Financial Management Prelims Question Paper – Vipin Saboo Tutorials

FM Prelims 2

Section 1

1. Explain the following in 1 line (5 X1=5)
   1. What are cash and trade discounts
   2. What is float
   3. What is ICD
   4. What is capital gearing
   5. Explain wealth maximization as an objective of financial management
   6. Solve any 2 (2X5=10)
      1. A company currently sells 10000 units @ 50 Rs per product and the variable cost is Rs 30 per product. The fixed cost amount to 1 lacs. The company currently sells the products @ 1 month credit, bad debt chances are 1%. Cost of funds is 12 percent. The company is looking at a more liberal policy of 3 month credit. The sales would increase by 10 percent and the other details would remain same. However for increasing the credit period the company would have to invest further Rs 5 lacs in working capital @ 8%pa and take a term loan of 1 lacs @ 10percent interest. Advice the company
      2. A project which the company proposes to undertake would cost the company Rs 1 crs. The company would be financing the same by equity-debt-preference ratio of 3:5:2. Post tax cost of equity, debt and preference are 12,9,14 percent respectively. The project would earn the company an IRR of 13 percent. Is it advisable to take the project
      3. Study the following balance sheet and advice the company as to what price it should look at to sell itself. PE is 3.45

2. A company has Rs 10 lacs which it wants to deploy. It is considering 2 machines and 1 investment proposition in a capital market scheme.(15 marks)

The capital market investment requires Rs 5 lacs in the first year and then annual after tax inflow would be 15% in the first 2 years and then 30% for the next 5 years. Cost of funds is 10%. The value of annuity of Re 1 @ 10@ at the end of 5 yrs is 3.065. evaluate which options the company should choose.

Section 2 (solve any 3)

1. The following information is available for a company. Prepare a cash budget for Jan-March

• Cash balance on 31st Dec was Rs 100000
• 10% sales are cash sales after a discount of 5%. The rest comes in 3 equal installments in the subsequent 3 month
• Purchases are all cash purchase which is equaling to 20% of the sales of the respective month
• Wages and other indirect expenses are paid with a lag of 1 week. Factory expenses are to be paid next month
• A commission of 10% of the cash sales is paid after 2 months of the actual receipt of the sales

5  A company has currently an ordinary share capital of Rs 25lacs consisting of 25,000 shares of Rs 100 each. The company wishes to raise 20 lacs under the four plans.

1. Entire through equity shares
2. Rs 10 lacs through equity and balance via debt @ 8% per annum
3. Rs 5 lacs through shares and Rs 15 lacs through debt @ 9% per annum
4. Rs 10 lacs through equity capital and the balance via preference shares carrying 5% dividend.

The EBIT of the company would be Rs 8 lacs. Tax rate 50%. Compute the EPS and the financial leverage.

6.Following information is available for a company for 1 year

1. Stock of material would be equal to 75 days of consumption
2. Stock of finished goods equal to 45 days
3. Credit allowed to debtors 60 days
4. Credit from suppliers 50 days
5. Time lag in payment of labor and OH is 15 days
6. Cash 52500 to be maintained. 20% sales are cash. Compute the amount of working capital required

7. A. What are the executive functions of FM

B. what are the factors affecting working capital

For any doubts, you can contact: Prof. Vipin Saboo – 9820779873