BA4202-FINANCIAL MANAGEMENT

QUESTION BANK
UNIT - I - FOUNDATIONS OF FINANCE

Introduction to finance- Financial Management – Nature, scope and functions of Finance,

organization of financial functions, objectives of Financial management, Major financial decisions
– Time value of Money – features and valuation of shares and bonds – Concept of risk and return –
single asset and of a portfolio.
PART - A
1. What is finance, and how does it contribute to business? (CO1, K1)
Finance involves managing money and resources to achieve the financial goals of a
business. It plays a crucial role in decision-making, resource allocation, and achieving
financial objectives.
2. Define Financial Management.(CO1,K1)
Financial Management refers to the planning, organizing, directing, and controlling of
financial activities within an organization to achieve its financial goals and objectives.
3. What are the main functions of finance within an organization?(CO1,K1)
The main functions of finance include financial planning, budgeting, raising funds,
investing, and managing risks to ensure the efficient use of financial resources
4. Identify one major financial decision that organizations make.(CO1, K1)
Capital budgeting, which involves deciding on long-term investment projects, is a major
financial decision made by organizations.
5. Explain the concept of Time Value of Money.(CO1, K1)
The Time Value of Money is the idea that a sum of money has a different value today than
it will in the future, taking into account factors like interest rates and inflation.
6. What are shares and bonds in the context of finance?(CO1, K1)
Shares represent ownership in a company, while bonds are debt securities representing
loans made by investors to organizations or governments.
7. Describe the concept of risk and return in finance. (CO1, K1)
Risk and return are interrelated in finance. Generally, higher returns are associated with
higher risk. Investors evaluate the potential return against the level of risk before making
investment decisions.
8. Differentiate between single asset and a portfolio in the context of investment.(CO1,K1)
A single asset refers to an individual investment, while a portfolio is a collection of
different assets, such as stocks and bonds, held by an investor.
9. What is the primary objective of Financial Management?(CO1, K1)
The primary objective of Financial Management is to maximize shareholder wealth by
making effective financial decisions that enhance the value of the firm.
10. How does the organization of financial functions contribute to the overall success of a
business?(CO1, K1)
Efficient organization of financial functions ensures that financial resources are managed
effectively, contributing to the achievement of financial goals and overall success of the
business.
PART - B
1. You're a young investor with a high-risk tolerance looking to invest $10,000 for potential
high returns over the long term. Which investment option would be most suitable for you?
A) Investing in technology company shares with promising growth potential.
B) Purchasing government bonds with a fixed interest rate and maturity date.
C) Diversifying your portfolio by investing half in shares of established companies and
half in corporate bonds.
D) Putting all your money into speculative penny stocks for quick gains.
Select the best choice and give justification for that. (CO1, K3)

2. You have just received a $10,000 inheritance from your grandparents. You are
considering investing it in a savings account that offers a 3% annual interest rate
compounded annually. How much will your investment grow to after 5 years?(CO1,K3)

3. An environmentally conscious investor is interested in investing in renewable energy

projects such as solar or wind farms. Discuss the potential returns and risks associated
with investing in renewable energy infrastructure projects and their role in contributing to
sustainability goals.(CO1,K3)
4. A small startup is looking for sources of finance to expand its operations. Which of the
following options would be most suitable for the company? (CO1, K3)
A) Venture Capital B) Bank Loan C) Personal Savings D) Crowd funding
Select the best choice and give justification for that. (CO1, K3)
PART - C

1. XYZ Manufacturing Company is a medium-sized manufacturing firm specializing in

the production of automotive components. The company has been experiencing
challenges with its working capital management, resulting in cash flow constraints and
inefficiencies in its operations. This case study explores the issues faced by XYZ
Manufacturing Company and proposes strategies to optimize its working capital
management.

 What are the key financial metrics and ratios that need to be analyzed to assess the
financial health and performance of XYZ Manufacturing Company?
  How do the company's financial performance metrics compare to industry
benchmarks and historical trends? (CO1,K3)

2. A. Describe a scenario where a company faces significant financial risks, such as

interest rate risk, foreign exchange risk, or commodity price risk. Evaluate the
company's risk management strategies and assess their effectiveness in mitigating
financial risks.

B. Discuss the role of financial derivatives, such as options, futures, and swaps, in
managing financial risks. Provide examples of how companies use derivatives to hedge
against various types of risk exposure.(CO1,K3)
 UNIT II - INVESTMENT DECISIONS
Capital Budgeting: Principles and techniques – Nature of capital budgeting- Identifying relevant
cash Flows – Evaluation Techniques: Payback, Accounting rate of return, Net Present Value,
Internal Rate of Return, Profitability Index – Comparison of DCF techniques – Concept and
measurement of cost of capital – Specific cost and overall cost of capital.
PART - A

1. What is capital budgeting, and why is it important for businesses? (CO2,K1)

Capital budgeting involves evaluating and selecting long-term investment projects. It is
important for businesses as it helps in allocating resources effectively to projects that yield
the highest returns.

2. Name one key evaluation technique used in capital budgeting. (CO2, K1)
Net Present Value (NPV) is a key evaluation technique in capital budgeting.
3. Define the Payback period in capital budgeting. (CO2, K1)
The payback period is the time it takes for a project to recover its initial investment
through the cash flows it generates.
4. What is the Accounting Rate of Return (ARR) in capital budgeting? (CO2, K1)
The Accounting Rate of Return (ARR) is a measure of a project's profitability, calculated
as the average annual accounting profit divided by the initial investment.
5. Differentiate between the Internal Rate of Return (IRR) and Net Present Value (NPV).
(CO2,K1)
IRR is the discount rate that makes the present value of cash inflows equal to the present
value of cash outflows, while NPV is the difference between the present value of cash
inflows and outflows.
6. What does the Profitability Index measure in capital budgeting? (CO2, K1)
The Profitability Index measures the ratio of the present value of cash inflows to the initial
investment, helping in project prioritization.
7. Compare two Discounted Cash Flow (DCF) techniques used in capital budgeting.(CO2,
K1)
NPV and IRR are both DCF techniques. NPV provides the absolute dollar value, while
IRR represents the discount rate at which the project breaks even.
8. Explain the concept of the cost of capital. (CO2, K1)
The cost of capital is the required rate of return that a company needs to achieve to attract
investors and maintain financial viability.
9. Differentiate between specific cost and overall cost of capital. (CO2, K1)
Specific cost of capital refers to the cost of capital for a specific source, like debt or
equity, while overall cost of capital considers the weighted average cost of all capital
sources.
10. Why is it important to identify relevant cash flows in capital budgeting? (CO2, K1)
Identifying relevant cash flows is crucial as it ensures that only cash flows directly
attributable to the investment decision are considered, providing a more accurate
evaluation of a project's profitability.
PART - B
1. A XYZ Corp, a manufacturing company, is considering expanding its operations by
investing in new machinery. To finance this expansion, they are evaluating their cost of
capital. Which of the following factors would likely increase their cost of capital? (CO2,
K2)
A) Decreasing interest rates in the economy
B) A stable and growing economy
C) Increasing competition within the industry
D) Issuing new equity shares
Select the best choice and give justification for that. (CO1, K3)

2. Imagine you are the financial manager of a medium-sized manufacturing company.

Your CEO wants to expand operations by acquiring a competitor. However, she's
concerned about the cost of capital for this venture. How would you explain the concept of
cost of capital to her and how it influences the decision-making process? (CO2, K2)
3. A company is considering investing in a new manufacturing facility. The initial
investment is substantial, but the facility is expected to generate significant cash flows
over its lifetime. However, there is uncertainty about future market conditions and the
exact cash flows. How should the company proceed with the capital budgeting decision?
(CO2, K2)
A) Proceed with the investment based on optimistic cash flow projections.
B) Delay the investment until market conditions are more certain.
C) Invest only if the company can secure external financing to mitigate risk.
D) Conduct a thorough risk analysis and use conservative cash flow estimates in the
decision-making process.
Select the best choice and give justification for that. (CO1, K3)
4. A company is considering investing in a new product line that requires an initial
investment in equipment and marketing expenses. Develop a list of relevant cash
flows associated with the project, including both initial investment costs and expected
future cash inflows. As a CFO, How would you determine the net present value (NPV)
of the project based on these cash flows?(CO2,K3)
PART - C
1. ABC Manufacturing Company is a medium-sized manufacturing firm that produces
automotive components. It has been in business for 15 years and operates in a highly
competitive market. The company sources raw materials locally and sells its products both
domestically and internationally.
Scenario: Over the past few years, ABC Manufacturing has experienced fluctuations in its
cash flows due to various factors such as changes in market demand, fluctuations in raw
material prices, and economic uncertainties. The management team has decided to conduct
a comprehensive analysis of the company's cash flows to better understand its financial
health and make informed decisions for the future.
Analyze the Operating Activities, Financing Activities, Investing Activities, Cash Flow
Statement and give your recommendation. (CO2,K2)

2. ABC Corporation is a manufacturing company that specializes in producing electronic

devices. They are considering investing in a new production line to manufacture a
cutting-edge smartphone model. The investment would involve significant capital
expenditure, and ABC Corporation wants to assess the viability of the project using
the payback period method.
Investment Proposal: ABC Corporation plans to invest $5 million in the new production
line. They estimate that the new production line will generate annual cash flows of $1.5
million for the next five years. Calculation of Payback Period (CO2,K4)
 UNIT – III – FINANCING AND DIVIDEND DECISION
Leverages – Operating and Financial Leverage – measurement of leverages – degree of Operating
& Financial Leverage – Combined leverage, EBIT – EPS Analysis – Indifference point.
Capital Structure – Theories – Net Income Approach, Net Operating Income Approach, MM
Approach – Determinants of Capital Structure.
Dividend Decision – Issues in dividend decisions, Importance, Relevance & Irrelevance theories
– Walter”s – Model, Gordon”s Model and MM Model. – Factors determining dividend policy –
Types of dividend Policies – Forms of Dividend.
PART – A

When is financial leverage

considered favorable?
Ans) Financial leverage is
considered favorable when
return on investment is
higher than the cost of
debt. When is financial leverage considered favourable? (CO3,K1)
1. Financial Leverage is considered favourable when return on investment is
higher than the cost of debt.
2. What is Capital Structure of a company? (CO3,K1)
Capital Structure is the relative proportion of different sources of long term
finance. In other words Capital Structure of a company referes to the
makeup of its capitalization.
3. How is overall cost of capital is calculated? (CO3,K1)
WACC calculates the average price of all of a company's capital sources, weighted by the
proportion of each type of funding used. WACC = (Weight of Debt*Cost of Debt) +
(Weight of Equity * Cost of Equity) + (Weight of Preferred Stock* Cost of Preferred
Stock).
4. Define the term Dividend. (CO3,K1).
 According to the ICAI, dividend is defined as “ a distribution to shareholders out of profits
or reserves available for this purpose.”
5. List out the types of dividend. (CO3,K1)
Cash Dividend, Stock Dividend, Bond Dividend and Property Dividend.
6. State the important assumptions of MM approach. (CO3,K1)
Perfect capital market, Investors are rational, There are no tax, The firm has fixed
investment policy and No risk or uncertainty.
7. What are the types of Dividend policy? (CO3,K1)
Regular Dividend Policy, Stable Dividend Policy, Irregular Dividend Policy and No
Dividend Policy.
8. Write a note on Trading on Equity. (CO3,K1)
Trading on equity is a financial process in which debt produces gain for shareholders of a
company. Trading on equity happens when a company incurs new debt using bonds,
loans, bonds or preferred stock.
9. If a firm has the sales of Rs. 1,00,000 and Variable Cost of Rs. 60,000, then how much is
the contribution?
a. Sales – Variable cost = Contribution.
b. 1,00,000 – 60,000 = Rs,40,000/-
10. What is risk and uncertainty?
Risk, as it is generally understood by health and safety risk analysts, measures the
probability and severity of loss or injury. Uncertainty, on the other hand, refers to a
lack of definite knowledge, a lack of sureness; doubt is its closest synonym.
PART - B
1. You're representing a startup tech company that's developed a groundbreaking software
solution for streamlining project management. You're meeting with a potential investor who
has expressed interest in funding your project. However, they seem hesitant about the
financial projections you've provided. How would you leverage your position to negotiate a
favorable deal with this investor? (CO3,K3)
2. A small bakery is trying to maximize its profits. Which of the following options best
describes the bakery's strategy for profit maximization? (CO1, K2)
A) The bakery sets prices based on the cost of ingredients plus a small markup for profit
B) The bakery sets prices based on competitor prices to ensure it remains competitive in
the market.
C) The bakery invests in advertising and promotions to increase sales and attract more
customers.
D) The bakery analyzes demand and adjusts prices accordingly to maximize revenue and
profit.
 Select the best choice and give justification for that. (CO1, K3)
3. You're representing a startup tech company that's developed a groundbreaking software
solution for streamlining project management. You're meeting with a potential investor who
has expressed interest in funding your project. However, they seem hesitant about the
financial projections you've provided. How would you leverage your position to negotiate a
favorable deal with this investor?
4. MNO Boutique is a small fashion retailer specializing in sustainable and ethically
sourced clothing. Evaluate the potential benefits of adopting a niche targeting strategy
for MNO Boutique. How can the company leverage its commitment to sustainability and
ethical practices to attract environmentally conscious consumers and differentiate itself
from larger competitors? Discuss the marketing channels and messaging tactics that
MNO Boutique should utilize to effectively reach and engage its target audience.
(CO3,K3)

PART - C

1. XYZ Beverage Company, a manufacturer of energy drinks, is considering sponsoring a

major sports event to increase brand visibility and engage with target consumers. Evaluate
the benefits and challenges of event sponsorship as a promotional strategy for XYZ
Beverage Company. How can the company effectively activate its sponsorship investment
through on-site branding, experiential marketing activities, and social media engagement to
maximize brand exposure and consumer engagement?(CO3,K3)

2. JKL Cosmetics has achieved success in selling its beauty products through traditional
retail channels, but the company now seeks to explore new distribution channels to
capitalize on changing consumer preferences and market trends. Propose innovative
channel expansion strategies for JKL Cosmetics, such as partnering with subscription
box services, collaborating with influencers and beauty bloggers, or launching pop-up
stores in high-traffic locations. How can JKL Cosmetics leverage these alternative
distribution channels to reach untapped customer segments and enhance brand visibility
and accessibility? (CO3,K3)
 UNIT – IV - WORKING CAPITAL MANAGEMENT
Principles of working capital: Concepts, Needs, Determinants, issues and estimation of working
capital -Receivables Management – Inventory management – Cash management – Working
capital finance: Commercial paper, Company deposit, Trade credit, Bank finance.
PART - A
1. What is working capital?(CO4,K1)
Working capital represents the difference between a company's current assets and current
liabilities, reflecting its operational liquidity.
2. Why is working capital essential for businesses?(CO4,K1)
Working capital is crucial for meeting day-to-day operational expenses, managing short-
term obligations, and supporting ongoing business activities.
3. Define Receivables Management.(CO4,K1)
Receivables Management involves overseeing the company's accounts receivable to
ensure timely collection of payments from customers.
4. What is Inventory Management?(CO4,K1)
Inventory Management refers to the strategic control and tracking of a company's stock
of goods to optimize costs and ensure timely availability.
5. Explain Cash Management.(CO4,K1)
Cash Management involves monitoring and controlling a company's cash flow to ensure
there is enough liquidity for daily operations and to meet financial obligations.
6. Name one working capital finance option involving short-term borrowing.(CO4,K1)
Commercial paper is a form of short-term borrowing used for working capital finance.
7. What is the purpose of Company Deposits in working capital finance?(CO4,K1)
Company Deposits are a form of working capital finance where companies raise funds by
accepting deposits from the public to meet short-term financial needs.
8. Define Trade Credit.(CO4,K1)
Trade Credit is an arrangement where a buyer is allowed to purchase goods or services
on credit, extending the payment period beyond the typical immediate payment.
9. Mention one determinant of working capital needs.(CO4,K1)
Seasonal fluctuations in demand for products or services can be a determinant of working
capital needs.
10. How is the estimation of working capital calculated?(CO4,K1)
The estimation of working capital involves assessing the company's current assets and
liabilities, considering factors like operational cycles and growth projections to determine
the required level of working capital.
 PART -B
1. A manufacturing company is experiencing a slowdown in sales due to economic
conditions. As a result, they are looking to optimize their working capital management to
improve their cash flow. Which of the following strategies would be most appropriate for
them to adopt? (CO4,K3)
(A) Increase inventory levels to meet potential future demand.
B) Lengthen accounts receivable collection period to encourage more sales.
C) Negotiate longer payment terms with suppliers to preserve cash.
D) Implement aggressive cost-cutting measures to reduce operating expenses.?
Select the best choice and give justification for that. (CO4, K3)

2. DEF Travel Agency specializes in organizing adventure tours and outdoor

excursions for thrill-seeking travelers. Analyze the role of digital marketing channels,
such as social media advertising, search engine optimization (SEO), email marketing,
and content marketing, in DEF Travel Agency's promotional efforts. How can the
company leverage digital marketing initiatives to engage with target customers, build
brand loyalty, and drive bookings for its adventure tours? (CO3,K3)

3. ABC Corp. is a well-established company in the manufacturing sector. It has recently

declared a profit of $10 million for the fiscal year. The board of directors is discussing the
dividend policy for the shareholders. As a financial analyst, you're asked to provide your
insights. What would be your recommendation? (CO4,K3)
A) ABC Corp. should pay out the entire profit as dividends to reward shareholders.
B) ABC Corp. should reinvest the entire profit back into the business for future
growth opportunities.
C) ABC Corp. should pay a portion of the profit as dividends and retain the rest for
future investments.
D) ABC Corp. should distribute dividends only if there are excess funds after
covering all operational and expansion needs.
Select the best choice and give justification for that. (CO4, K3)

4. You are the finance manager of a medium-sized retail company. The holiday season is
approaching, and historically this is the busiest time of the year for your business. You
need to develop a cash management strategy to ensure smooth operations during this
period. As a CEO, How to develop and implement the strategies for your business.
(CO4,K3)
 PART – C

1. ABC Corporation is a medium-sized manufacturing company that produces electronic

components. Despite healthy sales, ABC struggles with cash flow due to inefficient receivable
management. The company's accounts receivable (AR) turnover ratio has been declining
steadily over the past few quarters, indicating that it takes longer for ABC to collect payments
from its customers. This issue is negatively impacting ABC's liquidity and profitability.

Analyse the following Challenges:

 Delayed Payments: Customers are taking longer to pay their invoices, leading to a
significant increase in the average collection period.
 Lack of Clear Policies: ABC lacks clear guidelines and policies regarding credit extension,
invoicing, and collection procedures.
 Ineffective Communication: There is a lack of communication between the sales team and
the finance department regarding customer creditworthiness and overdue accounts.

OR
2. ABC Manufacturing is a mid-sized manufacturing company that produces electronic
components. Despite having a strong market presence and steady revenue streams, ABC
Manufacturing has been facing challenges related to cash flow and working capital
management.
Scenario:
 Inventory Management: ABC Manufacturing is holding excessive inventory levels,
leading to tied-up capital and storage costs. Additionally, obsolete inventory is not being
efficiently liquidated.
 Accounts Receivable: The company's accounts receivable turnover ratio is low, indicating
slow collection of receivables. This is causing cash flow constraints and increasing the risk
of bad debts.
 Accounts Payable: Although ABC Manufacturing has negotiated favorable credit terms
with suppliers, it is not optimizing payment schedules. Early payments are being made
without taking advantage of available discounts, leading to unnecessary cash outflows.
How can you Propose the Strategies for Improvement? (CO4,K2)
 UNIT – V - LONG TERM SOURCES OF FINANCE
Indian capital market- New issues market- Secondary market – Long term finance: Shares,
debentures and term loans, lease, hire purchase, venture capital financing, Private Equity.
PART - A
1. What is the Indian capital market? (CO5,K1)
The Indian capital market is a financial system that facilitates the buying and selling of
long-term financial instruments, including stocks and bonds.
2. Differentiate between the primary market and the secondary market.(CO5,K1)
The primary market is where new securities are issued, while the secondary market is
where existing securities are bought and sold among investors.
3. Define long-term finance in the context of the capital market.(CO5,K1)
Long-term finance refers to funds raised for periods exceeding one year, typically through
the issuance of shares, debentures, term loans, and other financial instruments.
4. Name one type of long-term finance instrument used in the capital market.(CO5,K1)
Shares are a type of long-term finance instrument representing ownership in a company
and traded on the stock exchange.
5. What is the purpose of the New Issues Market?(CO5,K1)
The New Issues Market, also known as the primary market, is where new securities are
issued by companies to raise capital for expansion, projects, or other financial needs.
6. Define debentures in the context of long-term finance.(CO5,K1)
Debentures are debt instruments issued by companies to raise long-term funds. They
represent a loan to the issuing company and pay periodic interest.
7. What are the characteristics of the Secondary Market?(CO5,K1)
The Secondary Market is characterized by the buying and selling of existing securities
among investors after the initial issuance in the primary market. It provides liquidity to
investors.
8. Name a form of long-term finance that involves the temporary transfer of assets for a fee.
(CO5,K1)
Lease is a form of long-term finance that involves the temporary transfer of assets for a
fee.
9. Differentiate between venture capital financing and private equity.(CO5,K1)
Venture capital financing typically involves investing in early-stage startups, while private
equity involves investing in more mature companies with the aim of restructuring or
expanding their operations.
10. What is the role of Private Equity in long-term finance?(CO5,K1)
Private Equity involves investing in companies by acquiring a significant ownership stake.
 The goal is to improve performance, enhance value, and eventually exit the investment for
a profit.
PART - B

1. The Reserve Bank of India (RBI) announces a cut in the repo rate to stimulate economic
growth. How might this influence investor behavior in the Indian capital market,
especially regarding fixed income securities versus equities? (CO5,K3)
2. ABC Company manufactures electronic gadgets. Due to a sudden increase in demand for
its products, ABC is facing challenges in meeting its production targets. The company
needs to decide on the most appropriate working capital management strategy to address
this situation. What should ABC consider? Which of the following working capital
management strategies is most suitable for ABC Company to address the sudden increase
in demand?
A) Increasing inventory levels
B) Negotiating longer payment terms with suppliers
C) Accelerating accounts receivable collection
D) Investing in long-term assets (CO5,K3)
Select the best choice and give justification for that. (CO5, K3)

3. A retail chain wants to expand its operations by opening new stores in different
cities. How might the company utilize term loans to finance the expansion,
considering factors such as interest rates, repayment schedules, and collateral
requirements?(CO5,K3)

4. A small startup is looking to expand its operations by purchasing new equipment.

However, they lack sufficient funds to make the purchase outright. Which source of
finance would be most suitable for them? (CO5,K2)
A) Venture Capital B) Bank Loan
C) Trade Credit D) Crowd funding
Select the best choice and give justification for that. (CO5, K3)
PART - C
1. A small tech startup has been operating for a couple of years, and their product has
gained traction in the market. They have reached a point where they need to expand their
operations, invest in research and development, and scale their marketing efforts.
However, they are facing a financial crunch and need to raise capital to fuel their growth.
As the CFO of the company, you are tasked with exploring different capital financing
options.
 Scenario : As the CFO of the tech startup, How would you consider several capital
financing options to support and expansion of various plans? (CO5, K3)
OR
2. ABC Tech is a fast-growing technology company that specializes in developing
cutting-edge software solutions for businesses. Over the past few years, ABC Tech
has experienced significant growth, driven by the increasing demand for its products
in the digital transformation era. As the company continues to expand, it faces
strategic decisions regarding its approach to the secondary market.(CO5,K3)

Scenario: ABC Tech is planning to accelerate its growth through strategic acquisitions
and expansion into new markets. However, the company needs additional capital to
fund these initiatives. ABC Tech's management team is considering various options,
including raising funds through the secondary market. (CO5,K3)