TEST SERIES

FINANCIAL
NCIALKNAG
At A KaNAGEMENT
%CU EXAM 2024
GOBIND KUMAR JHA 9874411552
B. Com. (Semester – VI)
Financial Management
Exam Practice Series
Chapter – 1: Basic Concepts
1. Mr. Gopal is offered the following cash inflows:-
End of Year 1 2 3 4 5
Amount (₹) 15,000 20,000 32,000 20,000 18,000
Calculate the amount received by Mr. Gopal if he wants the whole amount at the end of 4th year.
(Applicable interest rate is 10% p.a. compound annually)

2. Mr. Ranjan is considering two investment proposals with the following details:-
Cash Inflows (₹)
Proposal Maturity Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Period
A 5 years 600 600 600 600 600 N. A.
B 6 years Nil Nil 2400 Nil Nil 800
PV of Re. 1 @ 10% 0.909 0.826 0.751 0.683 0.621 0.564
Suggest him for selecting the better option considering 10% discounting rate.

3. Explain the significance of time value of money in financial decision making. Calculate present value of
5 years annuity of ₹ 20,000 at a discount rate 10%.

4. X decides to invest ₹ 6,000 at the end of each year at the compound rate of interest of 12% p.a. for 8
years. What total amount he will get at the end of 8th year? [FVAF at 12% for 8 years is 12.30]

5. A sum of ₹ 5,000 is invested for 2 years at 10% interest rate compounded semi-annually. Find the
maturity value.

6. A company has issued debentures of ₹ 51 lakhs to be repaid after 7 years. How much should the
company invest at the end of each year in a sinking fund earning 12% to repay the debentures?
[FVIFA12%, 7 = 10.089]

Chapter – 2: Leverage
7. Relevant information about three companies are given below:-
X Ltd. Y Ltd. Z Ltd.
Annual Production Capacity (units) 1,00,000 1,50,000 2,50,000
Capacity utilisation and sales 75% 75% 75%
Unit selling price (₹) 40 50 50

1
GOBIND KUMAR JHA 9874411552
Unit variable cost (₹) 15 15 20
Fixed Cost p.a. (₹) 2,00,000 3,00,000 5,00,000
Equity Capital (₹) 5,00,000 7,00,000 10,00,000
(1,000 shares for each company)
10% Preference Capital (₹) -- 50,000 1,00,000
15% Debentures (₹) 1,00,000 2,00,000 3,00,000
Calculate operating leverage, financial leverage, combined leverage and EPS of these three companies.

8. If the combined leverage and operating leverage of a company are 2.5 and 1.25 respectively. Find the
financial leverage and PV Ratio, given that the equity dividend per share is ₹ 2, interest payable per year
is ₹ 2 lakhs, total fixed cost ₹ 1 lakh and sales ₹ 20 lakhs.

9. The following details of A Ltd. for the year ended 31.03.2023 are furnished:-
Operating Leverage 3:1
Financial Leverage 2:1
Interest charges per annum ₹ 20 lakhs
Corporate tax rate 50%
Variable cost as a percentage of sales 60%
Prepare the income statement of the company.

10. The selected financial data for companies A and B for the current year ended 31 st March, 2023 are as
follows:-
Particulars Company A Company B
Variable cost as a percentage of sales 60 75
Interest (₹) 500 800
Degree of operating leverage 4 5
Degree of financial leverage 2 3
Income tax rate 0.30 0.30
a) Prepare income statement of Company A and Company B.
b) Comment on the risks of the two firms.

Chapter – 3: Dividend Decisions

11. From the following particulars relating to X Ltd. determine the market price of a share using Gordon’s
Model:-
Total Investment in Shares ₹ 10,00,000
No. of shares 50,000
Total Earnings ₹ 2,00,000
Cost of Capital 16%
Dividend Payout Ratio 40%

12. The earning per share of a company is ₹ 8 and the rate of capitalization applicable is 10%. The company
has before it, an option of adopting (a) 50%, (b) 75%, and (c) 100% dividend payout ratio.

2
GOBIND KUMAR JHA 9874411552
Compute the market price of the company’s quoted shares as per Gordon’s Model if the company can
earn a return of (a) 15%, (b) 10%, and (c) 5%.

13. The following data are available for Radhika Ltd.:-

Earning per share ₹ 3.00
Internal Rate of Return 15%
Cost of Capital 13%
If Walter’s valuation formula holds, what will be the price per share when dividend payout ratio is (a)
50%, (b) 75%, and (c) 100%.

14. Determine the market value of equity shares of X Ltd. as per Walter’s Model:-
Earnings of the company ₹ 5,00,000
Dividend Paid ₹ 3,00,000
No. of shares outstanding 1,00,000
Price Earning Ratio 8
Rate of return on investment 15%
Are you satisfied with the current dividend policy of the firm? If Not, what should be the optimal
dividend payout ratio?

15. Details regarding three companies are given below:-

X Ltd. Y Ltd. Z Ltd.
Return on Investment (r) 15% 10% 8%
Cost of Capital (K) 10% 10% 10%
EPS ₹ 10 ₹ 10 ₹ 10
By Walter’s Model, you are required to calculate the value of an equity share of each of the companies
when dividend payout ratio is (a) 20%, and (b) 0%.

16. You are given the following information in respect of ABC Ltd.
a) Earning – ₹ 1,00,000
b) Equity Capital – 5,000 shares of ₹ 10 each
c) Cost of capital – 10%
d) Expected rates of return (i) 9%, (ii) 10%, and (iii) 12%
Assuming that dividend pay-out ratios are 0%, 50% and 100% respectively. Determine the effects of the
different dividend policies on the share price of ABC Ltd. for the above mentioned three alternative
levels of rate of return using Gordon’s Model.

17. The following figures are collected from the annual report of X Ltd.
Net Profit ₹ 60 lakhs
Outstanding 12% Preference Shares ₹ 200 lakhs
Number of Equity Shares 3,00,000
Return on Investment 20%
Cost of Capital (Ko) 16%
Compute the amount of dividend to keep the share price at ₹ 84 using Walter’s Model.

3
GOBIND KUMAR JHA 9874411552
18. Sanjay Ltd. is having cost of capital 10% and return on investment 12%. The company earned ₹ 20 as
profit per share and declare 30% dividend.
a) Calculate the market price of equity share under Walter’s Model.
b) To increase tge market price per share, the management is willing to increase the dividend pay-
out ratio in the next financial year, but the CFO Mr. Sajan has opposed such a decision. Give
your opinion in this matter.