MBM633, QB, Unit-4, 5

QUESTION BANK
MBM633, FINANCIAL MANAGEMENT

JANUARY 2023
Question Bank
MBM 633
Unit 4
1. ‘A Strategic Framework is required for Financial Planning’. Explain the statement with example.
2. What is financial model? Illustrate the development of a financial model.
3. Compute sustainable growth rate from the following information:
Table 1: Mason Industries Limited Balance Sheet, 31 December 2019

Rs 000 Rs 000
Creditors 6,725 Cash 4,035
Borrowings 40,350 Debtors 9,415
Share capital 40,000 Inventory 20,175
Reserve & surplus 27,250 Gross block 1,07,700
Less: 27,000
accumulate
d
depreciatio
n
Total 1,14,325 Total 1,14,325
Table 2: Mason Industries Limited: Profit & Loss Account, 31 December 2019
Sales 40,935
Less: cost of sales 10,916
Gross profit 30,019
Less: selling & admin. Expenses 15,010
Profit before interest and tax 15,010
Less: interest (at 12%) 4,776
Profit before tax 10,234
4. Are retained earnings less expensive than the new issue of ordinary shares? Give your views.
[Hint- Cost of internal financing and cost of external financing]
5. Define cost of capital? Explain its significance in financial decision making.
6. How do you apply the cost of capital concept when projects with different risks are evaluated?
7. Assuming a firm pays tax at 50%, compute after-tax cost of capital in the following question:
a. A preference share sold at Rs. 100 with 9% dividend and a redemption price of Rs. 110 if the
company redeems it in 5 years.
b. An ordinary share selling at a current market price of Rs. 120 and paying current dividend of Rs. 9
per share, which is expected to grow at a rate of 8%.
c. A ten year 8% Rs. 1000 par bond sold at Rs. 950 less 4% underwriting commission.
8. The company has the following capital structure on 30 th June 2019: (Amount is in ‘000)
Ordinary shares 4000 rupees (2,00,000 shares)
10% Preference shares 1000 rupees
14% Debentures 3,000 rupees
The share of the company sells for Rs. 20. It is expected that the company will pay a dividend of Rs. 2
per share which will grow at 7% forever. Assume tax rate @50%, Compute weighted average cost of
capital. Also compute WACC when the above Growth rate is 10%. Interpret the results.
9. How is cost of equity determined using Capital Asset Pricing Model? Explain.
10. Write short notes on:
a. Opportunity cost of capital
b. Book Value weights vs Market Value weights.
c. Different approaches to Capital Structure
11. Describe the traditional view on the optimum capital structure. Compare and contrast this view
with NOI and NI approach.
12. Consider two firms, L and U that are identical except that L is levered and U is unlevered. Let
Value of L and Value of U stand respectively for the market values of L and U. In perfect market,
would one expect Value of U to be less than, greater than or equal to Value of L. Explain.
13. Assuming the existence of corporate taxes describe MM position on the issue of an optimum
capital structure.
14. Messing a pharmaceutical firm has a total capitalization of Rs. 10,00,000 and it normalyy earns
Rs. 1,00,000 (before interest and taxes). The financial manager of the firm wants to take a decision
regarding the capital structure. After the study of the market, he gathers following data:
Amount of Debt (rupees in Interest Rate (%) Equity Capitalization rate

lakhs) (%) (ke)
0 - 10
1 4 10.5
2 4 11
3 4.5 11.6
4 5 12.4
5 5.5 13.5
6 6 16
7 8 20
a. What amount of debt should be used if the traditional approach is held valid?
b. If Modigliani-Miller approach is followed, what should be the equity capitalization rate
Assume there are no corporate taxes and the firms maintains its capital structure at book values.
15. The Levered company (L) and Unlevered company (U) are identical in every aspect, except that
Levered has 6% debt of Rs. 2,00,000. As per the Net Income approach, the valuation of the two firms
is as follows:
U L
Net operating Income 60,000 60,000
Kd - 12,000
Net Income 60,000 48,000
Equity Capitalizatio rate (ke) .10 .11
Market Value of Equity 6,00,000 4,32,000
Market Value of Debt 0 2,00,000
Total value of the firm 6,00,000 6,32,000
Mr X hold Rs. 2000 worth of shares of L. Is it possible for Mr. X to reduce its outlay to earn same
return through the use of arbitrage? Explain.
16. The Levered company (L) and Unlevered company (U) are identical in every aspect, except that
Levered has 6% debt of Rs. 2,00,000. Assume tax rate at 40%, NOI is Rs. 40,000 and equity
capitalization rate is 10%. Calculate the value of the firm when MM assumptions are met.
19. Does financial leverage always increase the earnings per share? Illustrate your answer.
20. What is the indifference point in the EBIT-EPS analysis? How would you compute it?
21. Consider the following information for Kaunark enterprises: Amount in lakhs
EBIT 1,120
PBT 320
Fixed Cost 700
Calculate percentage change in earnings per share if sales increased by 5%.
22. What are the essentials of Walter’s dividend model? Explain its shortcomings.
23. What are the assumptions which underlie Gordon’s Model of dividend effect? Does dividend
policy affect the value of the firm under Gordon’s Model?
24. What is Miller-Modigliani’s dividend irrelevance hypothesis? Critically evaluate its assumptions.
25. Give arguments to support the view that dividends are relevant.
UNIT-5
1. Explain briefly the concept of working capital and mention the important objectives of
working capital management.
2. “Working capital management is nothing more than deciding about the level, structure and
financing of current asset”. Discuss with relevant illustrations.
3. Write short notes on:
a) Gross and net working capital
b) Permanent and temporary working capital
4. What is the concept of ‘Operating cycle’? Why is it important in working capital
management? Give a suitable example to illustrate the operating cycle concept.
5. How would you assess the working capital requirements for seasonal industries? Give
example in support of your answer.
6. Explain briefly some of the techniques of inventory control used in manufacturing
organizations.
7. Explain the term Economic Order Quantity (EOQ). What are the basic assumptions of EOQ
model?
8. Differentiate ordering cost and Carrying cost and explain how these two costs are equal at
EOQ level with the help of imaginary figures?
9. Explain the concept ‘ABC Analysis’ as a technique of inventory control with the help of
imaginary figures and their classification and presentation on graph.
10. Write short notes on ‘Willian J. Baumol vs. Miller-Orr-Cash Management Models.
11. Explain the following terms in brief:
a) Cash Surplus
b) Cash Deficit
c) Safety level of cash

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QUESTION BANK

MBM633, FINANCIAL MANAGEMENT

2. What is financial model? Illustrate the development of a financial model.

3. Compute sustainable growth rate from the following information:

Table 1: Mason Industries Limited Balance Sheet, 31 December 2019

5. Define cost of capital? Explain its significance in financial decision making.

Ordinary shares 4000 rupees (2,00,000 shares)

10% Preference shares 1000 rupees

14% Debentures 3,000 rupees

10. Write short notes on:

a. Opportunity cost of capital

b. Book Value weights vs Market Value weights.

c. Different approaches to Capital Structure

Amount of Debt (rupees in Interest Rate (%) Equity Capitalization rate

b. If Modigliani-Miller approach is followed, what should be the equity capitalization rate

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