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FINANCIAL MANAGENENT

FINAL
REVISION
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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

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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.

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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.

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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.

Chapter – 4: Cost of Capital

19. X Ltd. consists of 4,000 equity shares of ₹ 10 each. Currently these shares are quoted in the market at ₹
200 each. The earnings available to the equity shareholders at the end of the period is ₹ 2,40,000. The
earnings are expected to grow @ 7%. What is the cost of equity capital?

20. X & Co. has issued 12% redeemable preference shares of face value of ₹ 100 for ₹ 10 lakhs. The shares
are expected to be sold at 5% discount. It will also involve floatation cost of ₹ 5 per share. The shares are
redeemable at a premium of 5% after 10 years. Calculate the cost of capital of redeemable preference
share, if the rate of tax is 50%. Ignore dividend tax.

21. The following information is extracted from the books of Gopal Ltd.
Capital Structure:-
Source ₹ After tax cost
Equity Share Capital 4,00,000 16%
Retained Earnings 1,00,000 16.5%
Preference Share Capital 3,00,000 12%
Debentures 2,00,000 10%
10,00,000
Calculate the weighted average cost of capital on the basis of book value weights.

22. The capital structure and specific cost of capital (after tax) of a company are given below:-
Source Book Value After Tax Cost (%)
(₹ in lakh)
Equity Share Capital of ₹ 10 each 200 18
Retained Earnings 100 18
Long-term Debts 200 6
500
The present market value of equity is ₹ 90 per share. Corporate tax rate is 40%.
Calculate weighted average cost of capital using:-
a) Book values as weights,
b) Market values as weights.

23. Sanjay Ltd. has the following capital structure:-

₹ in Lakhs
Equity Share Capital @ ₹ 10 per share 100
12% Preference Shares Capital (10,000 Shares) 10

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Retained Earnings 120
14% Debentures (70,000 Debentures) 70
14% Term Loan 100
400
The market price per equity share is ₹ 25. The next expected dividend per share is ₹ 2 and is expected to
grow at 8%. The preference shares are redeemable after 7 years at par and are currently quoted at ₹ 75 per
share. The debentures are redeemable after 6 years at par and their current market quotation is ₹ 90 per
debenture. The tax rate applicable to the firm is 50%.
You are required to compute weighted average cost of capital of the company using:-
a) Book value weights, and
b) Market value weights.

24. X Ltd. has the following capital structure:-

₹ in Lakhs
Equity Share Capital @ ₹ 10 per share 100
Retained Earnings 130
14% Debentures (70,000 Debentures) 70
16% Term Loan 100
400
The market price per equity share is ₹ 25. The next expected dividend per share is ₹ 2 and is expected to
grow @ 8%. The debentures are redeemable after 6 years at par and the current market quotation is ₹ 90
per debenture. The tax rate applicable to the firm is 50%.
You are required to compute the weighted average cost of capital of the company using market value as
weights.

25. Calculate Weighted Average Cost of Capital (WACC) considering market values as weights for Sonu Ltd.
from the following details:-
Sources of Capital:-
Equity Share Capital (₹ 10 each) 12,00,000
Retained Earnings 28,00,000
14% Preference Shares (issued at a premium of 8%) 90,000
15% Debentures 3,60,000
Other Information:-
a) Applicable corporate tax rate is 30%.
b) Market price per share ₹ 50, Dividend per share is expected to be ₹ 6. Sonu Ltd. maintains a growth
of 5% in this regard.
c) Debentures of face value of ₹ 1000 each were issued at 3% discount (with an additional
underwriters’ commission of 1.5% on face value). Tenure of debenture is 10 years.

26. Compute the marginal cost of capital from the following data:-
Existing Capital ₹ in Lakh Cost (%)
Equity Share Capital 6,000 15
Preference Share Capital 1,000 10
Debt 4,000 12
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Retained Earnings 1,000 18
Additional Requirements
Equity Share Capital 4,000 18
Preference Share Capital 2,000 12
Debt 3,000 16
Retained Earnings 1,000 18

27. The existing capital structure of X Ltd. is as follows:-

Equity Share Capital and Retained Earnings (Ke = 17%) ₹ 5,00,000
14% Preference Share Capital ₹ 2,00,000
10% Debt ₹ 3,00,000
The company wished to implement the expansion of the plant with capital outlay of ₹ 5,00,000. Besides
using the available retained earnings of ₹ 1,00,000, the balance additional fund will be raised as follows:-
10% Debt ₹ 5,00,000
14% Preference Share Capital ₹ 1,00,000
Corporate tax rate is 20%.
Assuming that specific cost of different components of capital remaining same, you are required to
calculate:-
a) Weighted average cost of capital after the issue of fresh securities;
b) Marginal cost of capital; and
c) Comment on the acceptance of the expansion plan if it is expected to give a return of 12%.

Chapter – 5: Working Capital Management

28. Estimate the working capital requirement on profit basis for the coming year from the following
information of a manufacturing company. Expected annual sales is 156000 units of 10 per unit. The
anticipated ratio of cost to selling price are:- Raw materials 50% and Direct wages 15%. Budgeted cash
overhead is 42,000 and depreciation is ₹10,000 per annum. Planned stock will include raw material for
45,000 and 9,000 units of finished goods.
Credit allowed to debtors is 1 month. Credit expected to be received from suppliers in 3 weeks. Overhead
and wages payment will be made 1 week after their occurrence. Material will stay in the process for 14
days. Cash in hand to be maintained is 15% of total working capital.
Assume that production is carried on evenly throughout the year. Raw materials are introduced at the
beginning of the process and wages and overhead accrue evenly during processing.

29. From the following information presented by a manufacturing company, prepare statement showing
working capital requirement for 2021-22:-
Expected monthly sales of 1,00,000 units at ₹ 15 per unit. The anticipated ratios of raw- material cost and
wages of selling price are:-
• Raw-material cost - 40%
• Wages – 30%
Budgeted overhead is worked out at ₹ 50,000 per week. Overhead expenses include depreciation of ₹
20,000 per week.

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Planned stock will include raw-material of 1,20,000 units and 40,000 units of finished stock. Material will
stay in process for 2 weeks. Credit period allowed to debtors is 5 weeks. Credit period allowed by creditors
is 1 month. Lag in payment of wages and overhead is 2 weeks. 20% of sales may be assumed to be made
against cash, and cash in hand is expected to be₹50,000.
Assume that production is carried on evenly throughout the year and wages and overhead accrue evenly.

30. ABC Ltd, sells its products on a gross profit of 20% on sales. The following information is extracted from
its annual accounts for the current year ended 31st March, 2023:-
₹
Sales at 3 months credit 40,00,000
Raw Materials 12,00,000
Wages paid average time lag 15 days 9,60,000
Manufacturing expenses paid (one month arrear) 12,00,000
Administration expenses paid (one month arrear) 4,80,000
Sales promotion expenses (payable half yearly in advance) 2,00,000
The company enjoys one month’s credit from the suppliers of raw materials and maintains a 2 months’
stock of raw materials and one-and-half month’s stock of finished goods. The cash balance is maintained
₹1,00,000 as precautionary measure.
Assuming 10% margin, find out the working capital requirement of ABC Ltd.

31. For a new business Mr. Gopal supplied the following information:-
a) The projected annual sales - ₹ 1,20,00,000.
b) He has estimated fixed expenses ₹ 20,000 per month and variable expenses equal to 2% of
turnover.
c) Percentage of gross profit on cost of purchase will be 25%.
d) Average expected credit period allowed to debtors – 1 month.
e) Average expected credit period from suppliers – 15 days.
f) He expects to turnover his stock 5 times in a year.
g) Average cash holding – 1 month’s expenses.
You are required to forecast his working capital requirement.

Chapter – 6: Capital Budgeting

32. The cost of a plant is ₹ 60,000. The expected life of the plant is 3 years. It is expected to generate EBDIT
₹ 26,000; ₹ 30,000 and ₹ 34,000 respectively. Compute Accounting Rate of Return assuming 30% tax
rate and straight line method of depreciation.

33. A project of ₹ 3,00,000 is supposed to yield ₹ 40,000 after depreciation @ 12.5% and is subject to income
tax @ 40%. Calculate the payback period of the project.

34. Sanju Ltd. desires to invest in a project which requires an initial investment of ₹ 50,00,000. The useful
life of the project is 10 years with a salvage value of ₹ 5,00,000 and will be depreciated on straight line
method. The profit before charging depreciation is ₹ 10,00,000 p.a. The income tax rate is 35%. Compute:-

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a) Payback Period;
b) Average Rate of Return (ARR);
c) NPV at 10% p.a.; and
d) P. I.

35. Using the information given below, calculate the profitability of a project using (a) Payback Period, (b)
Discounted Payback, (c) NPV, and (d) P. I. Method.
Cost of Investment ₹ 1,00,000
Estimated Life 5 years
Scrap Value Nil
Cost of Capital 10%
Profit after tax:-
Year 1 ₹ 5,000
2 ₹ 8,000
3 ₹ 10,000
4 ₹ 12,000
5 ₹ 9,000
Depreciation has been calculated under straight line method. The present value of ₹ 1, to be received at
the end of each year at 10% is given below:-
Year 1 2 3 4 5
PV 0.91 0.83 0.75 0.68 0.62

36. Following figures relate to a new project for which a machine is to be acquired at a cost of ₹ 2,50,000 and
initially ₹ 60,000 is to be invested as working capital:-
Year 1 2 3 4
EBIDT (₹) 80,000 90,000 1,45,000 1,20,000
Depreciation (₹) 75,000 62,000 48,000 25,000
At the beginning of 2 year, an amount of ₹ 10,000 is to be introduced as additional working capital. On
nd

completion of project i.e. at the end of 4th year. It is expected that ₹ 40,000 will be realised from sale of
scrap and working capital will be recovered in full.
Calculate NPV of the project and comment on its acceptability.
[Given the present value of ₹ 1 receivable at the end of each year for 4 years at 12% p.a. compounded
annually are 0.893, 0.797, 0.721 and 0.636 respectively]

37. A company is considering an investment project which requires an initial cash outlay of ₹ 5,00,000 on
equipment and ₹ 20,000 as working capital. The project’s economic life is 6 years. An additional
investment of ₹ 50,000 each would also be necessary at the end of second and fourth year to restore the
efficiency of the equipment. The annual cash inflows expected from the project are:-
Year Cash Inflows (₹)
1 80,000
2 1,20,000
3 1,80,000
4 2,00,000
5 2,60,000

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6 3,00,000
If the realizable scrap value of the equipment is ₹ 20,000 after 6 years and cost of capital is 20%. Justify
whether the project should be accepted or not by determining the net present value. Assume that working
capital will be recovered in full at the end of the project life.
Given that:-
Year 1 2 3 4 5 6
PV @ 20% 0.833 0.694 0.579 0.482 0.402 0.335

38. X Ltd. presently considering two machines for possible purchase. Other information related to the
machines are as follows:-
Machine – I Machine – II
Purchase Price ₹ 50,000 ₹ 60,000
Estimated Life 4 years 4 years
Cash flows before depreciation and tax:-
Year – 1 Year – 2 Year – 3 Year – 4
Machine – 1 25,000 25,000 25,000 25,000
Machine – 2 45,000 19,000 25,000 27,000
Rate of tax is 40%.
Compute net present value of each machine assuming cost of capital is 8%.
Which machine the company should buy?
The present value of ₹ 1 at 8% is as follows:-
Y1 = 0.926, Y2 = 0.857, Y3 = 0.794, Y4 = 0.735
(Assume straight line method of depreciation)

39. Gopal Construction Ltd. is considering the five possible projects to invest in, as shown below:-
Project Cash Outflow (₹) PV of Cash Inflows (₹)
A 5,00,000 7,50,000
B 2,00,000 2,10,000
C 5,00,000 8,00,000
D 1,00,000 80,000
E 3,00,000 3,30,000
Available fund is ₹ 12,00,000. Apply capital rationing decision concept and select the projects. All the
projects are divisible in nature.

40. A company will purchase either Machine X or Machine Y. Following are the information regarding the
two. The estimated life of both the machine is five gears with no salvage value.
Cost (₹) Anticipated cash flows after tax per year (₹)
Y1 Y2 Y3 Y4 Y5
Machine X 17,18,750 1,50,000 1,80,000 13,75,000 9,62,000 4,12,000
Machine Y 27,50,000 6,78,500 9,62,500 11,00,000 11,68,750 5,50,000
The company’s cost of capital is 10%. You are required to advise the management as to which one should
be procured using both (i) NPV, and (ii) IRR Method of project appraisal.

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Present value of Re. 1
Year 1 2 3 4 5
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
14% 0.877 0.769 0.675 0.592 0.519

41. The following information are made available to you:-

(₹ in Lakhs)
Project X Project Y
Project Cost 3500 3500
Cash Inflows: Year 1 500 2500
Year 2 1000 2000
Year 3 1500 1000
Year 4 2250 500
Year 5 3000 500
Assume no residual values at the end of the fifth year. The firm’s cost of capital is 10%.
You are required to calculate the following in respect of the two projects:-
a) Net Present Value, using 10% discounting;
b) Internal Rate of Return;
c) Profitability Index.
Present value of ₹ 1 at 10% discount rate for Y1 = 0.909, Y2 = 0.826, Y3 = 0.751, Y4 = 0.683, Y5 =
0.621.

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