis and clear the
current business expenses. In other words, the meaning of current assets can be explained as an
asset that is expected to last only for a year or less is considered as current assets.
Types :
 Cash and cash equivalent
 Inventory
 Ongoing projects
 Pre-paid expenses
 Account receivable
 Marketable securities

Current Liabilities : Current liabilities are an enterprise’s obligations or debts that are
due within a year or within the normal functioning cycle. Moreover, current liabilities are settled
by the use of a current asset, either by creating a new current liability or cash.
Examples :
 Accounts Payable
 Taxes payable
 Dividends payable

15. Discuss about the uses of Ratio Analysis.

Ans: Ratio analysis is a powerful tool used in financial analysis to assess the performance,
profitability, liquidity, solvency, and efficiency of a company.

Use of Ratio Analysis :

Ratio analysis is useful in the following ways:

1. Comparing Financial Performance: One of the most important things about ratio analysis is
that it helps in comparing the financial performance of two companies.

2. Trend Line: Companies tend to use the activity ratio in order to find any kind of trend in the
performance. Companies use data from financial statements that is collected from financial
statements over many accounting periods. The trend that is obtained can be used for predicting
the future financial performance.
 3. Operational Efficiency: Financial ratio analysis can also be used to determine the efficiency of
managing the asset and liabilities. It helps in understanding and determining whether the
resources of the business is over utilised or under utilised.

16. Write short notes on 1) Business Entity Concept 2) Going Concern Concept.
Ans :
Business Entity Concept : Business entity concept is one of the accounting concepts that states
that business and the owner are two separate entities and therefore, should be considered
separate from each other.
As per this concept, the financial transactions pertaining to the business entity should be
recorded separately from the business owners transactions.
This concept is also known as the Economic Entity Concept, which means that the owner of the
business and the business itself are considered as two separate entities.

Going Concern Concept : Going concern concept is one of the accounting principles that states
that a business entity will continue running its operations in the foreseeable future and will not
be liquidated or forced to discontinue operations for any reason.

In other words, a going concern is expected to have the following things working in their favour:

1. The business is capable of running the daily operations and has capital and raw materials
to do so.
2. A business has the ability to pay off the debt during the accounting period.
3. There should be demand in the market for the products or services offered by the
company.
4. There should be no changes in the law governing the business.

17. Write notes on 1) Owned Capital and 2) Borrowed Capital.

Ans :

Owned Capital :

Definition: Owned capital represents the ownership stake of shareholders in a company. It

includes the initial investments made by shareholders and any additional capital contributions
made over time.
Components of Owned Capital: Owned capital consists of several components, including:

 Share Capital: The amount of capital raised by issuing shares to shareholders.

 Retained Earnings: Profits retained within the company after paying dividends to
shareholders.

 Reserves and Surplus: Funds set aside from profits for specific purposes or as a buffer for
future contingencies.
Borrowed capital :

 Borrowed capital refers to funds obtained through borrowing from external sources such
as banks, financial institutions, or lenders.
 It is a form of debt financing where the borrower receives a specific amount of money
and agrees to repay it over time, usually with interest.
 Borrowed capital can be used for various purposes, including personal loans, business
loans, corporate bonds, lines of credit, and mortgages.
 Mortgages are borrowed capital used to purchase real estate, with the property serving as
collateral.
 Borrowed capital increases overall debt and should be managed effectively to avoid
negative impacts on credit ratings and financial stability.